Editor's note: We're thrilled to welcome Nels Johnson to our cast of contributors. Nels is a legislative advocate, a writer, and an activist who has worked on several recent campaigns in the region. More about Nels here.
It’s no secret that local government budgets have been shrinking since the Great Recession, much more so than states or the federal governments. As a city, Portland has struggled to pay the bills over the past few years and been forced to cut back positions and services, just like cities all across America. There’s a need to make long-term investments in things like infrastructure and education, but no money to do it. And even if there was money, it could be a tough sell to convince people that not only is a major project worthwhile, but that the government has the skills and capacity to deliver on time and on budget. We need to seriously rethink the way we raise and spend money on city government projects. There’s no more money for new projects and the old model of bonding and the current approach to funding creates barriers to innovation. Its time for a new approach, enter: social impact bonds.
As described in a recent article in The Economist, a social impact bond (SIB) is “an experimental financing method which connects financially-stressed municipalities with private investors to fund public projects at no initial cost to taxpayers.” Basically, private investors pay the costs of a new government program in the early years and then the government repays the investors if the program meets its goals, typically out of the budgetary savings that occur as a result of the program. Often, if the government program exceeds its goals, the private investors can earn bonuses. The payout typically comes from the government long-term budgetary savings resulting from the project. Not only does a SIB provide new revenue for the government, but it also provides an opportunity for private investment, thus creating jobs and more tax revenue for local governments.
The idea of social impact bonds is starting to catch on. Recently in New York City, Goldman Sachs invested $9.6 million over four years in a program designed to reduce re-incarceration rates among youth. The way it works is that if the re-incarceration rate among the youths involved in the program drops 10% at the end of four years, Goldman Sachs gets their money back. But if the re-incarceration rate drops even further, Goldman will make an even bigger profit. However, if the re-incarceration rate does not drop to 10%, then Goldman loses money. Make no mistake, Goldman Sachs isn’t investing in the program out of the goodness of their hearts, they’re investing because they believe in the quality of the program and believe they can make a profit off it. Imagine if Portland could create a model with reliable metrics for the structural long-term problems that ail us. We could not only solve a pressing problem, but we could make a serious investment into our future.
The Center for American Progress (CAP) argues that SIBs could revolutionize the way a local government spends money. CAP believes that SIBs will encourage innovation and provide greater accountability and creative flexibility for government projects. The thought being, if the government can’t demonstrate competent management and execution of a project, no private investor will be willing to plunk down money into a bond. Additionally, SIBs will also provide the desperately needed new revenue to tackle big, transformative projects like education or infrastructure that can take years to yield results.
SIBs aren’t without their critics. Some argue that a lot of what city governments do is basic maintenance and isn’t always easily reducible into metrics or definitive benchmarks. Governments provide a fundamentally different function from business and therefore can’t be measured against the same standards and metrics as businesses.
But lets just think for a moment about how this could play out in Portland. For instance, education advocates will say that one of the greatest indicators for whether or not a child succeeds in school is whether the child was exposed to early, pre-K childhood learning. According to the Children’s Institute, investment in early childhood education yields some of the greatest fiscal returns in public investment. For every dollar invested in early childhood education, there is nearly a $13 benefit through savings on future public expenditures related to social service and criminal justice costs. The problem is that it can take years to actually measure the positive results. In an age of chronic budget deficits and reductions, it’s hard to convince elected officials to look up from the current proverbial fire they’re fighting, to focus on long-term, preventative solutions like investing in early childhood education. SIBs would provide the necessary new revenue to make the long term investments in our children’s future that are needed to get back to stronger economic growth.
But most importantly, SIBs underscores a fundamental issue in local governance. Namely, how and why should the City spend money? What’s the right philosophy? What exactly is the role of local government? Is the City’s responsibility merely to focus on basic services and that doing so is the best way to encourage economic growth? Or should the City take more of an activist role, investing in projects or ideas that tackle our biggest structural problems like fixing education and long-term infrastructure projects. A candidate’s answer this question will shed light on how he will govern in City Hall. The next mayor is will have to find a creative way to tackle not just the short-term budgetary problems, but the long-term ones too. Social impact bonds may just be the way to do it.