the

Pay for Success
Handbook
Suzanne Adatto and Paul Brest

The Pay for Success Handbook

Suzanne Adatto
and
Paul Brest

Suzanne Adatto holds an MA from the Stanford Graduate School of Education and an MBA
from the Stanford Graduate School of Business.
Paul Brest is Professor Emeritus (active) at Stanford Law School, a lecturer at the Stanford
Graduate School of Business, and co-director of the Effective Philanthropy Learning Initiative at
the Stanford Center on Philanthropy and Civil Society. He was president of the William and Flora
Hewlett Foundation from 2000-2012.

Copyright © 2020 by Suzanne Adatto and Paul Brest. Licensed under a Creative Commons
Attribution 4.0 International (CC BY 4.0) License.

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CONTENTS
Preface and Acknowledgments......................................................................................................... 4
Part One: Introduction and Overview .............................................................................. 5
Antecedents: The Oklahoma “Milestones” Program ..................................................................... 7
Introduction to an Outcomes Framework: The Theory of Change for a Service Delivery
Program ................................................................................................................................................ 10
Ultimate Outcomes vs. Impact ..................................................................................................... 11
The Empirical Basis for the Theory of Change .......................................................................... 12
Pay for Success ...........................................................................................................13
Payment Under a PFS Program: Ultimate Outcomes vs. Impact ............................................... 13
The Service Provider’s Risks and Its Challenge of Obtaining Working Capital Under PFS .. 14
The Inherent Risk in the Service Provider’s Calculation of Costs and Revenues ................ 14
The Service Provider’s Need for Working Capital.................................................................... 14
Data Challenges for PFS .................................................................................................................... 15
Organizational Challenges for PFS.................................................................................................. 15
The Complexities of the PFS Process and the Need for External Support .............................. 16
Part Two: Case Studies of PFS Projects ..........................................................................17
New York State’s PFS Contract for Increasing Employment and Improving Public Safety ... 18
The Center for Employment Opportunity (CEO) ..................................................................... 18
The Pay for Success Project .......................................................................................................... 20
Financing.......................................................................................................................................... 21
Metrics and Payments .................................................................................................................... 21
The Program’s Structure and Timeline for Its Development .................................................. 23
Results to Date, and What Happens Next .................................................................................. 24
Cuyahoga County’s Partnering for Family Success Program ................................................. 25
Financing .......................................................................................................................................... 29

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The Launch and Subsequent Tracking ....................................................................................... 30
Other PFS Programs ........................................................................................................................... 30
Early Childhood Education ........................................................................................................... 30
Homelessness ................................................................................................................................. 32
Mental Health .................................................................................................................................. 34
Workforce Development............................................................................................................... 35
Environment .................................................................................................................................... 36
Part Three: Analysis .....................................................................................................39
The Government’s Role ..................................................................................................................... 39
Requisites for a PFS Project from the Government’s Perspective ............................................. 42
Predictable Likelihood of Success............................................................................................... 43
Evaluation......................................................................................................................................... 43
Generalizability ............................................................................................................................... 44
Predictable Costs and Benefits .................................................................................................... 45
Reliably Measurable Outcome Metrics Not Vulnerable to Strategic Behavior................... 45
No Unintended Negative Consequences .................................................................................. 47
Application of the Criteria to Various PFS Programs ................................................................... 47
Recidivism ........................................................................................................................................ 47
Job Placement................................................................................................................................. 49
Job Readiness/Transitional Jobs ................................................................................................. 49
Mental Health .................................................................................................................................. 50
Homelessness ................................................................................................................................. 50
Early Childhood Education ........................................................................................................... 50
Improving Outcomes for Disadvantaged New Mothers and Their Children ..................... 50
The Service Provider’s Perspective.................................................................................................. 51
Predicting the Service Provider’s Effectiveness ........................................................................ 51
Predicting the Service Provider’s Costs...................................................................................... 52
Payment Based on Impact vs. Outcomes .................................................................................. 52
Evaluation......................................................................................................................................... 53

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Rate Cards ........................................................................................................................................ 55
Data and Organizational Challenges to an Outcomes-Oriented Approach ........................57
The General Problem ......................................................................................................................... 57
Categories of Data .............................................................................................................................. 58
Legal Restrictions............................................................................................................................ 59
Siloed Operations and Lack of Database Interoperability ..................................................... 61
Organizational Challenges, and the Need for Active Contract Management ........................ 62
The Role of Intermediaries and Technical Assistance Providers ............................................... 63
Funding and Appropriations ............................................................................................................ 66
State and Local Budgets................................................................................................................ 66
Federal and Philanthropic Support ............................................................................................. 67
Social innovation financing ............................................................................................................... 69
Commercial lenders ....................................................................................................................... 70
Philanthropies ................................................................................................................................. 72
The Capital Stack ............................................................................................................................ 74
Intrinsic Project Costs and Transaction Costs ........................................................................... 76
Termination of the Project ................................................................................................................. 77
Conclusion ........................................................................................................................................... 78
Appendix: Other PFS Programs ....................................................................................80
Families and Children ........................................................................................................................ 86
Homelessness ...................................................................................................................................... 88

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PREFACE AND ACKNOWLEDGMENTS
This handbook is written for government officials considering the adoption of Pay For Success
(PFS) programs and for students in public policy and business schools interested in studying
outcomes-oriented government contracts for services. It is divided into three main parts. Part One
introduces concepts necessary to develop and operate a service delivery program and then surveys
some of the issues specific to PFS. Part Two presents two detailed case studies and a number of
shorter descriptions of PFS programs. Part Three focuses on the components of PFS programs; it
also discusses barriers to their development and ways of overcoming them.
The handbook grew out of a seminar taught at Stanford Law School during the winter quarter of
2015–16, which examined barriers to scaling up PFS programs. Paul Brest co-taught the seminar
with Professor Joseph Grundfest. In addition to Suzanne Adatto, the students were Brittany
Benjamin, Law School; Isiah Deporto, Law School; Sarah Hirshorn, undergraduate; Maria Garcia
Lecuona, International Policy Studies; Austin Lee, Law School; Spike Lipkin, Graduate School of
Business; and Lucie Zikova, International Policy Studies.
We are grateful for the assistance of Third Sector, Social Finance, the Nonprofit Finance Fund,
and the Government Performance Lab at Harvard’s Kennedy School; for comments by Carrie
Cihak, Chief of Policy for King County, Washington, who provided the valuable perspective of a
government agency; and for research assistance by Nicholas Kristof Branigan, Caroline Goodson,
Bianca Crivellini Eger, Catarina Dacosta Freitas, Milena Cecilia dos Santos Arbizu, and Bente
Van Winckel.
Cover by Anna Maria Irion.

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PART ONE: INTRODUCTION AND OVERVIEW

Government agencies frequently contract with nonprofit or for-profit organizations to provide
services to improve the well-being of their clients―for example, by reducing recidivism,
homelessness, or drug use. Governments have traditionally paid service providers on the basis of
the number of clients they treat.
The past decade has seen a number of Pay for Success (PFS) or results-based finance (RBF)
programs, in which service providers are paid for their outcomes or results. For example, whereas
a government agency contracting with a service provider to reduce recidivism among young men
released from prison would traditionally have paid the service provider for the hours spent
counseling a client, a PFS contract pays the organization for success in reducing the clients’ rate
of recidivism from some baseline.
PFS projects are an important part of a movement focused on
•
•
•
•
•

•

Improving the effectiveness of government agencies and service delivery organizations.
Achieving measurable social outcomes for beneficiaries.
Demonstrating, using evidence based on prior evaluation of that particular program or
similar ones, that a program is likely to work.
Monitoring and evaluating a program in real time to ensure that it is on track to achieve its
intended outcomes and to make course corrections where it is not.
Reducing the silos of government agencies so that they can better serve common
beneficiaries and improving coordination and collaboration among stakeholders more
generally.
Undertaking active contract management with service providers. This term, coined by
Jeffrey Liebman, director of Harvard’s Kennedy School’s Government Performance Lab,
describes combining “high frequency use of data and collaborative meetings between
government agencies and service providers to improve outcomes from contracted
services.”1

1 Harvard Kennedy School Government Performance Lab, Active Contract Management: How Governments Can

Collaborate More Effectively with Social Service Providers to Achieve Better Results. Retrieved January 30, 2019,
from https://govlab.hks.harvard.edu/files/siblab/files/acm_policy_brief.pdf.

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This list makes apparent the potential benefits of PFS for state and local governments. PFS can
improve the effectiveness of services that are already outsourced to non-governmental
organizations, and it may lead to the effective outsourcing of services that are currently provided
by governments.
But the design, negotiation, implementation, and assessment of PFS projects are fraught with
complexities. Even when governments can adopt an outcome-focused method of delivering
services—by no means an easy task—agencies may be entrenched in silos. They may be bound by
bureaucratic procedures and mentalities that resist the creativity and flexibility necessary for PFS.
Moreover, agencies’ budgets are often fragmented. Budget categories may produce mismatches
between who pays for a PFS project and whose stakeholders benefit—sometimes called the
“wrong pockets” problem.
Although some projects are producing positive results, the overall cost-effectiveness of PFS is less
clear when one considers projects that started up but were abandoned or failed. Even those that
succeeded may not be practical once one accounts for their full costs: the time devoted by
government officials and organizations; the transaction costs, including legal costs, of multi-party
negotiation; technical assistance; and philanthropic subsidies to insure against downside risk.
In any event, before committing itself to a PFS project, a government body should ask at least
these questions:
•
•
•
•
•
•
•

What can PFS accomplish that the government cannot do cost-effectively by other means?
Are the relevant agencies ready for an outcomes-focused approach to service delivery, and
if so, does PFS seem within their reach?
Is the project premised on a well-defined theory of change supported by reasonably good
evidence?
Will the program provide feedback to make course corrections along the way?
Will the program contribute to the evidence base of what works—and what doesn’t?
Can the program’s payment scheme reduce political and financial risks, and can outside
philanthropic or commercial funders help mitigate these risks?
If the project demonstrates success, is there a plan for continuing or scaling it?

We return to these issues in depth later in this handbook.
In the spring of 2019, the Nonprofit Finance Fund published Pay for Success: The First 25,2 a
comprehensive study of US PFS projects to date. We highly recommend it to readers who wish to
explore the topic in greater depth.

2 https://nff.org/report/pay-success-first-25

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ANTECEDENTS: THE OKLAHOMA “MILESTONES” PROGRAM
The concepts embodied in the PFS movement have roots in efforts to improve government
efficiency going back at least to the 1960s. They are well captured in David Osborne and Ted
Gaebler’s 1993 book, Reinventing Government. Before turning to the contemporary movement,
we will describe Oklahoma’s earlier Milestones program, which was designed to improve the costeffectiveness of placing the state’s physically and mentally disabled people in private sector jobs.3
Since the Rehabilitation Act of 1973, states have been able to draw on federal funds to support
people with severe developmental and mental disabilities. Beginning in 1987, the Community
Rehabilitation Services Unit (CRSU) of the Oklahoma Department of Rehabilitative Services
began contracting with service providers to place and support such people in jobs in the private
sector.
CRSU’s providers used job coaches to assess and train their clients and place them in jobs. The
coaches would often “shadow” their clients, accompanying them in their jobs, and then “fade” as
the clients no longer needed their support. The ultimate goal, which the federal statute called
Status 26 (“closed rehabilitated”), was successful attainment of the client’s individual vocational
goal and employment for 17 weeks plus 60 days (as shown in the table below).
The program started with CRSU paying providers $23/hour for services rendered by job coaches
and others. The agency required providers to document their particular services and bill in
15-minute increments. (Billing took 10 percent of providers’ employees’ work time.) On average,
it cost $22,527 and took 438 days to successfully close a client’s case. The typical coach worked
with five clients per year but did not meet CRSU’s minimum requirement of two closures per year.
Providers could bill for only 18 months, and they often went to the maximum.
Recognizing the inefficiency of the program, CRSU staff, in consultation with a number of
providers, piloted a radically different program, which it then implemented on a large scale. Rather
than paying for hours of services provided, CRSU paid providers for the accomplishment of steps
or milestones. The total payment was based on a percentage of the average cost of closure
(including dropouts). It was negotiated with each provider and varied by the nature of its client
population, available job opportunities, its past history, and other factors. The percentage paid
increased as more milestones were achieved. The following table shows the milestone payments
for developmentally disabled clients:

3 See Daniel O’Brien & Rebecca Cook. (1997). Oklahoma Milestone Payment System (Pioneer Institute). Retrieved

January 30, 2019, from http://bgc.pioneerinstitute.org/oklahoma-milestone-payment-system/. Harvard Kennedy
School of Government, Oklahoma’s Milestones Reimbursement System: Paying for What You Get (Case HKS060,
1998); Daniel O’Brien & Grant Revell. (2005). “The Milestone Payment System: Results Based Funding in
Vocational Rehabilitation,” ,Journal of Vocational Rehabilitation 23(2), pp. 101-114.

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Determine needs

10%

Job placement

15%

Four weeks job retention

15%

Ten weeks job retention

15%

Job stabilization (employed 17 weeks)

20%

“26 closure” (stabilization plus 60 days)

25%

Providers were anxious about the transition, sometimes for good reasons. The new system exposed
internal inadequacies in the providers’ systems and staff. Although the vast majority improved,
several providers went out of business.
Nevertheless, the positive results of the change were dramatic. Staff members had more flexibility
in dealing with the clients’ problems. They could give the clients more personalized attention and
generally fade earlier than under the prior system. The providers achieved twice as many closures
in much shorter times, with an average cost of $10,813 per closure—half that of the prior system.
The administrative costs of compliance and billing plummeted.
Nonetheless, problems remained. The milestones system treated stable work as the sole criterion
of success. Although the metric arguably reflected clients’ job satisfaction, some government
officials and providers believed that, especially for their most severely disabled clients, it did not
capture other important aspects of well-being (e.g., avoiding hospitalization). The contracts were
not open-ended, and some successful providers completed their contracts so early that they ran out
of paid work.
The milestones system was also vulnerable to the problem of cherry-picking or creaming,
especially in highly competitive urban markets. Under the previous pay-for-services model, it was
in a provider’s interest to take on very difficult clients, because it could bill almost countless hours
for them. Under the milestones system, the provider had to absorb the time spent on clients; it was
paid only for achieving program milestones. The new system created an incentive to select the
easiest clients―those most likely to meet all the milestones. CRSU responded by building in
countermeasures and controls.
A retrospective study of the Oklahoma Milestones program describes five alliterative principles
underlying the program:4
•

Collaborative planning. Three main groups of stakeholders were involved in designing the
program and planning for its implementation: government agencies, service providers, and

4 O’Brien & Revell. (2005).

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•
•

•
•

9

representatives of the clients. 5 One should not underestimate the difficulty of reorienting
government officials. Rather than checking providers’ compliance with contractual terms,
they were expected to help develop and then monitor appropriate milestones. The
program’s primary architect lamented the difficulty of countering “the resistance of some
agency staff to getting out of the office and getting their hands dirty.”6
Customer-centric outcomes. A primary determinant of stable employment is the client’s
satisfaction with the job.
Creaming countermeasures. At the outset, reducing creaming requires setting payment
rates to account for the risks involved in assisting the most severely disabled clients. The
Oklahoma Milestones program used a probability-based system that accounted for specific
client risk factors to set rates.
Customer control. The milestones were defined in terms that most clients could understand,
and where feasible, clients were given a choice of service providers.
Proven Concepts. The program was based on evidence from other vocational rehabilitation
programs, and the milestones were developed and updated in light of data gathered from
operating the program.

A retrospective summary of the program notes: “The three most important measures of success
are customer satisfaction (both employers and consumers of the services), reduced need for
regulation and oversight by the state agency, and increased achievement of the core outcome, that
is, successful competitive employment.”7
Opportunities for customer satisfaction checks come into play at several points in the Milestones
process. For instance, if a provider places an individual in a job that he or she does not like or for
some other reason does not want, the provider is not approved for payment for that milestone. This
motivates the provider to please two major customers, the consumer of the service and his or her
Vocational Rehabilitation Counselor, so that payment may be received. As job satisfaction is a
major component of success and the provider cannot be paid without achieving it, a major shift of
emphasis toward quality as defined by the customer has resulted. For example, goal planning is
reinforced by the requirement that the job achieved matches the customer’s career goal.
Each milestone definition includes quality outcome indicators to be accomplished before payment.
The final two milestones include verification that the consumer and employer are satisfied with

5 Apparently, clients themselves were not consulted. Listening to beneficiaries has only recently become a

mainstream practice. See Fay Twersky, Phil Buchanan, and Valerie Threlfall, “Listening to Those Who Matter
Most–the Beneficiaries,” Stanford Social Innovation Review. (Spring 2013). Retrieved June 6, 2019, from
https://ssir.org/articles/entry/listening_to_those_who_matter_most_the_beneficiaries.
6 O’Brien & Cook. (1997).
7 Ibid.

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the job placement, training, and support provided. Formal customer satisfaction surveys are
required for payment of the final milestone. This creates a quality check by the most qualified
evaluators, the recipient of the service and his or her supervisor. This information is submitted to
the agency staff overseeing the service. The state agency’s counselors are instructed to withhold
final payment unless it is confirmed that the consumer of services and employer are satisfied. This
has resulted in providers’ returning to the job site to correct problems they could have ignored
under previous payment structures.
The Community Rehabilitation Services Unit conducted an evaluation of results during
August 1997. Data was collected from agency records and supplemented with data gathered from
service providers.4 The data shows that waiting lists are reduced because consumers are now more
efficiently and effectively served. The average number of months consumers spent on waiting lists
was reduced from 8.14 months under hourly to 3.85 months under Milestones. This reduction
represents 53 percent fewer customer months of waiting for the providers who have a waiting list.
Consumers who previously had been perpetually “assessed” now move quickly through the
Milestones process to employment and independence. The average weeks spent in assessment
before job placement dropped 18 percent, from 12.1 weeks to 9.9.
Provider efficiency is improved by reducing the paperwork load required of the direct service
provider. When hourly rates are the basis for payment, the process of documenting increments and
categories of services provided must be meticulously tracked. Providers previously completed as
many as 18,000 data entry screens each month to insure payment for every increment of service
time. Now, time formerly devoted to detailed documentation is redirected toward accomplishing
the outcome for the consumer. The only information that must be documented by the provider and
approved by the counselor is the proof that the outcome was achieved. The change to Milestones
has resulted in a 33 percent overall reduction in the work hours required by record keeping.
Providers report as much as a 100 percent increase in productivity in terms of consumers placed
and stabilized in competitive employment.
One of the best features of the Milestones program is that providers generally like it better and feel
that it benefits the consumers they serve. Six months after conversion to Milestones, a survey of
direct service staff indicated that 81 percent believe the quality of services under Milestones is
better or much better than under hourly.

INTRODUCTION TO AN OUTCOMES FRAMEWORK: THE THEORY OF CHANGE FOR
A SERVICE DELIVERY PROGRAM
As background, it is helpful to set out the theory of change, or logic model, that underlies the
provision of virtually any social services. Consider the theory of change underlying a jobplacement program of the sort supported by the Oklahoma Milestones program.

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What the
Organization
Does and Delivers
•Activities
•Develop
program
•Recruit staff
•Recruit
participants

Intermediate
Outcome
•Clients
participate in
training and are
placed in jobs

•Outputs
•Provide job
training
•Provide
placement
opportunities

Ultimate
Outcome
•Clients remain
in jobs for 17
weeks plus 60
days

Impact

•More people
find stable
work as a result
of the
provider's
services than
would have
without those
services

The activities and outputs are what the service provider must do and deliver to achieve the ultimate
outcome. The intermediate outcome is a step along the way that typically requires a change in
beneficiaries’ behaviors—in this case, that clients participate in the program. The ultimate outcome
is the government’s and the service provider’s shared goal for the program―here, stable
employment, as defined by the federal standard for a “close.”
Activities and outputs are what the service provider organization does; outcomes are changes in
clients’ behavior as a result of what the organization does. To use the familiar cliché, activities and
outputs are the equivalent of leading a horse to water; the intermediate outcome is making the
horse drink. The ultimate outcome is that the horse is adequately hydrated. The ultimate outcome
of the vocational program is that the clients are stably employed.
ULTIMATE OUTCOMES VS . I MPACT
Impact is the difference between the outcome of the program and the outcome had there been no
program (or had there been an alternative program). Did the program cause the outcome? To arrive
at an answer, we consider what would have happened in the absence of the program (the
counterfactual). If the outcome would have happened anyway, then the program had no impact.
Why should Oklahoma’s CRSU care? Because if the outcome would have happened anyway, the
state agency could have avoided the effort and costs of the activities involved.

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THE EMPIRICAL BASIS FOR THE THEORY OF CHANGE
A theory of change is essentially a set of causal links. That each step will lead to the next is an
empirical claim. Whether the program’s outputs will lead to the intermediate outcome―that is,
whether the targeted clients will participate in the program―is relatively easy to predict. But
whether the intermediate outcomes will lead to the ultimate outcome of stable employment for
CRSU’s clients is more difficult to predict. Given the clients’ severe disabilities, it seems likely
that CRSU’s program will have had a positive impact on job placements and retention. As we will
see, however, this is hardly typical of social programs. Determining whether a particular program
actually has the impact desired is the task of program evaluation.

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PAY FOR SUCCESS

As of August 2019 there were twenty-two active PFS projects in the United States and about fifty
additional projects in development. 8 Twenty-one jurisdictions have enacted legislation to promote
the development of PFS projects.9 The projects operate on a municipal scale and statewide to deal
with a range of social issues, including recidivism, chronic homelessness, prenatal health care, and
early childhood education.

PAYMENT UNDER A PFS PROGRAM : ULTIMATE OUTCOMES VS. IMPACT
A PFS contract might stipulate payments based on either ultimate outcomes or impact.
Under an outcome-based payment scheme, the service provider is paid to the extent that its
program outcomes exceed an agreed reference point or baseline.
The outcome also must have occurred under an impact-based payment scheme. But in addition,
the success rate of the service provider’s clients is compared to a group of similar clients who are
not in the program, and the service provider is paid to the extent that its success rate is greater. A
highly regarded technique for an impact-based evaluation is the randomized controlled trial (RCT),
in which potential clients are randomly assigned either to a group eligible to receive the program’s
treatment or to a control grou10
The main advantage of an outcome-based payment scheme is that it is simple and inexpensive to
implement―largely because it does not require an evaluation to determine impact. An outcomebased scheme permits the government to publish rate cards, a payment mechanism wherein a
government specifies how much it is willing to pay for particular outcomes. Multiple service
providers can serve similar populations and be paid on a per-outcome basis, without complicated
individual negotiations with the government. Another advantage, discussed in the next section, is
that it allows the service provider to get paid sooner than under an impact-based scheme.

8 https://www.payforsuccess.org/projects/?facets%5B0%5D=current_phase%3A575&sort=recent
9 Id.
10 See page 59.

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The main disadvantage of an outcome-based payment scheme is that, in the absence of evaluation,
the parties cannot know whether and to what extent the program is actually making a difference.
And without at least occasional evaluations of programs addressing the issue, the field does not
gain knowledge of what works and does not work.

THE SERVICE PROVIDER’S RISKS AND ITS CHALLENGE OF OBTAINING WORKING
CAPITAL UNDER PFS
THE I NHERENT RISK IN THE S ERVICE PROVIDER ’S CALCULATION OF COSTS AND REVENUES
A service provider that is paid for the number of clients counseled can predict its costs and its
revenues from a government contract with considerable accuracy and can negotiate the terms of
the contract accordingly. A service provider paid for outcomes—especially when outcomes are
defined by a demonstration of impact—must treat a number of clients for each one who actually
achieves the agreed outcome. The uncertainty surrounding this number can be reduced if there is
good data about the outcomes of a program. This is the case if the program has run for a
considerable time. Even then, changes in the external environment could have a significant effect
on the success rate—for example, a region’s macroeconomic conditions will influence the success
of a job placement program—with particular risks to small programs.
Therefore when payment is based on outcomes or impact, the service provider assumes a
considerable risk that the services provided will not result in the agreed outcome or impact. The
risk can be mitigated by increasing the payment for each successful outcome, or by setting a lower
bar for success (for example, reducing the proportion of those treated who must succeed or
reducing the length of the period of job stability that counts as success), or providing base
payments for services rendered and a bonus for successful outcomes.
THE S ERVICE PROVIDER ’S NEED FOR WORKING CAPITAL
Under a conventional pay-for-services arrangement, a service provider can bill the government for
providing services weekly or monthly. Under a PFS contract, in contrast, the service provider must
await a determination that it has achieved the agreed outcome or, even more demanding, that the
service provider caused, or contributed to, 11 the outcome. Under Oklahoma’s Milestones jobs

11 Impact implies causation. It is the difference between the actual effect of an activity in achieving the intended

outcome and what would have happened if the activity had not occurred. It is seldom possible to attribute a result to
a single activity. To say that a service provider’s work “contributes” to an outcome means that, although the
investment may not be the sole cause of the outcome, the outcome would not have occurred, at least not to the same
extent, without its activities.

