Oregon considers social impact bonds
By Matthew Kish
Rep. Earl Blumenauer, a Portland Democrat, is among those who support the use of social impact bonds in Oregon.
Some of Oregon’s most influential financiers, elected officials and lawyers are studying whether a new type of bond could address some of the state’s most pressing social problems.
In the United Kingdom, New York City and Boston, the bonds — known as social impact bonds — are being test-driven on issues ranging from homelessness to inmate recidivism.
“This is something that I’m absolutely convinced ... can dramatically cut down long-term health care costs, collection costs and education costs, while we enhance the ability of government to deliver services,” said U.S. Rep. Earl Blumenauer, a Portland Democrat.
Social impact bonds work like this: an investment bank calculates how much a social problem, such as recidivism, costs a state. The bank issues a bond and raises money from investors. It uses the cash to address the problem. In this case, if recidivism drops, the state splits the savings with the bond investors. If the rate doesn’t drop, investors lose their money.
Nationally, social impact bonds were in the news this week after the giant investment bank Goldman Sachs backed New York City’s first social impact bond. New York state, Massachusetts, Connecticut, Cuyahoga County in Ohio and Los Angeles city and county are also considering social impact bond proposals. The Obama administration is also interested.
Oregon efforts are preliminary but gaining momentum. Oregonians working on the concept include Dave Chen, former chair of the Oregon Innovation Council and one of the state’s most well connected and successful financiers who is focused on sustainable investing innovations. Like others, Chen said social impact bonds are a way to increase government accountability and transparency.
“It’s exciting,” Chen said. “It’s an example of investors trying to collaborate with government in order to make a difference.”
Chen said several of the state’s biggest law firms are also interested, but he declined to share names given the early stage of the work.
Gov. John Kitzhaber has been briefed on the issue and considers it an “interesting policy concept,” according to a spokesman.
Do social impact bonds work?
It’s too early to tell if social impact bonds will work.
The first social impact bond was issued in the United Kingdom about two years ago in order to address recidivism. Due to privacy concerns, the U.K. doesn’t plan to release detailed information about arrest rates for former inmates involved in the program.
“What we can say is that they’ve been very pleased with the engagement levels,” said Justina Lai, an associate at New York’s Rockefeller Foundation, which has been instrumental in funding early social impact bond efforts.
The investors in the U.K. bond will get paid based on the percentage of inmates who avoid re-offending in the 12 months after release. Bond investors are betting that new programs put into place will lower reconviction rates by providing former inmates quicker access to housing and employment.
Best case scenario: Bond investors will make a 13.5 percent return on their investment. Worst case: They lose everything.
The U.K. bonds primarily attracted foundations and others closely aligned with corrections reform.
Chen predicts the initial investors in most social impact bonds will be those sorts of groups. If early bond offerings succeed, he predicts interest from more traditional investors, like hedge funds and pension funds.
That pattern is playing out in Massachusetts, where a group of organizations recently won the right to negotiate a roughly $10 million social impact bond-like contract with the state.
The organization is still negotiating with the state and has yet to market the bond, but its phone is already ringing.
“There does seem to be interest, specifically ... in the philanthropic realm,” said Joe Finn, president of the Massachusetts Housing and Shelter Alliance, one of the groups. “We’re hoping that it attracts other funds in the private sector.”
Big hurdles remain
Several significant hurdles remain. The first is that social impact bonds don’t have much of a track record.
“As an investor, you would want to have verifiable information that shows that the agency has had a proven success rate and solid leadership before thinking of investing in these securities,” said Deidra Krys-Rusoff, a portfolio manager at Portland-based Ferguson Wellman Capital Management who specializes in bonds, in an email. “Without a solid track record, you may want to think of it as a donation versus an investment.”
Another big hurdle: time. Most investors shy away from bonds that require locking up their cash for more than five years. But it could take 10 years for a program serving at-risk youth to prove it’s effective, for example.
“It needs to be a short enough period that investors have the patience to wait,” Chen said.
Pricing social impact bonds is also incredibly complex and requires crunching piles of data, said Chen, who cautioned that social impact bonds are investments, not charitable donations.
“At the end of the day it’s a fiduciary commitment,” he said.
The big rating agencies also haven’t rated any social impact bonds. That needs to happen in order for many institutional investors to buy them.
Blumenauer is confident those problems can be worked out.
“The premise is unassailable,” he said. “We are paying huge sums of money because of system failures in education, corrections, in health care. Prevention works. Training works. If we can structure (social impact bonds) properly and have a high enough degree of accountability, there’s no reason that we shouldn’t be able to borrow and pay back the loans with the longer-term savings.”
If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.