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How to Make Pay for Success Even More Successful

There’s an exciting opportunity bubbling up in the Pay for Success world. New legislation, the Social Impact Partnership to Pay for Results Act (SIPPRA), promises to expand outcomes-oriented private-public partnerships by providing up to $100 million in federal funding. LISC’s Pay for Success program manager, Anna Smukowski, takes a look at previous examples of public-private partnerships that were designed to serve low-income communities and dives into how SIPPRA can help scale PFS.

Since 2010, Pay for Success (PFS) has been an innovative tool to fund partnerships aimed at addressing complex social issues. Compared to other social services funding, PFS projects leverage upfront private dollars to scale programs with the agreement that a public funding source will repay investors if the program demonstrates success through measurable outcomes.

The enactment of the Social Impact Partnership to Pay for Results Act (SIPPRA) is an exciting opportunity to expand outcomes-oriented private-public partnerships by providing up to $100 million in federal funding for outcome payments, feasibility studies and evaluations. SIPPRA is an example of federal legislation that encourages the use of leverage between the public and private sectors to unlock new capital in vulnerable American communities.

SIPPRA isn’t the first of its kind. Many public-private partnerships designed to serve low-income communities are used in connection with government and philanthropic subsidies and enhancements ranging from tax credits, grant funds and other lending products that assist organizations in leveraging capital from the private sector. A couple examples include: 

  • The Credit Enhancement for Charter School Facilities Program provides grant funds to develop innovative credit enhancement models that assist charter schools in leveraging capital from the private sector. Examples of eligible uses of funds includes guaranteeing and insuring debt or leases for charter school facilities. Funds have provided 566 charter schools with access to financing, leveraging $4 billion in external funding.
  • The Community Development Financial Institutions Fund at the Treasury issues financial assistance awards to CDFIs that allow them to provide financial products like loan loss reserves, risk-sharing, loan guarantees, or lower interest rates. Since inception, the CDFI Fund has leveraged billions of dollars in private sector investment.
  • The Kresge Foundation has set a goal of issuing $150 million of guarantees by 2020 to leverage investment capital. They have worked with the Global Impact Investing Network to broaden the use of guarantees in community development, and most recently provided a $10 million guarantee to Maycomb Capital’s The Community Outcomes Fund that will invest in outcomes-based financing transactions in the US.

To date, only two out of 20 launched US Pay for Success projects have leveraged a guarantee structure to help leverage investor capital. The NYC Able Project was guaranteed by Bloomberg Philanthropies for $7.2 million. The project’s evaluation indicated it was unsuccessful triggering a call on the guarantee providing a 75% buffer on the investor’s capital. The New York Increasing Employment and Improving Public Safety Project has a 10% guarantee on senior lender’s capital. Other projects are still heavily subsidized by philanthropy, subordinate investors or legacy federal funding through the Social Innovation Fund.

SIPPRA is a promising next step to scale PFS, taking away some of the uncertainty around outcomes funding and getting to appropriate risk-sharing strategies that will incentivize innovation. As the field continues to develop, new tools that continue to mitigate risks in PFS investments can enhance the impact that service providers, governments and investors can have in distressed and underserved communities.

Anna SmukowskiABOUT THE AUTHOR

Anna Smukowski, Program Manager, Pay for Success
Anna manages the delivery of services for LISC’s Pay for Success initiative. Her duties include project management, financial modeling and stakeholder facilitation for the individual Pay for Success projects LISC selects through an open competition—moving transactions from feasibility to implementation.