Pay for Success: A way to address public needs without using taxpayer funds?
By Thamanna Vasan
Economic Policy Analyst
As Colorado grows so does the need to fund programs that will better serve our communities. However, with limited dollars in areas such as education and transportation, governments are being forced to do more with a whole lot less.
To ease this burden, legislators in Colorado and beyond are looking to alternative funding mechanism in the form of public-private partnerships, also known as Pay for Success (PFS).
Pay for Success is a model in which philanthropic and private entities are given the opportunity to invest in innovative public programs. From homelessness to education, these programs address important priorities that might otherwise be too risky or unpopular for government to undertake with public dollars. However, this isn’t a privatization of public priorities. Instead, governments and stakeholders establish expected outcomes, performance targets and standards. If the programs don’t meet these outcomes, funders don’t see returns on their investments and state money remains untouched.
In 2010, the Pay for Success model was first piloted in the United Kingdom. Since then the model has made its way across the world and the United States. Utah is currently executing a PFS program focused on expanding the Utah High Quality Preschool Program. Part of the Clinton Global Initiative America, the $7 million contract between Goldman Sachs, J.B. Pritzker, and the United Way of Salt Lake is the first early childhood education PFS in the United States.
The PFS would expand services for at-risk youth in the Granite and Park City school districts. The idea is that targeted early childhood education will result in fewer students requiring special education or remedial education down the road. The students in the program will be given standardized tests following preschool and those that test below average will be tracked through the 6th grade. For every year a student doesn’t need to enroll in special education, the state returns 95 percent of the savings and 5 percent base interest to J.B. Pritzker and Goldman Sachs. However, if school readiness standards aren’t met and special education services aren’t decreased, private funders will not see a financial return.
Critics of Pay for Success still remain suspicious of the structure, despite increased popularity. They find the lack of transparency, high base interest rates, displacement of public employees and lack of innovation involved in some of the current programs to be problematic. Many of these issues are tied to the fact that private entities take on the financial risk of funding these programs, suggesting a greater likelihood to cut corners and unwillingness to approach very innovative programs that are more likely to fail. After all, if the programs fail to produce expected results and savings, no returns are seen.
However, with a proper stakeholder process around PFS legislation many of these pitfalls can be avoided. Requiring states to ensure public access to contracts, allowing for public comment, limiting the rate of return, ensuring public employees aren’t displaced and requiring governments play a central role in accountability are all examples of best practices that can ensure successful PFS contracts.
These well-thought-out PFS contracts could prove to be powerful tools, especially in Colorado. Often times spending for public programs is deemed too risky because populations or issues served are unpopular and the upfront costs are too high. This means that, in a state with constitutional limits on spending of taxpayer dollars, the state doesn’t have the resources or support to pay for innovative, cost-saving programing. The new pool of private funds expands the pie and governments can provide new programming while shifting risk away from taxpayers.
Despite these advantages, PFS is not a fix-all. It is merely one of many innovative ways to ensure better social outcomes. In the meantime, discussions around increasing flexibility in spending in Colorado must continue to ensure economic prosperity for all Coloradans.
