Massachusetts has launched a new “Pay for Success” (PFS) initiative aimed at using philanthropic and capital investments to reduce chronic homelessness. The initiative will provide 500 units of stable, supportive housing for up to 800 chronically homeless individuals over 6 years, with the goal of reducing taxpayer burden for things like emergency shelter or Medicaid payments.
The initiative will be backed by social impact bonds which will be purchased by philanthropic and private investors to provide up-front funding for the project. Massachusetts will only repay investors if a third party evaluator determines the initiative achieved specific, predetermined outcomes that benefit society, including saving taxpayer dollars.
The project leverages $1 million in philanthropic funding and $2.5 million in private capital investments from Santander Bank N.A., the Corporation for Supportive Housing (CSH) and United Way of Massachusetts Bay and Merrimack Valley. Through the PFS model, the investors assume project risk by financing services up front with the promise of Commonwealth repayment only in the event of success.
The Commonwealth will make up to $6 million in success payments to repay investors and cover evaluation and intermediary costs. Success will be based on the stable housing for at least one year of chronically homeless individuals participating in the initiative. The maximum possible return to investors is 5.33 percent.
Massachusetts plans to maintain a “significant number” of the housing units after the six-year period concludes by repurposing existing state and provider resources. According to state figures, there are approximately 1,500 chronically homeless individuals in Massachusetts.
Massachusetts has been an early adopter of using social impact bonds to help deal with policy issues. In January 2012, the state announced a first-in-the nation initiative to allow Massachusetts to enter into PFS contracts designed to encourage innovative solutions to social problems, improve the performance of government, and save taxpayer money. Through the legislative authorization of the Social Innovation Financing Trust Fund, the Secretary of Administration and Finance is able to enter into up to $50 million in pay for success contracts.
Social impact bond startup, Instiglio, also emerged from Harvard University and has worked with local officials to address how social impact bonds can be used to create positive outcomes.
In January 2014 the Commonwealth launched its first PFS initiative, a $27 million Juvenile Justice effort, the largest financial investment in a PFS initiative in the country. That project aims to reduce incarceration rates and improve employment outcomes for young men in partnership with Roca, a Chelsea-based service provider, and Third Sector Capital Partners, a nonprofit fundraising and project management intermediary.