When the concept of Pay for Success (PFS) was introduced in the United States in 2010, Nonprofit Finance Fund (NFF) recognized its potential to improve the lives of people in need while addressing significant shortcomings in the way social services are funded. Five years later, it has become clear that PFS is just one example of a larger shift on the part of government, business and philanthropy toward paying for what works. With this shift comes the potential to better understand the true costs of achieving positive social change, catalyze investment in proven and innovative social programs, and improve the long-term financial sustainability of organizations working to address critical social issues.
Pay for Success projects currently underway across the country are addressing pervasive and complex issues and bringing services to people who need them most, from homeless families to teens struggling to graduate high school and individuals aiming to re-enter the workforce with skills that enable long-term self-sufficiency.
NFF's work in the PFS field includes helping service providers, philanthropic and other private investors, and governments understand and build readiness for participation in a U.S. social sector where providing and accessing capital is increasingly tied to the achievement of meaningful and measurable outcomes. To that end, we are committed to analyzing and sharing the successes, opportunities, challenges and failures of PFS efforts to accelerate adoption of approaches proven to improve lives and communities.
We are pleased to share this blog post as the first in a series featuring early leaders in the Pay for Success field. This series aims to provide insight into Pay for Success projects and amplify lessons learned. As early projects progress, we believe that sharing the experiences of participants is the best way to facilitate improvements in future outcomes-based efforts so as to refine the financial and structural mechanisms of such projects and accelerate the benefits of outcomes-based approaches. These blogs will keep the perspective of service provider organizations central to the ongoing discussions of the opportunities and challenges of Pay for Success projects, and the extent to which they merit continued exploration as a tool for responding to persistent social, economic and health challenges in the communities that these organizations exist to serve. Ultimately, the future of Pay for Success as one type of contracting and financing tool is far less important than its role in the movement to improve how we achieve, and pay for, positive social change. We look forward to continuing this conversation with these blogs, as well as through the resources on our PFS Learning Hub.
Below is the first installment of a three-part blog focused on Center for Employment Opportunities, the service provider in the New York State Recidivism and Workforce Development Project
As part of our work in Pay for Success (PFS), with support from the Rockefeller Foundation and the William and Flora Hewlett Foundation, Nonprofit Finance Fund (NFF) convenes discussions among funders interested in furthering the Pay for Success field.
On April 14, 2015, NFF sat down with two partners in the New York Increasing Employment and Improving Public Safety Pay for Success Project: Sam Schaeffer, the CEO of Center for Employment Opportunities (CEO), the service provider in the project; and Steven Lee, Managing Director of the Income Security Portfolio at the Robin Hood Foundation, an investor in the project and a long-time philanthropic supporter of CEO. We were also joined by Woodrow “Woody” McCutchen, Vice President, Senior Portfolio Manager at the Edna McConnell Clark Foundation (EMCF), also a long-time philanthropic supporter of CEO.
The importance of relationships in PFS projects was central to the conversation. Specifically, we discussed the relationship between the nonprofit and philanthropic sectors in catalyzing readiness for PFS participation, and how PFS projects can deepen, and change fundamentally, the relationship between the nonprofit sector and government. Other themes that emerged were the role of evidence in shaping PFS projects, and sustainability of PFS projects after the project term.
In this three-part blog series, we take a closer look at the New York State PFS project and focus on three main themes: first, the investments made in CEO leading up to their involvement in a PFS project; second, the motivations of CEO as service provider, and Robin Hood as an investor, to participate in a PFS project; and third, the experiences to-date of these partners in the PFS project and the implications of these experiences for the future.
Project overview: Increasing Employment and Improving Public Safety in New York
The $13.1 million New York State project was the third PFS project in the United States and the first conducted at the state level. In line with CEO’s broader mission, the project is designed to reduce recidivism rates among formerly incarcerated men by increasing employment after their release from state prisons.
Upfront investment provided by private investors through the PFS financing mechanism will allow CEO to serve an additional 2,000 formerly incarcerated individuals over the course of four years. The evidence-based intervention delivered by CEO serves recently incarcerated individuals within the first 90 days after their release from prison and combines intensive job readiness classes, paid transitional work opportunities on one of CEO’s work crews performing maintenance and labor for public sector customers, permanent job placement support, and job coaching and retention support for the first year of employment. The project aims to reduce recidivism and increase employment among this group when compared to a group considered to be at similarly high risk of returning to prison. Investors will be repaid their principal, plus some return, if and when target thresholds for reductions in recidivism and/or increases in employment are achieved. The potential rate of return to investors increases if CEO’s outcomes exceed the threshold for repayment. Funds for repayment are committed up front by the federal and New York State Departments of Labor.
More information on this project, including the outcome pricing methodology, and other PFS projects can be found on the Pay for Success Learning Hub, an NFF-curated repository of PFS information and tools.
Philanthropic Investment for Provider Readiness
Pay for Success projects present an exciting opportunity for service providers to further their missions and access new, and often more flexible, resources to support their work. But, there are significant hurdles that organizations must clear in order to be good candidates for PFS investments in the current landscape.