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program, one may not be able to measure meaningful outcomes for several months, and proof of
causation will further increase the delay.
Many potential service providers lack the reserves to absorb the costs of operating a program for
a year (or more). Few would be able to get a bank loan or line of credit, especially given the risk
of the organization’s failure to achieve the outcome that triggers payment.
PFS programs have attempted to solve this problem in two ways:
•

•

External investors may front the service provider’s operating funds and get repaid by the
government to the extent that the program succeeds. In many PFS programs to date,
philanthropic investors have made below-market-rate loans, and commercial investors
have lent at minimal market rates—sometimes backstopped by philanthropies. Although
having investors front the money reduces the risk both to the government agency and to
the service provider, recruiting investors to a PFS program and negotiating terms with them
tend to incur high transaction costs.
The government may pay partial compensation for services and reserve the remainder—
called deferred compensation or a bonus—for outcomes or impact.

DATA CHALLENGES FOR PFS
In order to predict whether a service provider’s program is likely to work, one must evaluate prior
similar programs and predict whether the conditions that led to their putative successes are likely
to be applicable in this situation as well. This is the question of generalizability, which we discuss
further below.
As the program is implemented, it also requires data collection and analysis (1) by the service
provider, who must track activities and outputs for internal management purposes; and (2) by all
parties who must track outcomes or impact. The first of these should be routine for most
organizations. Ideally, the second should be as well. But (as discussed immediately below), it is
not—either for most service providers or for many contracting government agencies. Moreover,
in both cases, the data may be dispersed among various sources and be difficult to gather in one
place because of a lack of interoperability, privacy regulations, or administrative inertia.

ORGANIZATIONAL CHALLENGES FOR PFS
The structure and modus operandi of both governments and service providers, as well as the
mindsets of their staff, present challenges for PFS contracts. Many, perhaps most, government
agencies are unfamiliar with outcomes-oriented payments for service delivery. Contract

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compliance tends to be focused on activities and outputs to the exclusion of outcomes and impact.
As Burt Perrin at the World Bank writes,
Implementing an outcome focus represents a fundamental shift in the nature of thinking, acting, and
managing within the public sector, away from a focus on process and on what one needs to do, to a
focus on benefits. This in turn has implications for many other aspects of management—for
example, for existing accountability and reward mechanisms, as well as the manner in which
government relates to its citizens.12

A further organizational problem involves government budgets for financing PFS programs. As
difficult as it is to combine data from various agencies, it is even more challenging to get them to
chip in to pay for a PFS program. For this reason, the ultimate payments for such programs often
come from a special budget allocation.
Feasibility studies for PFS projects have sometimes brought these issues to the fore. For leaders
of potential projects funded through the California PFS Initiative, 13 this exploratory phase
illuminated the need for enhanced data collection and evaluation systems. It also influenced the
collection of outcomes-related data. For example, when the City and County of San Francisco
considered reducing homelessness through a PFS model, it understood that it first needed to
strengthen its capacity to track the baseline outcomes of those who use their services. 14

THE COMPLEXITIES OF THE PFS PROCESS AND THE NEED FOR EXTERNAL
SUPPORT
For all of these reasons, the process culminating in a PFS program has generally been complex
and lengthy. Each contract must thread the needle between various parties, each with its own set
of goals and incentives. So far, these arrangements have been bespoke; each required individual
crafting. Other potential barriers to the adoption of PFS programs include

12 Perrin (2006, p. 7) in Marie-Louise Bemelmans-Videc, Jeremy Lonsdale, & Burt Perrin, editors. (2007). Making

Accountability Work – Dilemmas for Evaluation and f or Audit (Transaction Publishers, p. 143).
13 The California PFS Initiative was launched by the Nonprofit Finance Fund and the James Irvine Foundation in

2014. The initiative is a US$6.6 million effort to provide funding and expert support to help nonprofits and
governments to structure Pay For Success programs in California. Pay For Success blog. Nonprofit Finance Fund.
California Pay For Success Initiative. Retrieved January 28, 2019, from
https://payforsuccess.org/opportunity/california-pay-success-initiative.
14 A. Chan & K. Bailey. (2016). Pay for Success Feasibility Studies: Catalytic Investments, Moving the Needle. Pay

For Success blog, Nonprofit Finance Fund. Retrieved February 5, 2019, from
http://www.payforsuccess.org/blog/pay-success-feasibility-studies-catalytic-investments-moving-needle.

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•
•
•

17

Assembling the evidence to predict whether a program will succeed—evidence necessary
to satisfy governments, service providers, funders, and other stakeholders.
Identifying sufficiently reliably measurable success indicators to satisfy these parties.
Negotiating agreements among investors to provide the capital necessary to finance a
program, and agreements between those investors and the other parties.

Few state and local governments have the ability to explore the possibilities for a PFS program,
conduct due diligence, broker an agreement among the parties, and raise external funding. To fill
these needs, a handful of intermediaries have developed the expertise to counsel and represent
government agencies in these processes and assume some of the workload. These include, in the
United States, Social Finance US, Third Sector, Harvard Government Performance Lab, Nonprofit
Finance Fund, and Sorenson Impact Center, and, in the developing world, Instiglio.15
Among other things, these intermediaries help governments identify evaluations of prior similar
programs in order to assess the likelihood that a program they adopt will succeed. They also help
retain program evaluators once it is launched. Evaluation enters a PFS program at several possible
points:
•

•

•

Before the program is adopted―to predict the program’s effectiveness. To launch a
program, all parties need a certain degree of confidence that it is likely to achieve the agreed
outcomes.
During the program―to determine payments based on whether the program actually
improved outcomes for the target population. This sort of evaluation may be unnecessary,
or at least less important, when payment is based on rate cards or other specified outcomes.
After the program has been implemented―to evaluate its success and inform parties
whether the program should be replicated, scaled, modified, or abandoned.

15 See page 71.

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PART TWO: CASE STUDIES OF PFS PROJECTS

In Part Two we examine two PFS contracts in detail and then describe a number of others to give
readers a sense of the scope of this developing field. The first contract concerns recidivism and
unemployment among male ex-offenders in New York State and illustrates the specification of
outcome payments in a PFS program. The second contract covers vulnerable families in Cuyahoga
County, Ohio, and illustrates the intra- and inter-organizational dynamics involved in a PFS
program.

NEW YORK STATE’S PFS CONTRACT FOR INCREASING EMPLOYMENT AND
IMPROVING PUBLIC SAFETY
PFS contracts have been popular for preventing recidivism. A recidivism-prevention program
lends itself to quantifiable outcomes, is easily evaluated, and can create cost savings as well as
social benefits.
Rates of recidivism are high throughout New York State. In 2013, New York released
nearly 24,000 inmates; historical data predicts that 41 percent of them will return to prison within
the following three years. The annual state cost per prisoner in New York is about $60,000 per
year.16 Reducing the rate of recidivism would not only reduce the direct costs of housing a prisoner,
but increase public safety, improve the lives of the ex-offenders themselves and their families, and
increase the number of productive members of society.
In 2012, New York Governor Andrew Cuomo decided to explore a PFS program to reduce
recidivism. The Harvard Kennedy School Government Performance Lab assigned a full-time PFS
fellow to New York State to help develop the project and issue a request for proposal (RFP) for
an intermediary to facilitate the project. The state retained Social Finance as the intermediary to
raise capital, identify a service provider, and provide ongoing advising after the project launch.
After the RFP process, the state selected the Center for Employment Opportunity (CEO) as the
service provider.
THE CENTER FOR EMPLOYMENT OPPORTUNITY (CEO)
16 Center for Employment Opportunities website. (“About” section, 2011). Retrieved July 28, 2017, from

https://ceoworks.org/about/.

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CEO is a non-profit organization that developed a recidivism-prevention program based on the
theory that to avoid reoffending, ex-offenders must develop attachment to and engagement with
their home community, and they must become employed soon after release. To these ends, CEO
provides intensive life skills training and placement in a subsidized part-time job immediately after
release, followed by placement in a full-time unsubsidized job and support for job retention for
one year thereafter. CEO’s model had been developed over 30 years and successfully replicated in
fifteen locations throughout the United States.17
CEO was an attractive service provider for the State of New York because of its strong track record
of evidence-based interventions for ex-offenders and its demonstrated ability to implement the
program on a large scale. In 2004, CEO participated in a randomized controlled trial conducted by
the nonprofit policy research organization MDRC to measure the efficacy of its program. The
results, released in 2012, demonstrated significant decreases in rates of recidivism. 18 CEO’s model
showed particular impact on the ex-offenders who were deemed most likely to return to prison.19
Over the course of its existence, CEO invested heavily in its operating capacity―in performance
and data management systems, in personnel, and in creating a culture where data drives
improvement. Grants from the Robin Hood Foundation and the Edna McConnell Clark Foundation
had allowed CEO to improve its capacity to monitor the impact of its services. 20 CEO also had a
pre-existing relationship with the New York State Department of Corrections and Community
Supervision (DOCCS), including an ongoing contract to provide job training and other workforce

17 Center for Employment Opportunities website. (“About” section, 2011). Retrieved July 28, 2017, from

https://ceoworks.org/about/.
Center for Employment Opportunities. (“Our Offices” section, 2013). Retrieved July 28, 2017, from
https://ceoworks.org/our-offices/.
18 We describe the methodology of RCTs in a later section. An RCT conducted by MDRC found that “CEO’s

program reduced recidivism by between 9 and 12 percent among all participants and by between 16 and 22 percent
among those ‘recently released’ or those who enrolled within three months after release from prison. The MDRC
study also showed that CEO reduced days incarcerated by 30 percent for a high risk sub-population, or those
individuals at high risk of recidivism.” State of New York, Center for Employment Opportunities, & Social Finance.
(2014).
19 Cindy Redcross, Megan Millenky, Timothy Rudd, & Valerie Levshin. (2012). “More than a Job: Final Results

from the Evaluation of the Center for Employment Opportunities (CEO) Transitional Jobs Program,” SSRN
Electronic Journal (January). Retrieved February 5, 2019, from https://doi.org/10.2139/ssrn.2010208; and Roca
website. Retrieved April 21, 2017, from http://rocainc.org/work/pay-for-success/.
20 D. Archer-Rosenthal & A. Epps. (July 20, 2015). Voices from PFS Pioneers: CEO— Part 1 [Blog post]. Retrieved

April 6, 2017, fromhttp://www.payforsuccess.org/blog/voices-pfs-pioneers-ceo-part-1.

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development services. 21 CEO’s history of replicating its success in a variety of locations gave the
parties some confidence that it would succeed in additional cities.
THE PAY FOR S UCCESS PROJECT
Together with Social Finance and other project partners, CEO developed a strategy to serve 2,000
previously incarcerated men in Rochester and New York City between 2014 and 2018. The project
had two three-year phases, each serving a cohort of one thousand men for three years. The US
Department of Labor (DOL) committed to performance-based payments for Phase I, and New
York State agreed to pay for Phase II.22
Under the agreement, DOCCS identifies eligible ex-offenders in the two cities and then randomly
assigns them to a treatment or a control group. Participants in CEO’s program began with five
days of life skills training, followed by placement in subsidized transitional jobs—all the while
regularly meeting with CEO staff members who provide interview coaching, resume writing, and
other job training. Participants who are job-ready are then connected with businesses willing to
hire CEO graduates. During the job placement, CEO participants continue to meet with CEO
retention specialists, who provide workplace counseling and crisis management, as well as longerterm career planning. CEO also offers “Rapid Rewards,” monthly bonuses to its participants for
meeting employment milestones and other successes.
The program was designed to avoid perverse incentives and the risk of gaming the system―a
service provider’s meeting the payout criteria without actually achieving the desired outcomes.
One obvious way to game a PFS contract is to select easy-to-treat participants. Under this contract,
however, DOCCS uses its own measures of ex-offenders’ risk of relapse to select participants. The
men are randomly assigned to the treatment or control group, thus avoiding the possibility that
CEO could cherry-pick the participants who were the most likely to succeed.
By December 2013, the State of New York, the New York Department of Labor, the State Attorney
General, the Comptroller, the DOCCS, the US Department of Labor, CEO, and Social Finance had
entered into a PFS contract. Success payments under the agreement are triggered by an
evaluation—a randomized controlled trial (RCT) carried out by DOCCS’s Division of Program

21 D. Archer-Rosenthal & A. Epps. (July 22, 2015). Voices from PFS Pioneers: CEO— Part 2 [Blog post]. Retrieved

April 6, 2017, from http://www.payforsuccess.org/blog/voices-pfs-pioneers-ceo-part-2.
22 The US DOL agreed to provide success payments for approximately the first three years of the CEO program,

with the second phase funded out of an authorization from New York’s Executive Budget. New York State Division
of the Budget, 2013-14 Executive Budget (2013). Retrieved February 10, 2019, from
https://www.budget.ny.gov/pubs/archive/fy1314archive/eBudget1314/fy1314littlebook/BriefingBook.pdf.

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Planning, Research, and Evaluation and by New York State Department of Labor Division of
Research and Statistics, verified by an external organization, Chesapeake Research Associates.23
F INANCING
Because the success payments were to be based on comparing CEO’s outcomes with those of a
control group, it would likely take several years to determine what, if any, success payments were
due. To provide working capital in the interim, Social Finance recruited funding from Bank of
America Merrill Lynch, which in turn recruited more than forty individual and institutional
investors. In addition, the Robin Hood Foundation invested $300,000 in the project and the Laura
and John Arnold Foundation $4 million.24 To make the investment more attractive to the private
investors, the Rockefeller Foundation committed to a 10 percent first-loss guarantee for the
project—that is, an agreement to indemnify the investors for 10 percent of the loss of capital
invested in the project. 25 If the program reached or exceeded specified goals, the DOL and State
of New York, for the first and second phases respectively, would pay the investors back the
principal, plus interest based on the program’s success.
METRICS AND PAYMENTS
The stakeholders agreed on a set of metrics and associated performance-based payments based on
three outcome objectives:
•

•

•

Reduction of recidivism―the average reduction in the number of “bed days” for treatment
group participants compared to the control group. This metric mainly reflects the state’s
costs of incarcerating a prisoner. Payments are based on the costs avoided of an additional
day of incarceration. An average reduction of 36.8 prison days during the time periods of
the contract would trigger payment of $85 per day in Phase I and $90.10 in Phase II.
Engagement in transitional jobs―the number of treatment group participants who start a
CEO transitional job. The number of treatment group members who start a CEO
transitional job will trigger success payments of $3,120 per participant in Phase I and
$3,307 in Phase II.
Employment―a binary metric based on positive earnings in the fourth quarter after release
from prison. This reflects the program’s impact after the transitional job; it uses data from
New York State’s own Department of Labor that captures quarterly unemployment
insurance wage data. Payments are based on greater anticipated tax revenue and reduced

23 In addition to these parties, Jones Day provided legal counsel, and the Harvard Government Performance Lab is

providing additional technical assistance to the State of New York.
24 LJAF will redirect any returns from this investment toward future social innovation project financing, particularly

for program evaluation and scaling.
25 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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public assistance, determined by the percentage difference between the treatment and
control groups. An increase of 5 percent would trigger a payment of $6,000 per person in
Phase I and $6,360 per person in Phase II.26 See Table 1 below.

Table 1. Public sector savings and benefits.27
If CEO reaches these goals, the private investors receive returns as high as 12.5 percent on the
capital they invested. If the payoff thresholds are not met, the investors lose all but 10 percent of
the capital invested.28

26 Id.
27 State of New York, Center for Employment Opportunities, & Social Finance. (2014).
28 S. Schaeffer, “Assessing Nonprofit Risk in PFS Deals,” Stanford Social Innovation Review. (2014). Retrieved

February 11, 2019, from https://ssir.org/articles/entry/assessing_nonprofit_risk_in_pfs_deals.

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THE PROGRAM’S S TRUCTURE AND TIMELINE FOR I TS DEVELOPMENT
Figure 1 illustrates the relationship among the parties to the PFS contract. At the center of the
organization chart lies Social Finance NYS Workforce-Re-Entry 2013 LLC,29 a special purpose
vehicle to manage implementation of the project, including the transfer of funds among the parties.

Figure 1. CEO Pay For Success stakeholder model.30

Figure 2 shows the timelines leading up to the PFS contract. It illustrates the bespoke nature of
most PFS programs to date and indicates the significant transaction costs involved—matters that
we shall return to in Part Three of this book.

29 Bloomberg, Company Overview of Social Finance NY State Workforce Re-Entry 2013 LLC. Retrieved

February 13, 2019, from
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=253809042 .
30 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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2012

2013

2014-2016

2017

Global Performance Lab | Provide technical
assistance on project design

Ongoing advising to New York State

State of New York | Develop project; retain
intermediary

Ongoing program monitoring

Social Finance | Raise capital; select service
provider; develop contract (with Jones Day)

Ongoing performance management and investor relations

Deposit performance-based
payments (funded by DoL grant)

Bank of America Merrill
Lynch | Deposit funding

Repaid

NY DOCCS Research | Assign individuals
into treatment and control groups

NY DOCCS Research,
NYS DoL Research |
Evaluate intervention

NY DOCCS Parole Officers | Refer
individuals in treatment groups to CEO
CEO | Enroll and perform services
Chesapeake Research
Associates | Validate outcomes
Rockefeller Foundation |
Deposits 10% first-loss, if needed

Figure 2. CEO Pay For Success stakeholder relationships and Phase 1 timeline. Adapted from
State of New York et al., 2014.

RESULTS TO DATE, AND WHAT HAPPENS NEXT
The first phase of the contract concluded in 2019. An evaluation by the New York State Division
of Criminal Justice Services (DCJS) found:31
•
•
•

Medium-Term Employment Impacts: 12 months post-enrollment, CEO participants were
52% more likely to be employed than their counterparts in the comparison group.
Long-Term Employment Impacts: Three years post-enrollment, CEO participants were
48% more likely to be employed than the comparison group.
Persistent Recidivism Impacts in NYC: CEO-NYC participants were 19% less likely to be
re-convicted or re-arrested for a felony 3 years post-enrollment.

Meanwhile, the contract has changed the relationship between the government and the service
provider in some fundamental ways. Previously, it was CEO’s responsibility to recruit participants
for its employment program. Under the PFS program, DOCCS evaluates and refers ex-offenders

31 CEO, Improving Long-Term Employment Outcomes: Promising Findings from New York State (February 2019).

Retrieved November 7, 2019, from https://ceoworks.org/assets/downloads/CEO-Improving-Long-TermEmployment_022219_v3.pdf

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who are deemed high-risk. DOCCS Parole Officers collaborate with CEO staff to encourage
offenders to engage with CEO and to meet the conditions of parole. DOCCS has created an internal
governance structure to manage the project. DOCCS and CEO have a shared commitment to reach
the high-risk men who are likely to benefit most from CEO’s services. 32 The government’s role
has shifted from being a consumer of services to a partner in achieving outcomes.
What happens after the PFS program is completed? In the development of this project there was
no formal understanding of what would happen after a successful, or unsuccessful, outcome. The
Department of Labor grant was likely one-time only, to test the concept. Although New York State
has made no commitments, some stakeholders hope that, if it proves successful, it will lead to a
continued relationship between CEO and the state.33
(See the Appendix for other examples of PFS programs addressing recidivism.)
CUYAHOGA COUNTY ’S PARTNERING FOR F AMILY SUCCESS PROGRAM
In December 2014, Cuyahoga County, Ohio, which encompasses the Greater Cleveland Area,
launched a PFS program to reduce the length of stay in out-of-home foster care placements (OHP)
for children whose families are homeless or experiencing housing instability. 34
The idea of a PFS project was brought to the County Executive by the Cleveland-based George
Gund Foundation35 in 2011. The county understood that its agencies’ common clients were not
being effectively served through disconnected services and systems. Children from families
experiencing housing insecurity spend 40 percent longer in the foster care system than their peers.
The PFS program’s goal was to help families reunify so that their children would spend less time
in foster care. The County Executive included PFS as part of a broader plan to reshape Cuyahoga
County’s delivery of services. As one county administrator remarked in retrospect, “the creation
of the … program enabled us to be truly outcomes focused, collaborative with funders and service
providers on initiative design, and risk tolerant.”36

33 D. Archer-Rosenthal & A. Epps (July 24, 2015). Voices from PFS Pioneers: CEO - Part 3 [Blog post]. Retrieved

April 17, 2017, from http://www.payforsuccess.org/blog/voices-pfs-pioneers-ceo-part-3.
34 The following description draws heavily on Third Sector, Cuyahoga Partnering for Family Success

Program: Partner Perspectives and Lessons Learned Report (interim report February 4, 2016).
35 Marcia Egbert, Senior Program Officer at the George Gund Foundation, proposed the idea of the PFS project to
the Cuyahoga County Executive and played a leading role in guiding approval of the PFS contract and the county
legislation establishing a fund to make success payments. As a funder herself, Ms. Egbert gained the support of the
project’s other two local funders, the Cleveland Foundation and the Sisters of Charity Foundation of Cleveland.
36 Enterprise Community Partners & Third Sector Capital Partners. (2016). Developing the Cuyahoga Partnering for
Family Success Program: Partner Perspectives and Lessons Learned. Retrieved February 12, 2019, from

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During the three years that followed, proponents explored the idea of a PFS program with
government and community partners, local and national funders, and investors. They helped
prepare necessary legislation relating to the county budget process, procurement, contracting, and
data sharing. In particular,
•
•
•

•

The County Council, the county’s legislative branch, approved the PFS project and
committed funds to it.
The Office of the Cuyahoga County Executive initiated and continued the PFS project
under the leadership of the County Executive.
The Division of Children and Families, which is responsible for the well-being of children
in the program, contributed subject-matter expertise about the population being served and
guidance on agency processes. It also provided data needed for identifying the beneficiary
population.
The City of Cleveland-Cuyahoga County Office of Homeless Services, which coordinates
the county’s efforts to reduce homelessness, provided access to the local homeless
management information system and expertise in supportive housing models for
populations at risk for homelessness.37

During the planning phase of the PFS project, the County Executive Office involved the County
Law Department, Fiscal Office (Office of Budget and Management as well as Controller’s Office),
Sheriff’s Office, Division of Children and Family Services, Office of Homeless Services, and
Cuyahoga County Council. The planning process required 10–20 percent of the time of one staff
member, who otherwise worked on procurement, contracts, and human services. In the contract
development phase, his time allocation increased to 50 percent.38
The participants relied on Case Western Reserve University’s existing ChildHood Integrated
Longitudinal Data System (CHILD). This system, created in 1999, connects data from 18 sources
and stores more than 500,000 records of children who have lived in Cuyahoga County. CHILD
helped project designers identify the beneficiary population, quantify the children’s duration in
foster care, and design an intervention that met the specific needs of the children and parents. 39
With this data, the planners could move forward to design the program and engage stakeholders.

http://www.thirdsectorcap.org/wp-content/uploads/2016/02/Final-Cuyahoga-Partnering-for-Family-SuccessProgram-Lessons-Learned-Report.pdf.
37 Enterprise Community Partners & Third Sector Capital Partners. (2016).
38 Id.
39 P. Auspos. (2017). Integrated Data Are Key to “Pay for Success”. Baltimore, MD. Retrieved November 7, 2019

from http://www.aecf.org/m/resourcedoc/aecf-integrateddataarekeytopayforsuccess-2017.pdf.

