Illinois becomes early user of new financing model — social impact bonds
|Monday, May 13, 2013 at 01:03 PM
Illinois has become only the second U.S. state to enter into a unique kind of bond market — one in which “social impact bonds” are bought and sold.
If it works, this financing model has the potential to be a win-win for taxpayers and private investors: The state can begin tackling a complex social problem without the need for up-front public dollars, and the investor gets money if the program launched via the social impact bonds is successful.
An article in the March/April edition of CSG’s Capitol Ideas magazine notes that New York City has been a national leader in pursuing the use of social impact bonds. Under a project financed by the firm Goldman Sachs, a behavioral-therapy program has been launched for young people in the city’s prison system. A reduction in recidivism rates would result in Goldman Sachs getting rewarded for the investment and the city reducing its incarceration costs.
Social impact bonds are also known as “pay for success contracts.” Targets are agreed upon by both sides to determine the program’s success, and the state and investor settle on the amount owed to the investor if the targets are reached. A $275,000 grant from the Dunham Fund will be used to launch the bond program in Illinois, where ideas for the use of social impact bonds include increasing graduation rates, lowering hospital readmission rates and reducing recidivism rates.