Social Impact Bonds

2014 Cascade Conference, SeaTac

In the 20^th Century, if you wanted to solve a public problem, you’d build a bureaucracy and scale it up. Today, we’re living in the age of networks, where people can build all kinds of partnerships to collaborate and solve problems together. Innovative groups of people can solve problems outside of bureaucracies. 

And there are no more pressing problems facing our communities than those of poverty and educational opportunity.

Shortly after the 2012 election I was at a dinner with Skip Li, who was Dan Evans’ legal counsel and went on to found a charitable organization called Agros International which promotes economic self-sufficiency for poor families in Central America. We were talking about where Republicans need to go after the losses in the 2012 election. Skip said this: “Republicans don’t have a vocabulary for talking about poor and minorities, other than free-market talk. Republicans must recruit candidates with a heart for the poor.” 

And that really got me thinking—we need to do more than just talking about limited government. We need real policy solutions to the problems of poverty that confront our neighbors.

I was on a panel about poverty issues at the Roanoke Conference earlier this year along with Jeff Lilley from the Seattle Union Gospel Mission. Jeff said something that has stuck with me. He said that homelessness is not a resources issue, it’s a relationships issue.

I think that most center-right Americans would agree with that statement, but it’s not how we talk as a movement, and that’s to our detriment. Because homelessness is a real issue, and simply saying that limited government will solve it is not enough, just like saying that resources will solve it is not enough.

Let’s talk about the role of resources in connection to relationships. That is, resources should leverage relationships. Government indeed has a role in leveraging relationships and creating incentives.

I want to spend the next few minute talking about Social Impact Bonds. Social Impact Bonds are an innovative way for government to leverage relationships, engage the private sector in solving public problems, and drive cost-savings and program effectiveness. They work when there is money to be saved through prevention – dropout prevention, homelessness prevention, reduction of prisoner recidivism, or disease prevention.

I got interested in social impact bonds after reading a book by former Indianapolis mayor Stephen Goldsmith called The Power of Social Innovation, which I’d highly recommend. 

At the root of this, I believe that we need to bring more innovation to the realm of human services.

We don’t tend to innovate at present. Government tends to be risk averse – we like to stick with what we already know. And various stakeholders have become protective of the status quo.

Innovation requires risk, but it requires incentives for profit that make the risk worth the effort.

In the social services realm, it requires the ability to attract social entrepreneurs and capital. Through Social Impact Bonds, investors can receive a return if their investment is effective, in other words if there are demonstrated results and savings to the state over time. This is good for the investor, good for taxpayers, and most of all it’s good for those who benefit from improved outcomes.

A growing list of states are adopting social impact bonds because they offer the promise of solving problems, not just funding and maintaining the status quo. Minnesota, Massachusetts, Utah, and New York City were among the first to get on board. Just this year a number of state legislatures have passed bipartisan legislation for social impact bonds. A headline in Governing Magazine in January said that “Pay for Success Programs will be front and center in 2014,” and they are.

The Harvard Business Review has named social impact bonds among the foremost “audacious ideas to solve the world’s problems.”

And when I introduced House Bill 2337 to bring Social Impact Bonds to Washington State this year, we had one of the most diverse coalitions I have ever seen on any issue. We had a number of Democrats on the bill, led by Ruth Kagi, the chair of the House Committee on Early Learning and Human Services, as well as Republicans like Chad Magendanz, Kevin Parker, Dave Hayes, Linda Kochmar, Maureen Walsh,  and Cathy Dahlquist. We had the Washington Policy Center and human services advocates in the same room testifying in favor of the bill. Education advocates, housing advocates, state employees, philanthropists, investors, liberals and conservatives have found common cause on this issue.

The libertarian Reason Foundation blogged in support. And the Seattle Times wrote, “This is a smart approach. Government alone cannot solve social problems, and the state must direct more money into education. Wooing investors to fund proven prevention programs is a win-win.”

We’ll press on next year and we’re bringing together stakeholders next month to strategize. And next year, I want to zero in a specific issue that we can tackle with Social Impact Bonds. It’s the issue of dropout prevention for low-income students. Everything during the 2015 legislative session will be linked to K-12 education. We need to attract new sources of funding to help our low-income students succeed in school.

Let me just briefly give one example of where investments could be put to good use. The example comes from McCarver Elementary on the Hilltop in Tacoma. Going to visit McCarver last year was one of the most inspiring things I’ve done as a legislator. 

A few years ago, there was 179 percent turnover among students within a single school year, and that’s tragic. That means single moms moving their kids from place to place to place. It means a kid’s world turned upside down as they leave behind their friends and their neighborhood, and you repeat that with all the other problems of poverty, and you’re talking about the conditions that lead to dropouts later on.

And McCarver had zero credibility with these low-income parents to get them involved in their kids’ education.

One agency that did have some credibility was the Tacoma Housing Authority. Some visionary leaders at THA decided to initiate an innovative partnership between the Tacoma School District, THA, and 30 nonprofits. They made a deal with parents: you can stay in THA housing for 5 years if you commit to staying there, getting involved in your child’s education, and improving yourself to become better educated and having a steady job. The Gates Foundation is tracking the project and showing amazing results.

After just a couple years, turnover has fallen from 179 percent down to 75 percent. Parents are feeling engaged in the school, they are learning skills, they have a sense of place and community that they’ve never had before. And that’s just the parents. Parents matter a whole lot. And the kids are improving their scores in reading and math. It’s amazing.

This is the kind of program that we could scale up if the private sector could come in with strategic investments through Social Impact Bonds. Let’s continue this work in 2015. This is about engaging the private sector in our response to public challenges. It’s about creating market incentives to solve problems. If you want to get involved in the discussion, come find me afterwards and I’ll let you know how you can help. Thanks so much.