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In 2012, with the Gund Foundation’s support, the county formally engaged Third Sector to
undertake a feasibility analysis of social issues that might be amenable to a PFS model. During the
fall of 2012, the county issued a formal Request for Responses (RFR) and launched a competitive
process for selecting social service providers, evaluators, and other project partners. The county
was seeking responses that addressed a well-defined problem of adolescent behavioral health and
child welfare, targeted a specific population, used evidence-based interventions with measurable
outcomes, and achieved cost savings for the county and a potential return for funders. The process
took fifteen months from the RFR to selection. The county also partnered with staff from local
foundations, who helped score proposals and select projects for further review. 40
Between the winter of 2013 and the following summer, the county selected its service provider:
FrontLine Service, a community-based mental health provider for homeless individuals and
families. FrontLine collaborates with housing providers to help homeless families settle in housing
and stabilize their home environments. It had decades of experience operating in Cuyahoga
County, and it offered evidence-based practices that dealt with trauma, child welfare, substance
abuse, and homelessness. 41 FrontLine’s costs were paid up front, quarterly, from 2015 to
2018, according to a predetermined service budget for the duration of the program.
The county also selected the Center on Urban Poverty and Community Development (Poverty
Center) at Case Western Reserve as the lead evaluator and Enterprise Community Partners, Inc.,
as the project manager, fiscal agent, and manager of a special purpose vehicle to handle the
project’s fiscal transactions. The Poverty Center had a longstanding relationship with Cuyahoga
County and its Division of Children and Families; it had partnered with the division over the past
fifteen years to create an integrated data system that connected administrative data from sixteen
government systems.
The Poverty Center and project partners also created the main PFS outcome metric: the percentage
reduction in out-of-home placement (OHP) days for children of the targeted families (compared
to that for children of families in the control group). 42 And the Poverty Center designed an RCT
with a total of 270 families or caregivers, with equal numbers in the control and treatment groups.

40 As we mentioned above, the George Gund Foundation had initiated the idea of the PFS program. The foundation

also played a guiding role throughout the process leading to its launch. The Cleveland Foundation and the Sisters of
Charity Foundation of Cleveland had long-term interests in improving social service systems in Cuyahoga County.
They, as well as Gund, contributed expertise in social issues related to homelessness and child welfare.
41 County Commissioners Association of Ohio; FrontLine Service; Jack, Joseph, and Morton Mandel School of

Applied Social Sciences; C.W.R.U.; & Third Sector Capital Partners. (2014). The Case for Pay for Success in
Cuyahoga County. Retrieved February 10, 2019, from http://www.ccao.org/userfiles/140625_Cuyahoga PfS_v4.pdf.
42 County Council of Cuyahoga County, Ohio (2014). Ordinance No. O2014-0018. Retrieved February 11, 2019, from

http://council.cuyahogacounty.us/pdf_council/en-US/Legislation/Ordinances/2014/O2014-0018.pdf.

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The County Council established a $5 million Social Impact Financing Fund to develop PFS
financing.43 During the spring and summer of 2014, the County’s Division of Children and Family
Services (DCFS) worked with FrontLine to develop a program that would take into account the
unique needs of the child welfare population. At the time, FrontLine provided case management
for housing-insecure families who used DCFS services, but its programming did not measure child
welfare outcomes. FrontLine also needed to modify its existing interventions to achieve the PFS
goal of reducing out-of-home placement days while continuing to support housing stability and
mental health.44
Subsequently, a full-time PFS Coordinator with expertise in child welfare and homelessness joined
the county team to help design the intervention, program operations, and enrollment referral
processes. The coordinator is an ongoing point of contact for DCFS and stakeholders, and it
reviews eligibility from referral partners. Meanwhile, local housing providers agreed to collaborate
with the PFS program: Cuyahoga Metropolitan Housing Authority, Famicos Foundation, and
Emerald Development and Economic Network (EDEN), all housing providers for low-income
families, agreed to provide priority admissions to public housing and housing vouchers for PFS
families.45
Unlike CEO in the preceding example, FrontLine did not have experience with the particular
intervention or desired outcomes of the PFS project. A ramp-up period was essential. FrontLine
used July through October 2014 to test elements of the program, hire and train staff, and develop
other operations before the official project launch, when the agency would be on the clock under
the PFS contract. Doing so ultimately reduced the time between a person’s enrollment in the
program and approval of his or her housing application by half. Activities during this period were
largely funded by a grant from the Laura and John Arnold Foundation (LJAF).
FrontLine and DCFS case workers learned how to work together to achieve their new, integrated
PFS goals. FrontLine also worked with Cuyahoga Metropolitan Housing Authority and other
agencies that would provide housing to the majority of PFS clients. 46

43 Id.
44 Enterprise Community Partners & Third Sector Capital Partners. (2016).
45 Id.
46 The ramp-up period allowed DCFS to practice selecting potential families, coordinate the randomization process

with the Poverty Center, and educate its staff about the needs of the PFS project. A lesson learned in developing the
Cuyahoga County PFS is that an evaluation contract should allow for flexibility in making modifications to the
sample and evaluation design. Soon after randomization started, a review of individual DCFS cases revealed that the
initial criteria to determine simultaneous housing instability and entry into foster care were too narrow. With the
consent of various stakeholders, the criteria were modified.

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Enterprise Community Partners, the county, FrontLine, and Third Sector finalized the PFS
contract, which was formally approved by the Cuyahoga County Council in October 2014. By
December, national and local funders had formally committed and entered into lender and grant
agreements.47
F INANCING
In December 2014, after a year of conversations and various due diligence processes, Third Sector
received formal commitments from the project’s national and local funders. A consortium of five
funders would provide up-front funding of $4 million for the program, anchored by a senior loan
of $1,575,000 at 5 percent interest from Reinvestment Fund, a national community development
finance institution that focuses on neighborhood revitalization. 48 The remainder came from
subordinate philanthropic loans with interest rates varying from 0 percent to 2 percent and from
recoverable grants 49 from the Nonprofit Finance Fund, the George Gund Foundation, the
Cleveland Foundation, and the Sisters of Charity Foundation of Cleveland.
The project’s target impact is a 25 percent reduction in OHP days. If that goal is met, the county
will realize modest net savings, and all funders will be repaid their principal investment with base
annual interest. If the reduction in OHP days is greater than 25 percent, the county’s savings will
be substantially greater, and funders will receive up to $1 million in success payments. 50 The
program’s investors received $75 per OHP day saved.51
All other project agreements, including those with the Poverty Center, Enterprise Community
Partners, and Third Sector, were also finalized in December 2014. It is worth noting that none of
the stakeholders had anticipated the legal complexities and costs of drafting and negotiating the
PFS contract.52

47 Enterprise Community Partners & Third Sector Capital Partners. (2016).
48 Id.
49 Success fees would be dedicated to other charitable purposes.
50 County of Cuyahoga. (2017); County of Santa Clara & Abode Services. (2015).
51 County of Cuyahoga. (2017). Fact Sheet: The Cuyahoga Partnering for Family Success Program. Retrieved

January 16, 2019, from http://www.thirdsectorcap.org/wp-content/uploads/2017/03/Cuyahoga_PFS_FactSheet_UPDATED-MAR-2017.pdf; and County of Santa Clara & Abode Services. (2015). Project Welcome Home
Fact Sheet. Retrieved January 16, 2019, from http://www.thirdsectorcap.org/wpcontent/uploads/2015/08/150811_SCC-CH-PFS_Fact-Sheet.pdf.
52 Enterprise Community Partners & Third Sector Capital Partners. (2016).

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THE L AUNCH AND S UBSEQUENT TRACKING
The project team publicly announced the launch of the project in Cuyahoga County in late
December 2014.53 Since that time, evaluators have released a study that identified treatment group
characteristics, reviewed the case management process for clients, and made a preliminary
assessment of the project’s impact on clients and service delivery. 54 In addition to revealing early
signs of success (the treatment group was less likely to require housing services than the control
group), the evaluation identified procedural recommendations to improve coordination between
FrontLine and county workers.
Project enrollment ended in September 2017, and outcomes tracking continues through
December 2019..The program will have a single payment, to be calculated and made in the first
quarter of 2020.
See the appendix for other examples of PFS programs concerned with families and children.

OTHER PFS PROGRAMS
Governments in the United States and around the world are increasingly developing and
implementing PFS in areas ranging from health to education, from homelessness to the
environment. Here we survey some of these projects.
EARLY CHILDHOOD EDUCATION
A number of PFS initiatives provide early childhood education with the goal of reducing at-risk
children’s need for special education and, more broadly, preventing educational deficits from
reducing their life opportunities.
Utah School Readiness Initiative (2013). A consortium of public school districts and private
organizations provided high quality preschool education to approximately 4,000 low-income
three- and four-year-olds between 2013 and 2018. 55 The project sought to lower the need for
special education services in later years of schooling by preparing children to remain on track in

53 Third Sector Capital. Retrieved February 20, 2019, from https://www.thirdsectorcap.org/portfolio/cuyahoga-

county-partnering-for-family-success-program/ .
54 R. Bai, C. C. Collins, D. Crampton, C. Liu, & R. Fischer (2017). Cuyahoga Partnering for Family Success

Process Evaluation 2017. Briefly Stated, 17(1). Retrieved January 28, 2019, from
http://povertycenter.case.edu/wp-content/uploads/2017/07/Briefly_Stated_No_1701_Cuyahoga_Partnering_for_Family_Success.pdf.
55 https://www.deseretnews.com/article/900054770/this-utah-preschool-program-helped-inspire-a-us-law-that-

will-create-a-dollar100-million-fund-heres-what-its-for.html.

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elementary and high school. United Way of Salt Lake and Salt Lake County committed to paying
for the success of the first cohort, with appropriations from the State of Utah paying for subsequent
cohorts. Goldman Sachs’s Social Impact Fund made a $4.6 million loan to the providers as senior
lender, and the J. B. and M. K. Pritzker Family Foundation lent $2.4 million as the subordinate
lender. United Way of Salt Lake, a Utah nonprofit, has served as the program intermediary,
overseeing implementation and managing repayments to investors.56
Using results of the Peabody Picture Vocabulary Test (PPVT), United Way of Salt Lake
identified 110 children (within a cohort of 595 children) as likely to need special education and
enrolled them in early childhood education programs. Only one of those students ended up actually
needing special education services in kindergarten—almost a 100 percent success rate. The PFS
contract provided that investors would receive a repayment equal to 95 percent of the savings
brought to the state by the program. With the first cohort, the payers saved $281,550 57; Goldman
Sachs received a $260,000 repayment.58
Experts voiced considerable skepticism about the program’s actual effectiveness. Most early
childhood education programs—even those better funded than Utah’s—have much lower success
rates, typically 10 percent to 20 percent. It is noteworthy that, unlike many of the recidivism
programs, the Utah School Readiness Initiative’s payments were not based on a conventional
evaluation technique that compared participants in the program with similarly situated children
who did not participate, but solely on children’s PPVT scores. This decision left open the
possibility that the program’s spectacular success was based on the erroneous assumption that a
high percentage of the children who scored low on the PPVT would otherwise have required
special education. 59
Chicago Child-Parent Center Initiative (2014). In a pre-K education PFS program with goals
similar to Utah’s, the Child-Parent Center provides early childhood education to increase

56 Goldman Sachs. (2015). Initial Results Released for First Social Impact Bond for Early Childhood Education

Show Success: 109 of 110 At-Risk Utah Students Avoid Special Education Services Following Preschool. Retrieved
February 9, 2019, from http://www.goldmansachs.com/what-we-do/investing-and-lending/impact-investing/casestudies/sib-slc-fact-sheet.pdf.
57 Calculated from the state’s additional per child funding of $2,607.
58 Goldman Sachs. (2015).
59 Doubts were also expressed about the predictive validity of the PPVT. In this regard, see A. Loewenberg

(November 6, 2015). “Pay for Success” Gaining Traction as ECE Funding Option, But Should It Be? Retrieved
April 23, 2017, from https://www.newamerica.org/education-policy/edcentral/payforsuccess/; and N. Popper.
(November 3, 2015).” Success Metrics Questioned in School Program Funded by Goldman,” New York Times.
Retrieved February 9, 2019, from https://www.nytimes.com/2015/11/04/business/dealbook/did-goldman-make-thegrade.html.

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kindergarten readiness, improve third-grade literacy, and reduce the need for special education. In
addition to delivering high quality preschool services, the program provides support to parents. It
aims to reach a total of 2,618 children over four years. The pilot cohort comprises
374 children―four-year-olds from families living below the poverty level who attend schools in
low-income communities where there is a shortage of high quality preschool education
opportunities. 60
The program’s success in achieving special education outcomes is based on a comparison group
of children from similar neighborhoods and with similar demographic characteristics who did not
attend preschool. In contrast, success with respect to kindergarten readiness and literacy outcomes
is based not on a comparison group, but on students’ performance on the Partnership for
Assessment of Readiness for College and Careers test. 61 Lenders are repaid if, on average, the
children score above the 25th national percentile. SRI International, the independent evaluator for
the project, released the results of the first cohort in the spring of 2016. SRI found that 59 percent
of the participating children showed kindergarten readiness rates above the national average. Like
the Utah program, the $16.6 million Chicago project was funded by Goldman Sachs’s Social
Impact Fund. Additional money came from Northern Trust as a senior lender and the J. B. and
M. K. Pritzker Family Foundation as subordinate lenders. 62 The investors received a success
payment of $500,000 based on the program’s outcomes.
HOMELESSNESS
Santa Clara County Project Welcome Home (2015). In 2015, Santa Clara County, California,
launched Project Welcome Home to serve 150–200 people who are chronically homeless and use
emergency rooms, jails, and other government-funded services at a disproportionate rate. Abode,
the service provider, offers housing placement and support services (for example, search, lease
negotiation, conflict mediation) and access to additional care such as crisis intervention, mental
health and primary care treatment, and substance use counseling. Abode pursues two
complementary approaches shown to reduce hospitalization and homelessness. “Housing First”
provides immediate housing without conditions concerning substance use or program

60 https://iff.org/chicago-pay-success-initiative/; https://www.payforsuccess.org/project/chicago-child-parent-center-

pay-success-initiative.
61 The Partnership for Assessment of Readiness for College and Careers (PARCC) is a consortium of eight states,

the District of Columbia, and the Bureau of Indian Education that work together to create and deploy a standard set
of K–12 assessments in Mathematics and English based on the Common Core State Standards. Retrieved February
25, 2019, from https://parcc.pearson.com/.
62 Chicago SIB Authorizing Ordinance. (2014).

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participation. “Assertive Community Treatment” provides comprehensive treatment for mental
and physical illnesses and substance abuse. 63
Using the services of Third Sector, the project intermediary, the county lined up $6.9 million in
funding from private funders and philanthropic organizations, and (somewhat unusually) from the
service provider’s deferred service fee. 64
With these interventions, the goal is to increase “continuous stable tenancy” to at least 12 months
for more than 80 percent of enrollees. 65 (A “month” of continuous residency allows for a
participant to spend up to 14 days incarcerated or hospitalized). Santa Clara County begins issuing
success payments when a participant achieves 3 months of continuous tenancy, and payments
increase after each 3-month milestone for a year. The county will pay a total of $12,240 for a
participant who maintains stable tenancy for 12 months. Table 2 shows the milestones that trigger
progressive repayment.
Participant Milestone
# months of continuous tenancy
3 months

Success
Payment
per Participant
$1,242

6 months

$1,863

9 months

$2,484

12 months

$6,831

Cumulative payment through 12 months

$12,240

Each month after the first year of stable tenancy

$1,035

Table 2. Success Payment per Participant for Project Welcome Home. (County of Santa Clara &
Abode Services, 2015)

63 E. A. Latimer. (1999). “Economic Impacts of Assertive Community Treatment: A Review of the Literature,” The

Canadian Journal of Psychiatry 44(5), pp. 443–454. Retrieved January 25, 2019, from
https://doi.org/10.1177/07067437990440050.
Legislature of the State of Texas. An Act Relating to the Administration of “Pay for Success”; Contracts for State
Agencies, Pub. L. No. HB 3014 (2015). Retrieved February 2, 2019, from
http://www.payforsuccess.org/sites/default/files/resource-files/84r_hb_3014_-_enrolled_version_-_bill_text.pdf .
64 County of Santa Clara & Abode Services. (2015).
65 Ibid., p. 3.

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If overall outcomes reach the target level of impact, the success payments will fully repay funders
their principal investment with annual interest. If the outcomes exceed the target, funders receive
additional success payments, up to a cap of $8 million. (The University of California San Francisco
School of Medicine is conducting an RCT to measure the program’s effectiveness, but not for
purposes of payment.)66
(See the Appendix for other examples of PFS programs addressing homelessness.)
MENTAL HEALTH
Santa Clara County Partners in Wellness Project (2016). The county hopes to reduce the costs
of treating its acutely mentally ill population, many of whom are repeat users of the county’s
emergency and inpatient mental health facilities. For example, in recent years, more than one
quarter of the nearly 7,000 patients who used these facilities were readmitted. Patients requiring
emergency services use the county’s Emergency Psychiatric Services (EPS) and then transfer
either to one of the contract hospitals or to the Barbara Arons Pavilion (BAP), a 48-bed acute
inpatient psychiatric facility. Because the county lacks space for patients who no longer need acute
inpatient care, many of them stay at BAP for an unnecessarily long time, occupying “acute beds.”
This forces the county to send patients who need acute care to contract hospitals outside the county
system at a cost of millions of dollars per year. 67
In December 2014, Santa Clara County retained Third Sector as an intermediary and issued a
request for proposal for a PFS contract with a service provider that could care for the mentally ill
in a less restrictive environment than the county facilities. The contract was awarded to Telecare
Corporation, a for-profit organization with considerable experience in this field. The beneficiary
population includes at least 250 severely mentally ill people who have been previously admitted
to an inpatient facility. The six-year project aims to improve the health and well-being of this
population while lowering the county’s costs through reduced and more efficient use of emergency
and inpatient psychiatric services. The county hopes to save at least $5 million.
Telecare’s remuneration will be based on its success in reducing client use of high-cost services.
The reduction targets are based on the historical use by the beneficiary population, with payments
based on an estimate of how much the county expects to save when those targets are

66 UCSF is using an Intention to Treat approach, which compares people assigned to the treatment group with the

control group, regardless of whether the people in the treatment group actually enroll for permanent supportive
housing. It is also measuring other outcomes not tied to success payments, such as use of primary care, hospital and
emergency room, mental health, and substance use services.
67 D. Schifrin & P. Brest. (2016). Pay for Success and Social Innovation Financing: Serving Santa Clara County’s

Mentally Ill Residents (Stanford Graduate School of Business Case No. SI-133). Stanford, CA.

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met.68 Although payments are not based on an RCT, a professor in the Stanford School of Medicine
Department of Psychiatry is conducting an RCT to gather evidence about the program’s efficacy.
In addition, clients will be surveyed to determine their subjective well-being.
Although development of the program benefited from grants from the James A. Irvine Foundation,
Nonprofit Finance Fund, and California HealthCare Foundation, the county and Third Sector
decided not to look to foundations or commercial investors to front the working capital, instead
opting to pay Telecare directly. 69
WORKFORCE DEVELOPMENT
Massachusetts Pathways to Economic Advancement (2017). Limited English language skills
make it difficult for many immigrants in the greater Boston area to get jobs. A PFS project
launched by Massachusetts in 2017 aims to increase employment opportunities for adult language
learners through English language classes, vocational training, and job search assistance. 70
Jewish Vocational Service will deliver these services to nearly 2,000 immigrants and refugees
over three years. 71 Social Finance raised $12.43 million for the project from 40 investors,
including financial institutions, donor advised funds, individuals, and foundations. Prudential
Financial, in collaboration with Maycomb Capital, provided nearly 50 percent of the total
investment. Bank of America Merrill Lynch acted as the placement agent for certain qualified high
net worth and institutional investors. 72 The commonwealth’s repayment of investors is based on
JVS clients’ successful engagement with the program, improvement in earnings, and transition to

68 Basing payments on anticipated rather than actual savings limits the role of factors outside Telecare’s control that

might affect the county’s actual savings. Email from Greta Hansen to Paul Brest. July 22, 2016.
69 Third Sector Capital Partners, County of Santa Clara, Telecare Corporation, & Corporation for National &

Community Service. (2017). Partners in Wellness Fact Sheet. Retrieved February 1, 2019, from
http://www.thirdsectorcap.org/wp-content/uploads/2017/02/Partners-in-Wellness-Fact-Sheet-Final.pdf.
70 Social Finance. Massachusetts Pathways to Economic Advancement Pay for Success Project Fact Sheet.

Retrieved February 12, 2019, from http://socialfinance.org/content/uploads/MAPathways_FactSheet.pdf.
71 Nonprofit Finance Fund. Pay For Success blog (2018). Massachusetts Pathways to Economic Advancement.

Retrieved September 16, 2018, from https://payforsuccess.org/project/massachusetts-pathways-economicadvancement and Social Finance. Massachusetts Pathways to Economic Advancement Pay for Success Project Fact
Sheet. Retrieved February 12, 2019, from http://socialfinance.org/content/uploads/MAPathways_FactSheet.pdf.
72 Other investors include Living Cities Blended Catalyst Fund, Combined Jewish Philanthropies’ Donor Advised

Funds, Barbara Bush Foundation for Family Literacy, ImpactAssets via the Giving Fund of Blue Haven Initiative,
the Boston Foundation, Boston Impact Initiative, the Inherent Foundation, the Kresge Foundation, the Shapiro
Foundation, the Sorenson Impact Foundation. Massachusetts Pathways to Economic Advancement Pay for Success
Project. Retrieved February 12, 2019, from http://socialfinance.org/focus-areas/workforce/massachusetts-pathwayseconomic-advancement-project/.

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higher education. The project consists of four distinct program tracks to accommodate varying
language levels, personal resources, employment objectives, and educational goals. The success
of the program tracks will be assessed by various evaluation methods. For example, the Skills
Training program will be assessed by comparing how much a participant earned before and after
enrolling in the project. The English for Advancement program, on the other hand, will be
evaluated by assessing how the participants are performing in comparison to a control group of
similar people who were not part of the project.73
Veterans Coordinated Approach to Recovery and Employment (2018). Veterans CARE was
launched in 2018 to provide Individual Placement and Support (IPS) services over three years
to 480 unemployed and underemployed veterans in New York City, Boston, Brockton, and central
and western Massachusetts who have been diagnosed with Post-Traumatic Stress Disorder
(PTSD). The project, coordinated by Social Finance, is the first PFS project in the United States to
focus on improving employment outcomes for veterans and the first multistate project of its kind. 74
The services will be delivered by IPS teams at local VA Medical Centers, with coordination and
technical assistance provided by the Tuscaloosa VA Medical Center. The success of the project
will be measured by Westat on the basis of increased earnings, sustained employment, job
satisfaction, and fidelity to the IPS model. BNP Paribas, Northern Trust, the Dakota Foundation,
Deutsche Bank, and the Robin Hood Foundation are responsible for the initial investment of
approximately $5 million. If the program is successful, the principal amount plus interest will be
repaid to the investors by the US Department of Veterans Affairs, Massachusetts; the Economic
Development and Industrial Corporation of Boston; and the New York City Department of
Veterans Services.
ENVIRONMENT
DC Water Environmental Impact Bond (2016). In 2016, the DC Water and Sewer Authority
launched the first-ever environmental PFS project. It is building green infrastructure to improve
DC’s water quality. Goldman Sachs and the Calvert Foundation pledged $25 million, which will

73 Jewish Vocational Service, Social Finance (2017). Pay for Success blog. Massachusetts Pathways to Economic

Advancement—A Next Generation of Pay for Success Project. Retrieved February 24, 2019, from
https://payforsuccess.org/blog/massachusetts-pathways-economic-advancement-next-generation-pay-successproject.
74 Nonprofit Finance Fund. Pay for Success blog. (2018). Veterans Coordinated Approach Recovery and

Employment Care. Retrieved February 12, 2019, from https://www.payforsuccess.org/project/veterans-coordinatedapproach-recovery-and-employment-veterans-care; Social Finance. Veterans Coordinated Approach Recovery and
Employment Care Fact Sheet. Retrieved February 12, 2019, from http://socialfinance.org/content/uploads/VeteransCARE_FactSheet.pdf; and Social Finance. (2018). VA partner organization launch innovative approach using long
term employment to improve lives of veterans with PTSD. Globenewswire. Retrieved November 1, 2018, from
https://globenewswire.com/news-release/2018/10/03/1600900/0/en/VA-partner-organizations-launch-innovativeapproach-using-long-term-employment-to-improve-lives-of-Veterans-with-PTSD.html.

