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SALT LAKE CITY — It's common for governments to issue bonds to raise money from the private sector for projects like building a bridge, library or zoo. But this legislative session, Utah State Senator Aaron Osmond (R-South Jordan) proposed a bill with an innovative solution similar to a bond. However, instead of just a financial return, a social return is also expected in order for investors to get their money back.
It's called a social impact bond, or pay for success bond, and the first bond of its type was in 2010 in a town an hour train ride from London. It was devised as a way for the local government of Peterborough to pay for a social prevention program to help newly-released prisoners. Nearly $8 million was raised from 17 investors in Britain and the United States.
The investors are to be repaid in 2016, but only if the prison's reconviction rates are 7.5 percent lower than a matched group of prisoners elsewhere. If the rates are higher than 7.5 percent, investors lose all their money.
The idea is appealing on a number of levels. Additional money can be infused into the system that will only be paid back if results are achieved. There are many industrial banks that are looking for opportunities to invest in the community due to their Community Reinvestment Act requirements. And new dollars are invested in prevention, which is less expensive, while still paying for current remediation needs.
We have a new fiscal reality in government. We have to find new and innovative ways to get better results at less cost. We don't have a choice at this point.
–Jay Gonzalez, Mass. secretary of administration and finance
It's an idea that is quickly spreading across the country. Take for example Massachusetts and New York. Both states issued social impact bonds last summer. Massachusetts was the first to do so and raised nearly $50 million. The money is designated for two programs that focus on keeping youth from being re-incarcerated and the homeless from living in costly shelters. New York financed a $9.6 million social bond with Goldman Sacs for a prisoner rehabilitation program.
Jay Gonzalez, Massachusetts' secretary of administration and finance, said, "We're cutting the shelter budgets, so it's even harder to find resources to invest in preventive solutions before we can realize the savings. We have a new fiscal reality in government. We have to find new and innovative ways to get better results at less cost. We don't have a choice at this point."
The first rounds of social impact bonds have focused on cutting incarceration and homelessness. But this legislative session, Osmond was the first to propose a social impact bond aimed at providing preschool for at-risk students to reduce the number that would need long term remediation. Statewide, 17 percent of low-income students are in special education; while only 10 percent of non-low income and non-English language learners are in special education.
To close the gap, Osmond looked to the Granite Preschool Program. A recent study demonstrated that $1.75 million in state special education costs was avoided from school year 2007-08 to school year 2011-12 following a reduction in special education use among the at-risk preschoolers in the program. The study also showed that at-risk children that start school behind their peers often remain behind, but at-risk children who entered kindergarten at the top of their class stayed at the top of their class through the 4th grade.
A summary of national research done by the Ounce of Prevention Fund found that without high quality early childhood intervention, an at-risk child is:
- 25 percent more likely to drop out of school
- 40 percent more likely to become a teen parent
- 50 percent more likely to be placed in special education
- 60 percent more likely to never attend college
- 70 percent more likely to be arrested for a violent crime
The major stumbling block to offering a program statewide is funding. Yet this is one area where an ounce of prevention may actually produce more than a pound of cure. Research from the Granite program shows that fewer students in special needs and remediation programs could save about $1,600 per child each year. By the time a student reaches 6th grade, the state could save $7 to every $1 invested.
Through an innovative approach to government financing, Osmond devised a funding formula to leverage up to $10 million for statewide preschool, and putting $1 million of state money aside per year. The bill allowed the government to contract with a private-sector investor to pay for voluntary early childhood interventions to be repaid only if cost-avoidance was demonstrated and the education gap closed. According to Osmond's financial predictions, the program could reduce the number of students placed in expensive special education and cut costs of at least a half billion dollars a year.
Osmond's bill, SB 71, was voted down last Tuesday on the Senate floor. Senators were hesitant on the funding mechanism and some expressed concerns about taking children away from the home. The failure to pass the bill however was disappointing to United Way of Salt Lake, the UEA, the PTA, the state school board and the business community.
The community had a great deal to gain in this situation. Key education and business partners were behind the bill as well as many parents' of low-income children. As we wrap up the legislative session this week, I hope this is not the last we hear from Aaron Osmond on the issue and encourage you to contact your local state Senator if you feel the same.