May 15, 2011

Charities May Wind Up Paying for President’s 'Pay for Success’ Idea

President Obama

President Obama’s budget proposal for 2012 includes a $100-million idea that could revolutionize the way social programs are financed—or could put a ticking time bomb next to the heart of some of our society’s most needed social programs.

While the proposal quickly attracted support and excitement from both sides of the political spectrums, nonprofits need to reflect on some of the drawbacks before rushing to support the concept. Mr. Obama’s idea is a welcome import from Britain, which is experimenting with what it calls social-impact bonds.

Introduced by the government of Prime Minister David Cameron, the concept is getting a test with inmates released from a prison 75 miles outside London.

Today, 60 percent of those prisoners can expect to land in jail again within a year after their release. But a nonprofit group has raised $8-million to test a social-service program designed to reduce that probability—in part by helping the former prisoners learn how to stay healthy and find work.

The nonprofit is convinced that it can reduce the number of repeat offenders to 7.5 percent, and if it does, the people who put up the $8-million will get all their money back from the government.

If the charity does better than the goal, and even fewer people return to jail, the donors will get a bonus.

But if the group fails altogether, the money will be essentially a typical charitable donation.

Mr. Obama rebranded the idea as “pay for success” bonds, and his budget plan includes experiments with seven government programs, such as job training and juvenile justice.

After more than a decade’s work evaluating social programs, and another decade as a social worker, I am intrigued by Mr. Obama’s ideas but also skeptical.

The main concern will be how to define success; in the real world, it is difficult, if not impossible, to agree on rigorous measures that make sense.

Change comes in many forms and is brought about in many ways.

Everything that happens in a social-change experiment can affect the results, and it is often impossible to figure out that just one innovation made all the difference.

What’s more, it’s hard to imagine how “pay for success” programs can be sufficiently insulated from political pressures, so that disputes about measurement standards and acceptable levels of rigor won’t become a political shuttlecock.

Using the British prison program as an example, what happens if some powerful group of political leaders or activists no longer accepts the idea of keeping prisoners from crime for just one year but wants three years—or five? Or if a 7.5-percent drop in repeat-offender rates is no longer acceptable and instead this group desires 10 percent or 20 percent? Or if not returning to prison is no longer the desired measure but instead rates of permanent employment?

Those who advocate social-impact bonds say that the goal posts cannot be moved once they are agreed upon for a specific program.

But it is quite possible that some politicians and pressure groups may use a disagreement on the measures of such programs as a strategy to reduce government support for social programs.

Imagine them pledging philosophical support for the pay-for-results approach but then refusing to finance them because the measures of success were impossible to reach.

If all government-financed programs were to rely on the social-impact-bond approach, the debate over measurements of success would more often than not set up social programs to fail, with a nonprofit’s program, not the unrealistic expectations attached to it, becoming the scapegoat.

And that could unwittingly undermine society’s support for government financing of programs to help the needy just at a time when relatively little support already exists.

The ideas and motives behind social-impact bonds are worthy, but they won’t succeed unless they take the following into account:

Set realistic goals for any program, and measure only direct results. The further in the future the goal, and the more complex the social problem being solved, the more likely that confounding variables will get in the way.

Expand social-impact bonds incrementally. As they prove themselves, and learn from each success and failure, the idea can grow into a more ambitious effort. It is humbling, and important, to keep in mind that the first test of this idea in the real world is only a few months along.

Get nonprofit workers to share their perspective. The charity workers who will be charged with operating these programs must be closely involved in their design, as well as in devising the measures that will determine their ultimate success.

After all, they are the ones who will make social-impact bonds a success—or a failure if they are not given a leadership role.

Peter York is senior vice president and director of research at TCC Group, a nonprofit-management consulting firm in New York.