Six states, including Illinois, are moving to develop so-called social impact bonds, marking a broad expansion of an experiment that taps private investors to fund capital-hungry social programs.
Connecticut, Illinois, New York, Ohio, South Carolina and Colorado won a competition initiated by Harvard University and the Rockefeller Foundation, which will provide them technical assistance with developing bond programs.
In the coming months, the states plan to write contracts for social service programs that taxpayers would pay for only if they prove to be successful. The initial outlays for the programs would be financed by private investors, who would reap a profit years later if the programs work as promised.
Proponents of the bonds, which are also called pay-for-success contracts, say they have the potential to unlock vast pools of private financing to provide stable, long-range funding for social programs that governments often are hard-pressed to finance, particularly with the fiscal constraints they face in the wake of the recession.
"The basic problem that all government leaders face in the current fiscal situation is they don't have money to pay for what they are already doing, so how do they invest in new things that might be effective solutions for difficult problems?" said Jeffrey Liebman, who directs the Social Impact Bond Technical Assistance Lab at Harvard University.
The concept of social impact bonds was virtually unknown until a couple of years ago. Now it is capturing the attention of government leaders eager to find ways to fund programs that they believe could reduce future expenses.
The deals typically require investors to put money into programs operated by nonprofit groups with government contracts. The private investments would allow the programs to expand in ways that they would not be able to otherwise.
An independent evaluator would determine whether the programs have succeeded in achieving government savings and meeting the programs' goals. If the programs are effective, they would create savings for taxpayers, and investors would benefit by reaping part of those savings. If the program fails, investors lose their money.
Among the most popular targets are programs aimed at reducing chronic homelessness and prison recidivism and boosting early childhood education and child health.
"Social impact bonds have traveled from concept to execution faster than any other social innovation in recent history," said Kippy Joseph, associate director for innovation at the Rockefeller Foundation, which helps support the SIB lab at Harvard.
Over the past year, both Massachusetts and New York City have launched pay-for-success projects. President Barack Obama has also proposed federal funding for the idea.
The competition for technical assistance attracted 28 applications -- a number that surprised officials at Rockefeller and Harvard.
The six winners are developing programs that range from early childhood education to efforts aimed at helping senior citizens remain in their homes longer.
"I love this pay-for-success model," said South Carolina Gov. Nikki Haley (R), whose state is planning a nurse-family partnership program aimed at reducing the state's infant mortality rate, which at 7.4 per 1,000 births is among the highest in the nation. "We have tried to make different moves to try to fix that number. This will allow us to go farther."
Colorado plans to target homelessness in a way that Gov. John Hickenlooper (D) said would be fiscally impossible through the normal government funding channels.
"The hardest money for us to raise is when we have a new idea and it has been in a couple of places but is not widespread," he said. "There is an inclination in mayors' and governors' offices to avoid risk. But investment funds that have a strong social component will inherently take more risk."