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be repaid on the basis of outcomes in storm water runoff reduction with an initial 3.43 percent
interest coupon, payable semiannually, for the first five years.75

75 The stated maturity date is October 1, 2046. The mandatory tender date is April 1, 2021. Goldman Sachs, DC

Water, & Calvert Foundation. (2016). Fact Sheet: DC Water Environmental Impact Bond. Retrieved January 28,
2019, from http://www.goldmansachs.com/media-relations/press-releases/current/dc-water-environmental-impactbond-fact-sheet.pdf, and retrieved February 20, 2019, from https://www.epa.gov/sites/production/files/201704/documents/dc_waters_environmental_impact_bond_a_first_of_its_kind_final2.pdf.

PART THREE: ANALYSIS

THE GOVERNMENT’S ROLE
Governments’ motivations for operating PFS programs include improving the lives of
beneficiaries, providing social services more cost-effectively, changing the governments’ own
cultures to be more outcome-oriented, and minimizing the risk of unproven programs.
Imagine that you are a senior official or administrator of a government agency. On any given day,
many issues compete for your attention. A PFS project is costly, novel, and complex. It requires
interrupting business as usual and subordinating other priorities. You will have to invest political,
social, reputational, and financial capital to get the project off the ground and keep it flying.
For all of these sunk costs, the benefits are unknown. Although PFS may reduce certain risks, it is
fraught with others:
•

•
•

Nonperformance risk, if the intervention does not achieve its specified outcomes. The
service provider and any outside investors bear the greatest financial risks of
nonperformance. But the government itself has much to lose: failing to achieve its social
goals and the loss of reputation and political capital.
Termination risk, if any of the other major parties decides to withdraw, whether justified
by the contract or not.
Unanticipated costs. Almost all PFS contracts to date have taken more time, cost more
money, and consumed more human resources than anticipated by the parties.

Given these risks and costs, a PFS project requires an advocate who has the authority and will to
shepherd a project from concept to completion, as well as staff who can slog through the long path
from designing to operating and monitoring a contract.
High-level government champions have played critical roles in many PFS projects:
•

New York State’s recidivism PFS program was part of Governor Andrew Cuomo’s policy
agenda in his campaign for governor.76

76 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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•
•
•

•

The New York City recidivism PFS program originated in Mayor Michael Bloomberg’s
Young Men’s Initiative, focused on “improv[ing] the lives of black and Latino men.”
Mayor Ben Adams of Salt Lake County made it a priority to collaborate with the local
United Way to improve outcomes for disadvantaged children.
Gary Graves, Santa Clara County’s Chief Operating Officer, initially doubted that the
proposed Welcome Home PFS project could reduce the county’s costs in caring for
homeless people. But after the Board of Supervisors concluded that it was worth tackling
a high priority social problem even if the project did not save money, his commitment made
it possible for the project to take root.77
In reviewing the Massachusetts Juvenile Justice initiative, Third Sector noted that “having
a government champion to actively promote PFS is essential. Governor Deval Patrick’s
public support of PFS was necessary for the project’s success.”

But senior leadership is only the start. Greta Hansen, Chief Assistant County Counsel of Santa
Clara County, California, who has been the lead on two PFS projects, notes that it requires at least
one dedicated staff member with “the desire, the bandwidth, and the capacity” to undertake the
project and stay with it through implementation. The staff member must grasp economic and
statistical models, finance vehicles, the service provider’s operations, and clients’ needs, as well
as negotiate complex legal contracts. It is not surprising that, even with the assistance of
intermediaries, many governments initiating PFS projects have dedicated a full-time staff member
to them.78
PFS also calls for a change in the government’s mindset and practices from procuring services to
active contract management with the aim of achieving measurable outcomes. It is not only the
initiating agency that needs to be reoriented. Most social problems affect multiple government
agencies, each of which has its own jurisdiction, budget, mission, staff, and operating procedures.
Recall the many agencies involved in New York State’s project to reduce recidivism and Cuyahoga

77 Eleanor Clement Glass, Chief Giving Officer of Silicon Valley Community Foundation, a supporter, stated,

“Seeing the County’s commitment at multiple levels and Gary’s leadership addressed a threshold question that
permitted us to consider supporting this project.” https://healthtrust.org/wp-content/uploads/2015/11/From-Idea-toAction-Pay-for-Success-in-Santa-Clara-County-Report.pdf.
78 US GAO. (2015). Pay for Success: Collaboration among Federal Agencies Would Be Helpful as Governments

Explore New Financing Mechanisms. Washington, DC. Retrieved February 12, 2019, from
https://www.gao.gov/products/GAO-15-646. In a review of the Massachusetts Juvenile Justice Project, Third Sector
Capital said, “It proved essential that the government was able to allocate dedicated personnel to the development of
the project.”
S. Kodali, J. Grossman, & G. Overholser (2015). The Massachusetts Juvenile Justice PFS Initiative: Lessons
Learned, p. 9. Retrieved from http://www.thirdsectorcap.org/wp-content/uploads/2015/02/TSCP_MAJJ-PFSLessons-Learned.pdf.

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County’s project to protect vulnerable families. But even agencies that are not involved in the
project may be affected by its activities and outcomes. For example, Santa Clara County’s Project
Welcome Home affects the county’s Office of Supportive Housing, Emergency Medical Services,
the Public Health Department, the Health and Hospital System, Behavioral Health Services, the
County Sheriff’s office, the county jail, the judicial system, the Department of Corrections, the
Parks and Recreation Department, Reentry Services, and Veterans Services. The project also
affects agencies in the county’s cities, such as East Palo Alto and San Jose, as well as large
unincorporated areas such as Stanford University.
In practice, PFS programs may create opportunities and incentives for collaboration among
government agencies that increase efficiency and improve outcomes for their shared beneficiaries.
In an ideal world, the various government entities that enjoy these benefits would contribute to the
costs of the projects. In reality, they don’t. Leaving aside the costs of coordination, projects of this
sort often face what the Urban Institute terms “wrong pocket problems,” where one government
entity pays the costs of an intervention while others benefit from the savings it creates. 79 Wrong
pocket problems fall into several categories:
•

•
•
•
•

•

Intra-agency: one or more divisions within a single agency (such as police, probation,
courts, corrections, and parole within the criminal justice system) pay for a program, but
another division within that same agency receives the benefits.
Interagency: one agency (such as the criminal justice system) pays the cost of a program,
but another agency (such as the public health system) receives the benefits.
Time: one executive or legislative administration pays the costs of a program, but a future
administration receives the benefits.
Regional governance: one place (such as a city government) pays the costs of a program,
but a different place (such as a bordering county) receives the benefits.
Intergovernment: one level of government (such as a municipal government) pays the costs
of a program, but another level of government with jurisdiction in the same geography
(county, state, or federal) receives the benefits.
Inter-sectoral savings: residents benefit from the program, but the savings are not reflected
in any government budget; although society benefits, government agencies cannot capture
that benefit.80

79 J. K. Roman. (2015). Solving the Wrong Pockets Problem: How Pay for Success Promotes Investment in

Evidence-Based Best Practices. Washington, DC. Retrieved February 12, 2019, from
http://www.urban.org/sites/default/files/publication/71501/2000427-solving-the-wrong-pockets-problem_1.pdf.
80 Ibid., p. 3.

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Pay for Success programs can mitigate these problems by drawing on citywide, countywide, or
statewide budgets.

REQUISITES FOR A PFS PROJECT FROM THE GOVERNMENT’S PERSPECTIVE
Although the government and service provider have many shared interests, it is useful to look at
the requisites for a PFS project separately from the government’s and the service provider’s
perspectives. From a government standpoint, the ideal PFS project has five characteristics:
•
•
•
•
•

Quantifiable benefits of the expected outcomes
Predictable likelihood of success
Predictable costs and benefits
Reliably measurable outcome metrics not vulnerable to strategic behavior
No unintended negative consequences

For the recidivism programs, there are fairly good data on the costs of incarcerating a prisoner. 81
The overall cost savings include the marginal costs of avoiding housing one inmate over a set
period of time and, ideally, the fixed costs of closing facilities if the total prison population
decreases by a certain amount. A study by the State of Maryland summarized:
The majority of cost savings from a reentry program are associated with avoided reimprisonment.
Within this category, the largest cost savings come when an agency can close a wing of a prison or
an entire prison due to a drop in the number of prisoners. In Maryland, this typically requires a
reduction of at least a few hundred prisoners per year. Until this threshold is obtained, Department
of Public Safety and Correctional Services can only save on marginal costs for inmate wages,
contractual services, materials, supplies, food and medical costs. These marginal costs are
approximately $4,623 per inmate per year for the department.82

In the New York State PFS program described above, the jurisdictions estimated the annual
marginal costs of a prisoner is $31,00083

81 C. Henrichson & R. Delaney. (2012). The Price of Prisons: What Incarceration Costs Taxpayers. New York,

NY. Retrieved February 12, 2019, from https://www.vera.org/publications/price-of-prisons-what-incarcerationcosts-taxpayers.
82 K. A. McKay. (2013). Evaluating Social Impact Bonds as a New Reentry Financing Mechanism: A Case

Study on Reentry Programming in Maryland. Annapolis, MD. Retrieved February 10, 2019, from
http://mgaleg.maryland.gov/Pubs/BudgetFiscal/2013-Evaluating-Social-Impact-Bonds.pdf.
83 Estimated annual marginal costs of a prisoner. Note: New York’s estimate from the Detailed Project Summary

(2014) converted the marginal cost per day to an annual cost.

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Social costs are more difficult to quantify and are based on subjective judgments. In the case of
recidivism, they include
•

•

Costs to ex-offenders. “At the time of their release, felons return to the community
with norms and attitudes that are maladaptive to society outside of the prison walls.
Compounding the problem, many—perhaps most—have weak labor market
attachments and social supports. Reentry programming can provide a highly
socially valuable set of services, independent of the fiscal impact, that contribute
toward stronger and safer communities when former inmates are able to begin
rebuilding healthy and productive lives.”84
Costs to victims, including lost earnings and medical costs from the injury, property loss
or damage, jury compensation to victims, 85 and the costs of citizens not feeling safe on the
streets and in their homes.

The social consequences of reducing homelessness, providing early childhood education, and
supporting families are if anything more subjective, more varied, and more difficult to measure.
Different government jurisdictions may place different values on healthy lives, fulfilled lives, and,
indeed, just plain lives. The time horizon of the impact also can extend far into the future.
Ironically, because placing value on social outcomes is fundamentally a political decision, the
subjectivity inherent in valuing outcomes does not pose a greater problem for the adoption of PFS
projects than it does for allocating funds for, say, street beautification or pothole repairs.
In sum, the requirement of quantifiable benefits does not create significant barriers for most PFS
programs.
PREDICTABLE L IKELIHOOD OF S UCCESS
A fundamental requisite of a PFS contract is that the parties have good reason to believe that the
program will succeed in achieving their mutually agreed outcomes. For all practical purposes, this
means having confidence in the theory of change that underlies the program and in the service
provider’s ability to implement the program. This requires that prior similar programs have been
well evaluated and that the evaluation results are generalizable to the context in which the program
will operate.
EVALUATION
The fundamental purpose of program evaluation is to determine whether a program caused its
intended outcome. Evaluation answers two questions: (1) did the desired outcome occur at all, and
if so, (2) would the outcome have occurred (to the same extent) even without the program.

84 McKay. (2013, p. 11).
85 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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Consider the example of a teen pregnancy prevention program. Assuming that one can track
program participants, the first question is relatively easy to answer: each participant who did not
become pregnant within some predefined period counts as a desired outcome. The second question
is more difficult to answer: would that teenager not have become pregnant even if she hadn’t
participated in the program? Answering it involves comparing the actual results of the program to
the counterfactual: What would have happened in the program’s absence?
(Note that we are considering evaluation here as a way of predicting the success of a servicedelivery program. We will return to evaluation later as method for retroactively assessing the
success of a program.)
GENERALIZABILITY
Even if a past implementation of a similar program has been highly successful, differences between
that program and the proposed one―for example, differences between their beneficiaries or
between their social or economic environments―often make it difficult to predict success.
To use a simple example, suppose that in the Santa Clara County’s homelessness project, Abode’s
approach to providing permanent supportive housing reduced homelessness among a group of
volunteers in the city of San Jose. Consider why the program might not be as successful if it were
made available to all the homeless people in that city. And consider why a similar program might
not be as successful in rural parts of the county, or in other US cities, or in developing countries.
In the first case, volunteers may exhibit a motivation to live in stable housing that isn’t necessarily
shared by the population at large. In the second case, transportation systems, social services,
employment opportunities, and the availability of alcohol and drugs may differ significantly from
one locale to another. The problem can occur even with the same program conducted some years
later by the same provider in the same locale for the same population of clients, when the external
environment may have changed.
Assessing external validity is as much art as science. One must consider salient variables,
differences in those variables introduced over time and space, and what effect the differences may
have on a program’s outcomes.
Prediction can be improved by understanding the particular mechanisms by which the intervention
works86 and by multiple replications of a strategy in different settings, as in the case of Nurse
Family Partnership. But replication is expensive, and there are not many programs for which there
is strong evidence.

86 Mary Ann Bates & Rachel Glennerster. (2017). “The Generalizability Puzzle,” Stanford Social Innovation Review.

Retrieved February 12, 2019, from https://ssir.org/articles/entry/the_generalizability_puzzle.

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PREDICTABLE COSTS AND BENEFITS
A PFS contract requires being able to make reasonably good predictions about the extent to which
interventions will bring about outcomes and the costs of achieving those outcomes. Both parties
must determine how success will be measured and must specify the dollar value of each positive
outcome. In addition—a matter we postpone to a later section—the service provider must estimate
the cost of treating a cohort of participants in order to determine the net cost of providing a single
outcome, such as an ex-offender who does not offend again.
Let’s return to the hypothetical PFS project to reduce teen pregnancy. To state the obvious, in our
example, the intended outcome is a pregnancy avoided. We need to estimate:
•

•

•

The value of an avoided teen pregnancy. The government might estimate the net present
value of avoiding a teen pregnancy as $75,000. 87 This figure might be based on the costs
to the potential mother (such as health expenses; forgone employment, education, and
opportunity) and the costs to the potential child, whose mother may lack the ability to
provide adequate care. Although the government may be willing to pay the service provider
up to the full value of $75,000 per pregnancy avoided, it may begin negotiations with a
lower offer.
The base rate of teen pregnancies in the targeted group. The government ideally would
pay the service provider only for its impact―for participants in the program who do not
get pregnant but otherwise would. A necessary starting point is the base rate of pregnancies
for the population treated by the program. There is reasonably good social science evidence
about the teen pregnancy rates for girls with different demographic characteristics in
various geographic locales—though any estimate for the particular population served by
the program will be subject to a considerable margin of error. For illustrative purposes, our
hypothetical program focuses on girls “at risk” of becoming pregnant, among whom 20
percent actually do.
The program’s impact. The program’s success rate, or impact, is the difference between
the percentage of participants in the program and the percentage of participants in similar
populations that attained the outcome. If 20 percent of high-risk teenage girls in the
relevant population become pregnant and only 7 percent of those enrolled in the program
are likely to get pregnant, the impact would be 13 percentage points or 65 percent.

RELIABLY MEASURABLE OUTCOME METRICS NOT VULNERABLE TO S TRATEGIC BEHAVIOR
•

There is a single specified quantifiable outcome metric, or at most a couple.

87 This is a conservative estimate. See National Campaign to Prevent Teen and Unplanned Pregnancy. (2014).

Counting It Up: Total Costs to Taxpayers. Washington, DC. Retrieved February 12, 2019, from
https://thenationalcampaign.org/sites/default/files/resource-primary-download/total-costs.pdf.

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•
•

The outcome metric is identical to the ultimate outcome that the government desires, or a
very closely correlated proxy for the ultimate outcome.88
The program is relatively immune to strategic behavior such as creaming and outright
cheating.

Our teen pregnancy prevention program has a single outcome: a participant does not become
pregnant within a specified time (e.g., while in the program plus a specified number of months or
years afterwards). The metric is clear: As the saying goes, one cannot be a little bit pregnant. It is
not always easy to obtain the relevant data, however. It is difficult to track girls who drop out of
the program; schools may be legally prohibited from sharing the information, if they have it.
Unless it is part of a mandatory school curriculum, participants must volunteer for the program,
leading to the possibility that it attracts girls who are less likely than their peers to become
pregnant. The program may be more or less susceptible to the service provider’s strategic behavior
in recruiting participants.
We should note that the downside of focusing on quantifiable metrics and easily obtainable data
is that the programs may not take adequate account of other important outcomes, such as the
subjective well-being of their clients. To address this problem, Santa Clara County’s mental health
program supplemented the readily obtainable administrative data relating to cost savings with a
survey of the service provider’s clients’ physical and psychological well-being.
The addition of survey data to administrative data in Santa Clara County’s Partners in Wellness
Project necessarily adds an expense; the South Carolina Nurse-Family Partnership PFS program
relies exclusively on survey data. Survey data almost inevitably adds an incremental cost to a
program where administrative data is, by hypothesis, already being collected. The reliability of
both forms of data is highly dependent on context―on the nature of the data and the standards,
methods, professionalism, and objectivity of the data collector. 89 Where administrative data can
provide a reasonably good proxy, the parties to a PFS program may rely on the administrative data
and use surveys as spot-checks.

89 An excellent paper on Barriers to Using Administrative Data for Evidence-Building, prepared by the Office of

Management and Budget for the White House Commission on Evidence-Based Policymaking, describes not only
barriers to sharing administrative data but potential solutions, such as regulatory reforms and data clearinghouses.
Office of Management and Budget. (2016a). Barriers to Using Administrative Data for Decision Making. Washington,
DC. Retrieved February, 14, 2019, from https://obamawhitehouse.archives.gov/sites/default/files/omb/mgmtgpra/barriers_to_using_administrative_data_for_evidence_building.pdf).

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NO UNINTENDED NEGATIVE CONSEQUENCES
•
•

The provider’s efforts to achieve the outcome do not crowd out other valuable outcomes.90
The provider’s efforts to achieve the outcome do not create negative externalities.

When school districts and teachers are rewarded on the basis of students’ performance on math
and reading tests, educators may focus on those subjects to the exclusion of others. Because PFS
programs inevitably induce service providers to teach to the test, they may be vulnerable to the
same phenomenon. We don’t see this as an issue for any of the programs described above,
however.
Nor do these programs seem to create negative externalities—that is, harms to others. Job training
and placement programs do, however, create the possibility of displacement: the program’s
beneficiaries may simply take jobs now held by others.91

APPLICATION OF THE CRITERIA TO VARIOUS PFS PROGRAMS
Let’s analyze some of the criteria considered above as applied to some PFS programs.
RECIDIVISM
Days in prison avoided translate directly into cost savings for the government. 92 Reduced criminal
conduct also has social benefits for the potential victims of crime and the ex-offender himself. As
explained in CEO’s Project Summary, “the bed days measure captures both the budgetary costs of
incarceration and the victim and community impacts of new crimes since serious crimes result in
longer sentences.” 93 As we mentioned above, most US jurisdictions maintain reliable
administrative data on whether a person is in prison. The Massachusetts Juvenile Justice PFS

90 The paradigmatic example of crowding out occurs in education, where measuring only select subjects such as

reading and math scores may crowd out science, arts, and other subjects.
91 B. Crépon, E. Duflo, M. Gurgand, R. Rathelot, & P. Zamora. (2013). “Do Labor Market Policies Have

Displacement Effects? Evidence from a Clustered Randomized Experiment,” The Quarterly Journal of Economics,
128(2), pp. 531–580. Retrieved February 12, 2019, from http://dx.doi.org/10.1093/qje/qjt001. A related issue is the
equilibrium effect, when a program successfully serves its entire eligible population (A. V. Banerjee & E. Duflo.
(2009). “The Experimental Approach to Development Economics,” Annual Review of Economics 1(1), pp. 151–
178). Consider the possible equilibrium effect of scaling up a homelessness program whose success depends heavily
on training and placement for low-wage jobs if the number of available jobs in the area is highly limited.
92 The greatest cost savings would come from reducing recidivism enough to close a jail—probably an unattainable

objective for most PFS projects.
93 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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project bases its main performance metric on the length of the prison sentence rather than actual
days in prison.94
The danger of creaming—of a service provider’s selecting only clients who are predicted to
succeed in the program—is highly unlikely to occur in any of the existing anti-recidivism projects,
because the service provider lacks control over who is placed in the program.95
Beyond biased selection of participants, a service provider might bias its provision of services to
those participants who seem most likely to succeed. The classic example of such triage has
occurred as a result of high-stakes testing in education; teachers have an incentive to dedicate more
effort to so-called bubble kids who are just below a cut-off point than to students further below or
above the line.96 In contrast to education, which has norms of equal treatment, however, the payer
in a recidivism PFS project may not object to a service provider’s strategy of giving more attention
to ex-offenders who are less likely to re-offend.97 Of course, some ex-offenders wouldn’t relapse
even if they received no treatment at all, but a well-designed PFS contract will not pay for them.
Are recidivism PFS projects vulnerable to other forms of gaming, in which seemingly successful
client outcome would not actually satisfy the government’s interests? To use an outlandish
example, rather than reducing a client’s likelihood of reoffending, a service provider might teach
him how to avoid getting caught when he commits a crime. We cannot imagine any plausible
examples, however.
High-stakes testing has led to some flagrant cases of outright cheating—for example, falsifying
students’ test scores. Given the nature of pertinent administrative data, recidivism projects seem
relatively immune from cheating. 98

94 For New York, the number of “bed days,” which is equal to the sum of (1) the number of days a person spends in

jail or prison between initial release from prison and the end of the relevant observation period, and (2) if a person is
in prison at the end of the observation period, the number of days remaining in his sentence, capped at 5 years from
the date of his first release. CEO, Investing in What Works. Retrieved February 25, 2019, from
https://www.payforsuccess.org/sites/default/files/resource-files/pfsprojectsummary_0314.pdf.
95 Roca’s contract with Massachusetts excluded certain types of offenders that it believed could not benefit from

cognitive behavioral therapy.
96 J. Booher-Jennings. (2005). “Below the Bubble: ‘Educational Triage’ and the Texas Accountability System,”

American Educational Research Journal 42(2), pp. 231–268. Retrieved February 12, 2019, from
http://www.jstor.org/stable/3699376.
97 Moreover, although the nature of the offense, previous convictions, and demographic data may help predict

recidivism, these data are unlikely to have the same predictive power as a student’s academic record.
98 It’s worth noting that a PFS contract in which an all-or-nothing payment to the service provider was based on

meeting some threshold would create a strong incentive to cheat if the provider’s outcomes were just beneath that
threshold. (For whatever reason, the Peterborough recidivism project (see page 88) had this characteristic—though

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JOB PLACEMENT
The Massachusetts (MAJJ) and New York State (CEO) recidivism programs also include
payments for job placement, which can be thought of either as a valuable outcome independent of
reduced recidivism, or as an intermediate outcome that is likely to reduce recidivism (though not
a strong proxy, as employed ex-offenders often re-offend). The MAJJ metric is based on “each
quarter that a Roca participant is employed as compared to similar young men who are not in the
program.” 99 The CEO metric is a “binary indication of positive earnings in the fourth quarter
following release from prison.”100
As we mentioned above, depending on how participants are selected, job training programs are
susceptible to strategic behavior. In the Oklahoma Milestones program described above, the
service providers could choose their clients; the result was some creaming by choosing those most
likely to succeed. Job placement programs might also be vulnerable to strategic behavior, such as
achieving stable employment by placing clients in relatively non-demanding dead-end jobs. The
MAJJ and CEO projects were designed to reduce the possibilities for strategic behavior of these
sorts.
JOB READINESS/TRANSITIONAL JOBS
The MAJJ and CEO programs also compensate service providers for job-readiness training and
placement in transitional jobs. For example, under MAJJ, Roca receives payments for increases in
job readiness for each participant in each quarter that a participant engages with a Roca youth
worker nine or more times. CEO is compensated for the number of clients who start a CEO
transitional job during the relevant observation period.101 These are early steps on the path toward
stable jobs. Especially because placement in transitional jobs is entirely within CEO’s control, the
metric is vulnerable to some forms of strategic behavior.
Paying a provider for job readiness and transitional jobs is pretty far removed from the concept of
PFS. Rather, including these criteria in a job placement or recidivism project is a means for giving
a provider working capital as it seeks to meet more ambitious outcome requirements.

there are no indications of attempted cheating. Subsequent PFS projects have paid the service providers
incrementally for each successful participant.)
99 Kodali, Grossman, & Overholser. (2014, p. 10).
100 State of New York, Center for Employment Opportunities, & Social Finance. (2014, p. 10).
101 “Transitional jobs are a critical step in the process of achieving employment and avoiding recidivism, according to

the intervention’s theory of change. This metric also captures the real financial value that the work performed in
transitional jobs creates for the public sector.” Id.

