Wall Street, Meet Child Welfare Bonds

Move over stock market, there’s a new kind of bond in town. We have all heard of stocks and bonds, savings bonds, and other investment options. Lately I’ve been reading about a new type of investment tool: Social Impact Bonds. I would describe it as a cross between Performance Based Contracting and investment bonds, with a focus on compelling societal needs.

The basic premise is this: investors provide capital for innovative approaches to social issues.  The funding supports promising prevention strategies and if they work, investors realize a profit. After a set amount of time, maybe five to ten years, their initial investment is returned along with any savings by the government that is achieved. One of the first examples of this was started recently in the UK and is aimed at addressing recidivism in corrections.  My child welfare spin on this is not entirely original; Australia is looking at this approach with foster care. I believe it is time to pursue this concept in more jurisdictions. After all, a childhood cannot be recovered.

We all know there is tremendous cost to society when child abuse or neglect occurs. A report by The Pew Center on the States recently announced that cost of child abuse in the year 2008, in just the one year, was $124 billion. Multiply that over time and add in things like Social Security Disability payments related to post-traumatic stress, decreased work productivity, health care, public mental health costs, multi-generational abuse, homelessness, and costs of incarceration associated with the long-term effects of abuse and neglect and the price tag is staggering.

Being the researcher wanna-be that I am, I would put forward the following social experiment. My proposal is modest and focuses on building a model that can be undertaken in the short-term while evaluating the process, conducting research, and exploring opportunities to bring child welfare bonds to scale throughout the US and in other countries. For the sake of illustration, I’ll use Joliet and Naperville, Illinois. They both are medium-sized cities with populations between 140,000 and 150,000 within the state of Illinois. Let’s assume they have consistently had similar child abuse and foster care rates over the last 5-10 years. One could reasonably assume that the two jurisdictions would continue on similar or parallel trajectories in child abuse and foster care rates in the next 5-10 years. They would react to the same changes in state or federal policies or practices, eliminating the potential bias as a result of outside influences.

For the sake of research and to provide a comparison population, one city will undertake a social impact funding model while the other continues to provide services as in the past. Organizations with a proven track record of providing quality services in the area of prevention of child abuse are identified to participate in this study. After all, investors want to put their money in successful companies likely to produce results, and profits. They may have utilized evidence-based programs such as Triple-P Positive Parenting Program or Nurse Family Partnerships or may have developed their own, promising model. Let’s say Naperville establishes a process by which bonds can be purchased with the money supporting a well-defined matrix of service provision by the identified organizations. Essentially, they will be participating in performance based contract with the investment money provided ‘up-front’ rather than after the fact, eliminating the need for often cash-strapped social service organizations to ‘front’ the money to provide services.

The services are provided for a pre-determined length of time; for the sake of discussion, let’s say five years. During that time, investors will be monitoring performance. In order to determine level of success, data will be collected on the number of child abuse reports, investigations, and foster care placement rates in both Joliet and Naperville as well as differences in child welfare spending. Joliet will be the ‘yardstick’ by which success is evaluated. We’ve already determined that the two communities historically have similar rates in child abuse and foster care. Given the two communities are within the state of Illinois, data collection procedures and instruments are likely to be identical, reducing potential bias in the process.

Hypothetically, in five years, Naperville will have demonstrated reduced rates in child abuse and a corresponding reduction in foster care numbers. Let’s say Naperville now has 15% fewer child abuse referrals as compared to Joliet and foster care numbers are 10% lower. The public child welfare agency calculates the amount of money saved by the lower rates and this amount is returned to investors along with their initial investment. Since the state normally would have provided services to victims of child abuse and neglect over the past five years, there will be no additional cost to the community.

Now we have a model that can guide future projects utilizing child welfare bonds. The pilot test of the approach in two communities will provide valuable information regarding anticipated savings for public agencies and return on investment for investors. Even a modest success will have long-term effects for the community of Naperville.

Of course, as with any investment, there is risk involved. This can be minimized by selecting provider agencies with proven track records, use of evidence-based practices, close monitoring by bond holding entities, and ongoing data analysis. As with any company, adjustments may be needed along the way. It certainly makes more sense than continuing to invest public dollars in treatment after child abuse or neglect has occurred. Any innovators ready to invest in vulnerable children and the future of a community?