PFS projects involve rigorous evaluation of the outcomes delivered by the project intervention. Generally, this requires a high level of sophistication from nonprofit service providers, including: the ability to deliver, with fidelity, a well-developed and tested service model that has demonstrated positive impact; the systems and human capital to collect and use program data to manage performance; and the risk tolerance to engage in an unproven model of program financing and contracting. Thus, for many service providers, the path to PFS project readiness is a long one.
For CEO, this journey started in 2004, when the organization chose to participate in a randomized control trial (RCT) to determine its program’s effectiveness. The RCT results, released in 2012, demonstrated that CEO’s program produced significant reductions in recidivism, and that this impact was greatest for individuals that were considered to be at highest risk of returning to prison based on a number of factors, including age and number of prior offenses.
Sam Schaeffer is quick to disabuse anyone of the notion that solely this RCT prepared CEO for PFS, though it did play a crucial role in positioning CEO for the opportunity and increasing investor confidence (as discussed in the forthcoming second blog post of this series). Rather, in addition to the evidence, he highlighted the crucial philanthropic investments in CEO’s core program, as well as the supporting organizational infrastructure, which enabled CEO to continue to implement performance management systems and develop a culture of, and commitment to, continuous improvement and refinement of its model using real-time program data.
The Robin Hood Foundation has been supporting CEO’s program since 2003. Early on, Robin Hood chose to target its grant dollars to bolster CEO’s job retention and follow-up services, because the foundation uses one-year job retention as one of the primary markers of success for all of the job training and placement programs it funds as part of its mission to reduce poverty in New York City. Until that point, CEO didn't have dedicated resources to allocate to long-term job retention services, because its training program was primarily funded by public funding sources which focused on initial job placement rather than retention and wage growth as markers of success.
Interestingly, the RCT did not demonstrate significant long-term job retention outcomes for individuals served by CEO. However, during the study period and since its conclusion, CEO has been making continuous tweaks and improvements in its job retention efforts with Robin Hood’s steady philanthropic support. Based on their internal data, CEO knows that long-term job retention rates for participants placed in the unsubsidized workforce have more than doubled in the past ten years, and this additional layer of impact is something that CEO is aiming to demonstrate as part of the evaluation of the New York State PFS project.
Around the same time that CEO undertook the RCT, the organization was approached by the Edna McConnell Clark Foundation (EMCF) for support to undertake strategic planning and theory of change work. Woody McCutcheon recalls how impressed he was that an organization would voluntarily subject itself to the rigors and risks associated with an RCT, and how that seriousness of purpose that CEO demonstrated motivated EMCF to invest in the organization’s strategic work. CEO’s theory of change work, funded by EMCF, was conducted with an eye towards future replication and scaling of CEO’s model. In 2011, CEO received a $6 million, three-year Social Innovation Fund award from EMCF, and became a True North Fund grantee. These funds provided the growth capital for CEO to replicate its program model outside of New York State for the first time. In 2013, EMCF followed up with an 18-month, $750,000 investment.
Throughout this period, Robin Hood Foundation and EMCF also funded crucial data management systems and human capital investments at both the leadership and front-line staff levels. In total, these two foundations invested nearly $25 million in CEO in the ten years prior to the launch of the Pay for Success Project. This is not an insignificant sum, but it is worth noting that the organization was, and remains, funded primarily by public grants and earned income from contracts for its transitional work crews.
Nonetheless, Sam Schaeffer posited that CEO’s investment in data and performance management was one factor that set them apart during the service provider selection phase of PFS project construction, and related what he saw as a pivotal moment in the early genesis of the PFS project and their selection as the project’s service provider: when Social Finance, the project intermediary, was conducting due diligence on service providers, CEO was able to generate a requested data report on past performance in 20 minutes.
This performance management capacity built the confidence of project stakeholders that CEO would be able to handle being involved in the project and replicate past performance. Further, the data generated by CEO’s performance management system was central to the project design, as was the evidence from the RCT. CEO’s program was found to have the greatest impact for the recently released and highest-risk individuals, so that is the entire service population in the PFS deal. And, the target outcomes for reductions in recidivism and increases in employment are built on CEO’s past performance. This helps mitigate the level of performance risk in the project, and helped CEO, the state and investors get comfortable with the project.
- The ability of any service provider to participate in PFS projects, and by extension other outcomes-oriented financing or contracting arrangements, requires commitment to and investment in processes that enable continual learning about program effectiveness. Likewise, it requires investment in human capacity to deliver programs and manage to results, as well as systems to track performance management.
- Philanthropy can play a critical role in readying service providers to participate in PFS financing arrangements by providing long-term investments in core programs as well as more episodic strategic investments in organizational infrastructure, strategy and human capital.
- Providers with access to data that demonstrates the efficacy of their own program or intervention with a specific population are better positioned to participate in the design and implementation of outcomes-based contracts. Having an active role in program design may prove critical to success in PFS project implementation.
The next installment of the blog series will explore the relationships that led to and have been strengthened by the PFS project in New York State.