Making a Better Safety Net —Wall Street Style

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By Pippin Ross

The Statehouse’s ‘Great Hall’ is packed, like it is almost every day leading up to the moment when the Governor finally signs off on the next budget. Every group pushing for every piece of the state funding pie turns out in full force. Today, the mood is expectant, the dress code casual. The room is filled with teenage girls with babies and strollers, boy-men in low-pants, grinning lawmakers scoping out who’s who, and organizers wearing gratuitous smiles to mask fear-of-funding.

Xexiel Mejia is, as he puts it, “F—’in determined to straighten this out.”

Mejia is a 17-year-old who swears he dodged jail because, when arrested for graffiti at 13, “I skipped juvey and did ROCA.” ROCA, Inc. is a 23-year-old Chelsea-based program for high-risk kids, the phrase used for young people already caught by the criminal justice snare. “Doing this kept me from going to the streets and then prison.” He says, “I know so many people who go to jail and fester into someone worse like a caged animal. Prison never gets budget cuts. Places like ROCA do.”

A floor above the Great Hall, in a different style of delivery, Secretary of Finance and Administration Jay Gonzalez repeats the message. “We have to change the way we do business. What we’re doing is unsustainable. There are lots of good reform efforts, but I’m definitely excited about this one.”

Gonzalez recently dispatched an RFI (request for information) to collect ideas and proposals for what’s known as Social Impact Bonds and Pay For Success contracts.

Here’s how it works: Private investors bankroll alternatives to government-funded social safety net programs. If the different approach actually meets a pre-arranged goal made between the investor and the government on things like keeping people out of prison and homeless shelters, the government reimburses the investment. The government’s payback is justified as a portion of the money saved from a much more effective, cheaper service that ultimately, costs the government less. If it doesn’t work as planned, investors don’t receive a dime.

“Transforming how we handle social challenges while controlling government waste is a pretty audacious goal. Even people who do know about it can’t quite believe it,” says Tracy Palandjarian, the CEO of Social Finance, Inc., a social impact bonds business that just set up shop in Boston. It’s an offshoot of Social Finance, UK, not-for-profit venture capitalists who, everyone does agree, are responsible for launching the first test-drive of SIB’s, or Social Impact Bonds.

Like her colonial cousins across the pond, the U.K. spends billions of dollars a year on a prison system so ineffective, 60 percent of incarcerated first offenders recidivate. Social Finance spent a couple of years convincing 17 investors, including the Rockefeller Foundation, to sign on to a Social Impact Bond.

Akin to playing the stock market, with a healthier society as an investment goal, the investors put up $8 million to fund a carefully picked social service provider’s strategy to keep inmates out. The “bond” was then taken to the British government and a deal was made: If 3,000 prisoners on first-time offenses at HMP (Her Majesty’s Prison) Peterborough stay out of prison within one year of release, the government refunds the investors, with interest. If by 2018, the provider’s work lowers recidivism by 7.5 percent, investors get their money back. If the work lowers repeat bids as much as 13 percent, investors get a bonus. To the government, the refund is about 50 percent of the money saved. If the plan falls one inmate below the agreed upon stats, no refund, and the government gets a lot of its work done for free.

The notion that it’s extremely easy to out-perform the government came this winter from an unexpected critic: the President.

“Instead of spending first and asking questions later, we’re rewarding folks inside and outside of government who are delivering results,” President Obama said at his budget address, to justify adding $100 million to motivate investors to come up with innovative repairs to government waste. The Obama Administration is putting the money up to fund seven “Pay For Success contracts” as part of a pilot program to see how well the idea works.

The spectacular views from the 14th floor of 200 State Street have little — thus far — to do with success since opening up the Boston spin-off of the UK recidivism project. The space has been donated for Social Finance, Inc.’s first year by Parthenon Capital Partners, upscale money managers comfortable with high-risk investment.

“Boston is a hotbed of social and financial innovation,“ is Social Finance CEO Palandjarian’s explanation as to why they picked Boston for their US launch of Social Impact Bonds. She must believe in what she’s taking about — she left a cushy job one floor below, developing investment strategies for Parthenon’s non-profit clients.

“There’s money, there’s a broad culture of social services, there’s a government that has no problem with setting precedent. Our job is to arrange a perfectly balanced 3-legged stool to achieve a low-risk, high result in refund.”

The legs to which she refers are the government, the investor, and the social service provider.

The toughest part of the deal is duking out an agreement as to what sort of ‘measurement’ qualifies as a success (refund), or failure (investor’s loss).

“When I read an article about what’s going on in the UK, I went berserk!” says Molly Baldwin, the founder and executive director of ROCA, Inc. She can’t wait to find investors to underwrite an expansion of the agency’s excellent track record of helping young people dodge crime and prison. ROCA, Inc. currently receives only 12 percent of its funds from the state. “I’m in a business in which we all talk about how much money is being wasted on failure and never invested in success. We carefully track what we do to see where we aren’t doing it, and how and why we are. Meanwhile, our criminal justice system, which doesn’t track or ever adjust, is a miserable failure that’s ridiculously expensive. After all the talk of evidence-based practice, it’s time for the government to put its money where its mouth is.”

Baldwin is putting together a proposal to deliver to Sec. Gonzalez’s office, aware that the Patrick Administration’s fix-up priorities are homelessness and high-risk youth. She’s also met with Social Finance, Inc. “They gave a lot of social service providers a talk about how and what they do. I was so psyched, I couldn’t stay in my seat!”

“Is it going to be simple?” asks Sec. Gonzalez. “No. It needs some real rigor to make it right, but we’d be fools to not explore this, and the exploration has definitely begun.”

PIPPIN ROSS is a freelance reporter.