[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                   SOCIAL IMPACT BONDS: CAN THEY HELP
                 GOVERNMENT ACHIEVE BETTER RESULTS FOR.
                           FAMILIES IN NEED?

=======================================================================

                                 HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 9, 2014

                               __________

                            Serial 113-HR14

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel

                                 ______

                    SUBCOMMITTEE ON HUMAN RESOURCES

                DAVID G. REICHERT, Washington, Chairman

TODD YOUNG, Indiana                  LLOYD DOGGETT, Texas
MIKE KELLY, Pennsylvania             JOHN LEWIS, Georgia
TIM GRIFFIN, Arkansas                JOSEPH CROWLEY, New York
JIM RENACCI, Ohio                    DANNY DAVIS, Illinois
TOM REED, New York
CHARLES W. BOUSTANY, JR., Louisiana


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of September 9, 2014 announcing the hearing.............     2

                               WITNESSES

Lloyd Doggett, Representative from the State of Texas............     6
Linda Gibbs, Principal, Bloomberg Associates.....................    24
David Juppe, Senior Operating Budget Manager, Maryland Department 
  of Legislative Services (DLS)..................................    32
George Overholser, CEO and Co-Founder, Third Sector Capital 
  Partners.......................................................    39
Robert Romo, former client, Center for Employment Opportunities..    20
Sam Schaeffer, CEO and Executive Director, Center for Employment 
  Opportunities (CEO)............................................     7

                       SUBMISSIONS FOR THE RECORD

American Federation of State, County and Municipal Employees 
  (AFSCME), statement............................................    60
American Public Human Services Association (APHSA), statement....    62
CSH, statement...................................................    65
Douglas P. Koch, MAI, AICP, statement............................    70
Enterprise Community Partners, statement.........................    77
Green & Healthy Homes Initiative, statement......................    81
Institute for Child Success, statement...........................    88
ReadyNation, statement...........................................    95
Results for America, statement...................................   104

 
 SOCIAL IMPACT BONDS: CAN THEY HELP GOVERNMENT ACHIEVE BETTER RESULTS 
                         FOR FAMILIES IN NEED?

                              ----------                              

             U.S. House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:05 p.m., in 
Room 1100, Longworth House Office Building, the Honorable Dave 
Reichert [chairman of the subcommittee] presiding.
    [The advisory announcing the hearing follows:]
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                                 ---------

    Chairman REICHERT. Thank you for being here today. We will 
call the committee to order.
    Of course, today's hearing is on social impact bonds, and 
our goal today is to review these innovative financing ideas 
and determine whether they can help government achieve better 
results for families in need.
    And to discuss this approach in greater detail as well as 
legislation that he has introduced to promote development of 
social impact bonds, I want to yield the balance of my time to 
the gentleman from Indiana, Mr. Young.
    Mr. YOUNG. Well, I want to thank Chairman Reichert for 
holding this hearing today to discuss how social impact bonds 
can be an innovative tool to improve social and public health 
outcomes, save taxpayer resources, and unleash non-governmental 
investment capital to help at-risk Americans.
    I also want to thank our panelists for being here today to 
share testimony with the committee.
    I want to give special recognition to Congressman Delaney, 
a Maryland Democrat and a very conscientious colleague, for his 
leadership and partnership with me on this initiative. This is 
the sort of big-idea, bipartisan initiative that we need more 
of in Washington, and he has helped make that happen here.
    Now, I studied a bit of economics at the University of 
Chicago, and I want to start today with a quote from Milton 
Friedman, who once said, ``One of the great mistakes is to 
judge policies and programs by their intentions rather than 
their results.''
    I have spent the last 2 years on this subcommittee learning 
about many of our Nation's social services programs, and I 
found that to ring exceedingly true. For all our best 
intentions, each of us knows that too often we see government 
programs fail the constituencies they are intended to help and 
the taxpayers who fund them.
    Unfortunately, instead of trying to determine how to get 
better results, serious discussions about social service 
provisions tend to devolve quickly into superficial arguments 
over funding levels. Instead of outcomes, we spend too much 
time talking about inputs. Now, to some, it is tempting to 
measure compassion with dollar signs, but this was not and is 
not what our social safety net is all about.
    Social impact bonds can help change our focus from inputs 
to outcomes, where it belongs. They do this by requiring every 
approved project to answer three basic questions at the outset:
    One, what does a successful outcome look like?
    Two, whom are we trying to serve?
    And, three, what is the value of a successful outcome in 
terms of current government spending?
    When those questions are answered, we can develop programs 
with measurable policy goals and measurable savings. Measurable 
policy goals and savings are pre-conditions to using social 
impact bonds as a funding mechanism to raise private investment 
capital, administer the evidence-based social intervention. And 
then, if and only if those policy goals are met, the Federal 
Government can pay back those initial investors.
    If the goals aren't met, the Federal Government doesn't owe 
a dime. In essence, SIBs bring pay-for-performance to the 
social and public health sectors, allowing the Federal 
Government to improve both the impact and cost-effectiveness of 
vital government services.
    In short, the Social Impact Bond Act, which I sponsored 
with Congressman Delaney as well as Mr. Griffin and Mr. Reed on 
this subcommittee and several Democrats, including Mr. Larson, 
who is joining us here today, empower states, local 
governments, non-profits and the private sector to scale up 
evidence-based social and public health interventions to 
address some of our Nation's most pressing social challenges.
    The results of these projects will help empower well-
intentioned policymakers across all levels of government to 
improve lives through evidence-based policymaking as well as 
aid non-profits in expanding their models with fidelity across 
different geographies and populations.
    In turn, this expands our menu of policy options and offers 
meaningful alternatives to simply increasing funding for 
existing government programs that we know are less than 
successful at meeting their stated policy objectives.
    With that, I will once again thank our panelists for being 
here today, thank the chairman for this opportunity.
    And I yield back.
    Chairman REICHERT. I thank you, Mr. Young.
    Mr. Doggett, would you like to give an opening statement?

