Harvard Kennedy School picks Michigan for 'pay-for-success' social program
LANSING — Michigan plans to enlist private investors to finance a public social program, becoming the latest state government to try an experimental "pay-for-success" approach in tackling persistent problems such as homelessness or criminal recidivism.
The state announced Monday that it is the seventh chosen through a national competition to receive technical assistance from Harvard University for a social impact bond.
Also known as pay-for-success contracts, social impact bonds work like this: Private investors - potentially a bank and a philanthropic foundation - put up money for a program with a specific goal. A contract is signed with a service provider.
If the goal is achieved, the government pays back the investors, with a profit. If not, the government pays nothing.
"We believe it makes government delivery of services more accountable. If it's successful, we benefit. If for whatever reason the targets aren't met, taxpayers aren't on the hook for those dollars," said Joe Pavona, special adviser for public-private partnerships to Gov. Rick Snyder.
The state will issue a request for information Monday to identify potential projects.
Some possibilities mentioned by Pavona include infant mortality, early childhood development, homelessness and recidivism. But he said the Snyder administration could settle on something else depending on feedback from potential investors and service providers.
The Harvard Kennedy School will send a full-time fellow to Michigan for a year to help launch the initiative, with support from the Rockefeller Foundation and the Laura and John Arnold Foundation. After helping Massachusetts and New York become the first state governments to develop pay-for-success contracts using social impact bonds, Harvard held a competition to award assistance to other governments.
Six winners out of 28 applicants were announced in June. The school added Michigan after finding more funding because it was among a handful of other "really strong" applications, said Jeffrey Liebman, a public policy professor at Harvard who directs the university's Social Impact Bond Technical Assistance Lab.
He said the No. 1 criteria in choosing a state was the commitment of its leaders to follow through.
"If we work with a state for a year to put together a project, we want them to actually do it," Liebman said.
Social impact bonds began in Britain. The first U.S. government to put one together was New York City, which announced a year ago that Goldman Sachs would invest almost $10 million in a city jail program to keep inmates ages 16-18 from reoffending.
The firm will get back the $9.6 million if recidivism dips by 10 percent and as much as $2.1 million in profits if the reoffending rate declines more. Goldman will lose as much as $2.4 million if recidivism does not fall by at least 10 percent. Mayor Michael Bloomberg's personal foundation, Bloomberg Philanthropies, provided a $7.2 million loan guarantee that can be used to repay the rest of Goldman's investment.
Supporters of social impact bonds say they are a promising way to foster innovation in social service programs by finding out what works on a small scale, with the hope that improvements can implemented on a broader scale in the future. The pay-for-success arrangements are still new and unproven, however, and some observers question the implications of injecting more private profit-making into government functions.