With the start of the pilot phase for the R.E.A.C.H. and Homes Not Jail projects in Salt Lake County, NFF once again spoke with Third Sector Capital Partners, Inc. (Third Sector) and the Community Foundation of Utah about the Salt Lake County Pay for Success Portfolio Projects. This blog is part of an interview series with selected project partners from our Social Innovation Fund transaction structuring competition.
NFF: Congratulations on reaching contract with two projects that are going to make a significant difference in the lives of those in need in Salt Lake County.
Third Sector: Thank you! In developing its new Pay for Success Initiative, Salt Lake County took the unique step to concurrently address two complex issues with a profound, negative impact on the community. Launching the Criminal Justice PFS Project (R.E.A.C.H) and the Homelessness (Homes Not Jail) PFS Project in tandem, the County is changing the way it approaches these two highly inter-related issues. The two PFS projects will shift resources to where they are needed and where they can have the biggest impact. If successful, the County will minimize the service burden currently faced by the jail and emergency shelter, and in doing so will help more than 500 underserved, vulnerable individuals.
NFF: It’s always great to remember the real reason we go through all of this work, to help these individuals. While we do not want to dampen the mood, perhaps we can quickly address why we’re now discussing two projects instead of three? Any lessons to be learned?
Third Sector: The change in the number of PFS projects was driven by the funding sources appropriated by the County to finance them. In December 2015, the Salt Lake County Council discussed the PFS projects as part of its overall criminal justice reform initiative and they approved a budget that included continuing County funding used over the past twenty years to pay debt service on a 1995 jail construction bond. This funding source, which constitutes approximately $9.4 million annually, is used to appropriate funding for the PFS project. It was determined that focusing on the development of two high-quality PFS projects would be the most effective and efficient use of County dollars.
NFF: Let’s talk about some of the other successes and challenges in launching multiple projects. One of your early hypotheses from when we talked last was that this would be a way to introduce innovation in financing. How did that play out?
Community Foundation of Utah: There were a lot of positives in the dual-approach. Funders could be efficiently engaged across both projects since outreach could be conducted simultaneously. It also provided funders with risk diversification across the two projects. The initiative could minimize development and operational costs as the same partners were used for both projects. For instance, the evaluator will be able to pull similar data for both efforts simultaneously.
However, our biggest hope, that funders and investors would participate in both projects and underwrite them together, didn’t entirely come to pass. To reach our full capital raise in both initiatives we found that two funders invested and participated in only one project because it aligned with the issue area that they fund as an organization. This led to complications in financially structuring and aligning the different capital sources across the two projects. As relationships with investors were built, we encountered what we started to coin “diseconomies of scale,” elements that were more challenging because of the simultaneous development. For example, there was confusion about constructing separate internal rate of return (IRR) levels and waterfalls of success payments for each project. This adjustment was necessary due to the differing nature of the projects, referral pathways, structure of outcomes to be achieved, and timing of payments. Some funders, however, wanted to see the models for the projects displayed in a similar way and for the impact levels to be roughly equivalent, even though these were two very different programs. This led to confusion about whether the project with the higher IRR levels or success payments was “more important” than the other.
Funders also made it clear that each project needed to have separate financial reporting. This brings a level of complexity, as the Special Purpose Vehicle must then create separate ledgers for each account, even though the funding is all deposited into one bank account. Knowing up front how revenue and expenses will be recorded from an accounting and auditing perspective, and generating accurate financial reporting for each project, is critical in order to minimize future audit and financial issues.
NFF: Knitting together different kinds of capital and different priorities is one of the hardest things we see PFS projects tackle. Another hypothesis we discussed at the start of the grant was a possibility for efficiencies in contracting.
Community Foundation of Utah: We definitely saw increased benefits and efficiencies by pursuing two projects that would not have been apparent with a single project. Leveraging the same contractual structure for both projects also helped to reduce overall legal fees.
We only had one small challenge in contracting, which was that we had to establish termination clauses in such a way that if one project were to be cancelled the other would not be affected.
NFF: Any other efficiencies or challenges in the multi-project structure that you’d like to raise?
Third Sector: From a capacity perspective, the County staff time was more efficiently used as the same staff could oversee both projects simultaneously. The two service providers also benefitted from the support and camaraderie of having a local peer organization join them in the PFS process.
NFF: As you all know Nonprofit Finance Fund is particularly interested in learning about, and supporting, service providers in PFS projects. We look forward to hearing more from them directly in our next blog post with you all.