 STATEMENT OF THE HONORABLE LLOYD DOGGETT, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. DOGGETT. Thank you very much, Mr. Chairman.
    I welcome the discussion about how we invest in our future. 
In a time when there are so many valuable initiatives that are 
limited by budget squeezes and even by sequestration, it is 
important to be as creative as possible.
    I salute Mr. Young, Mr. Larson and their co-sponsors for 
recognizing the need to invest more in programs that will help 
low- and middle-income Americans get an education, attain long-
time employment, and be successful in other areas.
    We know that social impact bonds are a relatively new 
phenomenon, having, I believe, begun in the United Kingdom in 
about 2010. I am familiar with the effort in New York City and 
Rikers Island, the work being done in Utah.
    The question we have today is the impact of social impact 
bonds as a new phenomenon and whether this is the best way to 
encourage stronger and more responsive communities.
    Since the States are laboratories of democracy, one 
question presented by today's hearing is whether Federal 
intervention is necessary or desirable at this early stage.
    Most of us are familiar with the old saw that a 
conservative is someone who says, ``You go first.'' Well, we 
have a method in the States and the localities already to 
determine how effective these programs are and to evaluate 
whether they are accomplishing their objectives. I look forward 
to hearing from each of our witnesses on this question.
    I know that many of our programs, including those in which 
this committee has been involved in the past, face significant 
questions as to whether they can continue even next year.
    Home visiting for at-risk mothers and their children is set 
to expire next March, and I do have some doubts as to whether 
now is the time to implement a funding structure that will help 
put taxpayer dollars with some third-party investors instead of 
directly into the future of these children.
    I welcome the good counsel of all of those present, and I 
think we must be open to new ideas. We just need to be sure 
that those new ideas are the best way to make effective use of 
what are fairly precious taxpayer dollars.
    And I thank you, Mr. Chairman.
    Chairman REICHERT. Thank you, Mr. Doggett.
    And I show there is some agreement on the panel here. I 
want to thank all of you for being here, and we do look forward 
to the information that you will provide us today.
    We are looking for new and innovative ways where we can 
help people in this country, and I think we need to keep an 
open mind as to how we do that. And your information today will 
help us determine if we should do anything in the Federal 
Government or not.
    So, again, appreciate your testimony you are about to give, 
and thank you for being here again today, as I said.
    Without objection, each member will have the opportunity to 
submit a written statement and have it included in the record.
    I want to remind our witnesses to limit their oral 
statements, please, to 5 minutes. However, without objection, 
all of the written testimony that you have submitted will be a 
part of the permanent record.
    On our panel this afternoon, we will be hearing from Sam 
Schaeffer, CEO, Center for Employment Opportunities; Robert 
Romo, former client, Center for Employment Opportunities; Linda 
Gibbs, principal, Bloomberg Associates; David Juppe, senior 
budget operating manager, Maryland Department of Legislative 
Services; and George Overholser, CEO and co-founder, Third 
Sector Capital Partners.
    Mr. Schaeffer, thanks for being here today, and proceed 
with your testimony, please.

