Paying for Success: Opportunities and Challenges

One of the more interesting innovations in the public sector is Pay for Success, where private investors provide funding needed for new services and get their money back, plus interest, only if there are proven results. This concept, also called Social Impact Bonds, is under development across the country. It covers a range of services, including early childhood education, job training and rehabilitation of incarcerated offenders.

Group of elem. childrenDespite the excitement, the results from the first Pay for Success program in the United States came back recently, and they were disappointing. Juvenile offenders at New York City’s Rikers Island had the same recidivism after receiving treatment as before. As a result, the program is ending, and the investors are not receiving repayment.

There are two critical lessons. First, Pay for Success has benefits even when a program is unsuccessful. The Rikers Island initiative ended up costing taxpayers nothing; the investors – Goldman Sachs and Bloomberg Philanthropies – carried the full cost. Indeed, the risk of an uncertain intervention was transferred fully from the government to the private sector. Also, as demonstrated at Rikers, Pay for Success produces timely, actionable data on whether a program is working. In contrast, most public sector programs have no data on effectiveness; yet they continue year after year.

Second, even if a program has worked with one type of population in one setting, it does not mean it will work elsewhere. Rikers is one of the toughest environments for juvenile offenders in the country. Perhaps it required double the dose of services to work. Instead, most Rikers participants received less treatment. Based on the Rikers experience, investors are likely to require even more evidence of a program’s prior effectiveness, and they will want to apply it in very similar circumstances and ensure effective implementation.

The interest of investors in Pay for Success remains high, notwithstanding the setback at Rikers. However, it is important to apply these lessons when considering Pay for Success initiatives in K-12 education. One area of great potential is dropout prevention. Multiple studies have shown that each dropout costs taxpayers hundreds of thousands of dollars. Dropouts typically have lower salaries and therefore pay less in taxes. They have higher incarceration rates and often require costly job training services. Even before dropping out, they repeat grades, meaning taxpayers pay double.

Another area is early elementary education, kindergarten through third grade. Effective programs, like Success for All, not only improve reading outcomes, but they have also reduced special education placement and saved money.

To find investors after the Rikers experience, it is important to find rigorously evaluated dropout prevention programs and then use Pay for Success to replicate them at high quality with similar populations. This will be a challenge, but it is a challenge well worth meeting.

About the Author

Matthew Joseph is the Policy Director for Education Funding at ExcelinEd.

Solution Areas:

Education Funding