Social Impact Bond Sample Contracts Working Group

Liebman’s Basic SIB Program Framework* Generate government cost savings Pay interest on invested capital to investors Repay invested capital Government savings cover full cost of services *See Jeffrey Liebman, Social Impact Bonds: A Promising New Financing Model to Accelerate Social Innovation and Improve Government Performance, Center for American Progress, February 2011. http://www.americanprogress.org/issues/2011/02/social_impact_bonds.html.

Basic framework with flow of funds (arrows) and probable needed contractual agreements (ovals) Stakeholders agree to organize an early childhood social impact bond program Business and Philanthropic Leaders and SIB Investors Third Party Program Evaluation and Certification SIB Issuer and Investor Agreements Third Party Feasibility Study 5. SIB Issuer repays investors 1. Investors provide Working Capital SIB Issuer and Research Group Agreement Organizers and Research Group Agreement SIB Issuer and Government Agency Agreement SIB Issuer and Service Provider Agreement Government Health or Education Agency 4. Part of Government savings paid SIB Issuer SIB-Issuing Organization 2. Operating funds paid to to Service Providers Early Health or Education Service Providers Bylaws or Operating Agreement of SIB Issuer Service Provider and Parent Agreement 3. Cost savings generated

Initial list of needed contractual agreements Bylaws or Operating Agreement of the SIB-issuing organization to specify governance, organizer roles and responsibilities, capital calls, distributions of net income or losses, and other Agreement between SIB organizers with a third party to provide initial feasibility research focused on specific children and institutions. Agreements between the SIB-issuer and early childhood service providers to specify service details, and between the service providers and parents or caregivers to clarify family responsibilities. Agreement between the SIB-Issuer and the government early health or early learning agency to specify cost savings determination and distribution. Agreement between the SIB-issuer and SIB investors to specify maturities, interest rates, terms of any performance-based payments, and capital repayment. Agreement between SIB-issuer and others with a third-party to provide performance evaluation and performance certification. May 14, 2019

SIB Example Developed by the Kauffman-ReadyNation Working Group on Early Childhood Financial Innovation Bethlehem Area School District School-Readiness PKSE SIB Program May 14, 2019

Example: Bethlehem Pennsylvania School-Readiness PKSE Social Impact Bond Program A PKSE bond is a kind of SIB used to pay for quality Pre-K to reduce Special-Ed Costs Regional Business Leaders and Philanthropists -- Establish a School Readiness Capital Partnership (SRCP) to provide for more Pre-K Counts (PKC) prekindergarten. SRCP -- Conducts a study of regional preschool effects on regional k-12 special-ed costs and enters into contracts with school districts SRCP -- Pays set-up, operations, parent mentoring and child monitoring costs of PKSE bond program State Governments -- Provide statutory recognition and possibly incentive funding and PKSE bond tax exemption PKSE fund providers – SRCP sells bonds or borrows from banks. Bond buyers or bank lenders provide funds for pre-k scholarships so at-risk kids get quality preschool and reduce special-ed costs School Districts -- Rebate annual special-ed cost savings to the SRCP SRCP -- Pays interest and principle due on PKSE bonds or loans out of the special-ed savings and reinvests special-ed savings gains in further rounds of PKSE scholarships

May 14, 2019

Following the flow of the diagram -- Bethlehem Regional Business and Philanthropic Leaders Business leaders and philanthropists in the Bethlehem area agree to establish a capital partnership to pay for setting up and paying the operating expenses of a PKSE social impact bond issuing organization to increase regional school-readiness, reduce school operating costs, and strengthen the region’s future workforce. Partnerships to establish PKSE bond programs can take any one of a number of forms, including a 501c3 created for this purpose, a donor advised fund in a community foundation or under the auspices of the United Way Bethlehem School Readiness Capital Partnership (Capital Partnership) The Bethlehem Capital Partnership is the SIB issuing organization. It issues PKSE bonds to fund scholarships to pay for quality pre-k for cohorts of 3 and 4 year-old at-risk children in the Bethlehem Area School District. It oversees all aspects of PKSE operations, scholar selection, pre-k provision, special-ed assignment and savings calculations, and compliance with Capital Partnership contracts, and it contracts with a third party to evaluate program performance. It receives funds from the business and philanthropic partnership, and from PKSE bond investors and pays interest and principle payments on the bonds when due. It operates through contracts with preschool service providers and the regional school districts. State of Pennsylvania Recognizing the impact of PKSE financing and wanting to encourage Pre-K Counts expansion, state law specifically recognizes PKSE bonds and permits Pennsylvania PKSE issuers under certain circumstances to issue tax-exempt bonds if they choose. Also, under certain circumstances, Pennsylvania may contribute funds to the Capital Partnership to enhance success -- for example, in the form of a limited match of investor funds, a small bonus percentage of special-ed costs savings, or contributions to provide mentoring for parents of children who receive PKSE scholarships. Bethlehem PKSE Bond Investors Private investors, asset management funds, foundations, companies, and others purchase Bethlehem Capital Partnership PKSE bonds. May 14, 2019

5. PKSE Funds Distributed to the BASD PKSE Account The Bethlehem Area School District receives PKSE bond funds from the Capital Partnership. A school district can receive the funds itself or through a 501c3 established for this purpose. 6. PKSE Scholarships for At-Risk BASD Children Parents sign an agreement with the Capital Partnership in order to receive PKSE scholarship funds that says they will positively and actively participation in their child’s education. The regional school districts provide pre-k scholarships to at-risk children for their parents to use to pay for prekindergarten early education services. 7. Children Attend Pre-k Scholarships can be used to attend a regional school prekindergarten program or a church, non-profit, or for-profit prekindergarten, so long as the services are rated Keystone Star 3 or 4 as required by the Pre-K Counts program. 8. Bethlehem Area School District Special Education Cost Savings When PKSE graduates move into public school, special education assignments decline and special-ed spending falls. As the graduates move grade by grade through elementary school, middle school and high school, special-ed cost savings accumulate. 9. Allocation of Special-Ed Cost Savings Projected cost savings are calculated each year as provided for in the PKSE contract between Capital Partnership and the school district. The imputed cost savings are credited each year to the Bethlehem Area School District’s PKSE account 10. Cost savings distributed to Capital Partnership The Capital Partnership receives the imputed special-ed cost savings each year. 11. PKSE Bond Interest and Principle Payments The Capital Partnership makes interest and payments and repays PKSE bonds as they come due.