Implementing Pay for Success and Social Innovation Finance Webinar

1. Implementing Pay for Success and Social Innovation Finance Webinar October 25, 2012

2. 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

3. Third Sector Capital Partners Transaction Advisory Services Program Feasibility, Program Risk Evaluation and Partnership Formation

4. Overview of Pay for Success

5. What is Pay for Success? • performance-basedcontracting for outcomesbetween government and social service providers • financing that supports PFS. “social impact bonds” are one type of SIF financing. • PFS requires a public-privatecollaboration focused on outcomes • and preventiveinitiatives 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):

6. PFS Construct

7. 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 3rd Party Evaluator is essential to independently track and validate outcomes.

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

9. Existing Landscape of PFS Exploration

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

11. Key State and Local Agencies

12. 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

13. Question Break

14. Existing PFS Pilots: Massachusetts & Cuyahoga County, OH

15. 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

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

18. Question Break

19. Mechanics: Cuyahoga County Pay for Success Process How is this different to MA? Similar? 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 Dec-May 2013 August-Sept. Sept-October November July 2012

20. Early Stakeholder Roles: Cuyahoga

21. From Interest to Action: Cuyahoga Success Factors: • Leadershipfrom 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

22. Question Break

23. PFS Outcomes Measurement

24. 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.

25. 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: • Select a technical assistance provider or evaluator with experience measuring outcomes with government administrative data • Determine what administrative data sources and data collection strategies are available to measure key outcomes and process for accessing this data. • Define and articulate a shared vision of what a successful program would accomplish for the target population. • 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)

26. Who Measures Outcomes? • The number one risk of PFS failure is tied to the possibility of non-rigorous evaluation. • Essential to have independent, 3rd 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

27. Potential Applications for PFS

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

29. Challenges for PFS Implementation

30. Promising SIB Intervention Areas

31. Roadmap for PFS Exploration

32. Steps for Exploring PFS Opportunities

33. 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?

34. Questions & Contact Information • Commonwealth of Massachusetts Ryan Gillette, Government Innovation Fellow ryan.k.gillette@state.ma.us • CuyahogaCounty, Ohio David Merriman, Special Assistant to the CountyExecutive dmerriman@cuyahogacounty.us • APHSA Larry Goolsby, Director of Strategic Initiatives lgoolsby@aphsa.org • ThirdSector Capital Partners Caroline Whistler, Partner cwhistler@thirdsectorcap.org George Overholser, Co-Founder and CEO goverholser@thirdsectorcap.org