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The Kresge Foundation’s Social Impact Transactions

By Kimberlee R. Cornett

David Osborne and Ted Gaebler’s 1993 book Reinventing Government: How the Entrepreneurial Spirit Is Transforming the Public Sector was acclaimed for lighting the way to a smarter, leaner government. One of the book’s key points is that governments should “stop rowing and start steering.” In today’s conversation about the merits of pay-for-performance models, the public sector has the opportunity to do exactly that — if it takes three important steps:

  • Invest in data.
  • Insist that the marketplace develop multiple pay-for-performance models.
  • Find ways to measure and monetize benefits that accrue to multiple payers.

Social impact bonds (SIBs) are an innovation that has caught the imagination of the public, private, philanthropic and nonprofit sectors. States such as Illinois, Massachusetts, Maryland, New Jersey, New York and Texas are hoping to produce a transaction that will bring social investors running. As promising as SIBs are, however, they are not the only solution. Rather, SIBs should be part of a larger family of social impact transactions (SITs) that bring new capital for services, drive providers toward transparent results, and help all parts of the public sector understand what strategies work. Because of the great need for new resources — funding that lasts longer and is larger and less siloed — the interests of the public sector, providers, and philanthropy are fully aligned.

SIBs have already ignited a conversation about moving from outputs to outcomes. But by focusing only on SIBs, we may leave undiscovered structures that are simpler and easier to implement and replicate than some of the early SIB structures.

At the Kresge Foundation, we have participated in multiple pay-for-performance structures to create a catalog of transactions that might help nonprofit or public-sector partners identify the most appropriate structure for their situation. Although some SITs might include “success payments” from the public sector, other, simpler structures could also have value. Take, for example, Kresge’s $3 million working-capital loan to Colorado Coalition for the Homeless (CCH), a provider of housing and health services for vulnerable individuals in metro Denver. CCH wanted to expand health services for its clients before the Affordable Care Act’s expansion of Medicaid eligibility was fully implemented. Kresge, for its part, wanted to drive CCH to further improve individual outcomes relating to health and housing stability. The loan is based on performance, and the interest rate is linked to outcomes on 10 metrics. If CCH fully meets the objectives (all of which exceed current levels), the interest rate on the loan can drop to as low as 1 percent. Such pay-for-performance models could raise a large pool of new capital to address social problems by offering investors the opportunity to benefit from savings that accrue to the government. These approaches also align the interests of service providers and investors and help all stakeholders focus on outcomes. However, because little precedent exists for having the government share its savings with private investors, implementing pay-for-performance  models will be challenging in some locations. Models such as the one CCH adopted use a similar structure and formula to accelerate outcomes.

In addition to paying for success, the Kresge Foundation believes that the next generation of service funding should pay for value, driving both providers and their public-sector partners toward interventions that deliver improved outcomes and cost savings. For example, National Church Residences, an Ohio-based national developer of affordable housing and services for seniors, has documented the Medicaid savings created when individuals are able to move from nursing homes into affordable assisted living. The state of Ohio has proposed a pay-for-performance structure that uses a small portion of these Medicaid savings to build affordable assisted-living units for frail and disabled people. A Kresge Foundation guarantee ensures that the state will pay only if a “nonqualified” individual (that is, someone who otherwise would be in nursing care) occupies the unit and that debt service on the loan remains current throughout the term. Over 11 years, this structure is estimated to save the state of Ohio more than $15 million.

Regardless of the type of structure, successful pay-for-performance transactions, particularly those that aim to attract commercial capital, depend on a quality data. Yet few funders, public or private, invest consistently in data collection and analysis. If we are seeding a new way of funding services, we must fund systems to collect and analyze data.

Finally, the savings that result from improved health, welfare and productivity outcomes rarely benefit a single public agency. Instead, multiple systems are likely to see these savings. Current public policies, however, often fail to recognize the overall benefit to the system when savings are split among agencies. A robust SIT sector will require us to find a way to fully account for these benefits.

Although SITs are not a panacea, they could be a robust source of capital for the social sector, help advance social progress, and create better outcomes for the growing number of people who need an investment in opportunity to fully realize their potential. Conducting more pay-for-performance pilots across geographical and issue areas is essential to understanding how to effectively organize and implement these transactions.

Kimberlee R. Cornett is director of the Kresge Foundation’s Social Investment Practice. Kresge is a $3 billion private foundation that works to expand opportunities in America’s cities through grantmaking and investing in arts and culture, education, the environment, health, human services, and community development efforts in Detroit.