“Pay for success” has gone viral among those seeking to tie government funding to measurable impact.
And it’s time for the District to consider whether this type of financing could address its affordable-housing crisis.
The premise behind pay for success (also known as social impact bonds) is straightforward: Investors fund a set of interventions to achieve a desired social outcome. If the goals are achieved, the government repays the costs of the program, plus a return for the financial risk the investors bore. If the goals are not achieved, the investors lose their money, and the government owes nothing.
The region’s struggles with ensuring an adequate supply of affordable housing are well-documented. The 2014 study “Housing Security in the Washington Region” examined the area’s affordable-housing supply across a range of income levels. This study and others have found that the causes of homelessness run the gamut, from an inadequate supply of affordable options to a lack of well-paying jobs to struggles with mental health.
To address this crisis, D.C. Mayor Muriel E. Bowser (D) has made good on her promise to commit $100 million per budget year to the Housing Production Trust Fund. The fund is the district’s main tool for financing housing.
Unfortunately, the yearly politicking necessary to preserve this appropriation leaves the trust fund susceptible to changing political winds. This can discourage investment in long-term solutions.
In 2013, the waiting list for public housing got so long that the D.C. Housing Authority closed it to new applicants. With this level of need, the District needs innovative solutions.
By leveraging private capital in the form of pay-for-success financing, the D.C. government would send a strong signal that it is committed to multiyear, comprehensive solutions. And the pay-for-success structure minimizes the District’s risk because the city is financially liable only if a project meets its targets.
Indeed, policymakers around the country support pay for success. Denver launched a program this year to provide supportive housing to 250 residents . And in February, Connecticut and South Carolina joined a growing collection of states experimenting with this financing model.
Before implementing such a program here, D.C. leaders, investors and service providers should establish a common framework. Their task would be to clearly define the program’s goals, outline a repayment structure and specify how the outcomes are to be measured. The more ambitious the goals, the more risk the investors bear, but also the greater the potential return.
Pay for success is clearly not a silver bullet for addressing social issues. If it were, the model already would have been widely adopted. These programs are highly complex, require a strong working relationship among the participants and raise legitimate questions about whether employing profit-making practices is an appropriate way to address social ills.
The District should convene area leaders in supportive housing services and program evaluation as well as potential investors to outline specific opportunities and challenges posed by this financing model.
It is a complex process, to be sure. But it would not be the District’s first foray into the world of pay for success. And the District can benefit from lessons from Denver’s supportive-housing program.
Pay for success is a relatively new idea, but it could be an important tool in increasing access to supportive housing for its residents. Though complex, such a program could build cross-sector partnerships among a variety of stakeholders.
With increasingly strained budgets, pay for success could ensure public dollars are spent as effectively as possible.