STATEMENT OF SAM SCHAEFFER, CEO AND EXECUTIVE DIRECTOR, CENTER 
                  FOR EMPLOYMENT OPPORTUNITIES

    Mr. SCHAEFFER. Thank you, Chairman Reichert, Ranking Member 
Doggett, and all the Members of the Committee for highlighting 
social impact bonds at today's hearing.
    SIBs have the potential to scale some of this country's 
most effective social interventions, helping communities expand 
programs that have proven results and save taxpayer dollars.
    My name is Sam Schaeffer, and I am the executive director 
and chief executive officer of the Center for Employment 
Opportunities, or CEO.
    CEO is an organization devoted to exclusively meeting the 
employment needs of men and women with histories of 
incarceration. Since founded in New York City in 1996, CEO's 
transitional jobs program has helped more than 16,000 people 
coming home from prison secure full-time employment.
    CEO has been proven, through random assignment evaluation, 
to reduce recidivism and provide up to $3.30 in taxpayer 
savings for every dollar invested in the program. Over the last 
5 years, CEO has leveraged its expertise to expand into ten 
cities across California, Oklahoma, and New York State.
    In a few moments, you will hear from Robert Romo, one of 
the thousands of individuals we have worked with every year, on 
how CEO turned his life around. Robert's story illustrates the 
challenges so many face when coming home from prison.
    Every year more than 60,000 people are released, but more 
than 40 percent will return. This failure is costly. The United 
States spends $64.3 billion annually on incarceration.
    It also has a profound effect on public safety, as well as 
families and communities impacted by the criminal justice 
system. Attracting new capital for prisoner re-entry programs 
like CEO is critical.
    In December 2013, CEO, New York State and the intermediary, 
Social Finance, began a 4-year SIB project that will help us 
serve an additional 2,000 high-risk recently released men in 
New York City and Rochester. 44 private investors provided 
$13.5 million in capital to support this expansion of services.
    This is a performance-based contract, but instead of 
focusing on outputs like job placements, it hinges on our 
organization making an impact on recidivism and long-term 
employment.
    If a random assignment evaluation shows that individuals in 
the treatment groups spend at least 8 percent fewer days in 
jail or prison than the control group and shows a 5 percent 
increase in their immediate and long-term employment, USDOL and 
the State of New York will return investors their upfront 
capital. If we exceed these measures, returns can reach as high 
as 12.5 percent. But if the targets are not met, investors 
stand to lose their capital.
    CEO is excited to take part in this historic project. It 
represents a watershed moment in which both the State of New 
York and the Federal Government are supporting the full funding 
of our core model delivered to our primary service population.
    What is more, the contract aligns our partners in New York 
and Social Finance to drive effective performance management, 
fidelity, and collaboration. Congressman Young and Delaney's 
Social Impact Bond Act provides robust tools to create more 
deals like CEO's SIB.
    Drawing on our organization's experience, I would humbly 
offer the following suggestions to help guide this nascent 
field, several of which are also contained in Young-Delaney.
    Select experienced, proven providers. At this early stage, 
it is important to select service providers whose programs have 
been proven through experimental or quasi-experimental studies. 
For the field to gain steam, we need to construct projects 
around interventions most likely to demonstrate impact.
    Choose performance and repayment metrics carefully. 
Performance thresholds must be achievable based on a provider's 
track record. Projects should only aim to achieve results that 
are consistent with provider's historical performance.
    Attract new capital. Don't cannibalize. One of CEO's 
interests in participating in the SIB was accessing new forms 
of financial support. If CEO's existing government or 
philanthropic funding were diverted to support this SIB, the 
project's appeal would have diminished considerably.
    Government champions are critical. For a deal to close and 
be successfully operationalized, strong government leadership 
is essential. Government must be committed as a payor, but also 
as a performance and operations partner.
    Help providers manage risk. Government should provide tools 
for providers negotiating transaction. The risk of any large, 
high-profile project is significant, and they will benefit from 
the help assessing evaluation design, investment terms, among 
other areas.
    Finally, cost-benefit is key, but it is not the only thing. 
We should find a way to support projects with clear societal, 
if not exclusively monetary, benefits. Interventions focusing 
on violence reduction or literacy, for example, may show 
impacts, but fewer cost savings. These projects should receive 
support, if they produce results, government values.
    Not all social problems can or should be solved by SIBs, 
but in a resource-scarce environment, SIBs allow government to 
support proven interventions that show impacts on a specific 
social problem.
    Perhaps most importantly, SIBs and the Young-Delaney 
legislation have the opportunity to help change how cities, 
States and the Federal Government support the social sector by 
persuading them to fund what works.
    Thank you.
    [The prepared statement of Mr. Schaeffer follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

                                 ---------

    Chairman REICHERT. Thank you, Mr. Schaeffer.
    Mr. Romo, please.

