A Look at the Arnold Foundation's Big Bet on Social Innovation Financing

Three big multi-year grants went out from the Laura and John Arnold Foundation starting in 2014 to investigate and support "Social Innovation Financing." And this is just part of the picture of what the Arnolds are doing to fund Pay for Success (PFS) initiatives. What is going on with this new trend?

Impacting Juvenile Justice

Let's start with Arnold's grant to Youth Services, Inc. for the development of social innovation financing of the Massachusetts Juvenile Justice Project. Over $3.34 million is going to support the fourth PFS project, launched in January 2014. It's designed to improve outcomes for hundreds of at-risk young men in the probation system or leaving the juvenile justice system.

This initiative aims not only to improve the lives of young people, but also to reduce crime, promote safer and stronger communities and save taxpayer dollars.

The initiative will allow Roca, a nonprofit based in Chelsea, to provide its high-impact intervention to 929 at-risk young men aged 17 to 23 who are in the probation system or exiting the juvenile justice system.

Roca’s programming aims to reduce recidivism and increase employment through intensive street outreach and targeted life skills, education and employment programming. The Roca intervention is delivered over an intensive two-year period followed by two years of follow-up engagement.

While Arnold has taken the lead on supporting many Pay for Success ventures, there are also other big partners to this $27 million initiative. Former Massachusetts Governor Deval Patrick was one of the lead public figure partners and the featured speaker announcing the launch. Patrick recently joined Bain Capital to lead a new social impact fund. That firm is already involved in social innovation financing.

Pay for Success is all about trying to respond to chronic social problems in a new way. In a PFS initiative, funders assume up front financial risk by providing the capital investment, and taxpayers pay for a program only if a third-party evaluator determines that the initiative has achieved specific outcomes that create benefits to society and generate savings for government. 

It's a complicated idea and some believe there are big holes in the theory, but these initiatives are going forward. The plan with this juvenile justice initiative involves "street outreach" where the goal is to increase employment, education, and life skills for the specified population. For two years, the Roca intervention works "intensively" with identified individuals, followed by two years of "follow-up engagement."

If successful, Massachusetts will pay back investors with $27 million, but only if Roca's services are proven to produce positive outcomes and savings for the state. These "success payments" will come from the state and the U.S. Department of Labor, which awarded Massachusetts a first-of-its-kind PFS grant of $11.7 million. The additional funding for success payments from the Department of Labor grant will enable the state to extend the project, if successful, to an additional 391 young men. 

Social Service Delivery

Another big grant from the Arnolds for social innovation financing is going to the Nonprofit Finance Fund. With $720,000 in support from the Laura and John Arnold Foundation along with funding from the Social Innovation Fund, these dollars will go to help social service organizations to meet the demand for services in their communities.

A key White House initiative for growing the economy and addressing inequality, the Social Innovation Fund (SIF), along with the Corporation for National and Community Service (CNCS), is bringing together government and private sector resources in order grow the impact of innovative community projects that have the greatest promise for improving the lives of people in low-income communities across America. The three priorities SIF invests in are economic opportunity, healthy futures, and youth development.

SIF hit the ground running and has been growing by leaps and bounds ever since. In just a few years, SIF and its private-sector partners have invested more than $700 million in community projects$243 million in federal grants plus $540 million in non-federal match commitments. Through SIF, 217 nonprofits in 37 states and the District of Columbia have been able to expand evidence-based projects that have the potential to pay for themselves by expanding economic activity and reducing the need for government services.

Mobilizing Investment Capital

The Arnolds are also investing $4 million in Social Finance, Inc., a nonprofit dedicated to "mobilizing investment capital to drive social progress."

Social Finance, Inc. is a market intermediary that structures deals that create "innovative financing solutions." This nonprofit works to develop Social Impact Bonds (SIBs), which draw upon private capital to fund effective interventions designed to address social needs. SIBs can work to address complicated social problems like poverty, unemployment, and overincarceration.

The idea here is to give government more flexibility to invest in promising initiatives and see if they really pay off. The bonds can help to unlock capital to finance the expansion of projects and explore alternatives, often preventative measures, that can decrease the need for future services, making for big savings for government in the long run. 

Related: The Arnold Foundation is Betting Big on Pay for Success