• April 26, 2016
• Project on Municipal Innovation

Pressed to deliver better social services outcomes under constrained budgets, many cities and states across America have embraced new arrangements that draw private capital to invest in long-term preventative social service programs. Known as Pay for Success (PFS) models, these arrangements originated in the UK in 2010 and have since spread rapidly in the United States, in particular after President Obama’s inclusion of $100 million for PFS initiatives in his 2012 budget.

PFS models shift the financial risk of new social programs from governments to investors; in doing so, PFS projects essentially require governments to only pay for services that meet agreed-upon outcomes within a given timeframe. This means that, rather than paying vendors only for the services they provide, governments can instead focus on how those services enhance the well-being of their jurisdiction’s residents and communities.

Starting a PFS initiative isn’t as easy as signing a dotted line. These models often target issues such as homelessness or recidivism, and require collaboration among multiple government agencies in addition to funders and service providers. Furthermore, they require cities or other units of government to enhance their capacity for collecting, analyzing, and monitoring data — which isn’t easy when working across multiple parties and players.

Pay for Success and how to best deploy it was a topic at the 15^th convening of the Ash Center’s Project on Municipal Innovation, sponsored by Living Cities. The discussion included officials from Denver and Austin, who offered different takes on their experiences with PFS programs, in addition to experts from Third Sector Capital Partners and Living Cities.

In Denver, for instance, the city’s Crime Prevention and Control Commission tackled overcrowding in the county jail with a PFS project aimed at assisting chronically homeless “super-utilizers” of government services. These individuals accounted for a disproportionate share of service costs—on average, about $38,000 was being spent annually on each—so the Commission wanted to find a way to keep these users out of the system with supportive housing and more comprehensive, targeted services.

“By working with our local health department and justice system, our organization was able to precisely identify not only who our target population was, but how much that group annually cost the city through various services,” explained Regina Huerter, the Commission's Executive Director.

By knowing these costs, Huerter and the partners assembled by the Commission identified the number of days clients spent in jails and hospitals as a specific, measurable goal to target with wraparound social services in an extensive PFS program. So far, results have been encouraging: one year into the intervention, the average annual cost per individual in the pilot group had dropped over $25,000.

A different PFS story is unfolding in Austin, which is currently in the midst of separate feasibility studies for four potential PFS initiatives – an undertaking that presents challenges of its own.

“We’ve found PFSs to be a great convener and motivator for parties to get together and share data,” said Sly Majid, Chief of Staff to the Mayor of Austin. “We’ve also learned that PFS projects are a marathon, not a sprint—patience and flexibility are essential. It’s an advantage to have a single consensus area identified ahead of time, in which there’s already solid knowledge of the landscape.”

Denver’s and Austin’s experiences offer guidance on the structural settings in which a PFS project is most primed to thrive. While the City of Austin has strong partnerships with a wide range of local agencies and partners, the large number of projects has added complexity to the PFS development process. Majid said that aligning new coalitions around common interests has been paramount. The Denver Crime Prevention and Control Commission, meanwhile, had this advantage from the outset. As a coalition of key players from government agencies, foundations, non-profits, law enforcement, the judicial system, and the faith community, the Commission’s very existence removed the obstacle of building a trusting coalition of partners to work together and share data in pursuit of common goals.

Yet the key to success for any PFS isn’t necessarily its institutional starting point; it has more to do with a government’s ability to access, use, and analyze reliable data. Eileen Neely, Living Cities’ Director of Capital Innovation, emphasized that having good data is important for the long-term. “One key reason we find PFS to be so important is that it changes government’s mindset on social services from activities to outcomes,” she said. “Articulating this is very difficult—and in the long run, data is the key to doing so, and to helping achieve those results in the long-term that cities and governments want to see.”