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MENTAL HEALTH
The Santa Clara County mental health PFS project meets most of the criteria set out above. The
purpose of the project is to reduce the county’s emergency services for acutely mentally ill patients;
the outcome metric is reduction in use of high-cost services. The county keeps accurate
administrative data on utilization, both for its own purposes and for accounting to Medi-Cal. (The
county’s liability for Medi-Cal fraud far exceeds any benefits it could gain by cheating.) The most
apparent way that the provider, Telecare, could engage in strategic behavior would be to prevent
its clients from making use of the county’s emergency services without providing them with
equivalent services. To avoid this potential problem and to learn from the program, the program’s
evaluator is charged with monitoring the quality of Telecare’s care for its clients.
HOMELESSNESS
The most complex metric for the Santa Clara County homelessness project is whether a participant
is in “continuous tenancy.” The contract defines this term in considerable detail, making
allowances for absences for various reasons, including emergency psychiatric care and
incarceration. 102 The county does not collect administrative data on occupancy of permanent
supportive housing as a matter of course, however, and the provider has considerable control over
the reporting.
EARLY CHILDHOOD EDUCATION
There is evidence that early childhood education can reduce at-risk children’s needs for special
education and increase academic achievement. 103 Most school districts have reliable
administrative data indicating whether children are in special education classes. The main
vulnerabilities of early childhood PFS projects involve the specification and administration of
outcome metrics. In the Utah program, the need for special education was determined by the
Peabody Picture Vocabulary Test (PPVT), which some experts thought led to an exaggerated
number of children diagnosed as at-risk and therefore too low a bar for success.104
I MPROVING OUTCOMES FOR DISADVANTAGED NEW MOTHERS AND THEIR CHILDREN
The South Carolina Nurse-Family Partnership (NFP) PFS program was launched in 2016 with the
goals of “reducing preterm births; decreasing child hospitalization and emergency department
usage due to injury; improving healthy spacing between births; and increasing the number of first-

102 Santa Clara County, Project Welcome Home - FAQ. Retrieved February 25, 2019, from

https://www.sccgov.org/sites/opa/nr/Documents/FINAL%20-150814_SCC%20CH%20PFS_FAQ_vFinal.pdf.
103 W. S. Barnett. (1995). “Long-Term Effects of Early Childhood Programs on Cognitive and School Outcomes,”

The Future of Children, 5(3), pp. 25–50. Retrieved February 12, 2019, from https://doi.org/10.2307/1602366.
104 https://www.nytimes.com/2015/11/04/business/dealbook/did-goldman-make-the-grade.html.

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time mothers served in the lowest-income communities.”105 Prior RCT evaluations of several very
similar programs gave the parties to the South Carolina contract reasonable confidence that it
would produce the agreed outcomes. Payments are based on a contemporaneous RCT. Much of
the outcome data is based on surveys.

THE SERVICE PROVIDER’S PERSPECTIVE
PREDICTING THE S ERVICE PROVIDER’S EFFECTIVENESS
As we mentioned above, service providers must be able to predict the program’s costs with
reasonable certainty. Their main challenges lie in predicting how effective the program will be—
that is, how many clients must be treated at what cost to achieve a single successful outcome. A
robust evaluation of a prior similar program can reduce, but not entirely eliminate, the margin of
error. Significantly overestimating the program’s effectiveness could lead to the service provider’s
insolvency—or require the organization to beg for relief from the government or philanthropic
funders. This uncertainty creates a degree of risk for the service provider, who may reasonably
respond by demanding a higher payment per outcome, or a graduated payment scheme that moves
the program out of the red with early indications of success.
Therefore, before entering into a PFS contract, the parties will endeavor to predict the service
provider’s success rate―a probability distribution centered on the best estimate. 106 Returning to
our example of a teen pregnancy prevention program, the provider’s best estimate may be that 7
percent of the girls in the program become pregnant, but there’s some probability that none of
them do (total success) or that 20 percent or more become pregnant (total failure or worse). The
prediction will be based on past experience with similar programs.
Under a PFS program with payment based on impact (rather than merely outcomes), the parties
must predict not only the actual program outcomes but how they will compare with the
counterfactual (what would have happened in the absence of the program).
The most robust prediction would be based on well-designed and well-conducted evaluations of
one or more very similar prior programs—evaluations based on RCTs that compare the outcomes
for people served by the program to a similar group of people who were not served. In the

105 South Carolina - Healthy Connections Medicaid. Fact Sheet: South Carolina Nurse-Family Partnership Pay for

Success Project. Retrieved February 12, 2019, from https://www.scdhhs.gov/sites/default/files/2-16-16-SC-NFPPFS-Fact-Sheet_3.pdf and Coalition for Evidence-Based Policy. (2014, p. 2).
106 The prediction is important not only to the provider, but also to the government, which does not wish to incur the

transaction costs and reputational costs of a failed program.

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Massachusetts Juvenile Justice project, New York State recidivism project, and Nurse-Family
Partnership project, for example, the service providers had conducted prior programs with
evaluation that provided reasonably good evidence of the success of interventions. In the absence
of a prior evaluation, the parties must rely on weaker evidence of the service provider’s or others’
interventions. This was true of the Peterborough and Riker’s Island recidivism programs and the
Santa Clara County homelessness and mental health programs.
PREDICTING THE S ERVICE PROVIDER’S COSTS
Let’s suppose that, based on its own or others’ past experience, the service provider estimates the
cost of the teen pregnancy prevention program at $2,500 per client, which, of course, includes
counseling the girls with whom it does not succeed and the many who would not have become
pregnant anyway. We’ll assume that the provider’s program typically involves 100 girls per year.
So far, we also have assumed that:
•
•
•
•

The government is willing to pay at least $35,000 per pregnancy avoided.
The base rate of teen pregnancies for the target population is 20 percent.
The service provider’s best estimate of its effectiveness is that it can reduce the rate to 7
percent.
It costs the service provider $2,500 per participant in its teen pregnancy prevention
program, or $250,000 for a cohort of 100 girls.

The payer would not pay the service provider anything if 20 or more participants got pregnant.
Between 20 and 0 pregnancies, it offers to pay $35,000 x (20 minus number of pregnancies),with
the service provider receiving a maximum of $700,000.
The table on the next page shows the service provider’s net profit or loss for various outcomes in
treating a cohort of 100 girls. It will break even if 12 girls become pregnant and will lose if more
than 12 do. It is apparent that the parties’ estimation of the likely outcome is a crucial factor in
determining the terms of a PFS contract.

PAYMENT BASED ON I MPACT VS . OUTCOMES
The methods for evaluating success as a basis for paying the provider may be more or less accurate
and more or less costly, and there generally is a tradeoff between accuracy and cost. There are
essentially two ways to establish a benchmark for payments under a PFS project:
•

An evaluation that compares outcomes for the provider’s clients with those of a similar
group who did not participate in the provider’s program

•

a successful outcome. The payment rate is based on the government’s estimate of the cost
savings or on the individual or social benefits for each successful outcome.

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Table 3. Net profit or loss for service provider in hypothetical project to reduce teen pregnancy.

•
•

An evaluation that compares outcomes for the provider’s clients with those of a similar
group who did not participate in the provider’s program
A “rate card,” in which the provider is paid a specified amount for each client who achieves
a successful outcome. The payment rate is based on the government’s estimate of the cost
savings or on the individual or social benefits for each successful outcome.

EVALUATION
The surest way to measure a program’s success is to build a contemporaneous evaluation into the
program. The basic strategy underlying an evaluation is to compare the average outcomes of

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participants in the program (the “treatment group”) with the average outcomes of similar people
who do not participate—those who receive whatever services the government would ordinarily
provide (the “control” or “comparison” group). If the average outcomes of the treatment group are
better, there are standard techniques for assessing whether the difference is statistically significant
(rather than simply different by random chance). How much better the outcomes need to be for
what amount of payment is initially the government’s decision, and then the subject of negotiation
among the parties—issues that we have discussed above.
The gold standard for an evaluation of program outcomes is a randomized controlled trial (RCT),
in which potential clients of the program are randomly assigned either (1) to the program
(treatment group) or (2) to a control or comparison group that receives whatever services the
government would ordinarily provide―and the outcomes of the two groups are compared.
An RCT is called an experimental technique. Evaluation also can be done through quasiexperimental techniques, in which the comparison group is created by selecting people who seem
similar to those in the treatment group. The weakness of quasi-experimental techniques is that the
experimenter may miss some salient characteristics used to match the groups, whereas a properly
done RCT takes account of all of these characteristics. Another technique involves a comparison
with a similar population at an earlier time. In addition to the weaknesses just mentioned, a pre/post
evaluation may not account for changes in the external environment over time that would lead to
the apparent success (or failure) of the program. In the Santa Clara County mental health and
homelessness PFS projects, for example, perhaps changes in the economy, including the cost and
availability of housing, make it difficult to generalize from one period of time to another. These
questions must be considered one PFS project at a time 107
Evaluations are costly and time consuming, and there is ample potential for errors. 108 But when
done well, they not only provide an accurate basis for payment, but develop knowledge about a
program’s impact that can be useful beyond the particular project to others interested in achieving
good outcomes for similar populations.
Many of the PFS programs described in Part II determine success payments on the basis of
evaluations using experimental or quasi-experimental methods.109

107 Rather than discussing evaluation techniques at greater length here, we put a reference in a footnote. An excellent

(and free) book is Paul Gertler et al., Impact Evaluation in Practice (2nd ed. World Bank, 2016). Retrieved February
20, 2019, fromhttps://openknowledge.worldbank.org/handle/10986/25030.
108 A. Deaton & N. Cartwright (2016). Understanding and Misunderstanding Randomized Controlled Trials (No.

22595). Cambridge, MA: National Bureau of Economic Research. Retrieved February 12, 2019, from
http://www.nber.org/papers/w22595.pdf.
109 K. A. Walsh, R.TeKolste, B. Holston, & J. K. Roman. (2016). An Introduction to Evaluation Designs in Pay for

Success Projects. Washington, DC. Retrieved February 10, 2019, from

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RATE CARDS
In a number of PFS projects, the parties have based payments on outcomes alone, without evidence
of causality, or impact.110 Outcome rate cards are a prime example. Also known as benchmark
design, rate cards have been used in performance-oriented programs in the United Kingdom and
United States. With a rate card, the government payer defines:
•
•
•

the target group of beneficiaries
the outcomes it wishes to achieve
the price per outcome it is willing to pay.

Rate cards do not require any contemporary evaluation. Rather, they compare a program’s outcome
against a predetermined baseline or benchmark. Rate cards are simpler and less expensive to use,
and payment determinations can be made more quickly. They are less risky for service providers
and investors because they don’t require demonstrating that the intervention contributed to the
outcome. 111 Eliminating the requirement of attribution allows a PFS program to have multiple
service providers, each of which can work with the same target population as long as each has
identifiable clients.
But rate cards come with significant limitations as well. The absence of a comparison group limits
the government’s ability to determine whether the outcomes were caused by the intervention or by
other factors. To the extent the outcome would have occurred even in the absence of the program,
the government wastes its money. And whereas each experimental evaluation contributes
knowledge about the value of an intervention, rate cards make no such contribution.
Another potential risk connected with rate cards is that if service providers can independently
choose whom to serve, they might cherry-pick clients who are most likely to have successful
outcomes. One solution is to offer higher rates for services to populations that are harder to
serve. 112 Another is to assign participants randomly to service providers. (Even if a service

http://www.urban.org/sites/default/files/publication/83931/2000913-an-introduction-to-evaluation-designs-in-payfor-success-projects.pdf.
110 E. Gustafsson-Wright & S. Gardiner. (2015). Policy Recommendations for the Applications of Impact Bonds.

Washington, DC. Retrieved February 12, 2019, from https://www.brookings.edu/wpcontent/uploads/2016/07/SIB20Policy20Brief201web-1.pdf.
111 M. Eldridge. (May 23, 2016). How the U.K. Pays for Success. Retrieved June 27, 2017, from

http://pfs.urban.org/pay-success/pfs-perspectives/how-uk-pays-success.
112 J. Grossman & K. Tan. (January 12, 2016). What Can the Australian Job Services System Teach Us About Pay

for Success? Retrieved June 27, 2017, from marketplace; Social Finance. (2016a). Outcomes Rate Cards:
Frequently Asked Questions. Retrieved February 12, 2019, from
http://socialfinance.org/content/uploads/OutcomesRateCard_FAQ.pdf.

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provider is unable to cream the whole pool, however, it could still potentially identify those within
their assigned group and focus its efforts for the highest possible payout.)
Most PFS projects in the United States incorporate experimental evaluation methods, but rate cards
or their equivalents are increasingly being used:
•
•

•

Utah School Readiness Initiative, described above, in which payments are based on the
number of children not needing special education each year.
Santa Clara County Project Welcome Home, in which payments are based on the number
of months of continuous tenancy per participant. (An RCT companion study was used to
assess the program’s efficacy, but not for payment.) The Massachusetts Chronic Individual
Homelessness PFS project uses a similar payment scheme.
Santa Clara County Partners in Wellness Project, in which payments are based on reduction
in the use of emergency and inpatient psychiatric services by the people in the beneficiary
population compared to historic use. (As in the Santa Clara County homelessness project,
an RCT companion study was used to assess the program’s efficacy, but not for payment.)

As in any before/after evaluation, the more confident one can be that the external environment has
not changed in important ways, the more confidently one can rely on the prior benchmark without
the need for a contemporaneous evaluation.
In sum, rate cards can reduce the cost of PFS programs, but at the expense of learning whether a
program actually causes its intended outcomes. We imagine that rate cards are most valuable in
situations where there have already been robust evaluations of a program and social scientists are
reasonably confident in their generalizability. Even then, knowledge about the efficacy of
programs will depend on repeated experimental evaluation from time to time. In 2016, the
Corporation for National and Community Service awarded $1.44 million to Social Finance to
introduce outcome rate cards in the United States.113

113 Corporation for National and Community Service. (November 3, 2016). Federal Agency Announces $13 Million

in Funding to Support Pay for Success Projects. Retrieved June 27, 2017, from
https://www.nationalservice.gov/newsroom/press-releases/2016/federal-agency-announces-13-million-fundingsupport-pay-success.

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DATA AND ORGANIZATIONAL CHALLENGES TO AN OUTCOMESORIENTED APPROACH

THE GENERAL PROBLEM
In 1993, during the Clinton administration, Congress enacted the Government Performance and
Results Act (GPRA) with the goal of fostering effective performance management practices within
federal government agencies. Among other things, the GPRA required agencies to publish
strategic plans and annual performance plans and reports. As it turned out, however, few agencies
examined performance data or evaluation findings.114
Two decades later, the Obama administration sought to foster improved program outcomes
through the GPRA Modernization Act of 2010, which required agencies to set goals, including
goals for cross-agency collaborations, and to establish evaluation mechanisms to report the
performance and outcomes of each program and make revisions as needed. The Act recognized
the need for innovation and testing to discover better practices. 115
Despite improvements over these decades, many federal agencies still fall far short of developing
strategies and using data to achieve effective program outcomes. 116 With a few noteworthy
exceptions, state and local government agencies have done no better.
In his important article “Using Data to Make More Rapid Progress in Addressing Difficult
U.S. Social Problems,” Jeffrey Liebman, director of the Harvard Kennedy School’s Government
Performance Lab (GPL), uses the example of a program to reduce infant mortality to describe four
types of data analysis necessary for effective social interventions by government agencies:
•

The agency must analyze infant deaths and low-birth-weight babies to identify the entire
target population (rather than only those who show up at the agency’s front door) and
formulate hypotheses about policy interventions that could potentially ameliorate or solve
the problem.

114 Shelley Metzenbaum & Robert Shea. (2016). Performance Accountability, Evidence, and Improvement. PDF.

National Academy of Public Administration and Volcker Alliance Inc., October 2016, p. 4.
115 Ibid., (2016, pp. 5–7).
116 Ibid., (2016, p. 7).

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•

•
•

The agency must use data on risk levels and intervention cost effectiveness for specific
subpopulations to refer the right people to the right services (e.g., high- or low-intensity
home visiting; public health campaigns around nutrition, exercise, and healthy infant sleep;
drug treatment programs; and teen pregnancy prevention programs).
The agency must monitor the delivery of services in real time and collaborate with service
providers to minimize the portion of the target population that fails to receive the services.
The agency must periodically compare outcomes for people referred to different services
to determine how to allocate resources and adjust referral protocols going forward.

Liebman concludes that the main barriers to using data to improve government agencies’ outcomes
are the absence of leadership willing to undertake change based on data, lack of staff with the
expertise and capacity to lead data-driven projects, and lack of the software and hardware
infrastructure to manage data. These challenges are exacerbated by insular organizational cultures,
legal restrictions on sharing data, and non-interoperable databases.
This section reviews the barriers to collecting and using data to design, manage, and improve social
programs and suggests how they can be overcome. We should note that a number of the PFS
programs described in Part Two have been quite successful in this regard. Recall that Cuyahoga
County, Ohio, realized that the common beneficiaries of various social programs were not being
effectively served by disconnected government services and developed an integrated data system
as part of its program to address their problems.
The operations of Cuyahoga County’s agencies serving homeless families and families with
children placed in foster care had not previously been integrated to identify families who were
experiencing homelessness in either way. The Center on Urban Poverty and Community
Development at Case Western’s School of Applied Social Sciences used the ChildHood Integrated
Longitudinal Data System (CHILD), which connects data from 18 systems and stores more
than 500,000 records of children living in Cuyahoga County. 117 This integrated data system
enabled the PFS project to identify the beneficiary population, quantify the children’s time in foster
care, and design an intervention that met the specific needs of the children and parents.

CATEGORIES OF DATA
Government agencies providing social services need data to inform a program’s design and
development and to monitor and evaluate its implementation. Designing the program calls for
combining evidence about similar programs in other places with data about one’s own population.
Monitoring the program’s implementation requires data specific to the population being served.

117 Center on Urban Poverty and Community Development. (2019). “CHILD System.” Retrieved February 14, 2019,

from http://povertycenter.case.edu/data-systems/child-data-system/.

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Once a PFS contract is in place, both the government and the service provider need ongoing data
to monitor, improve, and ultimately evaluate performance and determine payments based on it.118
For our purposes, there are two important categories of data: administrative and survey data.
Administrative data is collected by agencies or their contractors in the ordinary course of
performing their work. To use familiar examples, a department of motor vehicles has data
concerning people who hold drivers’ licenses; a department of corrections has data on people who
are incarcerated; a school or college has data about enrolled students and their grades. These groups
may have various information about their clients or other stakeholders, such as their ages, certain
physical characteristics, social security numbers, and addresses. Some agencies are more
meticulous than others in ensuring the accuracy of administrative data. All things considered, the
more salient the data is to the agency’s function, the more likely it is to be accurate. Administrative
data have been vital to the evaluation of anti-recidivism, education, and other social programs.
Survey data is collected either for statistical purposes—in the original sense of statistics, meaning
information relevant to the state—or to gather information about particular programs. The
US Census is an example of the former, as is the European Union’s Eurostat database, which
includes data about population and social conditions, economics and finance, industry, trade, and
agriculture.119
The monitoring and evaluation of social programs often requires survey data that is collected
specifically for programmatic purposes. For example, in the case of Santa Clara County’s mental
health PFS program, whereas information about patients’ hospitalization is administrative, the
assessment of their physical and psychological well-being is based on surveys. One cannot
generalize about the relative validity and reliability of one form of data compared to the other.
Because the collection of administrative data is likely to be already included in an agency’s budget,
however, survey data often adds incremental costs to a project.
Whatever the nature of the data, PFS projects often require aggregating and analyzing data from
various sources. There are three barriers to doing this: (1) legal restrictions on sharing data, (2)
agencies’ siloed cultures, and (3) non-interoperable databases.
L EGAL RESTRICTIONS
Out of concern for clients’ privacy, regulations often prohibit agencies from sharing certain data
with other agencies, researchers, or non-governmental organizations. Some of these prohibitions
are embedded in long-standing statutes that have not been updated to reflect contemporary needs
and data-analytic techniques. Unclear regulations tend to be interpreted conservatively to disallow

118 Office of Management and Budget. (2016).
119 Eurostat. Retrieved November 7, 2019, from http://ec.europa.eu/eurostat.

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data sharing.120 The Family Educational Rights and Privacy Act (FERPA) has long vexed colleges,
governments, and researchers who need access to student records for research purposes. In the
absence of clear guidelines about how such data may permissibly be shared and used, most
organizations take a conservative approach. Nonetheless, many state laws and regulations permit
sharing specific government data among government entities and organizations contracting with
them.121
Researchers often need personally identifiable information to aggregate data from multiple
datasets. The individual information often can then be redacted to protect privacy. But in their
concern for privacy, many regulations prevent sharing information without considering the
possibility of redaction. 122 In general, when federal and state regulations permit confidential data
to be used for research, the researchers must describe how the data will be protected from any
unauthorized disclosure. In many cases the law requires a formal contract or interagency
agreement between the research institution and the agency. 123
Sharing health data is important for treating patients and for epidemiological purposes. The federal
Health Insurance Portability and Accountability Act (HIPAA), which governs confidentiality of
patients’ medical information, does not specify how medical information may be used and
disclosed by government health agencies. 124 The Department of Health and Human Services

120 Office of Management and Budget. (2016).
121 Several states, including Iowa, Minnesota, and California, identify organizations that are exempt from data

sharing restrictions by data user category or name. K. Poole & H. Springer. (2015). Balancing Confidentiality and
Access: Sharing Employment and Wage Data for Policy Analysis and Research. Center for Regional Economic
Competitiveness. Retrieved February 12, 2019, from http://www.lmiontheweb.org/download/2015-05/Report-_Data_Confidentiality_and_Sharing_-_CREC-LMI_Institute_-_May_2015.pdf.
122 National Research Council. (2001). Studies of Welfare Populations: Data Collection and Research Issues.

Washington, DC: The National Academies Press. Retrieved February 12, 2019, from
https://doi.org/10.17226/10206.
123 National Research Council. (2001).
124 Section 264 of the HIPAA provides that the Secretary of Health and Human Services shall submit to the Senate

and the House of Representatives recommendations on the standards for protection of privacy of individually
identifiable health information, addressing rights, procedures, and authorized uses and disclosures of such
information. Such legislation should have been enacted within 36 months after the enactment of the HIPAA. In its
absence, the Department of Health and Human Services published the Privacy Rule on December 28, 2000, but the
HIPAA provides that such regulation may not supersede a contrary provision of state law if the latter imposes
requirements, standards, or implementation procedures that are more stringent than the regulation itself. As a result,
state and local laws, as well as agencies’ policies, establish the procedures for the use, maintenance, and disclosure
of a patient’s disease information.

