Implementing Pay for Success and Social Innovation Finance Webinar October 25,

Agenda Opening remarks from APHSA and logistics 5 min Overview of Pay for Success (PFS) Update: Existing PFS Exploration 15 min Q &A 10 min Existing PFS Pilots & Questions: –Massachusetts 10 min Q &A 5 min –Cuyahoga County, OH 10 min Q &A 5 min PFS Outcomes Measurement Potential Applications for PFS Roadmap for PFS Exploration 20 min Q &A 10 min 2

Third Sector Capital Partners Transaction Advisory Services Program Feasibility, Program Risk Evaluation and Partnership Formation Mission Accelerate America’s transition to a performance-driven social sector. Services Nonprofit financial advisory firm and intermediary in emerging fields of Pay for Success and Social Innovation Finance 3

Overview of Pay for Success 4

What is Pay for Success? performance-based contracting for outcomes between government and social service providers financing that supports PFS. “social impact bonds” are one type of SIF financing. PFS requires a public-private collaboration focused on outcomes and preventive initiatives that are rigorously measured Investors bear the majority of up-front risk, government reallocates expenditures towards success payments only when results are achieved Pay for Success (PFS): Social Impact Financing (SIF): 5

PFS Construct 6

How is Impact Rewarded? Reward for impact is an outcome-based success payment from government Outcomes determined with support of project parties and evaluator to design rigorous, feasible and appropriate measures Success payments are triggered when a PFS program achieves mutually, pre-determined metrics outlined in contract Outcome metrics are critical for alignment between government, service providers, intermediaries, and investors. Role of 3 rd Party Evaluator is essential to independently track and validate outcomes. 7

Types of Investment 8 Non-recoverable Grants Recoverable Grants/Program Related Investments Loans Private Investment Pay For Success programs allow investors to structure their investments using various financing options:

Existing Landscape of PFS Exploration 9

National Developments = Third Sector Projects = SIB Interest/Developments 10

Key State and Local Agencies 11 Executive Office Administration and Finance Health and Human Services + Other Departments Performance Management; Data Systems; Procurement

Goals and Timeframes Requires up-front community education with providers, funders, government stakeholders and evaluators Contingent on government approach (procurement vs. sole-source pilot) Dependent on access to administrative data for evaluation and cost-benefit purposes – MA: 15 Months to select winning bidders- still in negotiations – Cuyahoga: 12 months of exploration and RFR procurement launch Significant time and resource investment for government and all partners 12

Question Break 13

Existing PFS Pilots: Massachusetts & Cuyahoga County, OH 14

Metrics: Massachusetts Procurement Process: – Request for Information (RFI) – Request for Responses (RFR) for both intermediaries and providers in two areas: juvenile justice and homelessness – Negotiations to contract with first apparent bidders in each area Trust – Legislative approval for up to $50M of pay-for-success contracts, backed by the full faith and credit of Commonwealth – Ongoing analysis to estimate and capture budgetary savings – Independent Evaluator hired by Commonwealth will be responsible for validating outcomes that trigger payments 15

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Stakeholder Roles: Massachusetts 17 Commonwealth of Massachusetts (ANF, HHS, LWD) Political leadership and staffing, project management, procurement, fiscal commitment Commonwealth of Massachusetts (ANF, HHS, LWD) Political leadership and staffing, project management, procurement, fiscal commitment Professor Jeffrey Liebman Government advisor and technical assistance for evaluation, procurement and contract design Professor Jeffrey Liebman Government advisor and technical assistance for evaluation, procurement and contract design Third Sector Capital Partners Chosen intermediary; project manager with Pay for Success Expertise Third Sector Capital Partners Chosen intermediary; project manager with Pay for Success Expertise Roca Inc. Chosen lead service provider; program expert Roca Inc. Chosen lead service provider; program expert Department of Youth Services Leadership and staff resources, parties to project and contract negotiations Department of Youth Services Leadership and staff resources, parties to project and contract negotiations Evaluator & Validator Evaluation design and outcomes for contract; validation/auditing function Evaluator & Validator Evaluation design and outcomes for contract; validation/auditing function

Question Break 18

Community Outreach and Education Landscape Analysis and Identification of Suitable Interventions Process Advice for County Technical Assistance for Responders Technical Assistance and Deal Construction For Finalists Mechanics: Cuyahoga County Pay for Success Process July 2012 August-Sept.Sept-October November Dec-May 2013 How is this different to MA? Similar?

