Massachusetts may only pay fruitful social projects
NEW YORK |
NEW YORK (Reuters) - Massachusetts might require nonprofits it contracts with to tackle social ills such as homelessness to first obtain private funding, with state payments delayed until the groups show tangible results.
Charitable foundations and philanthropists interested in addressing societal problems would have to offer initial financing for a project, said Jay Gonzalez, the Massachusetts secretary of administration and finance.
Massachusetts recently put out a request for information to explore this strategy, which Gonzalez says is part an attempt "to find smarter ways to deliver services more cost-effectively and to stretch every taxpayer dollar as far as possible."
Though both state and federal tax collections have improved since the recession, the federal government also is looking at this approach, which was pioneered in the UK.
President Barack Obama's 2012 budget plan includes $100 million for these "social impact bonds," which more closely resemble private loans than debt.
The investment returns could be juicy. The Rockefeller Foundation, which invested $500,000 in an $8 million project to cut recidivism in the UK prison system, could reap the equivalent of up to a 13 percent annual interest rate payment, according to Antony Bugg-Levine, a Rockefeller managing director.
That maximum rate would only be paid out if the project meets the highest of a series of benchmarks measuring how successfully the UK project keeps felons from being sent back to prison, Bugg-Levine said.
Alternatively, investors could lose their entire stake.
"The program has to be minimally successful to get your money back," Bugg-Levine said. "If it does not succeed, they (the investors) lose all their money."
Massachusetts' Gonzalez said it was much too soon to estimate the size of its initiative. The responses to its request are due in June; by the end of summer, Massachusetts hopes to be able to issue a formal request for proposals.
(Reporting by Joan Gralla; Additional reporting by Ross Kerber in Boston; Editing by Leslie Adler)
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How does this work? The SIB is a completely voluntary initiative for participating nonprofits that would give them access to new financial resources to expand their already successful intervention programs with the goal of lessening the need for more expensive and less effective government remediation efforts in the future. The Social Impact Bonds (SIBs) would raise private investment that would be used to fund the participating nonprofit programs up front. The only state payments that would be “delayed” are the returns to investors, after predefined metrics are achieved. Participating nonprofits would not have to wait to get paid as the story implies. Instead, private investors would assume all the financial risk.
SIBs are not only about attracting new sources of funding. They’re about forging new partnerships across the public, private, and nonprofit sectors to address long-standing economic and social challenges. The announcement in Massachusetts is a critical first step in bringing innovative social financing and forging a new form of cross-sector collaboration to drive systemic change.
Tracy Palandjian
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Social Finance, Inc.
www.socialfinanceus.org
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