Making Government Smarter

Government can be an incredible solution, but it can also be an incredible hindrance. The Social Innovation Fund and Social Impact Bonds are two recent social financing innovations that demonstrate the power of government and the private sector to solve inefficiencies and societal challenges. State and local governments across the country would be wise to embrace these two social financing mechanisms.

The 2009 Edward M. Kennedy Serve America Act created the Social Innovation Fund. Administered by the Corporation for National and Community Service (the government agency that runs AmeriCorps), the Social Innovation Fund starts with $65.8 million a year that it awards in one to ten million-dollar increments to non-profit intermediary grantees. These organizations demonstrate their ability to select, validate, measure, and scale other non-profit organizations through a competitive application process.

Intermediary grantees are then required to match the government's donation one for one. This doubles the pool of available money. The intermediary grantee is responsible for distributing at least 80 percent of the money in grants of at least $100,000 a year to effective non-profits. In order to receive a grant, the non-profit recipient commits to matching the funds one for one. When all is said and done, tax dollars are matched three to one.

Take New Profit, a Boston based example of one of the Social Innovation Fund's 20 intermediary grantees. Throughout its five-year SIF grant, New Profit will match the $25 million it receives from the federal government by raising another $25 million from private funders. New Profit provides yearly million-dollar-plus grants, intensive strategic support, technical assistance, and measures the results of six different organizations in their Pathways Fund working to increase educational attainment and employment outcomes for low-income youth. A total of $44 million will be provided directly to these organizations over the five years. The six organizations, in turn, match this funding dollar for dollar for a total direct investment of $88 million.

The Social Innovation Fund effectively triples the government's initial investment. To date, the Federal Government has invested $177.6 million that has been privately matched by $423 million to support 20 intermediary grantees and a total of 217 nonprofits in 37 states. Rigorous evaluation of each grantee ensures that both tax and private dollars are efficiently spent.

Government is often not as efficient at the Social Innovation Fund. This is where the Social Impact Bond comes in by creating a financial incentive to improve efficiency. A Social Impact Bond takes a bet on an organization or a group of organizations that put forward a plan to save the government money. Individual and foundation investors provide the financial resources that allow the cost-saving project to happen. If the initiative is successful in saving the government money, then the investors receive a share of the money saved and a repayment of the initial investment.

Social Impact Bonds have begun to pop up across the United States. In New York City, Goldman Sachs has funded a $9.6 million dollar bond targeting recidivism of young men at the Rikers Island correctional facility. In Utah, philanthropist J.B. Pritzker has funded a $7 million dollar bond increasing the number of students at a high quality pre-school program in an effort to reduce the need for remedial education. In California, The California Endowment has funded a $660,000 dollar pilot project to reduce emergency room visits for 200 children with asthma by improving their living conditions.

The Social Impact Bond is brilliant in that it mobilizes organizations toward demonstrated results and raises the private capital they need to succeed while reducing cost to tax payers. Social Impact Bonds have huge potential as there is a rising "impact investing" movement of donors looking to improve the world with their money but also to make a return on their investment. In addition, because Social Impact Bonds offer a return, foundations can invest a percentage of their endowments, increasing their giving capability.

Both The Social Innovation Fund and Social Impact Bonds view government not as a problem but as a convener leveraging outside resources, momentum, and energy to catalyze positive social change for America. Local and State governments should capitalize on these social financing mechanisms to solve their biggest challenges.