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Privacy Rule, published on December 28, 2000, provides that federal regulations may not
supersede more stringent requirements required by state laws.
State and local laws therefore are important in determining the procedures for the use,
maintenance, and disclosure of a patient’s disease information. For example, the health data of
patients in New York City is regulated by the New York State Public Health Law, the New York
State Sanitary Code, and the New York City Health Code. The resulting patchwork of regulations
can impede data sharing even among programs and government agencies in the same state. For
example, the New York State Public Health Law provided that HIV-related information could be
disclosed only through a written and signed authorization from the patient or for medical treatment
purposes. In 2010, the New York State legislature amended the Public Health Law to allow HIVrelated information to be used for additional purposes, including service delivery program needs.
New York City health departments developed the necessary infrastructure to share and integrate
public health data among health departments.125
S ILOED OPERATIONS AND LACK OF DATABASE I NTEROPERABILITY
Government agencies often operate in silos. Data collected from their targeted beneficiaries often
is not shared with other agencies and service providers even when permitted by regulations, 126 and
agencies often do not ask social service providers for data necessary to identify target populations,
measure outcomes, and manage operations. 127 Necessary capacities for useful data sharing
include128
•
•
•

The administrative infrastructure to manage data-access requests and develop and
implement data sharing agreements.
Data management and curation infrastructure to make the data useful for evidence-building
activities.
Information technology to meet operability and data security needs.

M. Rose Gasner, Jennifer Fuld, Ann Drobnik, & Jay K. Varma. (2014). American Journal of Public Health 104(6):
993–997. Published online June 2014. doi: 10.2105/AJPH.2013.301775. Retrieved February 14, 2019, from
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4062019/.
125 Id.
126 The Annie E. Casey Foundation. (2017). Improving Child and Family Service Through Integrated Data Systems.

Baltimore, MD. Retrieved February 15, 2019, from http://www.aecf.org/blog/improving-child-and-family-servicesthrough-integrated-data-systems/.
127 Harvard Kennedy School Government Performance Lab, Active Contract Management: How Governments Can

Collaborate More Effectively with Social Service Providers to Achieve Better Results. Retrieved January 30, 2019,
from https://govlab.hks.harvard.edu/files/siblab/files/acm_policy_brief.pdf.
128 The Office of Management and Budget. (2016).

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•
•
•

Infrastructure to ensure privacy and confidentiality.
Hardware and software for data analysis.
The technical capacity for analyzing the data gathered.

Even when the right data is collected, many government agencies lack staff capable of reviewing
data to identify best practices and drive operational or practice reforms and improvements.
A possible solution to some of these problems is to designate certain agencies as hubs to use the
infrastructure already in place for this purpose. 129 For example, the Census Bureau has the
technical and policy infrastructure necessary to oversee large, multilayered datasets and has
experience in providing access to researchers through the Federal Statistical Research Data
Centers.

ORGANIZATIONAL CHALLENGES, AND THE NEED FOR ACTIVE CONTRACT
MANAGEMENT
The Harvard Kennedy School’s Government Performance Lab (GPL) published a study assessing
how government agencies could collaborate more effectively with service providers to improve
outcomes for their clients.130 The study identified a passive stance toward contract management as
a major barrier. Contract management typically is performed by an agency’s back office, which
often focuses on invoicing and compliance rather than actively monitoring and working with a
service provider to achieve the expected results. Not surprisingly, service providers rarely receive
information comparing their performance to that of other providers, thus limiting opportunities to
identify and replicate best practices.
To overcome these organizational problems, the GPL proposes a set of strategies termed “active
contract management,” which call for changes in the internal organization, culture, and operation
of both government agencies and service providers, and changes in their relationships with each
other. Under active contract management, the parties select appropriate metrics and indicators for
each program, share information and data through a joint management information system with a
common database, and elevate the status of contract activities from back-office to senior staff
responsible for working with service providers to improve outcomes.

129 Id.

Harvard Kennedy School Government Performance Lab. (2019). Retrieved November Active Contract
Management: How Governments Can Collaborate More Effectively with Social Service Providers to Achieve Better
Results. Retrieved January 30, 2019, from https://govlab.hks.harvard.edu/files/siblab/files/acm_policy_brief.pdf.
130

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THE ROLE OF INTERMEDIARIES AND TECHNICAL ASSISTANCE PROVIDERS
The complexities of the PFS process, the number of stakeholders, and the necessary parties’
frequent lack of requisite expertise have created a demand for third party organizations that provide
technical assistance to governments and other stakeholders and coordinate their work. These
intermediaries play an important role in three phases of a PFS program.
In an exploratory phase, the intermediary helps a government
•
•
•

•
•
•

Identify intended social outcomes for a particular target population.
Identify possible interventions to achieve the outcomes.
Assess the feasibility of a project, i.e., the ability, willingness, and commitment of
government agencies, service providers, and other stakeholders to participate successfully
in the project.
Assess the suitability and possibilities of PFS financing.
Write and issue requests for proposals.
Select a service provider.

If the potential project seems promising, it proceeds to the development phase, where the
intermediary helps
•
•
•
•
•
•
•
•

Determine social and financial outcomes and set specific project goals.
Define how to measure the outcomes.
Develop a payment model and a contract structure.
Develop a work plan and design the project’s financial structure.
Estimate the total funding needed for the project and assess its financing needs
Identify funders and engage in fundraising.
Negotiate contracts with the stakeholders.
Engage an independent evaluator to measure the outcomes and determine payment.

In the third phase, once the project is launched, the intermediary may assume an ongoing role in
project management and oversight. The intermediary
•
•
•
•

Monitors progress.
Ensures that the project is on track and recommends necessary corrective measures.
Ensures that evaluation findings and other information are shared among the stakeholders.
Prvides accounting and analytic support.

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Throughout the second and third phases, the intermediary mediates among the stakeholders
involved, who often have differing interests.131
The preceding delineation of the intermediary’s functions is based on self-descriptions of two
leading intermediaries in the United States: Third Sector and Social Finance.
Third Sector, based in Boston, is a nonprofit advisory firm founded in 2010 by George Overholser
and Caroline Whistler. Third Sector’s stated mission is to “accelerate the transition to a
performance-driven social sector” by “collaborating deeply with communities to re-write how they
contract for social services, re-aligning vast amounts of public resources to move the needle on
social problems.”132 Social Finance, also based in Boston, is a nonprofit organization that supports
PFS financing in the United States. It was founded in 2011 by David Blood, Sir Ronald Cohen,
and Tracy Palandjian, mirroring its British sister organization, Social Finance UK, which
pioneered PFS financing in England. Social Finance’s mission is to “mobiliz[e] capital to drive
social progress.”133
Although Third Sector and Social Finance engage in similar activities, Third Sector acts in an
advisory capacity, typically at the behest of the government entity that will ultimately pay for
performance, whereas Social Finance assumes direct responsibility for managing the PFS project
before and after its launch.
There is one prominent global intermediary outside the United States. Instiglio is a nonprofit
organization founded in Bogota, Colombia, in 2012 by three Kennedy School alumni, Michael
Belinsky, Michael Eddy, and Avnish Gungadurdoss. Its goal is to alleviate poverty in developing
countries by using instruments that tie funding to measurable results and impact. Since its creation,
Instiglio has launched PFS projects in the Americas, Asia, Africa, and the Middle East. Its target
issues include education, conservation, workforce development, and market building. 134
These three organizations are almost exclusively focused on PFS or (to use Instiglio’s term, which
is common outside the U.S.) results-based financing (RBF). Several other organizations with
broader mandates have become more active in PFS.
The Government Performance Lab (GPL) at Harvard’s Kennedy School of Government is the
successor to the Kennedy School’s SIB Lab, founded in 2011. Its goal is to improve the

131 Kodali, Grossman, & Overholser. (2015).
132 Third Sector Capital Partners. Mission and Values. Retrieved February 15, 2019, from

https://www.thirdsectorcap.org/mission/
133 Social Finance webpage. Retrieved February 15, 2019, from http://socialfinance.org/.
134 Instiglio webpage. Retrieved February 15, 2019, from http://www.instiglio.org/en/.

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effectiveness of state and local government funding of social projects by promoting an outcomes
orientation and improved data management technology.135 The GPL holds competitions in which
government groups are invited to submit applications to receive pro bono technical assistance to
implement PFS and other projects. Winners receive the support of Government Innovation
Fellows, who serve as their advisors on the project for one year. The GPL has helped numerous
government agencies implement active performance management (described in the preceding
section).136 In addition to providing technical assistance, GPL sometimes acts as an intermediary
in PFS programs, providing services similar to those of Social Finance and Third Sector.
The Nonprofit Finance Fund, founded in 1980 by Clara Miller, helps organizations achieve their
social goals by providing a range of advisory and financing services to nonprofits and funders. 137
NFF, whose main activities involve raising capital from banks, foundations, and governments to
make loans to nonprofits, has expanded its work to provide technical assistance for PFS projects.
Since 2014, the Sorenson Impact Center at the University of Utah David Eccles School of Business
has provided technical assistance and PFS fellows to numerous government agencies and
organizations.138
Several other technical assistance providers focus on particular subject areas. For example, the
Institute for Child Success offers technical assistance to prospective projects in early childhood
health, welfare, and education 139; the Green and Healthy Homes Initiative helps develop projects
that address asthma 140 ; and the Corporation for Supportive Housing focuses on homelessness
(CSH, 2017).141

135 Harvard Kennedy School Government Performance Lab webpage. Retrieved February 15, 2019, from

https://govlab.hks.harvard.edu/home.
136 Harvard Kennedy School Government Performance Lab. Harvard Kennedy School Government Performance

Lab. https://govlab.hks.harvard.edu/projects, Retrieved March 7, 2019.
137 Nonprofit Finance Fund webpage. Retrieved February 14, 2019, from http://www.nonprofitfinancefund.org.
138 https://sorensonimpact.com/
139 Institute for Child Success. (June 22, 2017). Pay for Success Technical Assistance Competition. Retrieved July

27, 2017, from http://pfs.instituteforchildsuccess.org/ta_competition/.
140 Green and Healthy Homes Initiative. (2017). Pay for Success. Retrieved July 27, 2017, from

http://www.greenandhealthyhomes.org/get-help/pay-success.
141 Massachusetts Housing & Shelter Alliance, Corporation for Supportive Housing, & United Way of

Massachusetts Bay and Merrimack Valley. (2017).

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FUNDING AND APPROPRIATIONS
S TATE AND L OCAL BUDGETS
Under a PFS project, the government commits to making payments a number of years later. The
other parties need assurance that the government will actually pay. The committed funds can come
either from a pre-existing budget authorization or from a new funding stream created for the
specific purpose of PFS. Among the existing PFS projects in the United States, a few have been
funded through carve-outs from existing budgets—essentially in the same way that governments
commit to multi-year vendor relationshieps—and the majority from special state or local
legislation.142
As an example of the funding through carve-outs from existing budget authorizations, the Board
of Supervisors of Santa Clara County simply allocated the necessary funds from its regular budget
to support the Project Welcome Home permanent supportive housing project. In a “nonbinding
Memorandum of Understanding” signed by all of the main stakeholders, the county agreed to
include up to $2 million in success payments during the first year of the project and to engage in a
six-year PFS contract with the service provider, Abode.143
Special legislation has the advantage of assuring that the contract is within the government’s
authority and creating a formal guarantee of repayment if the terms of the contract are met. An
analysis by Third Sector and the law firm Orrick, Herrington & Sutcliffe notes that “while states
may enter into PFS contracts without specific legislative authorization, the lack of legislative
support may limit the ability to attract funders and to corral relevant state actors.”144
In July 2012, Massachusetts became the first state to enact special legislation of this sort. “An Act
Establishing the Social Innovation Financing Trust Fund” created a financial trust “for the purpose
of funding contracts to improve outcomes and lower costs for contracted government services,
hereinafter referred to as ‘pay for success contracts.’”145 The law conditioned the payments on the
achievement of outcomes based on evaluation and created a sinking fund that required regular

142 P. Teicher, J. Grossman, & M. Chong. (2016). Authorizing Pay for Success Projects: A Legislative Review and

Model Pay for Success Legislation. Retrieved February 20, 2019, from http://www.thirdsectorcap.org/wpcontent/uploads/2016/03/Authorizing-Pay-for-Success-Projects-Legislative-Review.pdf.
143

http://sccgov.iqm2.com/Citizens/Detail_LegiFile.aspx?Frame=&MeetingID=6059&MediaPosition=&ID=77051&C
ssClass=
144 http://www.thirdsectorcap.org/wp-content/uploads/2016/03/Authorizing-Pay-for-Success-Projects-Legislative-

Review.pdf
145 https://malegislature.gov/Laws/GeneralLaws/PartI/TitleII/Chapter10/Section35VV

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appropriations. Since Massachusetts’s lead, eleven jurisdictions have enacted similar PFS laws.
Some, like Massachusetts, authorize contracting for a broad range of social services. Others are
limited to particular social issues, such as criminal justice or pre-kindergarten or family support
programs.

Many of the special PFS laws condition payment on cost savings. For example, the Arkansas “Pay
for Success Act” requires that any PFS contract “will result in specific performance improvements
and budgetary savings if the performance targets are achieved.”146 Texas HB 3014 requires that
“the state agency and the Legislative Budget Board certify that the proposed contract is expected
to result in significant performance improvements and significant budgetary savings for the state
agency or agencies party to the contract if the performance targets are achieved.” 147 Cuyahoga
County, Ohio’s, ordinance establishes a fund “for the purpose of funding contracts to improve
outcomes and lower costs.” 148 These authorizations would not encompass a PFS program that
improved outcomes for its beneficiaries without creating budgetary savings.
F EDERAL AND PHILANTHROPIC S UPPORT
Several federal programs have supplemented a state or local government’s own budget to pay for
a successful PFS project:
•

•

•

The White House Social Innovation Fund (SIF), a program of the Corporation for National
and Community Service, supported community solutions through its SIF classic and SIF
Pay for Success programs. $352 million in federal investments have been matched by
$707 million in state and private sector commitments.149
The Department of Housing and Urban Development issued an RFP with funding from the
Department of Justice for uses of PFS to help previously incarcerated people obtain
permanent supportive housing.
The Department of Labor Workforce Innovation Fund awarded $24 million to support the
anti-recidivism projects in New York State and Massachusetts. A stakeholder interviewed
by the GAO said that the DOL grant “catalyzed the New York project, allowing them to

146 J. SB 427: Criminal Justice Reform Act of 2015, Pub. L. No. SB472 (2015). Retrieved February 12, 2019, from

https://capitol.texas.gov/tlodocs/84R/billtext/html/HB03014F.HTM
147 https://capitol.texas.gov/tlodocs/84R/analysis/html/HB03014;
148 https://payforsuccess.org/resource/county-council-cuyahoga-county-ohio-ordinance-no-o2014-0018.
149 Corporation for National and Community Service. Social Innovation Fund. Retrieved February 12, 2019, from

https://www.nationalservice.gov/programs/social-innovation-fund.

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•

fund outcome payments for the first cohort of 1,000 participants.” 150 The DOL funding
enabled the Massachusetts officials to increase the number of total participants.
The South Carolina Nurse-Family Partnership Pay for Success Project is being funded
significantly by Medicaid waivers.

In some projects, government funds have been supplemented by philanthropic funding. In the fiveyear Utah High Quality Preschool Program, United Way of Salt Lake County, paid for the first
cohort of children through a grant.
The federal government and other funders have provided resources for technical assistance to help
state and local governments navigate the PFS process:
•

In addition to subsidizing PFS payments, the White House Social Innovation Fund (SIF)
makes grants to intermediaries to provide technical assistance to state and local government
agencies. 151 For example, SIF awarded the Institute of Child Success (ICS)
$782,412 over two years to make sub-grants for youth development projects, which
included technical assistance for the City of Evansville, Indiana, to assess whether PFS
could expand access to quality preschool education; technical assistance to help the
Children and Families Commission of Orange County, California, determine whether PFS
financing could be used to reduce abuse and neglect for at-risk children and families; and
technical assistance to the Sonoma County, California, Department of Health Services to
assess the feasibility of this largely rural county’s initiating PFS projects for universal PreK and an expansion of the Nurse-Family Partnership.152

150 U.S. GAO. (2015, p. 59).
151 Corporation for National & Community Service. (2017).
152 Corporation for National and Community Service. (April 16, 2016). Grantee Information: Institute for Child

Success. Retrieved August 16, 2016, from https://www.nationalservice.gov/programs/social-innovation-fund/paysuccess/institute-child-success. More broadly, ICS and similar organizations have assisted political and community
leaders in spearheading PFS projects. For example, with the support of the Duke Endowment and the Doris Duke
Charitable Foundation, ICS convened a working group of government officials and funders to help “provide the
political leadership needed for a new approach.” M. Golden. (2014). Climbing the Pay for Success Learning Curve:
How a Working Group Helped South Carolina Understand and Prepare for PFS Financing. Greenville, SC.
Retrieved February 20, 2019, from https://www.instituteforchildsuccess.org/publication/climbing-pay-successlearning-curve-working-group-helped-south-carolina-understand-prepare-pfs-financing/
As part of the SIF’s sub-grantee program, the University of Utah Policy Innovation Lab awards governments
$75,000 toward the hiring of a full-time staff member. Corporation for National and Community Service. (April 20,
2016). Grantee Information: Sorenson Impact Center at the University of Utah. Retrieved June 29, 2017, from
https://www.nationalservice.gov/programs/social-innovation-fund/pay-success/university-utah-policy-innovationlab.

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•

•

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The Corporation for National and Community Service Social Innovation Fund awarded
$12 million to fund intermediaries to provide technical assistance to local PFS projects. As
of January 2017, the intermediaries had made awards to a total of 48 state and local
governments and nonprofit organizations.
In 2016, the US Department of Education announced its first PFS awards for career and
technical education and dual language programs for early learners. These include a
$2 million grant to Social Finance, in partnership with Jobs for the Future, and a contract
with the American Institutes for Research to determine how to use Pay for Success
strategies for English learning.153
Most recently, the Social Impact Partnerships to Pay for Results Act (SIPPRA), a provision
of the Bipartisan Budget Act of 2018, authorizes $100 million for outcome payments,
evaluation costs, and select feasibility studies for state and local governments
implementing programs that produce defined and rigorously measured outcomes and cost
savings.154

SOCIAL INNOVATION FINANCING
In a typical fee-for-service arrangement, a government agency contracts directly with a service
provider, paying the organization more or less contemporaneously for services billed. A PFS
program complicates this arrangement in several ways. First, it is far from certain that the program
will actually achieve its agreed outcomes, thereby entitling the service provider to receive success
payments. Second, determining outcomes is inevitably more complicated than assessing whether
services were delivered. Third, measurable outcomes—for example, an ex-offender’s having
stable employment rather than returning to prison—often lag the provision of services by years.
In theory, a service provider might deal with the funding gap through its own reserves or by
borrowing money from a bank. But the delays and uncertainties just mentioned are likely to strain
an organization’s resources and make it difficult to obtain a conventional loan.
This problem can be solved in three ways. First, the government may pay some portion of the
organization’s expenses under a conventional fee-for-services arrangement, withholding the
remainder for proof of outcomes or paying a bonus for achieving specified outcomes. The

153 The White House Office of the Press Secretary. (October 11, 2016). Fact Sheet: New Commitments Announced

in Support of the My Brother’s Keeper Initiative at ESPN Town Hall with President Obama at North Carolina A&T
State University. Retrieved June 29, 2017, from https://obamawhitehouse.archives.gov/the-pressoffice/2016/10/11/fact-sheet-new-commitments-announced-support-my-brothers-keeper.
154 https://pfs.urban.org/get-started/issue-areas/content/social-impact-partnerships-pay-results-act-sippra;

https://home.treasury.gov/system/files/226/SIPPRA-NOFA-Feb-22-2019-FINAL.pdf.

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provisions for payment for job readiness and job placement in some recidivism contracts can be
seen as compromises with a pure PFS program to provide the service provider with working
capital.
Second, the government may pay the full amount in advance, but try to “claw back” as much as it
can if the agreed outcomes are not achieved. Although clawbacks are theoretically possible, they
are generally impracticable: the government may suffer reputational and political damage by going
after a service provider who, in any event, may not have recoverable assets.
Third, the project may attract social innovation financing—typically a blend of philanthropic and
commercial funding by third parties who front the necessary capital. The government commits to
repay the loans with interest, to the extent that the service provider achieves the agreed outcomes.
Under social innovation financing, it is the lender, rather than the service provider, that gets paid
for the service provider’s success. Although the service provider may have less financial incentive
to produce outcomes, its mission, reputation, and long-term interest in continuing the program
create strong safeguards against slacking. Neither the literature nor our private conversations with
stakeholders hint at cases of this sort of strategic behavior.
Under social innovation financing, a typical capital stack for a PFS program comprises.
•
•

•

Loans by commercial lenders, usually at the lower end of risk-adjusted market rates.
Below-market loans from foundations (typically made through program-related
Investments) or from high net worth individuals, which are repaid either to the donor or
to a revolving fund for disbursement to other PFS programs.
Pure grants from foundations or high net worth individuals.

COMMERCIAL LENDERS
Commercial investors may have a mix of motivations for investing in a PFS project. For banks
such as Goldman Sachs and Bank of America Merrill Lynch, which have been among the most
frequent commercial lenders, investments may
•
•
•
•
•

Provide an appropriate risk-adjusted return.
Make an intrinsically valuable social contribution.
Fulfill obligations under the Community Reinvestment Act (CRA), which requires banks.
to meet the credit needs of the communities they serve.
Burnish their reputations.
Offer a service to high net worth clients who wish to make social investments.

With respect to the last of these, Bank of America Merrill Lynch raised $13.5 million through a
private placement offering for New York State’s CEO recidivism project. Andy Sieg, head of the
bank’s Global Wealth and Retirement Solutions, noted,

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One of the most pronounced trends among our clients is for their investments to not
only earn a return but also to help drive social change in their communities and in
society. We’re unlocking the potential for this type of investing, enabling clients to
direct capital to programs and organizations proven to produce positive outcomes,
and taking an important step toward a scalable new marketplace.155
Banks have considerable experience in evaluating potential borrowers and calculating risks and
returns. Investments in PFS programs are quite different from the mainstream of banks’ lending,
however. When a bank considers an ordinary loan, it analyzes the company’s organizational health
and balance sheet and considers market conditions that could affect the company’s bottom line
and hence its ability to repay the loan. The bank has a standard vetting process based on decades
of loans to companies of similar size, age, and industry. This knowledge keeps the transaction
costs relatively low and the estimated risk and return within a small margin of error.
In contrast, when considering a PFS contract, the bank must estimate the likelihood of success by
examining the service provider’s effectiveness. It must review literature on the subject and
determine whether the targets that trigger success payments are realistic for the service provider
to achieve. The interest rate on most PFS loans is at the low end of commercial returns; 5 percent
is typical. There are seven principal risk factors for a commercial lender:
•
•
•
•
•
•

PFS lenders are not repaid unless the service provider achieves an agreed target defined in
the contract.156
The lender must accurately predict whether the intervention will achieve the target.
Achieving the target depends on the service provider’s effectiveness in fulfilling its
mission, as well as external factors that could impede success.
Except where payments are based on a rate card, the lender’s determination is based on an
evaluation plan that is subject to an intrinsic margin of error as well as human error.
Repayments are capped at a specified success level.
Repayments depend on the government’s willingness to follow through on a commitment
often made a number of years earlier by a different administration. (Not all PFS projects
have ironclad protection against the risk of a government’s not appropriating the funds.157)

155 Bank of America Newsroom. (December 30, 2013). Bank of America Merrill Lynch Introduces Innovative Pay-

for-Success Program in Partnership With New York State and Social Finance Inc. Retrieved September 6, 2016,
from http://newsroom.bankofamerica.com/press-releases/global-wealth-and-investment-management/bank-americamerrill-lynch-introduces-innovat.
156 For example, MAJJ requires a 40% reduction in days of incarceration for success

payments.https://www.thirdsectorcap.org/wp-content/uploads/2015/02/TSCP_MAJJ-PFS-Project-Brief.pdf. .
157 Massachusetts is unique for establishing a social innovation trust fund with full backing by the Commonwealth,

which applied to MAJJ. D. Archer-Rosenthal. (2016). Pay for Success : The First Generation.