Postscript:
In the news: an example of Social Impact Bonds in New York aiming to improve outcomes of incarcerated adolescents is described in the article, Social Impact is Investing, Not Fundraising.

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About ckhayek

I am a Child Welfare Advocate, Data-geek, Writer (and Reader), Cheesecake Baker, and Stunt Kite Flyer .... balance is important! 8-)
Gallery | This entry was posted in Child Welfare, Community Engagement, Community Enhancement, Foster Care, Government, Prevention, Social Innovation and tagged , , , . Bookmark the permalink.

7 Responses to Wall Street, Meet Child Welfare Bonds

  1. I think I’ve heard talk of this elsewhere, but I can’t quite remember. You’d mentioned Australia, but I think I heard of this somewhere in the US too. Either way, I think it’s a fantastic idea!

  2. ckhayek says:

    Author’s note: The cities of Joliet & Naperville were selected randomly and were not consulted regarding this post or the proposed investment project. I sought to find two communities within a state that were large enough to conduct some evaluation/research, and might reasonably be expected to be similar in population demographics as well as rates of foster care. I know from experience that size and demographics are only part of the picture when it comes to the latter.

  3. Daniel STein says:

    I’ve been thinking about this for awhile, too – ever since working on early learning project in WA state and looking for additional capital to support smaller providers who needed to make home improvements to provide compliant service.

    One consideration, or rather question i never fully resolved is how is this any different than a municipal bond? These too are public interest bonds that serve social causes…. build road, hospital, schools, fill pot holes, build IT systems. There is upfront capital provided, risk assessed and performance managed. PRoviding social services is very closely related BUT without venture capitalists and other ‘market makers’ in the field. Aside from my sketicism about how the market forces (and their actual motivations) there is the annoying problem of accurately measuring results over time (since our data systems as so excellent at tracking measuring today, JK). The VC’s would want accurate, timely data that is verifiable…. and of course those other pesky problems of leadership turnover – what happens at year four when there is a new governor and the program is discontinued for whatever reason….

    I think this overly complicates a problem with a solution looking for a new market. Remember there are no free lunches. And can you imagine a city or state having to procure this, no less find millions of dollars five years later to pay for performance, NOT!

    Aside from these concerns, I think innovation is great but we should figure out how government can do a better job….

  4. ckhayek says:

    I wanted to respond to Daniel’s comments and also share a link that was provided by Heidi on Twitter. The link shared was http://ampr.gs/Hxs4iE – Fact Sheet: Social Impact Bonds, A Brief Introduction to a New Financing Tool for Social Programs, by the Center for American Progress.
    As far as the comparison to municipal bonds, I would say that yes they are similar. The primary difference would be that my proposal would be a variable rate of return–greater risk but also greater reward potential. My understanding is that municipal bonds generally are a fixed rate of return. (I’m not a financial analyst so would readily admit I may be mistaken.)
    Unlike the SIB proposed in the Center’s article, I would envision this being an actual bond similar to municipal bonds. I would also suggest that, unlike their SIB, this could be used to fund core services, in tandem with the government provided services.
    Daniel mentioned other issues such as data quality, and I would agree, that is a problem that would need to be addressed. And the current system of revolving doors with appointed child welfare leadership would require consideration. On this point, I believe moving to a financing structure that is independent of political whim may be a good solution.
    I agree, government can, and should do a better job. However, I recognize the significant obstacles to government driven innovation. I would posit that, given the slow progress in child welfare, the paucity of funding for prevention services, and the political influences that often delay or completely stall program improvements, we should seriously consider alternatives such as this.

  5. ckhayek says:

    In the news: eBay Founder Omidyar Network gives $2 million for ‘social impact bonds’
    http://www.bizjournals.com/sanfrancisco/news/2012/05/01/omidyar-network-gives-2-million-for.html

  6. Pingback: Center for Advanced Studies in Child Welfare – Social impact bonds, impact investing, pay-for-success contracts…

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