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Budgeting for results in human services

Get insight into funding pay for success initiatives.

Overview

Pay for success financing (PFS), often part of a social impact bond, is a new concept in which private investment supports the delivery of preventative services that save the government money with those savings used to repay the investment.

PFS is attractive because it has the potential to finance innovative evidence-based services and ensures that taxpayer dollars will only be spent once the desired outcomes have been achieved. More and more governmental organisations—including human services agencies—are exploring this approach.

This article provides essential information about how agencies can define savings—and how to capture them.

Background

There are generally three ways to think about savings in the context of PFS:

  1. Budgetary savings. A reduction from costs that would have been incurred in the absence of the program. These savings typically stem from reductions in anticipated spending from uncapped program accounts.

  2. Productivity savings. A reduction in the costs of capped programs in which there may be a waiting list or insufficient funds to serve the entire population. In this case, reducing the cost per outcome allows more people to be served using the same level of funding

  3. Social or long-term benefits. Benefits created from a re-oriented system, typically appearing 5 to 10 years after the PFS program.


Key Findings

DOWNLOAD THE FULL ARTICLE TO LEARN WHAT ALL THE EXCITEMENT AROUND PAY FOR SUCCESS IS ABOUT. [PDF]

Analysis

Calculating pay for success savings is complicated by a number of factors, including these common challenges:

  • Wrong pockets problem. Savings may accrue to agencies and/or programs within or across levels of government. While there are several potential solutions to such situations, most of them depend on accessing savings from the entity to which they accrue—but sometimes that is constrained by regulation or law.

  • Set aside and hold problem. PFS contracts are usually long-term agreements in which agencies commit to making a payment at a future date when certain outcomes have been achieved. However, most state and local governments are unable to commit future resources without specific budgetary authority, which raises questions around how sufficient funds can be set aside to pay for the results when they occur

Recommendations

When it comes to pay for success initiatives in human services and other areas where it is applied, the return on the investment needs to be balanced against the risk taken and savings achieved.

If the risk of failure is small, the government may not be willing to pay a premium for the program goals being successfully achieved. If the risk of failure is great, a non-governmental entity may not be willing to assume the risk without the promise of a large reward. In most PFS projects, philanthropic capital has played an important role to limit other investor risk.

While funding PFS initiatives raises both challenges and opportunities, the extraordinary growth of PFS reflects increasing realization of its underlying promise.

Authors

This article was originally published in the June 2015 edition of Policy & Practice magazine. It is authored by Gary Glickman, Managing Director, Accenture, and Douglas Besharov, Norman and Florence Brody Professor, School of Public Policy, University of Maryland.

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