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Non-profit seeks to bring social impact bonds here

Rochester Business Journal
September 27, 2013

Social impact bonds are something of a hot trend in the world of philanthropy, a way to infuse new money into non-profit agencies through private investors, and one local non-profit is hoping to bring the idea to Rochester.
 
The model aims to obtain funding for prevention programs through private investors' purchase of government-issued bonds. The government issuer is expected to pay back investors using budgetary savings generated by the success of the non-profit prevention program.
 
New York established a $30 million fund this year to develop social impact bonds, which the state refers to as pay-for-success contracts. The Children's Agenda, a local non-profit agency that advocates for evidence-based human service programs benefiting children, is pursuing some local uses for social impact bonds as a financial instrument to fund preventive services for children.
 
"If you do good things for kids, it saves money down the road," said Larry Marx, president of the Children's Agenda. "This is also a useful tool because it outlasts politicians, who may not have motivation to make these investments.
 
"Many of these program accrue savings only after five to seven years, and elected officials usually serve terms of two or four years."
 
Social impact bonds would be an especially important tool in New York, where state budget cuts have landed hard on non-profit organizations, he said.
 
These instruments are seen by proponents as the start of a major change in the government funding model. Pinched by declines in tax revenue, the federal and state governments have cut funding for non-profit agencies and been more targeted in the funding they do allot. Social impact bonds would represent a model of paying for results rather than paying for activities, according to a report from the consulting firm McKinsey & Co. Inc. of New York City.
 
"(Social impact bonds) could fill a critical void: Other than market-based approaches, a structured and replicable model for scaling proven solutions has not existed previously," McKinsey & Co. noted in a report issued in May. "SIBs can give structure to the critical handoff between philanthropy (the risk capital of social innovation) and government (the scale-up capital of social innovation) to bring evidence-based interventions to more people.
 
"SIBs can do this by aligning incentives among a broad set of stakeholders and shifting financial risk away from government."
 
Though still a new concept, social impact bond issues have begun. The first pilot program was in the United Kingdom, involving rehabilitation of 3,000 short-term prisoners incarcerated at a facility near London. Investors can earn returns as high as 13 percent each year if the program can cut recidivism by 7.5 percent.
 
A similar program has been set up in New York City involving convicts at Rikers Island. This program is funded by a $9.6 million loan from Goldman Sachs Group Inc.
 
Locally, Marx says, at least one program that would be a perfect fit for social impact bonds-the Nurse-Family Partnership. This program sends specially trained nurses to work with young, first-time mothers, consulting with them and helping with parenting.
 
"This program has over 30 years of research and evidence showing that if you pair a low-income mother from pregnancy to age 2 of the baby's life, that child will perform better in school, be less likely to commit crimes, and down the road the mom is less likely to have another unplanned pregnancy," Marx said. "All of those have long-lasting effects on public costs."
 
Social impact bonds could help the program grow to a size that it could truly have a major impact on the area, he added.
 
"In Monroe County there are only 300 to 350 families served each year by the Nurse-Family Partnership, but the Children's Agenda estimates that there are really about 1,000 families we could be serving," Marx said. "The county (has) been great and supportive, but if we want more money to grow, what are they going to do? They can't cut from roads and can't raise taxes.
 
"There are political barriers even to something that's proven to have a great impact down the road, and that's where these social impact bonds could do so much."
 
Marx acknowledged some skepticism about whether social impact bonds could work for both investors and non-profits, but he said that is normal for innovative funding instruments.
 
"If you look back 30 years ago, there was no such thing as microlending until Muhammad Yunus introduced the idea in Bangladesh," he said.
 
Microlending or microcredit involves extending very small loans to poor entrepreneurs who typically lack collateral, steady employment and the credit history needed for traditional bank loans.
 
"People called them crazy, but now it's a billion-dollar industry. That's the potential we see with social impact bonds, that it really has a chance to open up a new capital market that does social good," Marx said.

9/27/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


 


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