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•

The bank has no easy means of protecting against the government’s default.158

Commercial lenders can mitigate their risk by negotiating a low bar for performance. In the Utah
preschool program, for example, a low bar led to incredibly high success rates. But too low a bar
defeats the purpose of PFS and creates a reputational risk for the lender.
Somewhat akin to banks, Community Development Financial Institutions (CDFIs) are federally
regulated, mission-driven, private financial institutions that create economic opportunity by
providing financial services to low- and moderate-income individuals and communities.159 CDFIs
have traditionally invested in capital projects, such as affordable housing and community facilities,
but they can also advance their mission through investments in PFS projects.160 Their experience
working on complex, multi-party deals across local governments, funders, and nonprofits positions
CDFIs well to participate in PFS deals. One national CDFI, Reinvestment Fund, is a senior lender
in PFS projects in Cuyahoga County, Ohio, and Santa Clara County, California. Reinvestment
Fund has contributed both its expertise and funds to these projects.161
PHILANTHROPIES
Foundations and individual philanthropists are motivated by the desire to achieve particular social
objectives consistent with their missions or to serve their local communities. In a few cases— the
Laura and John Arnold Foundation (LJAF) is the most notable example—the philanthropic funder
wishes to advance the practice of evidence-based interventions. Foundations can contribute to a
PFS program’s financing in various ways. They can

158 As mentioned above, foundations have guaranteed a portion of the loans in several PFS programs, but this is not

typical.
159 Office of the Comptroller of the Currency. (December 29, 2010). Community Development Financial Institution

(CDFI) and Community Development (CD) Bank Resource Directory. Retrieved July 2, 2017, from
https://www.occ.gov/topics/community-affairs/resource-directories/cd-bank-and-financial-institution/index-cdbank-and-financial-institution.html.
160 S. Godeke & L. Resner. (2012). Building a Healthy & Sustainable Social Impact Bond Market: The Investor

Landscape. Retrieved February 12, 2019, from https://www.missioninvestors.org/system/files/tools/social-impactbond-investor-landscape-godeke-consulting-dec-2012.pdf.
161 Another CDFI IFF is serving as an intermediary in Chicago’s early childhood education PFS program. IFF

receives the loans from commercial and philanthropic investors and in turn disburses them to Chicago Public
Schools, the service provider. It will also receive success payments from the City of Chicago and disburse them to
investors. Federal Reserve Bank of St. Louis. (September 1, 2015). Engaging CDFIs in Pay for Success, Andy
Rachlin (The Reinvestment Fund) and Joe Schmidt (IFF). 8 From the Eighth Podcast. Retrieved February 20,
2019,from https://www.stlouisfed.org/community-development/multimedia/8-from-the-eighth/engaging-cdfis-inpay-for-success.

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•
•
•

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Make outright grants. In this case, the success or failure of the PFS program has no financial
consequences.
Make so-called recoverable grants that mimic loans, so that any success payments will be
ploughed back into this or other PFS programs.
Make below market-rate loans in the form of program-related investments (PRIs), often as
subordinate lenders who will be repaid after commercial lenders.
Guarantee the loans of commercial investors with a commitment to backstop investors’
losses up to an agreed amount if the program does not achieve its objectives.

For example, LJAF made grants to support the Massachusetts Juvenile Justice project and Santa
Clara County’s Project Welcome Home, and it made a PRI a junior investor in Denver’s Housing
to Health Initiative. Together with the Robin Hood Foundation, LJAF participated as a subordinate
investor in Bank of America Merrill Lynch’s offering for the New York State recidivism program.
The Kresge Foundation made a $1.5 million subordinate loan for the Massachusetts recidivism
project. Depending on the project’s success, it will receive principal, 2% annual interest, and a
success payment of $300,000. The Kresge Foundation also made a $300,000 grant directly to
Roca, the service provider, to support program implementation.
Bloomberg Philanthropies’ loan guarantee in the New York City recidivism project mitigated most
of Goldman Sachs’s risk as a commercial investor. The project provided an opportunity to advance
the foundation’s social mission―in this case, to increase support for the Mayor’s Young Men’s
Initiative for the advancement of young African American and Hispanic men. 162 As it turned out,
the project was terminated and Bloomberg Philanthropies paid Goldman Sachs $7.2 million,
or 75 percent, of Goldman’s loan.
The internal decision-making process of a foundation considering funding PFS projects is more
complex than for typical grant-making. The substance of a PFS project may be familiar to a
foundation with experience in making, monitoring, and evaluating grants to social service
providers. But grants are typically made in situations where no private parties stand to benefit from
the foundation’s funding. In contrast, grants for PFS projects provide a base of support necessary
to attract commercial investors. A successful project, which yields a profit for a bank, will be a
total financial loss―as grants always are―for the foundation. Especially when the bar for success
is low―as the press claimed it to be for the Utah early childhood initiative―it may appear that
the foundation is inappropriately subsidizing a private investor. 163

162 J. Hughes & J. Scherer. (2014, p. 34). Foundations for Social Impact Bonds: How and Why Philanthropy Is

Catalyzing the Development of a New Market. Boston, MA.
http://socialfinance.org/content/uploads/2015/10/Foundation-for-Social-Impact-Bonds-2014.pdf.
163 N. Popper. (November 3, 2015). Success Metrics Questioned in School Program Funded by Goldman. New York

Times. Retrieved February 9, 2019, from https://www.nytimes.com/2015/11/04/business/dealbook/did-goldman-

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The difficult question for a foundation is how large a subsidy, and on what terms, is necessary to
attract essential commercial capital. At stake are the opportunity costs of the foundation’s grant
funds, its reputation, and conceivably its compliance with IRS regulations prohibiting using
charitable funds for private benefit.
In addition to, or instead of, making a grant, a foundation may make a program-related investment
(PRI) in a PFS program. PRIs almost inevitably expect lower than risk-adjusted market returns,
and foundations typically are junior lenders, who receive repayments only after the commercial
lenders. A PRI may also be used to guarantee a commercial loan; Bloomberg Philanthropies
guaranteed Goldman Sachs’s loan in the New York City recidivism program. A PRI offers a
foundation more flexibility than a grant to calibrate the size and terms of a subsidy. Making a PRI
is considerably more complicated than making a grant and typically requires the input of staff with
investment and legal as well as substantive program expertise. 164
THE CAPITAL S TACK
Investments and grants come together in different ways in different projects. The following chart
shows the capital stacks for the Massachusetts and New York State recidivism projects and the
Denver and Santa Clara County homelessness projects.

make-the-grade.html. The first year’s results indicated that the project helped 99 percent of children being tracked
avoid special education. Researchers believed that a much lower reduction would have been more realistic.
164 For this reason, among others, only a small fraction of staffed foundations in the United States make PRIs. For an

example of the PRI risk assessment and accountability processes, see P. Brest. (2016). “Investing for Impact with

Program-Related Investments,” Stanford Social Innovation Review, 14(3), pp. 24–27. Retrieved February 12,
2019, from http://ssir.org/articles/entry/investing_for_impact_with_program_related_investments.

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Investment Sources, Repayment Potential
SIB Funding, $M

Max Repayment Allowed

$30

Deferred Fees
$25

Philanthropic Grants

$20

Junior Investment

$15

Senior Investment

$10
$5
$0
MAJJ

CEO

Housing to Health

Project Welcome Home

Table 4. Repayment types and schedule
Sources: (MAJJ Contract, 2014, p. 12; Appendix D-3-4; Appendix H-2-4, H-9-10, H-16, Denver PFS
Contract, 2016, pp. 10–12, 14, 46–47, Appendix C1; State of New York et al., 2014, pp. 5, 15, 17–18; The
County of Santa Clara California Office of the County Executive, 2015, pp. 10, 30–32).

The typical order of repayment in these programs is
•
•
•
•
•

Loan interest
Senior lender principal
Junior lender principal
Deferred service fees
Grant recycling

Upon certification that success payments are due, the government transfers funds into a project
account managed by an intermediary (often a special purpose vehicle), which then disburses to
lenders in accordance with an agreed schedule.
The financing structures of the programs differ. The Massachusetts anti-recidivism program has a
senior commercial investor, along with foundations serving as junior investors and making grants.
The capital stack consists of $6 million in recyclable grants from the Laura and John Arnold
Foundation, New Profit, Inc., and the Boston Foundation; $3 million as junior investments by the
Kresge Foundation and Living Cities; and the $9 million senior investment from Goldman Sachs.

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Quite unusually, the service provider and intermediary have also postponed some of their fees. 165
New York State’s anti-recidivism program has only a senior investor—a forty-member investment
group within the bank, composed of individuals, foundations, and the bank. It also has a small loan
guarantee.166
Santa Clara County’s Project Welcome Home has more subordinate than senior funding. Housing
to Health in Denver, Colorado, has two tranches of investors. The senior investors receive
repayments annually, and the junior investors will be repaid at the end of the project.
The timing of repayments and caps on the repayments differ. Because of the inevitable time delay
in evaluating the success of a recidivism project, success payments typically cannot begin until a
number of years after the initial drawdown. The Massachusetts program has four repayment
periods, all toward the end of the project—at quarters 18, 19, 21, and 23. New York State’s
program has only two periods, the first after year 4 and the second after year 5.5. The Denver
Housing to Health project has the simplest plan: repayment will be made only at the end of the
project.
I NTRINSIC PROJECT COSTS AND TRANSACTION COSTS
PFS projects are complex and costly in two ways. One set of costs―those involving designing
evidence-informed interventions, identifying appropriate metrics, collecting and analyzing data
for monitoring and evaluation, and active performance management―is intrinsic to every
outcomes-based approach to providing social services. These costs are likely to decrease to some
extent as practices evolve and the field gains knowledge and experience, especially if some kinds
of interventions become standardized.
The other costs are the transaction costs involved in putting the deals together. The complexities of the
overall process include
•
•
•
•

Obtaining the government’s budgetary allocations and binding commitment to make payments a
number of years in the future
Collaboration among government agencies and between governments and service providers in
sharing data and in implementation
Negotiating the metrics and other criteria on which success payments will be made
Providing the service delivery organization with working capital

165 Although this was done by Roca and Third Sector Capital Partners in the MAJJ project, it is atypical and perhaps

mostly symbolic; it is unrealistic to expect these organizations to forgo the working capital they need to implement
the project. See S. Kodali, J. Grossman, & G. Overholser. (2014). The Massachusetts Juvenile Justice PFS Initiative
Project Brief. Retrieved February 10, 2019, from http://www.thirdsectorcap.org/wpcontent/uploads/2015/02/TSCP_MAJJ-PFS-Project-Brief.pdf.
166 State of New York, Center for Employment Opportunities, & Social Finance. (2014).

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Negotiating the government’s, service providers’, and investors’ various interests, risk tolerances,
and desires for financial returns.

To elaborate on the last of these:
•
•
•

•

•

Government payers want to ensure that they pay only for good social outcomes or actual cost
savings.
Service providers need adequate working capital and want to ensure success: achieving social
outcomes with reasonably attainable targets.
Philanthropic funders wish to achieve social outcomes commensurate with the amounts granted or
sacrificed through below-market PRIs. They want to provide enough capital to attract commercial
investors to the project, but not to bestow private benefits on them.
Commercial investors, no matter what their interest in social outcomes may be, expect to ensure a
market financial return. They prefer seniority in the repayment structure, a payment guarantee, a
low success target, and payments sooner rather than later.
Intermediaries want to ensure adequate compensation for their facilitation of the program.

Here too, solutions may lie in standardization among projects with similar interventions, perhaps through
templates that can be used for various parts of the contract. So far, the market has been too small and too
varied to develop a standard approach.

TERMINATION OF THE PROJECT
In addition to negotiation over these other matters, the parties will wish to specify the terms under which a
project can be terminated before its completion. The most common contractual grounds for termination are
unanticipated changes in the project’s implementation or in external circumstances that render successful
completion infeasible. New York City’s Riker’s Island recidivism project was terminated for both reasons.
The homelessness PFS projects have clauses to permit early termination in the event of an insufficient
supply of affordable housing units. Each party wants to come out of an early termination with its interests
as well-protected as possible.
Termination upon a PFS program’s success may also present problems for some stakeholders. The
government may decide to run the program itself, building on the knowledge gained from the service
provider’s work. But this decision deprives the provider of the opportunity to continue the project. Or, as
in the case of the UK Peterborough prison project, the government may continue to outsource the program,
paying the service provider directly without the complex financing machinery of social innovation
financing. Although direct payment would please both the service provider and its philanthropic funders, it
might deprive commercial investors of long-term opportunities.
Even if the project continues, the government may press to reduce the payment terms because the success
of the first program reduces the risks of failure. In any event, because of possible differences in the target
populations and external circumstances, the benefits and costs of the continued program may be different
from the original one.

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CONCLUSION
Pay for success programs have seen impressive growth since the pioneering UK Peterborough program
in 2010. At the end of 2018, roughly 100 PFS projects are in progress around the world. If evidenceinformed, outcome-oriented provision of social services is so promising, why has adoption been so meager?
Of course, it has been less than a decade—still early days. But the projects undertaken to date reveal barriers
created by the competing interests of the many parties involved, the difficulties of coordinating activities
among the parties, the costs of gathering and evaluating data, and the complexities of financing.
At the beginning of this handbook, we mentioned questions that a government agency should ask about
these sorts of issues before beginning to pursue a PFS program. Here we mention some other concerns as
well. Some are intrinsic to the practice:
•

•
•
•
•

Though we think that Kasturi Rangan and Lisa Chase exaggerate when they assert that “many
social interventions simply defy the kind of impact measurement and linkage to financial savings
that the PFS structure demands,”167 measurement certainly can be complex and sometimes more
costly than justified by its benefits.
PFS favors relatively large and established providers over smaller and newer community-based
organizations.
PFS entails directing funds toward projects that are quite likely to work, not risking capital to
explore potential new ideas and fund new nonprofit entrants.168
PFS programs may lead to the privatization of services that some believe should be provided by
governments.
PFS doesn’t come to grips with systemic causes of poverty, discrimination, and other forms of
inequality.

Some of these concerns would be apt if PFS were offered as a panacea to replace all other social
interventions designed to benefit poor and vulnerable populations. But it is not. In many cases, the
PFS programs are aimed at replacing existing programs that are poorly designed or poorly
executed. As for the last concern mentioned, there is simply no evidence that forgoing individual

167 V. K. Rangan & L. A. Chase. (2015). “The Payoff of Pay-for-Success,” Stanford Social Innovation Review (Fall),

pp. 28–39. Retrieved from
http://0search.ebscohost.com.brum.beds.ac.uk/login.aspx?direct=true&db=sih&AN=109457325&site=ehostlive&scope=site. (2015, pg. 31).
168 R. Cohen. (June 12, 2014). “Eight Sobering Thoughts for SIB Supporters.” Retrieved April 17, 2017, from

https://nonprofitquarterly.org/2014/06/12/eight-thoughts-social-impact-bonds/
Commonwealth of Massachusetts. Section 35VV: Social Innovation Trust Fund (2012). Retrieved February 20,
2019, from https://malegislature.gov/Laws/GeneralLaws/PartI/TitleII/Chapter10/Section35VV.

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solutions would increase the likelihood of governments’ turning their attention to the deeper causes
of social problems.
Other concerns are particularly related to social innovation financing:
•
•
•

Commercial investors may press for low performance thresholds to reduce their risks.
It is inappropriate for commercial investors to make a profit by helping vulnerable people.
The financing of PFS projects allows unelected and unappointed philanthropic and
commercial funders to choose projects that appeal to their whims and interests, giving them
too much power and influence over the lives of the vulnerable people they serve.

We are sympathetic to the first concern. The solution is for the government to push back or look
for purely philanthropic funders. The second point strikes us as essentially ideological. We don’t
see anything inherently wrong with for-profit investors supporting socially valuable services. In
our view, the important question is whether the services are valuable and cost-effective. The last
point is met when—as appears to be true of all PFS projects to date—governments undertake only
PFS projects that reflect their own priorities and overcome funding barriers particularly for
innovative, untested programs. In these cases, the needs for the services supported by funders are
so deep that their funding barely scratches the surface. For better or worse, whatever power
philanthropists have over vulnerable beneficiaries is justified by the beneficiaries’ immense needs.
In any case, we should emphasize that PFS is not an end in and of itself, but rather a tool to improve
outcomes for the beneficiaries of government-funded social services in a cost-effective manner
and, more fundamentally, to induce governments, service providers, philanthropists, and other
stakeholders to develop evidence-informed, outcome-oriented mindsets and processes. The entire
movement toward outcomes is young, and PFS will surely not look the same in the next decade as
it does now. Perhaps it will turn out to be just a waystation to other practices. But right now, it is
an important catalyst for the movement.
We end on a central theme of this text. The key to an effective PFS program lies in the hands of
the government officials and agencies that initiate and implement the program. A successful
program originates in an agency’s desire to achieve particular social outcomes and its decision that
a non-governmental service provider can contribute mightily in producing those outcomes. The
agency’s senior management must be committed to the social objectives. It must dedicate human
and financial resources to the project and enlist the cooperation of other relevant agencies. An
intermediary organization can help gain and cement these commitments, but only on a foundation
laid by the government itself.

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APPENDIX: OTHER PFS PROGRAMS

Recidivism-reduction programs address a serious social problem. Their basic metric is based on
reliable administrative data (whether or not a person is incarcerated); and they are relatively easy
to evaluate. For these reasons, they have been among the most popular PFS programs in the
United States. States that use PFS to reduce recidivism include New York, Massachusetts,
California, Pennsylvania, Colorado, Oregon, and Alaska.169
HMP Peterborough (UK) Social Impact Bond Pilot (2010). In the pioneer PFS program at the
Peterborough Prison in the United Kingdom, the government payer was the UK Ministry of Justice
supported by the Big Lottery Fund, a national lottery that supports charitable projects throughout
the UK.
Service providers delivered individualized support to enable the ex-offenders to more effectively
bridge the gap between custody and their communities under a program called One Service. 170 The
goal was to reduce recidivism by at least 7.5 percent across all cohorts. There was also an
opportunity for early payments if One Service reduced reoffending by 10 percent for any
individual cohort. Social Finance served as the intermediary. The benchmark for success was a
comparison group composed of other ex-offenders released at the same time.
Seventeen social investors—charitable trusts and foundations—committed £5m to fund
rehabilitative interventions for prisoners for one year after their release from Peterborough prison
in the UK.171 The investors were to be paid by the Big Lottery Fund and the Ministry of Justice

169 Rayanne Hawkins, Mayookha Mitra-Majumdar, David McClure, & Ellen Paddock. (2017). Using Pay for

Success in Criminal Justice Projects. Urban Institute. Retrieved January 28, 2019, from
https://www.urban.org/sites/default/files/publication/94736/using-pay-for-success-in-criminal-justiceprojects_1.pdf.
170 The services provided were aimed at helping ex-offenders (short-sentenced male prisoners) find stability after

release. They included advisory and guidance services related to obtaining ID cards, accommodation, medical care,
family support, employment and training, benefits, and financial advice. For more detail, see E. Disley, C.
Giacomantonio, K. Kruithof, & M. Sim. (2015). The payment by results Social Impact Bond pilot at HMP
Peterborough: Final process evaluation report. Retrieved January 10, 2019, from
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/486512/social-impact-bond-pilotpeterborough-report.pdf.

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only if the target objectives of reduced recidivism were reached. 172 The program reduced
recidivism by 9 percent, exceeding the 7.5 percent aggregate recidivism target rate; investors were
repaid the principal amount plus an amount that represented a return of just over 3 percent per
annum for the period of investment. 173 Although the program was supposed to span three cohorts
over seven years, it was discontinued after two cohorts and five years. The Ministry of Justice
made changes in its own service-delivery practices174 that made the PFS an inefficient duplication
of efforts and impossible to evaluate. The Ministry of Justice continued the program on a fee-for
service basis until the changes to their services for short-sentenced offenders took effect. 175
Adolescent Behavioral Learning Experience Program (New York City, 2012). The Adolescent
Behavioral Learning Experience (ABLE) program offered cognitive behavioral therapy and moral
reconation therapy 176 to young men exiting the Rikers Island prison in New York City. MDRC
oversaw the implementation of the project by two nonprofit service-providers whose methods had

172 E. Disley & J. Rubin. (2014). Phase 2 report from the payment by results Social Impact Bond pilot at HMP

Peterborough. Retrieved February 9, 2019, from
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/325738/peterborough-phase-2-pilotreport.pdf.
173 Jake Anders & Richard Dorsett. (2017). HMP Peterborough Social Impact Bond - cohort 2 and final cohort

impact evaluation (National Institute of Economic and Social Research). Retrieved February 5, 2019, from
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/633243/peterboro
ugh-social-impact-bond-cohort-2-results-report.pdf; and Liam Kay. (2017). World's first social impact bond
achieved goals and repaid investors (Third Sector). Retrieved February 1, 2019, from
https://www.thirdsector.co.uk/worlds-first-social-impact-bond-achieved-goals-repaidinvestors/finance/article/1440676.
174 The Ministry of Justice introduced the Transforming Rehabilitation (TR) reforms, whose aim is to reduce

reoffending using a payment-by-results approach to rehabilitation of inmates. “Prior to the PFS program, short-term
(<12 months) male offenders did not receive rehabilitation services, a gap the program was able to fill. With the
implementation of TR at the end of 2014, this contingent of offenders will no longer be left out by the UK’s
overarching strategy for rehabilitation,” Social Finance, 2014, paragraph 2. See also:
https://apolitical.co/solution_article/worlds-first-social-impact-bond-uk-cuts-recidivism-rewards-investors/
(accessed on February 10, 2019).
175 Disley, Giacomantonio, Kruithof, & Sim. (2015).
176 The Osborne Association, one of the service providers for the project, defines moral reconation therapy (MRT) as

“the process of relearning how to think and act as a responsible person. MRT is a form of cognitive behavioral
therapy, an approach which, over a span of 30 years, has been shown by research to have the most positive impact
on criminal justice populations” (paragraph 1). The Osborne Association. (2012). Moral Reconation Therapy.
Retrieved April 20, 2017, from http://www.osborneny.org/programSubPage.cfm?subPageID=44

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demonstrated reductions in recidivism rates 177 but had never been tested on such a large scale.178
The program sought to reduce recidivism bed days 179 by 10 percent against a benchmark of
matched past ex-offenders. Bed days for 16- to 18-year-olds participating in the program
in 2013 were matched with prisoners released from Rikers between 2006 and 2010. 180 The
program was financed entirely by a $7.2 million loan from Goldman Sachs to MDRC. Bloomberg
Philanthropies guaranteed $6 million, or 83 percent, of the loan, substantially reducing Goldman
Sachs’s risk. An 8.5 percent reduction in the rate of recidivism would have triggered repayment of
principal, and a reduction greater than 10 percent would have led to a profit for Goldman. 181
The program encountered a host of implementation and measurement problems. Administrators
could not properly identify ex-offenders who were supposed to participate in cognitive behavioral
therapy. 182 The New York City Department of Education was unable to provide instructors as
called for by the program. Implementation was disrupted by security problems. And the budget of
one of the service providers was cut when Rikers’s teenage population fell below the number

177 G. L. Little & Robinson. K. D. (2018). “Effects of moral reconation therapy upon moral reasoning, life purpose,

and recidivism among drug and alcohol offenders,” Psychological Reports, 64(1), pp. 83–90. Retrieved February 13,
2019, from https://doi.org/10.2466/pr0.1989.64.1.83; and P. Phipps, K. Korinek, S. Aos, & R. Lieb. (1999).
“Research Findings On Adult Corrections’ Programs: A Review,” Washington State Institute for Public Policy.
Olympia. Retrieved February 13, 2019, from http://www.wsipp.wa.gov/ReportFile/1309/Wsipp_Research-Findingson-Adult-Corrections-Programs-A-Review_Full-Report.pdf.
178 L. Farmer. (2015). “Are Governments ‘Paying for Failure’ with Social Impact Bonds?” Governing. Retrieved

February 13, 2019, from http://www.governing.com/topics/finance/gov-social-impact-bonds.html.
179 The project measured “recidivism bed days” as “the number of days that members of the study cohort were held

in the jail during the 12 months following their release from Rikers.” The Vera Institute of Justice was the
independent evaluator in the Rikers ABLE project. J. Parsons, C. Weiss, & Q. Wei. (2016). Impact Evaluation of the
Adolescent Behavioral Learning Experience (ABLE) Program. Retrieved February 13, 2019, from .
180 The groups were matched on several factors including charge, criminal history, gender, and age via propensity

score matching. Parsons, J., Weiss, C., & Wei, Q. (2016).
181 City of New York. (2012). Fact Sheet: The NYC ABLE Project for Incarcerated Youth. New York. Retrieved

February 13, 2019 from http://www.nyc.gov/html/om/pdf/2012/sib_fact_sheet.pdf.
182 E. Porter. (July 28, 2015). “Wall St. Money Meets Social Policy at Rikers Island. New York Times. Retrieved

February 13, 2019, from https://storage.googleapis.com/vera-web-assets/downloads/Publications/rikers-adolescentbehavioral-learning-experience-evaluation/legacy_downloads/rikers-adolescent-behavioral-learning-experienceevaluation.pdf. The Vera Institute of Justice had anticipated this risk when establishing the measuring mechanism. It
established that a randomized control trial—comparing a treatment group randomly assigned to receive the therapy
with a control group that did not— was not feasible because inmates were frequently moved between housing units.
To avoid such risk, the Vera Institute used a historical group as control group. Nevertheless, this adjustment was not
enough to guarantee good impact measurement.