STATEMENT OF ROBERT ROMO, FORMER CLIENT, CENTER FOR EMPLOYMENT 
                         OPPORTUNITIES

    Mr. ROMO. Good afternoon, Mr. Chairman, and members of the 
House Ways and Means Committee.
    My name is Robert Romo, and I am very excited, very proud, 
and a little bit nervous to be here. Thank you so much for 
inviting me and letting me share my story.
    I was released from prison after doing 13.5 years, and 3 
days out my parole officer gave me two options for employment 
programs to attend. The first program required me to wear a 
uniform that made me feel uncomfortable and reminded me of 
prison. I wanted to take my shot with CEO.
    As soon as I started CEO, I felt positive about gaining 
employment sooner than I thought. Everything felt professional 
from the first day. It felt good to come to class every morning 
at 7:00 a.m., to have a place to go that made me feel positive 
about myself.
    My life skill instructor consistently treated us like 
equals every day. It never felt phony, and I got my attention 
right away. She truly believed in me and pushed me to 
accomplish things that I was not sure I could. She instilled in 
me to do my best every day and to believe that my conviction 
did not define me.
    I was taught that presentation helps define who we are. I 
learned how to interact appropriately and professionally on the 
job. I learned self-confidence, and the CEO staff helped build 
my self-esteem. My job coach worked with me doing mock 
interviews. She never said my ways were wrong, but encouraged 
me to look at a different way of expressing my way, myself.
    I worked for 6 weeks on a part-time transitional job site 
doing maintenance on college campuses. I got a paycheck at the 
end of the shift, which was great. It helped me buy extra 
groceries to support my family.
    At the same time, I was attending the carpentry program at 
the CEO training center two nights a week. CEO kept me busy. 
There was not a lot of leisure time, which was very good, 
because staying busy meant I was not tempted by bad habits and 
old acquaintances. I was totally focused on my future.
    None of this was easy, but my instructors motivated me, 
pushed me and believed in me 100 percent. I had to get good 
grades on multiple tests and have good attendance to have CEO 
pay my tuition at a local community college for the next part 
of the carpentry program. I did it. And before the training was 
over, my job developer set up an interview for me at a hotel, 
and I was hired on the spot, doing maintenance and carpentry.
    I kept in touch with CEO because they told me I could and 
should do something I love, not get stuck in just any job. I 
love construction. And they sent me on another interview. And 
again, I was hired on the spot.
    On that job, I met someone I knew while incarcerated. He 
told me about an opportunity with his window company and set up 
a meeting with his owner. I was planning to go in a suit, but 
my CEO job developer suggested I should dress like I was ready 
to start work that day. And I did. I was hired on the spot. I 
have been there since last October and have already 
participated in building two sites.
    Honestly, I could not have achieved all of this without the 
support of CEO. They helped me see beyond my conviction to a 
future that was really positive. I am grateful for the second 
chance.
    I always had a passion to help others who are in a similar 
situation, and CEO is helping me fill that dream. This 
opportunity to speak today is just a first step towards 
fulfilling that goal.
    Thank you again for having me here today.
    [The prepared statement of Mr. Romo follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
                                 ----------

    Chairman REICHERT. Well, if I can call you Robert.
    Mr. ROMO. Yes, sir.
    Chairman REICHERT. Robert, you did an awesome job. So we 
couldn't even tell you were nervous.
    Mr. ROMO. Thank you, sir.
    Chairman REICHERT. You did very well. And we are so happy 
to have you here. And I imagine that there were times in your 
life where you probably didn't have much hope at all in getting 
a job, and here you are. You were hired on the spot at least 
three times.
    I have never been hired on the spot my first applications 
in my previous career. And so congratulations on your success 
there. And I bet a few years ago you would never have thought 
you would have been--would have had the opportunity to testify 
in Congress. Right?
    Mr. ROMO. Absolutely, sir.
    Chairman REICHERT. Yeah. Well, you--as I said, you did an 
excellent job. You should be very proud. And we are happy to 
have you here today.
    Mr. ROMO. Thank you so much, sir. It means a lot.
    Chairman REICHERT. You are welcome.
    Ms. Gibbs, you are recognized for 5 minutes.
    Ms. GIBBS. That is a hard act to follow.
    Chairman REICHERT. Yes, it is.

