Laura TomaskoWhat Social Impact Bonds Really Mean for Philanthropy

By: Laura Tomasko In: Partnerships and Collaborations

17 Feb 2011

In President Obama’s budget request for FY 2012, philanthropic leaders should pay attention to an innovative proposal to partner with government. Called “pay for success,” this initiative tests social impact bonds in the United States.

With a social impact bond, a foundation identifies a promising service provider and raises money from private investors who believe that service provider can achieve positive social outcomes. A few years later, if the service provider achieves its desired outcomes, government reimburses the foundation for the cost of the program, plus a potential bonus based on how well the service provider did. If the service provider doesn’t achieve its desired outcomes, government pays nothing.

Social impact bonds allow government to encourage innovation without a financial obligation to unsuccessful programs. The way it works now, government continues funding social programs, even when they don’t produce intended outcomes. By requiring that programs meet specific outcomes, government gets an exit strategy.

The idea of achieving more than one type of return isn’t new to philanthropy. Since 1986, The John D. and Catherine T. MacArthur Foundation has awarded more than $377 million in program-related investments to charitable organizations. The W. K. Kellogg Foundation has committed $100 million of its endowment assets to pilot a mission-driven investment program. With more than 120 foundations and social investors in the PRI Makers Network—a forum for expanding the use of program-related investments—philanthropy has long since signaled its interest in impact investing.

What is new is the idea that a partnership between government and philanthropy can align financial incentives to social policy outcomes. In his budget request, President Obama encourages “pay for success” bonds across several departments, including Education and Labor. The New York Times reported that the budget would include $100 million to pilot seven “pay for success” programs.

Social impact bonds have high potential, but also distinct programmatic, evaluation, and financial limitations. To learn more about these challenges, read the full commentary here.

While there are important concerns to consider, it’s exciting to hear about new opportunities for public-philanthropic partnerships. At the very least, including this proposal in the budget should raise the profile of social impact bonds, which New York City and Massachusetts are already considering. The Council’s Public-Philanthropic Partnership Initiative looks forward to working with government and philanthropic leaders interested in exploring this new opportunity.

Laura Tomasko is manager of Public-Philanthropic Partnerships at the Council on Foundations

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