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contracted for.183 The program was aborted after the evaluator determined that it did not result in
a statistically significant reduction in recidivism, let alone meet the target reduction in bed days
of 10 percent.184 Under the circumstances, New York City paid nothing. Thanks to Bloomberg
Philanthropies’ loan guarantee, Goldman was only $1.2 million out of pocket.185
Massachusetts Juvenile Justice PFS Initiative (2014). In Massachusetts, another PFS program
seeks to decrease recidivism and increase employment opportunities for young men in the
commonwealth’s juvenile justice system. The nonprofit service provider Roca offers cognitiverestructuring and skills development interventions to juvenile ex-offenders. Using prior
evaluations of Roca’s effectiveness in reducing recidivism rates as a baseline, 186 the parties agreed
to a very ambitious minimum target: a 40 percent decrease in days of reincarceration, compared
to the commonwealth’s average rate, over seven years.187 Although the principal metric is avoided
days in jail, the Massachusetts program uses judges’ sentences as a proxy.
The commonwealth will begin making success payments when the program achieves a 5.2 percent
reduction in re-incarceration. Upon reaching the target of a 40 percent decrease , lenders’ principal
will be fully repaid with interest of up to 5 percent, and Roca and Third Sector will be paid their
deferred fees. At higher levels of impact, Goldman, which invested $9 million, could get as much
as $1 million, the junior lenders up to $300,000 each, and Roca up to $1 million in success
payments.188 At the 40 percent break-even point, the program’s payouts to funders and the savings
for the government would both equal $22 million, and funders would be fully reimbursed. If the
program exceeds the target reduction in recidivism, Massachusetts could save as much as
$45 million over seven years. The investors’ success payments are capped at $27 million, thus
allowing the commonwealth to capture all additional cost savings. 189 Like New York State’s CEO

183 G. L. Berlin. (2016). Learning from Experience: A Guide to Social Impact Bond Investing. Retrieved

February 13, 2019, from https://www.mdrc.org/sites/default/files/Learning_from_Experience_SIB.pdf; and
Porter. (2015).
184 Parsons, Weiss, & Wei. (2016).
185 The Bond Buyer. (2015). No Success like Failure: NY Sees Social Impact Bond Pluses. Retrieved February

14, 2019, from https://www.mdrc.org/news/mdrc-news/no-success-failure-ny-sees-social-impact-bond-pluses.
186 Roca. (2017).
187 S. Kodali, J. Grossman, & G. Overholser. (2014). The Massachusetts Juvenile Justice PFS Initiative Project

Brief. Retrieved February 10, 2019, from http://www.thirdsectorcap.org/wpcontent/uploads/2015/02/TSCP_MAJJ-PFS-Project-Brief.pdf.
188 Id.
189 Roca did not begin reporting outcomes until 2018. Roca reports: “Roca’s internal tracking shows that Roca’s

performance meets the projections: at the two year mark, overall retention rate was 73% (planned: 70%), attrition to

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program, the Massachusetts Juvenile Justice program also includes payments for job placement,
which can be thought of as a valuable outcome independent of recidivism or as an intermediate
outcome that is likely to reduce recidivism. The Massachusetts metric is based on each quarter that
a Roca participant is employed.
Ventura County Project to Support Reentry (2017). In April 2016, the California Board of State
and Community Corrections (BSCC) awarded grants for pilot PFS projects to reduce recidivism
rates, subject to the recipients securing matching funding, to Ventura County, Alameda County,
and Los Angeles County.190
The Ventura County program is a collaborative project between the County Executive Office,
County Probation Agency, Interface Children & Family Services and Social Finance. It is funded
by the Reinvestment Fund, Nonprofit Finance Fund, and Whitney Museum of American Art. The
project aims to reduce recidivism by providing programs customized to an ex-offender’s individual
needs over four years to 400 adults on formal probation in Ventura County. 191 Through an RCT
conducted with the University of California at Los Angeles, participants will be placed in the
program or into a control group. 192 The metrics triggering outcome payments will be the number
of quarters in which a client is not arrested and reduction in recidivism over a period of 12 months,
compared to the control group.
Alameda County Justice Restoration Project (2018). Under the same pilot project, the program
in Alameda County, coordinated by Third Sector, aims to reduce recidivism by providing support
services such as treatment for substance abuse, employment training, adult education, mental
health services, intensive case management, and housing assistance. The interventions include
coaching and mentoring by people with similar life experiences. The program plans to serve
approximately 200 young adults between the ages of 18 and 24.193 The services will be delivered

incarceration was almost at plan (actual: 19; planned: 17), and overall attrition was lower than expected (actual: 74;
planned: 78).” (Roca, 2016, para. 9).
190 Rayanne Hawkins, Mayookha Mitra-Majumdar, David McClure, & Ellen Paddock. (2017).
191 Social Finance. Ventura County Project to Support Reentry fact sheet. Retrieved September 15, 2018, from

http://socialfinance.org/content/uploads/VCProjectToSupportReentry_Overview.pdf.
192 Social Finance. Ventura County Project to Support Reentry. Retrieved September 15, 2018, from

http://socialfinance.org/focus-areas/criminal-justice/ventura-county-project-to-support-reentry/ and Nonprofit
Finance Fund. Pay For Success blog. Ventura County Project for Reentry. Retrieved September 15, 2018, from
https://payforsuccess.org/project/ventura-county-project-support-reentry.
193 Alameda County District Attorney’s Office website. (2017). Alameda County Justice Restoration Project

Launched. Retrieved February 13, 2019, from
http://www.alcoda.org/newsroom/2017/sep/justice_restoration_project; and Nonprofit Finance Fund. Pay For

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by La Familia Counseling Services and the county. The project’s funder is Reinvestment Fund.
Success payment will be determined by WestEd and will be based on agreed milestones in
participants’ reduced recidivism and improvements in their mental health, employment, and family
relationships. The funds for the success payments will be provided by the Board of State and
Community Corrections and Alameda County. The Nonprofit Finance Fund, the James Irvine
Foundation, and the Social Innovation Fund also supported the development stages of the
project.194
Salt Lake City, UT. Recovery, Engagement, Assessment Career and Housing Program
(REACH) (2017). In 2017, Salt Lake County launched the REACHproject . Over 5 years, the
program aims to provide behavioral health treatment, housing, and case management services
to 225 formerly incarcerated adult men in order to lower their likelihood of recidivism. 195
Enrollment for the PFS beneficiary population is voluntary. Adult Probation and Parole will share
with First Step House a list of eligible men based on pre-sentence investigations.
The first phase of the project involves behavioral treatment, with housing provided by First Step
House if needed, followed by support in maintaining connections with social and recovery
networks, as well as stable employment and housing. The project will be evaluated through an
RCT conducted by the University of Utah Criminal Justice Center.
Partial repayment of principal occurs if the treatment group fares better than the control group.
Full repayment happens if the project achieves a reduction between 15 percent and 20 percent in
days incarcerated. Success payments are based on 66.4 percent treatment engagement, 35 percent
reduction in arrests, 35 percent reduction in days incarcerated, and 25 percent improvement in
employment. Northern Trust, Ally Bank, QBE Insurance, Sorenson Impact Foundation, Sorenson
Family Foundation, and Living Cities are investors. Non-recoverable grants were provided by
Eccles Foundation, Noora Foundation, Miller Family Foundation, Zions Bank, Synchrony Bank,
Nonprofit Finance Fund, Ally Bank, and County Escrow.196
Women in Recovery (WIR), (Tulsa, OK, 2017). Family & Children’s Services launched WIR
in 2009 to reduce Tulsa County’s high female incarceration rate by providing substance abuse and

Success blog. Voices of PFS Pioneers: Alameda County Justice Restoration Project. Retrieved September 17, 2018,
from https://payforsuccess.org/blog/voices-pfs-pioneers-alameda-county-justice-restoration-project-acjrp.
194 Id.
195 Available at: Nonprofit Finance Fund. Pay For Success blog. Project Salt Lake County REACH. Retrieved

September 15, 2018, from https://payforsuccess.org/project/salt-lake-county-reach; and Third Sector Capital
Partners blog. Fact Sheet: Salt Lake County Pay For Success Initiative. Retrieved September 15, 2018, from
http://www.thirdsectorcap.org/wp-content/uploads/2016/12/161216_SLCo-Fact-Sheet-FINAL.pdf.
196 Id.

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mental health treatment, workforce readiness training, and assistance with parent-child
reunification to formerly incarcerated women. Following legislation authorizing PFS programs
in 2017, Oklahoma issued a public bid for proposals for WIR. 197 Voluntary enrollment is offered
in conjunction with the Criminal District Court, with referrals coordinated by the service provider,
judges, public defenders, district attorneys, and local supervision entity. Social Finance served as
the advisor to the project. Success payments of $5,646 are paid upon a participant’s graduation
from the program and then at 24, 36, and 54 months not back in prison. Payments are not based
on an RCT, but on data from the service provider and Oklahoma Department of Corrections.

FAMILIES AND CHILDREN
South Carolina Nurse-Family Partnership Pay for Success Project (NFP) (2016). Registered
nurses visit low-income, first-time mothers during their pregnancy and children’s infancy with the
goal of improving child and maternal outcomes. For many years, the organization’s interventions
were supported by philanthropists and had been subjected to at least three well-conducted
randomized controlled trials. 198
The NFP project was launched in 2016 with the specific goals of “reduction in preterm births,
reduction in child hospitalization and emergency department usage due to injury, increase in
healthy spacing between births, and increase in the number of first-time moms served in
predetermined ZIP codes with high concentrations of poverty.” 199 The project aims to
reach 3,200 first-time, low-income mothers in South Carolina over four years.
Social Finance raised the capital for the project and acts as the project intermediary. The Children’s
Trust of South Carolina is the fiscal agent, and the Harvard Kennedy School Government
Performance Lab provides technical assistance.
Medicaid is providing approximately $13 million via a Medicaid Waiver awarded to the South
Carolina Department of Health and Human Services, and philanthropic funders have committed

197 Nonprofit Finance Fund. Pay For Success blog. Oklahoma Women in Recovery, Retrieved September 20, 2018,

from https://payforsuccess.org/project/oklahoma-women-recovery]; and Social Finance. Fact Sheet Oklahoma Pay
for Success: Family and Children’s Services – Women in Recovery. Retrieved September 16, 2018, from
http://socialfinance.org/content/uploads/External-Fact-Sheet.pdf.
198 Coalition for Evidence-Based Policy. (2014, June). Social Programs That Work: Nurse-Family Partnership.

Retrieved April 25, 2017, from http://evidencebasedprograms.org/1366-2/nurse-family-partnership.
199 Nurse-Family Partnership. (2016). Fact Sheet: South Carolina Nurse-Family Partnership Pay for Success Project.

Denver. https://www.scdhhs.gov/sites/default/files/2-16-16-SC-NFP-PFS-Fact-Sheet_3.pdf. Retrieved March 7,
2019.

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$17 million. The program has no commercial investors. The South Carolina Department of Health
and Human Services will make up to $7.5 million in success payments, which will be reinvested
in the project 200 to sustain the activities of Nurse-Family Partnership if it attains outcomes
measured by a randomized controlled trial performed by independent evaluator J-PAL North
America.201
Connecticut Office of Early Childhood Maternal, Infant, and Early Childhood Home Visiting
Outcomes Rate Card Pilot (2018). In 2018, with the assistance of Social Finance, the Connecticut
Office of Early Childhood (OEC) launched a year-long PFS rate card pilot program.202 OEC will
incorporate bonus payments into existing service providers’ 2018 contracts 203 for achieving four
specified outcomes:204
•
•
•

•

Full-term birth: the child is born at 37 weeks gestation or later.
Safe children: there are no substantiated cases of maltreatment and no incidents of injury
requiring visits to the emergency room.
Caregiver employment: at the time of measurement, the caregiver (typically the mother) is
employed, is enrolled in education or training, or has recently graduated from an education
or training program.
Family stability: The basic needs of families for child care, health care, and housing are
met.

200 “In the hope of cultivating a path to long-term, sustainable funding of NFP in South Carolina, the investors are

rolling over any success payments into ongoing NFP operations in the state.” https://govlab.hks.harvard.edu/southcarolina-nurse-family-partnership-pay-success. Accessed March 7, 2019.
201 Id.
202 Connecticut’s Official State website. Connecticut Office of Early Childhood – Maternal, Infant, and Early

Childhood Home Visiting Outcomes Rate Card Pilot Fact Sheet. Retrieved February 10, 2019, from
https://www.ct.gov/oec/lib/oec/ct_oec_miechv_rate_card_fact_sheet.pdf; and Nonprofit Finance Fund. Pay For
Success blog. Connecticut Office Early Childhood Maternal, Infant, and Early Childhood Home Visiting. Retrieved
November 1, 2018, from https://www.payforsuccess.org/project/connecticut-office-early-childhood-maternal-infantand-early-childhood-home-visiting.
203 Existing network of 22 providers that deliver home visiting services to 1,300 at-risk families (the providers

include Parents as Teachers, Early Head Start (EHS), Nurse Family Partnership and Child First).
204 Connecticut’s Official State website. Connecticut Office of Early Childhood – Maternal, Infant, and Early

Childhood Home Visiting Outcomes Rate Card Pilot Fact Sheet. Retrieved February 10, 2019, from
https://www.ct.gov/oec/lib/oec/ct_oec_miechv_rate_card_fact_sheet.pdf; and Nonprofit Finance Fund. Pay For
Success blog. Connecticut Office Early Childhood Maternal, Infant, and Early Childhood Home Visiting. Retrieved
November 1, 2018, from https://www.payforsuccess.org/project/connecticut-office-early-childhood-maternal-infantand-early-childhood-home-visiting.

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OEC renewed the pilot in 2019 with adjusted prices based on 2018 results; OEC will adjust and
continue the program in future years.205
Connecticut Family Stability Pay for Success Project (2016). In 2016, Connecticut launched a
project to promote family stability and reduce parental substance use among 500 families served
by the Connecticut Department of Children and Families. The project drew on the Family-Based
Recovery program, developed at the Yale Child Study Center, under which treatment teams visit
families to promote positive parent-child interactions, increase parental awareness and
understanding of child development, and help parents maintain recovery from substance use.206
Social Finance serves as the intermediary, with the assistance of the Harvard Kennedy School
Government Performance Lab. The University of Connecticut Health Center will be the
independent evaluator. 207 Social Finance helped raise $11.2 million from private investors,
including BNP Paribas and several other commercial and philanthropic organizations. Payouts for
the project are based on four measures: enrollment in the FBR program, number of out-of-home
placements prevented, reduction in re-referrals to DCF, and decreased substance use. 208 Although
the first of these is for the provision of services, the other three are for outcomes.

HOMELESSNESS
Massachusetts Chronic Individual Homelessness PFS Initiative (2014). The initiative is a sixyear project launched in 2014 to increase permanent housing availability throughout
Massachusetts. Eighteen service providers, coordinated by the Massachusetts Housing and Shelter
Alliance (MHSA), will produce 500 stable housing units for up to 800 chronically homeless

205 Connecticut’s Official State website. Connecticut Office of Early Childhood – Current Contracts. Retrieved April

10, 2019, from https://www.ct.gov/oec/cwp/view.asp?A=4547&Q=581074.
206 Connecticut Department of Children and Families. (2016). Connecticut Family Stability Pay for Success Project

Fact Sheet. Retrieved February 9, 2019, from
http://www.ct.gov/dcf/lib/dcf/socialimpactbonds/pdf/ct_family_stability_pfs_fact_sheet_vfinal_(2).pdf.
207 Social Finance. (2016b, September). Connecticut Family Stability Pay for Success Project. Retrieved April 29,

2017, fromhttp://socialfinance.org/focus-areas/children-and-families/connecticut-family-stability-pay-for-successproject/.
208 Id.

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people.209 As the coordinator, MHSA provides technical assistance to the service providers as well
as program monitoring, data collection, and reporting.210
Success payments come from the commonwealth’s budget; operating capital comes from
$1 million in philanthropic investments and $2.5 million in private commercial investments from
United Way of Massachusetts Bay and Merrimack Valley, the Corporation for Supportive
Housing, and Santander Bank N.A. Success payments will be based on the housing outcome, with
repayments triggered when participants are in stable residency for at least one year. Depending on
the outcomes, investors may be fully repaid and may earn a return on their investments, currently
capped at 5.33 percent. Root Cause will be the independent evaluator of the program.211
Denver, CO, Housing to Health PFS Project (2016). In February 2016, the City of Denver
launched a project to provide permanent housing and supportive services to up to 250 chronically
homeless people within five years. The program aims to simplify access to housing and provide
the target population with healthcare, employment, and substance abuse treatment services. Social
Impact Solutions helped raise $8.63 million from private investors, which the city will repay only
if the project achieves specified outcomes. For the outcomes related to housing, the city will pay
$15.12 for each day spent in housing (minus the number of days that a participant spends in jail),
but only if a participant spends at least twelve months in housing. The program also measures
success in terms of reduced jail bed days for its participants. It is evaluated by the Urban Institute,
which will use an RCT.212
Los Angeles, CA. Just-in-Reach Project (2017). In 2017, Los Angeles launched a public-private
collaboration to improve overall health and well-being of homeless people in LA County. 213

209 Massachusetts Housing & Shelter Alliance, Corporation for Supportive Housing, & United Way of

Massachusetts Bay and Merrimack Valley. (2017). Pay for Success 2017 Fact Sheet. Retrieved February 9, 2019,
from https://www.mhsa.net/sites/default/files/PFS%20Fact%20Sheet%20December%202017.pdf
210 Office of Governor Deval L. Patrick. (2014, December 8). Massachusetts Launches Pay for Success Initiative to

Reduce Chronic Individual Homelessness. Commonwealth of Massachusetts Executive Department Press Release.
Retrieved February 5, 2019, from http://archives.lib.state.ma.us/bitstream/handle/2452/217588/ocn795183245-201412-08b.pdf?sequence=1&isAllowed=y.
211 Id.
212 Denver PFS, LLC (2016). Denver, CO. Retrieved January 28, 2019, from

http://www.payforsuccess.org/sites/default/files/resource-files/Denver PFS
Contract_201523939_20160205_172505.pdf.
Urban Institute. Los Angeles County Just in Reach Project. Retrieved February 10, 2019, from
https://pfs.urban.org/pfs-project-fact-sheets/content/los-angeles-county-just-reach-project; and Nonprofit Finance
Fund. Pay For Success blog. Los Angeles Just in Reach Project. Retrieved January 28, 2019, from
https://payforsuccess.org/project/los-angeles-county-just-reach-project.
213

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Over four years, the program seeks to place in permanent supportive housing 300 homeless people
with psychiatric or substance-abuse disorders who are currently in custody in a county jail. The
metrics of success are specified reductions in rates of re-incarceration and homelessness.214 The
project is managed by the Corporation for Supportive Housing and the National Council on Crime
& Delinquency. 215 The Los Angeles County Department of Health Services Intensive Case
Management Providers216 and Brilliant Corners (Flexible Housing Subsidy Pool Operator)217 are
responsible for the delivery of services. The project is initially funded by a $7 million loan from
United Healthcare218 and a $3 million loan from the Conrad N. Hilton Foundation. The repayment
of the principal plus interest—in case the project meets its targets—will be made by LA County,
the US Department of Housing & Urban Development, and the California Board of State and
Community Corrections.
Salt Lake County Homes Not Jail (2017). Alongside REACH (described above), Salt Lake City
launched a program to offer 315 people housing assistance and support services to improve
housing stability and behavioral health and reduce incarceration. 219 The program’s interventions
214 The program description states, “Although some PFS initiatives have utilized a randomization approach such that

eligible participants are assigned to an intervention or comparison group in which approximately half receive the
intervention, the PFS workgroup members did not perceive this approach as feasible for this project as it would require
identifying through a referral and screening process twice as many individuals than [sic]would receive the
intervention. This approach would require additional staffing to refer and screen individuals to a control condition.”
Available at http://file.lacounty.gov/SDSInter/bos/supdocs/114738.pdf.
215 Id.
216 The Office of Diversion and Reentry of the department will manage the program (Third Sector Capital Partners.

Los Angeles County Launches Just In Reach Supportive Housing Program to Break Cycles of Homelessness and Reincarceration. Retrieved September 15, 2018, from https://www.thirdsectorcap.org/news/los-angeles-countylaunches-just-in-reach-supportive-housing-program-to-break-cycles-of-homelessness-and-re-incarceration/.
217 The PSH will be provided through LA County Flexible Housing Subsidy Pool (FHSP). Brilliant Corners is

responsible for operating the FHSP program and will provide the housing units to be used in the program. (Los
Angeles County Health Agency. Approval of an Agreement with JIR Pfs, LLC for the Just In Reach Pay For Success
Program and Other Related Delegations of Authority. Retrieved September 15, 2018, from
http://file.lacounty.gov/SDSInter/bos/supdocs/114738.pdf.
218 Considered to be the first healthcare company to invest in PFS in California (Nonprofit Finance Fund and the

James Irvine Foundation. (2017). Pay For Success Scorecard: Lessons from the Vanguard of the Outcomes
Movement. Retrieved September 15, 2018, from
https://www.nonprofitfinancefund.org/sites/default/files/paragraphs/file/download/Pay%20for%20Success%20Score
card.pdf.
219 Nonprofit Finance Fund (2018). Salt Lake County Homes Not Jail. Retrieved September 15, 2018, from

https://payforsuccess.org/project/salt-lake-county-homes-not-jail; and Urban Institute. Salt Lake County Homes Not
Jail Program. Retrieved September 15, 2018, from https://pfs.urban.org/pfs-project-fact-sheets/content/salt-lakecounty-s-homes-not-jail-program.

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include rent assistance in the private rental market and individual counseling.220 The county will use data
from its Homelessness Management Information System to invite people to participate.

The Homes Not Jail project will be evaluated through an RCT by the University of Utah Criminal
Justice Center. Northern Trust, Ally Bank, QBE Insurance, the Reinvestment Fund, Sorenson
Impact Foundation, and Sorenson Family Foundation are investors in the project. Moreover,
Noorda Foundation, Miller Family Foundation, Nonprofit Finance Fund, Ally Bank, and County
Escrow contributed to the project with a non-recoverable grant.221
The trigger for initial repayment of principal is better performance than the control group. The
threshold for full repayment of principal is a reduction in months without jail or shelter between 15
percent and 20 percent. Full repayment of principal, plus maximum success payments, occurs
under 100 percent enrollment in mental health services, 100 percent enrollment in substance abuse
services, 30 percent improvement in months without jail or shelter, and 80 percent residency in
stable housing.222

220 Reinvestment Fund. Success Story: Homes Not Jail. Retrieved September 15, 2018, from

https://www.reinvestment.com/success-story/homesnotjailprogram/.
221 Nonprofit Finance Fund (2018).; and Urban Institute. Salt Lake County Homes Not Jail Program. Retrieved

September 15, 2018, from https://pfs.urban.org/pfs-project-fact-sheets/content/salt-lake-county-s-homes-not-jailprogram.
222 Id.