Making Government Work

When Taxpayer Dollars Aren’t Enough, Private Businesses Step in to Fund Public Programs

August 29, 2014
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When Taxpayer Dollars Aren’t Enough, Private Businesses Step in to Fund Public Programs
In the “pay for success” model, private sectors fund public programs to reduce recidivism, mental illness and homelessness. Scott Olson/Getty Images
If "pay for success" initiatives are successful, both investors and citizens win.

Taxes. It seems like we’re always grumbling about them — whether it’s the amount of sales tax we’re charged on a purchase or the total deducted from our paycheck. And regardless of the type, no one usually agrees on who should pay the most in order to bankroll all of the necessary programs funded by taxes.

Well, that’s why several states have developed a slightly different approach. Instead of using tax payer dollars to fund some public programs, they’re turning to the private sector.

It’s called “pay for success” and operates under the theory that if a program is a hit, investors won’t mind putting money into it.

To start, a state’s government outlines specific goals in a target area such as mental illness, homelessness or preventative health care. Next, private investors and philanthropic organizations finance nonprofits that provide cost-effective social services in that target area. Then, if the program meets the established goals, the investors will receive a “success payment.”  Not a bad deal, right?

As of right now, three states — New York, Utah and Massachusetts — and New York City have implemented such social impact bond (SIB) programs.

New York City was the first, establishing their Adolescent Behavioral Learning Experience (ABLE) program to reduce recidivism among 3,400 adolescents from Riker’s Island each year during a four year time period, according to the New York Times. The program was funded by Goldman Sachs. According to a press release, “Goldman Sachs receives its capital back only if the re-admission rate – measured by total jail days avoided – is reduced by 10 percent or more. Should the reduction exceed 11 percent, Goldman Sachs will also receive a financial return that is consistent with typical community development lending.”

The program in Massachusetts is targeting recidivism rates and employment outcomes among at-risk youth. There’s also a program for adult basic education in development.

Even the federal government is throwing its hat into the ring. The Obama administration funded a model project in Ohio as well as promised $500 million to help other states and local governments start programs.

And now, all eyes are on these programs whose success could mean a complete revamping in how governments operate. Fewer taxes and more public projects — now that’s a plan that most of us could get behind.

MORE: Better, Faster, Stronger: Why Ohio is Sending Government Officials to Boot Camp

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