Would you please provide a brief (1-2 page) summary of social impact bonds (pay for success bonds), how they have been used especially by U.S. Cities, and their strengths and weaknesses?
In March 2016, the City Manager’s Office prepared a memo summarizing social impact bonds (SIBs) including where they are being used or considered as well as their strengths and weaknesses. That memo is provided here as an attachment.
To summarize that memo, a social impact bond is “a multi-stakeholder arrangement in which governments attract outside capital to fund needed preventive social services.” At this point, SIBs are still in their infancy and there is limited data on their effectiveness. There is even less data on how these programs are used at a local level since SIBs are geared towards large social projects typically done at the state level. SIBs require a significant investment in staff time and financial resources to develop the program and attract investors followed by a period of three to five years to allow the stakeholders to achieve the desired outcome. At that time, the City Manager recommended “waiting until the SIBs experience of states and cities is greater before the City would consider them.”
Since this memo was completed, DC Water issued a $25 million SIB in September 2016 to fund green infrastructure projects to meet its combined sewer overflow (CSO) targets. It is reportedly the first SIB to be used for environmental projects. According to DC Water, “the [environmental impact bond] is based on an innovative financing technique whereby the costs of constructing the green infrastructure are paid for by DC Water, but the performance risks of managing stormwater runoff are shared amongst DC Water and the investors.” Staff will continue monitoring how SIBs, including this one from DC Water, are used and may be appropriate for use by the City at a future date.