   STATEMENT OF LINDA GIBBS, PRINCIPAL, BLOOMBERG ASSOCIATES

    Ms. GIBBS. Good afternoon, Chairman Reichert and Ranking 
Member Doggett and members of the Ways and Means Subcommittee 
on Human Resources.
    I am Linda Gibbs, principal at Bloomberg Associates, which 
is a non-profit consultant group that was established by 
Michael Bloomberg to support mayors in achieving their visions 
for the citizens of the cities they serve. Before joining 
Bloomberg Associates, I served as the New York City Deputy 
Mayor for Health and Human Services.
    Working in City Hall with Michael Bloomberg, we focused 
closely on poverty in New York City. The Young Men's Initiative 
was a key part of that work and--which was focused on reducing 
the disparities for young men of color across all social 
domains. The Nation's first social impact bond was born out of 
that initiative as we searched for funding sources to help 
commissioners to launch innovative strategies to meet the 
mayor's challenge.
    The goal of our SIB is to reduce future jail time among 
adolescent inmates who are held on Rikers Island. We know from 
historic data that this population has a shocking 1-year 
recidivism rate of 50 percent. Half of them will be back on 
Rikers within 1 year.
    We were determined to change this outcome, but that left us 
with a question of what was going to prove the most promising 
model. While we had many post-discharge programs in place, we 
wanted to explore a jail-based strategy to counteract the 
negative effects of incarceration itself on later criminal 
behavior.
    We settled on an evidence-based cognitive behavioral 
therapy program called Moral ReconationTherapy, which 
emphasizes changing negative patterns of thinking as a way to 
reduce harmful, self-destructive antisocial behaviors, and has 
evidence that demonstrates reduction in recidivism in the range 
of 15 to 30 percent where it has been evaluated across the 
country.
    We adopted this. We called it ABLE. And we worked with two 
proven non-profit providers to deliver the service, MDRC, a 
national research and evaluation shop, and Osborne Associates, 
who had a long history of work on Rikers Island. The 
independent Vera Institute of Justice will serve as our 
evaluator and will be monitoring the success of the program.
    Goldman Sachs fully funds the project's intervention by 
advancing a $9.6-million loan to MDRC. If recidivism, meaning 
return to Rikers, drops by 10 percent, the investor will be 
repaid the $9.6-million investment.
    At the 10 percent break-even point, the City will have an 
amount necessary to both repay that investment and to pay for 
the continuation of the program. Drops in excess of 10 percent 
produce increasing returns to the investor up to a total payout 
potential of $11.7 million, which--at a recidivism reduction of 
20 percent. Everything beyond that would accrue savings 
exclusively to the City. The investor's benefit is capped at 
that level.
    If the performance of recidivism does not drop by 10 
percent, a portion of the investor's investment will be 
protected by a guarantee fund provided by Bloomberg 
Philanthropies, which will protect part, but not all, of the 
investment.
    We have completed the first full year of service, and 
results on the reductions to recidivism will be calculated 
after a full year expires from the treatment cohort's exit from 
prison. We need to watch a full year after they leave to know 
what the recidivism rate is for those that received the 
service. The program is funded to continue for 4 years, and the 
evaluation will continue for a full 7 years. So that is our 
program.
    Reflecting now more broadly on the issue of social impact 
bonds, I believe the model has great potential for a number of 
reasons. You have heard many of them already.
    SIB funding frees up the creative thinking process and can 
really stimulate innovation, the potential that the resource 
brings to the table. And it not only brings private capital 
forward to fund social programs, it directs a flow of capital 
to areas that current private markets typically do not serve: 
high-need communities without liquid access to private markets.
    SIBs also advance promising strategies. SIBs can help 
evidence-based projects being tested in one place to more 
easily jump government boundaries for replication elsewhere, 
and SIB investors can facilitate the scaling up of what works 
locally.
    Less attention has been given to what I believe is a 
different and very significant benefit, that is, that SIBs 
elevate the tenor of outcome-based management in city halls and 
State houses, advancing skills and defining clear outcomes, 
measuring for results, and assessing governmental cost and 
benefits.
    In many ways, I believe the SIB's greatest potential for 
government is that it is bringing this expertise to the table. 
Particularly for small jurisdictions without the ability to 
invest in large research capacities, the field of SIB practice 
is making straightforward tools more broadly accessible.
    But SIBs are not a panacea. They are not appropriate, for 
instance, when the intervention will not produce government 
savings. There are many social programs that should and need to 
be done, but just require an outlay of government expenditure 
or philanthropic investment. So SIBs will not serve every 
purpose.
    Other programs produce savings, but they take too long for 
them to be realized to be relevant in an investor's timeframe 
or they are too dispersed to be easily recouped, although I 
would note that the Young-Delaney bill, 4885, would solve part 
of that problem by making it easier to recoup those Federal 
savings that do accrue.
    Two other cautions I would note. Without good data 
management systems, evidence cannot be produced to satisfy the 
rigor of the model. Over time, I would expect this will improve 
as government agencies become more adept and systems are more 
widely available at reasonable costs.
    Great expertise is developing in structuring programs to be 
administratively simple and increasingly well structured to 
avoid practitioner bias, but this is also an emerging expertise 
and design considerations are significant.
    And this effort is in its infancy. Transaction costs can 
still be high and prohibitively high for many. Again, as skills 
develop and tools proliferate, these barriers should drop, 
making the practice more widely available.
    In sum, I am optimistic that SIBs offer great potential to 
move the field of sound social service practice forward, 
providing well beyond the short-term benefits of new investment 
dollars to providing sound outcome-based management expertise.
    Thank you.
    [The prepared statement of Ms. Gibbs follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 

                                 ---------

    Chairman REICHERT. Thank you.
    Mr. Juppe. Is that pronounced correctly?
    Mr. JUPPE. ``Juppe.'' Yes. Thank you.

