Paying for Success in the Northwest

December 21, 2015

Jeff Clarke, CEO

The Pacific Northwest has a unique and globally influential culture marked by innovation, entrepreneurship, civic engagement, generosity and stewardship. Our region’s commitment to innovation drives our growing leadership in impact investing — leveraging private capital for social good. Impact investors seek opportunities to earn a financial return while also doing something good for society. Their aspirations are changing the way we think about solutions to big social problems like homelessness, poverty and unemployment. To do this this work well on a local basis requires a deep understanding of how communities really work. As we know, local is retail as opposed to wholesale work.

"Pay for Success" is an emerging and innovative new model of impact investing. (It’s also known as “social impact bonds.”) In it, private and institutional investors team up with state and local governments, nonprofits and academia to fund high-quality, evidence-based social programs in disadvantaged communities. Governments repay investors’ principal plus an agreed-upon return if — and only if — an independent auditor confirms that the project meets predetermined success metrics. While performance-based contracting is not new, its use in the social service sector is an innovative approach to public spending. Pairing performance-based contracting with social impact financing can help improve the quality of programs and pave the way for governments to pay for what actually works in social services.

In 2015, several Pay for Success feasibility studies began across the Pacific Northwest, including Idaho, Montana, Oregon and Washington. Each is exploring both if and how the model might be applicable locally. As part of our commitment to impact investing, Philanthropy Northwest is a supporting partner of Washington State Department of Early Learning’s and Thrive Washington’s process to explore whether a Pay for Success funding model can significantly expand, strengthen and sustain proven home visiting programs statewide.

Home visiting is a voluntary intervention that pairs social services professionals with new families to work together on a regular basis in the home. This model has been proven to improve maternal and child health, family self-sufficiency and school readiness. While home visits can change the trajectory of an entire family, they are expensive to provide and there is significant unmet demand. Washington state must find new ways to fund this work. The pay for success funding model is one option the state is currently exploring.

By spring 2016, the Pay for Success study will determine:

  • How the entire home visiting system can be strengthened. The study will provide more information about which program models work best in which communities and identify scaling opportunities and the return on investment for Washington state.
  • If the Pay for Success model could be a good fit to support Washington state’s home visiting work. If yes, the state will then need to decide if it should be used.

Background on the Washington State / Thrive Washington Project:

Resources to Results: The Washington State Pay for Success Symposium 

On November 18, Philanthropy Northwest joined Washington state nonprofit and government organizations in hosting a symposium as the start of a longer-term conversation about the potential for Pay for Success in our region. It was a blended conversation, with national participants from philanthropy, nonprofits, state and local government, academia, business and the White House.

Here are the top five things Philanthropy Northwest has learned through our Pay for Success work and the recent symposium:

  1. Pay for Success is so nascent that it serves as the perfect example of real or just-in-time learning. Those who gathered for the symposium are literally creating the field here in the United States. Each day brings new insight and learning.
  2. That said, the United States is now the world’s largest and most progressive pay for success market. The White House Social Innovation Fund and philanthropy have played crucial roles in stimulating market growth and mitigating early risk for other investors. Local government leaders have made equally important contributions in terms of their leadership and commitment to disrupting the status quo in order to seek measurable and sustainable community impact.
  3. To be successful, the Pay for Success model must reflect local conditions. Deal structures may be replicable in many places, but the substance of the intervention, its outcome measures and timelines must reflect local.
  4. Pay for Success is much more than an innovative financing mechanism or a “deal.” Discipline is necessary to ensure that the intended beneficiaries remain at the center of the work, especially when key investors are not from the local community.
  5. While it’s a good example of cross-sector collaboration and the aspirational “blended capital” model, the work is difficult. The “cross” in cross-sector means different languages, motivations and ways of working and Pay for Success projects require significant relationship-building. For government and elected officials, any change to how public dollars are invested is risky.

Symposium Materials

Symposium Advanced Reading

A June 2015 Wall Street Journal op-ed called Pay for Success “a radical form of civic-minded financial engineering that effectively reverses a problematic paradigm that prevailed during the financial crisis. Unlike the dysfunctional situation of 2008, when giant bank bailouts amounted to ‘privatized profits and socialized losses,’ this model leaves private investors bearing the risk that a social program might fail but sharing the spoils with taxpayers if they work.”

It’s too early to tell if and how Pay for Success will improve the configuration, delivery, financing and, most importantly, efficacy of social service programs. While Pay for Success is an emerging approach and won’t be of interest to all philanthropy, it is an important catalyst that encourages us all to thinking about solving community problems in new ways. However it turns out, let’s be sure to recognize and celebrate the willingness of government, philanthropy, nonprofits, businesses, financial institutions, academia and other intermediaries to experiment and learn together! We’re excited to be part of this journey.