Massachusetts Pay for Success Initiative Advances Government, Private Sector, and Philanthropic Investment in Human Capital

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Can you do good and do well? This is the driving question for impact investors - those who want their dollars to both provide a reasonable return on their investment and make the world a better place. By some estimates, in the next 30 years, there will be as much as $6 trillion of private money looking to be deployed in this way. While an exciting idea, the promise faces tough realities. First, many investment opportunities exist that could provide social returns, but not financial ones. Second, even those offering social returns often can't show outcomes --people's lives changed, only outputs--number of people served.

Pay for Success, also referred to as Social Impact Bonds, offers a chance to change that. The Pay for Success model involves a unique collaboration of government, private capital and non-profit service delivery. It begins with government reassessing a program that it is spending millions of dollars on but that is not achieving the results it wants, such as keeping fewer people out of hospitals, prisons and homeless shelters. A nonprofit service provider is contracted to deliver an intervention that achieves that result for substantially less than the government spends currently. Private and philanthropic investors make a bet on the evidence-based service provider by essentially fronting it the money to perform the intervention. If the provider successfully achieves target outcomes, the investors will be repaid by government, the lives of targeted people are made better and government has only spent its money on a proven success. A trifecta.

Harnessing all three of these forces for change in Pay for Success signals an enormous leap forward in terms of bringing private-sector discipline and resources to public-purpose activities. In my mind, it builds in many ways upon the experience and lessons learned by many of us from the community development field. There, beginning on a scale in the 1980s, government, private and philanthropic partners came together to expand affordable rental housing across the country using the Low Income Housing Tax Credit (LIHTC). Like with Pay for Success today, in the early days of the LIHTC, nonprofits were often the owners of the housing (the 'service providers') but the it could only be built because government, philanthropy and private financial institutions figured out how to share risk and demand quality outcomes.

Until Pay for Success, these types of partnerships had previously been reserved for investments in physical infrastructure. Now we can invest in human capital - like juvenile justice, education, workforce development, and health.

Living Cities is proud and excited to be participating as a funder in a Pay for Success initiative with the Commonwealth of Massachusetts focused on reducing recidivism and improving employment outcomes for at-risk youth in the Boston, Chelsea and Springfield, Massachusetts areas. This seven-year, $27 million project reflects the largest financial investment in the nation to a Pay for Success initiative. It will allow Roca, a non-profit that for 25 years has delivered an evidence- based high impact intervention that has reduced incarceration rates among high-risk individuals, to expand its services to more than 900 young men. These services work not only to tackle the problem of juvenile recidivism, but also to train participants in job readiness, education readiness, and life skills. Roca was chosen as the service provider partner through a highly competitive procurement process. It is exactly this type of rigor that is needed to ensure that resources-- public, private and philanthropic-- are aligned towards what works.

With 2.3 million people behind bars, we incarcerate more of our citizens than any other country in the world. In Massachusetts, 64% of young male ex-offenders go back to jail within 5 years and only 35% of them gain employment within a year of release. This has huge implications for the cycle of inter-generational poverty as their children are at great risk of economic hardship. The payoff for this investment in Massachusetts goes beyond the investment in the more than 900 men served. Success will model an inspiring new way for cities, states and regions across the country to fundamentally disrupt this, and other, systemic problems.

As a philanthropic organization focused on improving the lives of low income people in US cities, we see this initiative as a way for philanthropy to fulfill its important role as an accelerator of change: Taking on risk that other sectors cannot in order to test and prove new ways of solving wicked problems until a 'new normal' is established. Indeed, Pay for Success brings together three core elements that are fundamental to fixing long-broken systems: bringing cross-sector decision-makers together to set ambitious goals and to use data to measure progress; enabling the private sector to use its investments and practices for social results; and deploying public resources for greater impact.

Through these elements, there is great hope for expanding opportunity and making a dent in inequality.

Living Cities joins The Commonwealth of Massachusetts, Roca, Third Sector Capital Partners, Goldman Sachs, the Kresge Foundation, the Laura and John Arnold Foundation, New Profit Inc., and the Boston Foundation in the Massachusetts Juvenile Justice Pay for Success Initiative.

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