What are 'social impact bonds,' and will they be good for Michigan?

Sep 9, 2013

These are the basic questions being raised after Governor Rick Snyder announced "an exciting opportunity to continue the reinvention of Michigan" in a press release this morning.

"Social impact bonds" are coming to Michigan.

The state was chosen through a national competition to receive help from the Harvard Kennedy School's "Social Impact Bond Technical Assistance Lab."

What are social impact bonds?

Private investors finance social service programs aimed at reducing problems such as homelessness, recidivism, a lack of early childhood education, or obesity.

If the programs prove to be successful, taxpayers then pay back the investors who make a profit on their initial investment. If the program doesn't achieve results, taxpayers don't have to pay.

It's a new social program financing tool developed to encourage private investment in places where cash-strapped states can't or won't invest.

It was first developed in Britain and used to try to reduce prison recidivism rates.

Last June, before today's announcement, projects in six U.S. states were announced. Here's how Jeffrey Liebman, professor of public policy at Harvard Kennedy School and SIB Lab director, put it in a press release last June:

“In these challenging fiscal times, governments around the country are looking for new strategies to finance preventive investments and spur social innovation. The pay-for-success approach has the potential to generate scalable solutions to some of our nation's most pressing social problems.”

The same quote from Liebman is used in today's press release from the governor. 

In that release, Gov. Snyder says:

"We’ll be exploring how we can create cutting edge public-private partnerships to address persistent social problems, fund those programs through social impact bond financing, and save money for taxpayers."

Michigan will receive assistance from an "innovation fellow" from Harvard's SIB Lab who will work in state government for a year to help develop the projects.

Potential for corruption?

Critics of these programs say they set up incentives for corrupt practices - similar to how some school administrators exaggerated results to receive "No Child Left Behind" money.

A Washington Post piece points out that the programs will be monitored by an "independent evaluator."

Jon Pratt with the Minnesota Council of Nonprofits writes about the potential for problems in an opinion piece earlier this year. Most of his points seem to come from the fact that there's not much data on how well these programs work to date:

A great deal of creative energy has gone into the promotion of Social Impact Bonds, with striking visions of future payoffs and little discussion of risk. While the intense internal logic to SIBs works conceptually quite well in pilot projects, each implementation will deserve serious scrutiny and transparency, and acknowledgement that results may differ from the promotion.

We'll hear more about this idea today on Stateside. Their guest will be Chris Gautz from Crain's Detroit Business.