Early Stakeholder Roles: Cuyahoga 20 Leader: County Executive Political leadership and County staffing, project management, procurement, fiscal commitment George Gund Foundation & Foundation Community Project initiation & financial support, RFR review, leadership within funder & political community Third Sector Capital Partners Project Management, Landscape Analysis & Technical Assistance and Pay for Success Expertise Department of Health & Human Services Leadership and staff resources, liaison with funder, provider and evaluator communities

From Interest to Action: Cuyahoga 21 Success Factors: Leadership from County Executive Ed FitzGerald – Public Commitment to PFS in Western Reserve Plan Collaboration and early engagement with funders and providers – George Gund Foundation investment; Public Community Meetings and Landscape Education; Funder Convening; Commitment to improved social outcomes and savings – Willingness to explore intersection between County savings and programmatic priorities across multiple areas – Openness to failure or inability to find alignment in County Access to Technical Assistance – Third Sector brings PFS Expertise, Landscape analysis and project management skills

Question Break 22

PFS Outcomes Measurement 23

Evaluation Mechanism for PFS Evaluation of project outcomes is at the core of PFS and is key to validating a project’s impact and cost-savings. Impact measurement is a notoriously subtle science. The world is full of false-positive evaluations due to a large number of factors: – Underpowered experimental designs, – Publication bias, – Low-fidelity execution, – Wishful thinking, – Regression to the mean, and many others. 24

Developing Outcome Metrics Critical to establish ambitious yet realistic target metrics and thresholds that define program success. This requires significant discussion and negotiation between the intermediary, government, and potential investors. Process includes: 1.Select a technical assistance provider or evaluator with experience measuring outcomes with government administrative data 2.Determine what administrative data sources and data collection strategies are available to measure key outcomes and process for accessing this data. 3.Define and articulate a shared vision of what a successful program would accomplish for the target population. 4.Negotiate and establish ambitious but realistic outcome measures with clearly defined thresholds for success. – Pay “per” Success (ie foregone incarceration) – Pay for overall reduction (reduced recidivism rate) 25

Who Measures Outcomes? The number one risk of PFS failure is tied to the possibility of non-rigorous evaluation. Essential to have independent, 3 rd Party evaluators, with a strong focus on counterfactuals, and a power to audit. Administrative data is also essential for PFS as a key enabler of evaluation. Requires government collaboration with PFS project partners and may initially limit potential intervention areas if data is prohibitively costly or unavailable Outcome measurement and achievement of contractually- established metrics drive government success payments 26

Potential Applications for PFS 27

Key Characteristics of PFS 28 Government Leadership Significant Unmet Needs & Targetable Populations Credible Data Interventions that Work Scalable Service Providers Safeguards Cashable Fiscal Savings for Government

Unproven or Mandatory Programs Interventions Not Scalable No Fiscal Savings No Government Champion Lack of Proven Intermediary Outcomes Hard To Track Challenges for PFS Implementation 29

Promising SIB Intervention Areas Social ChallengePotential Interventions Homelessness (family or individual)Permanent Supportive Housing Child Welfare/Foster CareRedirection from Out-of-Home Placement Re-entry/Recidivism Community Based Alternatives to Incarcerations Kindergarten Readiness/ Early Childhood Education Universal Pre-K Interventions; Home visiting Mental & Behavioral HealthCommunity Based Clinical Interventions Workforce Development/ EmploymentApprenticeship Programs 30

Roadmap for PFS Exploration 31

Steps for Exploring PFS Opportunities Problem Identification Target areas w/high social & fiscal costs Government Solicitation Process Pilot vs. Procurement Determination of Intervention Focus on Impact Organizational Construct Lead Contractor and Provider Construct Developing Funding Arrangement Establish Return Parameters Document Agreements Performance, Financing and Operational contracts 32

Key Questions Is there initial community interest in Pay for Success? Is there government human and fiscal capacity to explore non- traditional procurement and payment policies? Are there interventions that are potential fits and also fall within existing community priorities? What are key concerns about a potential Pay for Success pilot in your locality? Will there be an investor base interested in funding a PFS pilot? 33

Questions & Contact Information Commonwealth of Massachusetts Ryan Gillette, Government Innovation Fellow Cuyahoga County, Ohio David Merriman, Special Assistant to the County Executive APHSA Larry Goolsby, Director of Strategic Initiatives Third Sector Capital Partners Caroline Whistler, Partner George Overholser, Co-Founder and CEO 34