  STATEMENT OF DAVID JUPPE, SENIOR OPERATING BUDGET MANAGER, 
       MARYLAND DEPARTMENT OF LEGISLATIVE SERVICES (DLS)

    Mr. JUPPE. Good afternoon, Chairman Reichert, Ranking 
Member Doggett, and Members of the Subcommittee.
    My name is Dr. David Juppe, and I am the senior operating 
budget manager with the non-partisan Department of Legislative 
Services in Maryland. I have spent the last 25 years analyzing 
operating and capital budgets and making recommendations on 
fiscal policy.
    I got involved with social impact bonds in 2012 when a 
former colleague, Kyle McKay, who is now with the Texas 
Legislative Budget Board, began examining a proposal by 
Maryland's Department of Public Safety and Correctional 
Services to utilize a social impact bond for reentry program 
funding for the purpose of reducing recidivism by at least 10 
percent.
    So I will talk a little bit about the findings of our paper 
briefly. As mentioned, there are a number of potential benefits 
for social impact bonds, but since it is a fairly new financing 
mechanism, you should also be aware of some of the concerns and 
issues that counteract some of the proposed benefits.
    I am not terribly surprised that social impact bonds would 
be considered at this point. Since the great recession of 2008, 
governments at all levels have been cutting back spending, and 
certainly it could be expected that providers would be seeking 
a long-term source of revenue. So you have--various mechanisms 
like social impact bonds, public-private partnerships and the 
like are gaining in popularity.
    Some of the risks that we would raise for your attention, 
at least consideration--first off is, you know, there is the 
higher cost to government for social impact bonds.
    Governments can and do procure contracts and services from 
private non-profit vendors through competitive procurements and 
single-source procurements every year and pretty much pay 
simply a direct cost, whereas, under a social impact bond, you 
have not only the direct costs, you have the potential for 
return on investment costs, costs for independent evaluations, 
as well as additional costs, such as management fees for 
intermediaries that link the financing with the providers and 
with governments.
    Related to this is the question of whether or not 
governments can really avoid having funding upfront provided in 
their budgets annually in terms of appropriations. One issue 
related to this is the fact that, when you look at State and 
local government budgets, typically they are--they build a 
request based off of their base and they often get a request 
ceiling or a target for the next year.
    So it would be very difficult--or more difficult certainly 
in this constrained fiscal environment for a level of 
government to provide 10, 20, $30 million above its base 
funding to pay a multi-year social impact bond payment.
    Certainly you would also expect that investors would like 
to see some sort of security. I mean, certainly, when 
purchasers of government-issued debt, either GO bonds or 
revenue bonds, see some sort of security in the forms of debt 
service reserve accounts, the bonds are insured or you may see 
debt service coverage ratios, but right now the only security 
you have is the expectation that, potentially, governments will 
appropriate the funds.
    A second issue that I would raise has to do with overstated 
cost savings and the likelihood of success. I have seen a 
number of proposals over the years, boot camps, community 
courts, drug courts and the like, social impact bonds.
    In many instances, there is a--it seems like there is a 
proclivity to taking the total cost of a facility, dividing it 
by the total number of cases, and deriving a cost per case and 
claiming that is a savings.
    So, for example, you may have a prison where it costs 
roughly $30,000 per offender. That includes all fixed and 
variable costs. So the savings from 100 inmates would not be $3 
million, as you might expect with the simple math. Typically, 
unless you shut down an entire wing or entire facility, you 
really only save the variable cost of food, supplies and 
medical costs. And in 2012, when we did our study, the variable 
cost was about $4,600 for offender in the Maryland prison 
system.
    So just--in short, just to say about our summary of our 
findings, we looked at a program that would involve 250 
offenders and we estimated costs of $4.1 million over 5 years 
against savings of about $250,000. So that pilot project would 
end up costing the State about $3.9 million.
    Also, with social impact bonds, we have a concern that 
short-term incentives could skew results to try to ensure 
success so that the investors get their return. And this could 
include selecting the most treatable offenders--or cases, a 
short-term focus on getting results as opposed to maybe longer-
term programs, and, again, I think a flight to safety, so the 
potential for focusing on programs that you know are successful 
so there is a greater likelihood of investors getting their 
money back.
    One other issue I would simply raise is just the risk 
versus the rate of return. We are seeing in social impact bonds 
a number of different negotiated on case-by-case rates of 
return. 13 percent in Peterborough. I think I saw 22 percent on 
one of other social impact bonds.
    And, you know, in the bond market, risk of non-payment is 
measured by bond rating agencies, and you also have, you know, 
a number of other factors, such as the length of the maturity 
and so forth.
    With social impact bonds, you know, for a short-term 
program, it seems like the rate of return can be fairly 
inordinate and--especially if there is a flight to safety and 
there is not as much risk or, in instances where--in New York 
City, where a portion of social impact bond was guarantied by 
the Bloomberg Foundation, then risk is very slight indeed.
    In closing, I have included in my written testimony some 
considerations for the legislation that you have before you. 
And I will just close by saying that social impact bonds do 
carry some risks, and in addition to the benefits, I think 
that, you know, you need to weigh carefully both the good and 
the bad here.
    Thank you.
    [The prepared statement of Mr. Juppe follows:]
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    Chairman REICHERT. Thank you for your testimony.
    Mr. Overholser.

