Social Impact Bonds
State Action Needed
Social Impact Bonds (SIB), also known as Pay for Success, are a relatively new financing tool that enables government agencies to pay for programs that deliver results. This financing tool enables governments to set specific, measurable outcomes for a defined population, children birth through age three for example, and promise to pay an external entity, deemed an intermediary, an agreed upon amount if the desired outcomes are achieved.
Government agencies are not required to provide funding upfront. Instead, private investors, philanthropies and other non-governmental funders provide the upfront investment. If the intermediary fails to achieve agreed upon outcomes, the government agency does not pay, the external entity bears the cost. If the outcomes are met, the government agency pays the external entity the agreed upon sum with a return paid to the investors for taking the upfront risk. Payments typically rise for performance that exceeds the minimum target, up to an agreed-upon maximum payment level.
Salt Lake City has launched an SIB initiative to expand preschool. (A case study is included in the toolkit.) Several states either have launched or are considering SIB initiatives. While SIBs are an emerging concept, this creative financial tool presents local governments with a funding structure that can leverage private funding sources to design and carry out successful early childhood initiatives. Enabling state legislation would be required in North Carolina for local governments to create Social Impact Bonds, primarily because payments based on defined outcomes are not currently authorized for local governments.