The city of Denver this year entered into a social impact bond (SIB) contract to reduce chronic homelessness and issues related to it, like overcrowded jails. It’s one of a wave of SIBs in the United States, including 11 like Denver’s that have closed and dozens more in the pipeline.
In Denver’s case, private investors provided $8.7 million in capital upfront for permanent supportive housing, a model that puts social services for vulnerable populations right in the same buildings where they live (healthcare, drug rehabilitation, financial coaching, job training, etc.). Denver’s SIB focused on services for mental health and substance abuse. Denver currently spends about $29,000 for each chronically homeless individual who is frequently arrested and in need of medical attention; that figure includes jail, police, courts, detox, emergency room and other medical costs.
Based on a growing mountain of nationwide evidence, Denver estimated that providing housing for 250 people would lead to a 35 to 40 percent reduction in jail bed days and 83 percent increase in housing stability among the target population. If the program meets those goals within five years, the city repays the eight investors on the deal a total of $9.5 million. The city repays less if those goals aren’t met.
Here’s the thing: Nobody lives in a bubble. Fewer emergency room visits and less time in hospitals means savings for federal and state Medicaid spending. Stable and supportive housing could allow some individuals to find steady employment and eventually put them on the path to get off food stamps or welfare rolls, leading to even more federal and state savings.
At the moment, while the savings potentially pop up in all the above parts of government and maybe more, the city of Denver is the only agency or level of government that is on the hook to pay investors that $9.5 million. It’s called the “wrong pocket problem.”
There is now a bill to create a mechanism to put the federal government on the hook to pay back part of what is owed to SIB investors. It could encourage even more cities, counties and states to try SIB-financed programs, as they would no longer be the only ones on the hook to repay investors. The bill passed the House unanimously in June, while a related bill awaits passage from the Senate.
“The main reason why the federal government needs to get involved is the idea that if the federal government is not paying for the savings down the line, it hamstrings state and local governments from pursuing these things,” says John Griffith, national director for state and local policy at Enterprise Community Partners, which is working with the city of Denver as an intermediary on their permanent supportive housing SIB.
It’s not just state and local governments that are hamstrung. According to Griffith, Enterprise has in the past decided not to support other SIBs precisely because there was no way to get the federal government on the hook despite the fact that it would have been one of the biggest beneficiaries of an SIB in terms of savings. One was an SIB to provide healthcare services inside housing for low-income seniors.
“We couldn’t make that deal work out without the federal government at the table,” Griffith says. “It’s a tremendously growing area with people retiring and seniors being poorer than they used to be.”
The bill, known as the Social Impact Partnerships to Pay for Results Act (SIPPRA), would direct $100 million in federal dollars, the vast majority of which would be set aside for future SIB repayments. A percentage of the funds would support feasibility studies for SIBs, as well as evaluations of SIBs that it would potentially repay.
“Evaluations are an expensive part of the SIB, to be entirely honest, and it’s not always easy to get that funded through the actual financing mechanism itself,” says Griffith.
While the bill supports randomized controlled trials as the “gold standard” of producing evidence, it has the flexibility to support other evaluation methodologies as appropriate. “RCTs aren’t always going to be financially viable or be the best thing,” Griffith adds.
SIPPRA would also create two supporting bodies at the federal level: the Federal Interagency Council on Social Impact Partnerships and the Commission on Social Impact Partnerships. The first would serve as the federal presence on the government side of the table in SIB negotiations. States and local governments would apply for a piece of the federal funding for SIB repayments, and the council would review and coordinate across different agencies that a SIB may affect. The second would conduct research for the council and provide other assistance to select the best projects at the federal level.
It’s important, Griffith notes, to point out that SIBs are not appropriate for every potential government program. They are flexible programmatically but occupy a specific piece of the public policy spectrum. There are certain services that the government will always have to pay for, and those work and have a clear social benefit. On the other end, there are things that are just so new and innovative that it will be really difficult to get a private investor comfortable with the level of certainty to invest. But there’s a vast gradient in between, says Griffith, “that’s the gray area in which SIBs are possible, but on either end of that spectrum it just doesn’t make sense or it’s too expensive or whatever.”
SIBs, Griffith says, should be a way to find out if existing programs operating on a small scale or in a different context are appropriate for the public sector to take on permanently, while passing the risk of the initial scale-up or adaptation to investors for a small return. Having the federal government at the table, he adds, would also potentially increase the size of any given SIB, making space for more investors and capital and programming.
There is another way SIBs fit into the existing policy landscape that is worth noting: The model complements decades of work by Enterprise and others who have used low-income housing tax credits and new markets tax credits to build affordable housing, and have had support from housing vouchers to maintain affordable housing.
“The actual bricks and mortar continue to be supported by these remarkably successful programs. The services, which are so essential especially when you’re talking about particularly vulnerable populations like the chronically homeless or older populations, those services are really tough to fund,” Griffith says. “The SIBs we have been pursuing are really focused on that housing-based services component of it.”
The Equity Factor is made possible with the support of the Surdna Foundation.
Oscar is a Next City 2015-2016 equitable cities fellow. A New York City-based journalist with a background in global development and social enterprise, he has written about impact investing, microfinance, fair trade, entrepreneurship and more for publications such as Fast Company and NextBillion.net. He has a B.A. in Economics from Villanova University.