Pay for Performance Bonds

1. Pay for Performance Bonds Public Sector Economics Workshop February 13, 2013

2. Pay for Performance BondingOverview • Pay for performance bonding context • 2011 Pay for Performance Act • Pay for Performance Committee • Role • Responsibilities

3. Pay for Performance Bonding:Models • Social Impact Bonds – UK • Pay for Success Bonds – US • Massachusetts • Minnesota • Goals • Increased efficiency and effectiveness of state government programming • Performance accountability for service providers • Demonstration of financial feasibility that will result in new investment models

4. Traditional Contracted Services Constituents Government Nonprofit Before or during service delivery Performance Contracts +/- 10%, 20%, 30% Note: Special thanks to Kate Barr and Brian Paulson for use of their graphics.

5. MN Pay for Performance Pilot Program Bondholders Constituents State of MN Nonprofit After validation of outcomes Third party Evaluator

6. Pay for Performance:History & Context 2011 Legislative Session – Pilot program created: • To demonstrate the feasibility of purchasing outcomes, rather than funding services • To expand initial pay for performance work done in the workforce development community • To document the value of certain investments in state services • To test the feasibility of financing state services with appropriation bonds

7. Pilot Program Goals:What do we want to learn? • Do state investments in specific programs create future state savings or increased revenues? Are those savings sufficient to pay for the programs themselves? • Are performance-based contracts a feasible way to share risk between the state and service providers and improve the performance outcomes of state investments? • Can performance-based contracting using data measurement and analysis be done in a cost-effective and efficient way to improve the outcomes of state investments?

8. Pay-for-Performance Program:Oversight Committee Role & Responsibilities • Identify criteria to select service(s) to include in the pilot program. • Identify conditions of performance and desired outcomes for each selected service. • Identify criteria to evaluate whether a service has met performance conditions. • Review methodology and data needed to calculate the state’s return on investment. Data must include: • revenues that would not have been collected without the service. • costs avoided by the state by providing the service. • Provide other advice or assistance to the commissioner as needed.

9. Pay for Performance:Characteristics of Appropriate Programs • Characteristics of successful service areas include: • Potential for high net benefits • Measurable outcomes • High degree of data reliability • Relatively quick demonstration of benefit

10. Required Return on Investment • Requires a service provider to generate a return on investment at least equal to: Note: Cost of provider’s working capital, if needed, will increase the provider’s required return on investment.

11. Timeline • Third party monitors progress towards goals • Evaluator collects data & conducts ROI analysis to determine progress towards meeting contract term • As outcomes are achieved, payment is made to service provider. Year 1 Six months to five years Year 10 Service provider contracts executed & programs implemented Contracts executed with third parties, including evaluator Evaluation design is confirmed • RFPs issued for: • Evaluator • Other third party • Service Provider Six months to ten years • Bonds are sold to make payments to service providers • Cost savings and revenue increases from service providers’ programs accrue to the state • State uses ongoing savings and revenue increases to repay the bonds