How Private Investment Yields Social Impact

It probably mattered little to the five people who were once chronically homeless that their new rental apartments in Worcester and Gloucester, Mass., arrived via a pilot program. But they now have a home thanks to an innovative funding and services effort aimed at getting about 500 people in Massachusetts permanent housing over the next six years.

Advocates for the homeless see the program — spearheaded by the Massachusetts Housing and Shelter Alliance (MHSA) — as a much-needed marriage, combining housing with critically needed supportive services. A new funding mechanism, social impact bonds (SIBs), is bringing it all together.

SIBs, also referred to as “Pay for Success” investments, fund social services with new capital from private investors who see a return on their investment only if agreed-upon metrics are met. Non-profits with a track record of success provide the services, and outside experts provide an evaluation and determine whether the investors receive a return on their outlay.

In the case of the Massachusetts housing program, the measure of success will be whether the once-homeless tenants remain in their homes for at least a year — a goal made more likely because of the supportive services that greet the new tenants.

This sort of backing is an essential ingredient for success, as the chronically homeless typically have serious physical or mental disabilities, or both. According to the National Alliance to End Homelessness, permanent supportive housing can both end chronic homelessness and save public funds that instead are directed to emergency room visits, incarceration of the homeless and simply maintaining shelters.

A 2013 report looked at four supportive housing programs that are helping to reduce chronic homelessness among veterans. At Hope Manor Apartments in Chicago, tenants can rely on case managers, clinic staff members and other support staff who create individualized plans for residents. Additional services include primary and mental health care.

While social impact funding often pays for entire projects — such as a New York City prisoner recidivism reduction program that Goldman Sachs has invested in — only a portion of the funding for the MHSA pilot comes from private investors. However, the social impact funding was a critical catalyst for bringing together support for the rest of the program, which is also funded by Medicaid and state housing vouchers.

“With limited resources on the public side, the private investment helps with a common vision focused on measurable outcomes,” said Joe Finn, MHSA’s president and executive director.

Social impact funding is also a good fit for supportive housing because those services have an incredibly rigorous evidence base built over the past 27 years, said Andy McMahon, managing director of government affairs and innovations at the Corporation for Supportive Housing, which is partnering with MHSA on the pilot program. He said that developing realistic measures for the return on investment is also crucial to the concept’s success and could serve as a model for other social program funding. This is why, McMahon said, the MHSA metric — tenancy for at least a year — is so important.

“We’re not ready to say you’ll be able to close down a wing of your jail with this investment,” said McMahon. “But there is a significant opportunity to look at marginal costs with the project, such as reducing reliance on contracted psychiatrists for prisons or expenses on psychotropic medicines.”

McMahon said he sees SIBs as a lever to change social policy, not just as a financing mechanism.

“The financing piece certainly gets a lot of attention, but at the end of the day you’re going to have providers who identify the right cohort of people, and provide services at a high level, so that you can prove out and meet the metrics that are agreed upon.”

However, he cautions that SIBs should be seen as additive rather than replacement funding.

“The return to investors comes from captured savings — such as shelters and police… but there’s no guarantee that ‘Pay for Success’ funding can provide the full funding that’s needed.”

About 30 social impact-funded projects are in various stages of development across the country. The initiatives vary, from asthma prevention in affordable housing to a program that enlists registered nurses to teach young families parenting and child development skills.

“The common thread among the projects is that they are all related to recurring social problems for which there is an intervention shown to work, but isn’t being funded because of political or budget reasons,” said Michael Chodos, senior fellow at the Beeck Center for Social Impact and Innovation at Georgetown University.

Bipartisan legislation supporting SIBs was reintroduced in the House of Representatives in early March. It would, among other things, rely on the federal government to set specific outcomes for social challenges — such as homelessness — with proposals submitted by state and local governments and funding from private investors. Rep. John Delaney, D-Md., and Rep. Todd Young, R-Ind., cosponsored the bill. SIBs legislation is expected to be reintroduced in the Senate as well.

Delaney said the concept “moves our government to be more evidence-focused, so we can pay for achieving desired outcomes rather than paying for services regardless of the outcome.”