   STATEMENT OF GEORGE OVERHOLSER, CEO AND CO-FOUNDER, THIRD 
                    SECTOR CAPITAL PARTNERS

    Mr. OVERHOLSER. Thank you, Chairman Reichert, Ranking 
Member Doggett, and Members of the Subcommittee. I am very 
pleased to be here.
    Just by way of introduction, I had a business career. I was 
on the founding management team of Capital One and then had a 
venture capital business that I built called North Hill 
Ventures, but for the past 10 years, I have spent more or less 
full-time on the social sector.
    The one thing that connects all the work I have done is 
riding on the megatrend that I think is behind the social 
impact bond discussion and pay-for-success discussion that we 
are having today, which is the inexorable and very powerful 
drop in the cost of computation and in the cost of capturing 
data.
    And what we are really seeing here is that, for the first 
time in history, just as it was true for the credit card 
industry 15 years ago, the cost of measuring outcomes has 
gotten to the point where we can actually do performance-based 
contracting based on outcomes, something which I think we would 
have done 20, 30 years ago if it were economically feasible. 
This cost is only going to continue to go down further, 
especially as we learn the art of performance-based contracting 
in this subsector.
    2 or 3 years ago I co-founded a non-profit called Third 
Sector Capital Partners. We currently have 25 people, and we 
spend 100 percent of our time working with partners around the 
country, putting together pay-for-success contracting that has 
SIBs as a source of loans for the financing associated with 
those contracts.
    Currently we have about 15 projects underway. And our first 
project was a $27-million transaction that we helped to set up 
in Massachusetts, which was based on variable costs.
    I think many of the points that Mr. Juppe brought up are 
highly valid. And we see it as our job to bring scrutiny to 
these arrangements so that they are of the highest fidelity.
    In Massachusetts, it was another recidivism project. In 
this case, it was helping an intervention that was--it is 
called Roca, which is a tremendous intervention that could not 
find its way to scalable funding.
    And the pay-for-success approach found a way to get scaling 
of this program so that 900 gang-involved youth could avoid the 
terrible obstacle, terrible statistic, of a 60 percent expected 
prison recidivism rate with an average of more than 2 years in 
prison.
    Each of our 15 projects has an enthusiastic government 
sponsor behind it. And these people, I have learned, around the 
country are extraordinarily busy. So why would they take on 
something so difficult as to basically undergo procurement 
reform, which is what I believe pay-for-success is about?
    And as I speak to them, here are the answers that I hear. 
First and foremost, these are public servants and they realize 
the current strategies just simply aren't working for the 
families in need in this country.
    At the same time, they know that there are untapped 
innovations that are waiting in the wings, and what they are 
looking for is a mechanism that makes it possible, easier, to 
surface the best interventions for the families in need and get 
them implemented at greater scale with greater fidelity and 
with strong focus on outcomes.
    They also realize that they don't have the working capital 
to get this done. And so they like the idea of lenders coming 
in. And I should mention that, in our 15 projects around the 
country, more than half of the money is coming from 
philanthropists. It is not coming from banks. It is coming from 
philanthropists who are looking for no return or for an 
exceedingly modest return.
    But what they are able to do is to absorb the risk of 
failure on these experimental pilots, and that allows public 
servants, people in government, to go after innovations that 
they otherwise might not be able to go after and often would 
never go after.
    The other thing that happens is that, bringing in private 
partners, we tap into human capital. If you work in government, 
which you do, and I am learning, as someone who is now 
traveling around the country, there is no one available on that 
staff to do the hard work of learning how to grapple with data, 
how to conduct deep due diligence, which is inherent to an 
outcomes approach. And so the private partners bring human 
beings who bring this type of expertise that otherwise would 
not be present, and I think this is very important.
    Then the last, probably most important, is having a 
mechanism in place that recognizes not that something is great 
now, but it recognizes when a program is no longer working. I 
would say government is very good at funding stuff that used to 
work, but it is not very good at recognizing when stuff isn't 
working anymore.
    At Capital One, we did 3,000 tests a year, and what we 
discovered is that our best innovations rarely lasted. And this 
was such a profound part of our business that we put posters 
all over the company of melting ice cream cones. And the poster 
said, ``It melts like ice cream.'' And what we were saying was, 
``Whatever you do, don't stop innovating.''
    What happens, I believe, with the way we do social policy 
is we have a fund-what-once-worked system. And the joke I like 
to make is, if we did music the same way we do social policy 
funding, we would all be listening to Meatloaf on an 8-track 
recording machine. And that is because 30 years ago Meatloaf 
was great music.
    Not to diss Meatloaf, but 30 years ago, Meatloaf was all 
the rage and the 8-track machine was cutting-edge technology, 
and you could imagine someone would say, ``This is great. There 
ought to be a law. Everyone should have access to this. Let's 
write it up like a recipe card into law and say, `Anyone who 
offers this standard of music and this standard of technology 
will be reimbursed, but if you don't--if you don't follow the 
recipe, you won't be reimbursed.' ''
    And that, to me, is a formula for freezing the system, and 
that is why we are stuck with programs that no longer work.
    Thank you.
    [The prepared statement of Mr. Overholser follows:]
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                                ---------

