New York boasts boldest pay for success program yet

New York City

New York State has launched a new *social impact bond (SIB) with Merrill Lynch and Social Finance Inc, which includes three innovations never seen before in a social finance partnership.

It is the first pay for success program to have been launched by a US state and the second to be trialed in the US. In 2012 Goldman Sachs provided a $9.6 million loan to support the first four year program, and at the end of last year Merrill Lynch followed suit providing investment for the latest social impact bond. 
Michael Belinsky tells us how this new SIB dares to be different and marks an exciting advancement for social impact bonds and the future of finance.
Just as a year full of rapid progress in social enterprise was ending, another social impact bond (SIB), also known as a pay for success bond or a social benefit bond, was announced on December 30. This is the second social impact bond in the US and the first one to be launched by a state – and its success may determine how US Treasury’s upcoming $300 million Pay for Success Incentive Fund will operate. The Fund, proposed by President Obama at the US 2014 Buget, is designed to empower cities, states and nonprofits to support more public-private partnerships that produce measurable results in their communities.
Since the programme will be funded on the basis of results, by the US Department of Labor and New York State, let’s call this social impact bond the “DOL-NYS SIB” 
The DOL-NYS SIB contains three interesting innovations that make it different from other SIBs being designed or implemented around the world. 
But first a quick description of the programme: In this programme, the Center for Employment Opportunities (CEO) will serve 2000 former inmates in Rochester and New York City with the goal of integrating them into the community. At $13.5 million spread over 5.5 years, this is the largest SIB that has been launched to date.
New York State was recently awarded an innovation grant by the US Department of Labor that it will combine with its own funds to pay for this programme. Payment will be made only if the programme is successful in increasing employment and reducing recidivism for its target population. Chesapeake Research Associates will use a randomized controlled trial to independently verify the programme’s success against employment and recidivism metrics. 
Although payment in this programme will be made for both employment and recidivism metrics, CEO’s past performance suggests that it will be much better able to affect recidivism. A randomized controlled trial conducted by MDRC, a nonprofit, nonpartisan education and social policy research organization from 2009 to 2011 found that the programme’s impact on employment “faded over time,” but that impact on recidivism was statistically significant and was well worth the effort. Recidivism dropped by 16-22% among inmates who entered the programme within 3 months of being released from prison. A cost-benefit analysis of this impact showed that for each $1.00 in cost the programme creates $1.26 to $3.85 in benefits.
Now, onto the distinctive aspects of this SIB.
1. Federal and state governments will pay for outcomes together
Collaboration with the federal government to fund SIBs may be challenging, especially for young organizations unused to going through federal procurement, but it offers rewards in the form of larger SIBs and SIBs that may have been impossible to create otherwise.
This SIB is one of two in the US that will feature a federal and a state outcome payer. Many previous SIB have had only one outcome payer. In the first US SIB, at Rikers Island, New York City is the sole outcome payer. The same goes for the first SIB in England, at Peterborough, where the Big Lottery Fund is the sole outcome payer. 
Yet government may be interested in creating SIBs to fund programmes that produce savings that accrue to federal budgets, such as savings to Medicaid and Medicare. This “positive externality” means that city and state governments may not undertake SIBs in which they don’t see a substantial portion of the savings. This has been noted in several responses to a request for information from the US Treasury about a proposed Incentive Fund for SIBs.
2. Individual investors participated in this deal
Many SIBs in Australia, England and the US have required significant collaboration with investors to get off the ground. This has increased transaction costs and made marketplace participants worried that SIBs will struggle to scale if every deal takes so much time and energy to create. 
The DOL-NYS SIB, however, is one of the first projects that contains a private placement offering. Over 40 private and institutional investors participated in this $13.5 million transaction via Merrill Lynch’s wealth management platform, making an average investment of $300,000. If wealth managers figure out how to standardize SIB offerings to their clientele, SIB transactions will become simpler and faster from the investor perspective. 
Two other private placement SIBs are being offered, and they are both in Australia. The Benevolent Society SBB (social benefit bond, a different term for SIBs used in Australia) is structured in two classes of bonds with performance-based returns ranging from -75% (loss of A$7.5 million of principal of A$10 million) to 30% per annum for the 5-year programme. The Newpin SBB is structured as a loan note with returns ranging from -50% (a loss of A$3.5 million of the A$7 million in principal) to 15% per annum over the full 7 years of the programme. 
3. Investors in this SIB may be taking on more risk than investors did in the previous SIB in the US
The Rikers Island SIB, the first SIB launched in the US, transferred a substantial portion of the downside risk of the programme from New York City government to Rockefeller Foundation, rather than to the investor, Goldman Sachs. Bloomberg Philanthropies backstopped $7.2 million of the $9.6 million investment made by Goldman Sachs, or 75% of the entire investment.
In the DOL-NYS SIB, Rockefeller Foundation has included a $1.32 million first-loss guarantee on a $13.5 million investment from Merrill Lynch’s private and institutional investors and the Robin Hood Foundation. At about 10% of the programme, this backstop is much smaller than the one made in the Rikers Island SIB.
Returns for an investment into the DOL-NYS SIB range from -90% (or -100% if some investors are not covered by the Rockefeller guarantee) to 12.5%. Returns for the Rikers Island SIB have not been made public, but I estimate them to range between -25% and 20%.
Are DOL-NYS SIB investors taking on more implementation risk than did investors in the Rikers Island SIB? There are several reasons to think that the DOL-NYS SIB carries greater risk than did the Rikers Island SIB:
This is the second social impact bond in the US, so uncertainty around programme design is lower; 
The outcome payers are a federal and a state government, rather than a municipality, so risk of default is lower; and CEO’s intervention showed positive results in a randomized controlled trial, whereas service providers in the Rikers Island programme are implementing an intervention for the first time (although that intervention, as provided by other organizations, did undergo a randomized controlled trial).
These three features make the DOL-NYS SIB an exciting advancement of the SIB market. Once the US Treasury Incentive Fund comes online and more states advance in designing their SIBs, we should see more SIBs like this one. 
*Social impact bonds, otherwise known as pay for success bonds are financial mechanisms that have been developed to provide an innovative way to finance social programmes. Programmes are run by selected nonprofits, charities or social enterprises with a proven track record of success. The money used to support the organisation’s work is tied to a rigorous measuring of the programme’s outcomes. The financial mechanism enables governments to save money and pay only for positive results. If a pay-for-success programme meets identified success metrics, private and institutional investors have the potential to earn positive financial returns. Through these programmes, the public, private and nonprofit sectors work together to achieve positive social outcomes.
(You can read more about SIBs at this Center for American Progress web page.) 
Michael Belinsky is co-founder of Instiglio (, which creates social impact bonds. He holds an MPP from the Harvard Kennedy School of Government, where he was managing editor of Harvard Kennedy Review.