Could pay-for-success bonds help curb homelessness?

SELLING BONDS: Diane Lynch, member of the Social Venture Partners Rhode Island board, says that Rhode Island’s size makes it easy to get “everyone in the room to sit down and talk.” / PBN PHOTO/DAVID LEVESQUE
SELLING BONDS: Diane Lynch, member of the Social Venture Partners Rhode Island board, says that Rhode Island’s size makes it easy to get “everyone in the room to sit down and talk.” / PBN PHOTO/DAVID LEVESQUE

There are, by varying estimations, some 400 to 700 chronically homeless people in Rhode Island who cost the state and its taxpayers an average of more than $30,000 each per year in service program, incarceration and medical costs.
But when the chronically homeless are placed in permanent housing programs with support services, the savings is close to $8,000 per person, per year, according to research produced by Providence College sociology professor Eric Hirsch and Roger Williams University anthropology professor Irene Glasser. That represents a total possible taxpayer savings of $5.6 million per year and Hirsch estimates those figures, from a study that measured the effectiveness of the Housing First Rhode Island program back in 2006, are a gross underestimation.
Now Hirsch and others are asking if there’s a way capture that savings while providing minimal risk of lost taxpayer investment. “I think the state and elected officials only seem to be worried about the bottom line and aren’t willing to invest money now to retain a savings down the road,” Hirsch said.
One funding possibility being investigated is using social-impact bonds to form a partnership between the state, investors and nonprofits to fund rehabilitation programs in order to provide measurable progress in social programs.
It’s a relatively new funding mechanism that is in place in only two other states.
Social Enterprise Ecosystem Economic Development, a partnership of entrepreneurs and social investors working to drive social-enterprise development in Rhode Island, is working with Boston-based Social Finance Inc., to study what it would take to bring a social-impact bond program, also called pay-for-success contracts, here to invest in chronic-homelessness rehabilitation programs.
“Rhode Island is small and [it is] easy to get everybody in the room and sit down and talk,” said Diane Lynch, a SEEED collaborator and a member of the board of directors of Social Venture Partners Rhode Island, which is closely aligned with SEEED. “I think it has the potential to be revolutionary.”
Social-impact bonds work by securing capital from private investors – from a business, a group of businesses, or a group of individuals – to fund service programs at local nonprofits. Investors would be gathered by an intermediary, such as Social Finance.
If the program produces its desired outcomes within the specified time period, the investors recoup their capital with interest from a state authorized “sinking fund” that initially would be funded through legislation and then replenished, in theory, with savings acquired through the successful program.
If the program fails, the private backers lose their investment and the state would return the “sinking fund” into its general budget or other designated slot.
“The No. 1 [thing] that needs to be clarified is exactly what a social-impact bond is, because no one [seems to know],” said Jim Ryczek, executive director of the Rhode Island Coalition for the Homeless, who is in the SEEED-led working group. “The attractiveness is the low risk to the state to do this. If it does work, the state benefits from not having to put out the capital to help solve the problem in the first place.”
The idea is that the state would coordinate how much money needs to be put into the “sinking fund” to compensate for the return of the private investors’ initial capital plus interest that would equal the cost savings that would come from successfully reducing, in Rhode Island’s case, the chronic homelessness program.
As Lynch, Ryczek and others explain it, yes, taxpayer money would be used to fund the “sinking fund” initially.
But, they said, taxpayers already are paying for costs associated with treating the state’s homeless population and the potential long-term savings would benefit them as much as the state.
“What we’re constantly coming up against in our advocacy is a long-term problem. It’s going to cost [to fix that] and we need some investment in order to solve it over time,” Ryczek said. “We run on a yearly cycle.”
So far, Rhode Island officials aren’t involved in the project. Lynch said both Gov. Lincoln D. Chafee and General Treasurer Gina M. Raimondo have been made aware of SEEED’s efforts.
Neither the governor’s nor the treasurer’s office immediately returned requests for comment.
Social-impact bonds are very new, with only New York and Massachusetts currently running such programs, though other states, including Connecticut and Ohio – are talking about similar programs. Both current programs announced their first bonds last August, with Goldman Sachs in New York investing $9.6 million for efforts to curb criminal recidivism of young adults.
Massachusetts announced its first successful bidders for pay-for-success contractors after Gov. Deval L. Patrick last July signed a law establishing a state fund of $50 million for the initiative, hoping to reduce repeat juvenile offenders and improve education and employment for youths exiting the system, and also to reduce emergency shelter and Medicaid costs associated with chronic homelessness.
A group of Brown University graduate students pursuing their capstone project provided analysis on what social-service programs would best benefit from a pay-for-success initiative here. They didn’t see prison recidivism as a good candidate, Lynch said, but that hasn’t been ruled out for future programs.
One consideration is that participating nonprofits must have the capability to meticulously measure defined goals and outcomes.
“I don’t have the sense that we’re quite there. I think we’re definitely moving in that direction, and I think certain issues and parts of the nonprofit sector are further ahead than others,” said Jessica David, vice president of strategy, planning and special projects at The Rhode Island Foundation.
Hirsch said the estimated savings from permanently reducing the chronic-homeless population here should speak volumes to potential investors and state officials.
In a study he participated in of the state’s Medicaid database, Hirsch cited the following:
• From Jan. 1, 2010, through April 30, 2012, all 2,038 homeless persons incurred more than $58 million in Medicaid costs.
• The top 67 chronically homeless users of Medicaid during that time incurred $9.3 million in Medicaid costs.
He estimates that by placing the chronic population into permanent housing, there could be more than $4 million in Medicaid savings.
“It’s their own data,” Hirsch said of the study statistics. “If [the state can’t provide funding], we’ll support giving the savings to investors or anyone who is interested in putting people into permanent housing.” •

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