    Chairman REICHERT. Very good. Thank you, Mr. Overholser.
    Those last few words really resonated with me. I don't know 
if you know my background, Robert, but I was a police officer 
for 33 years before I came here. So I just look like I have 
been here 40 years. But I want to visit with you afterwards. I 
am very proud of you.
    And I really agree with the comments that you made, again, 
at the end. Funding those programs that used to work I think 
has been a mistake that we have made across the board in a lot 
of social services and aid and help to families.
    So this is why this hearing is so important, to get the 
good news out about some of the new programs and new efforts 
that are being made across the country.
    And, Mr. Overholser, in--your testimony and your work at 
Third Sector Capital suggests that this social impact bond 
financing model has been catching on rapidly at the State and 
local level.
    Is this the case? And why do we need Federal legislation to 
implement it on a nationwide basis?
    Mr. OVERHOLSER. Thank you for the question, Chairman 
Reichert.
    Indeed, I do think there is a great deal of interest around 
the country. As I mentioned, we have about 15 projects 
underway, and each one of them does have a government sponsor. 
I would hasten to add, though, that many of these projects face 
considerable obstacles that could be addressed through Federal 
legislation that I will explain in a moment.
    The Massachusetts project, I would also mention, had as a 
major impetus a DOL match that was a Federal match. And, 
interestingly, that DOL program that challenged States and 
counties to come up with rigorous pay-for-success constructs 
caused many, many more applications to be developed, many, many 
more initiatives and investigations to take place around the 
country than actually were awarded in the end. In the end, only 
two of them were awarded. One of them was our project in 
Massachusetts.
    I would also say that the deadline that was imposed as part 
of that DOL Federal grant created great impetus. I am not sure 
we would have gotten the project done if we did not have the 
benefit of that match because it is--there is an impetus that 
comes if you have a match available from the Federal level.
    It allows a local politician to look at folks in the eye 
who may say, ``No. Wait a minute. Why are you spending time on 
this?'' And it allows them to say, you know, ``We are able to 
tap into some funding that we could not otherwise tap into.'' 
And even if that funding might be quite small, it changes the 
discourse.
    I would also say that Federal--that this Federal 
involvement sets much needed standards. Mr. Juppe brought up 
many pitfalls. If we, for example, in Massachusetts did not 
look at the variable cost behavior of prisons, that would have 
been a bad thing. And so I love the idea of having a Federal 
match that says, ``Hey, this match is contingent on quality 
standards as spelled out in the law.''
    There is also money there for feasibility studies. It is a 
modest amount of money. But when you look at local government, 
that money does not exist. So a very small amount of money for 
feasibility can unlock major initiatives.
    And then, finally, as Linda Gibbs pointed out, many of 
these social programs around the country, of course, have 
Federal savings that are generated. So work at the local level 
can generate savings at the Federal level.
    But if you aren't able to tap into those savings and have 
that feedback loop of the savings, then the cost-benefits don't 
work, as a matter of economics.
    And so the presence of a--and this is sometimes called the 
wrong-pocket problem--but the presence of a feedback loop that 
goes up to the Federal spending streams will make it so that 
more of these initiatives find the cost-benefit that they need 
in order to be successful propositions.
    Chairman REICHERT. You have answered question 2 and 3 as a 
follow-up question to your first question. So thank you for 
your answer.
    And, Mr. Schaeffer, you talk about the rigorous evaluation 
of the CEO model and the results of your model. I am going to 
shorten this up just a little bit because of time.
    Given that CEO has been shown to be effective, why should 
government fund it through a social impact bond and not just 
contract with you directly, or why not just turn it into a 
government-run program? Is this just a more expensive way of 
contracting out, as Mr. Juppe contends?
    Mr. SCHAEFFER. Thank you for the question, Chairman 
Reichert.
    You know, I would say, on the one hand, CEO is extremely 
proud of the evidence base we have developed over the last 
several years--right?--proving that you can reduce people going 
back to prison is hard work.
    But, on the other hand, I am not sure government at any 
level--city, county, Federal--has quite caught up in really 
adopting that ethos of funding what works.
    And so this project offers us a tremendous opportunity to 
build additional evidence, but also build a proof point around 
really getting government to take hold of this different ethos 
of funding what works.
    And, for us, that is really exciting. And my hope would be, 
at the end of this project, we would reach really what we could 
term a performance-based contracting 2.0-type approach where 
the State of New York, now seeing that we did a really great 
job, we reduced people going back to jail or prison, would want 
to contract with us directly. But I would also--it would be, 
you know, quite understandable at this point that we are not 
just at that level yet.
    I would also say, though, in the SIBs, there is--a 
tremendous thing that a few of the other witnesses hit on is 
just the deepness of collaboration that this brings a part 
between government and a contracting partner.
    So frequently we enter into a contract, at the end of a 
year, end of 2 years, we produce results and--or we don't 
produce results, and we report back to government.
    Given the reputational risks that I think all parties here 
are taking on, it has been a tremendous experience for us to 
really work hand in glove with the State of New York to solve 
operational problems when they arise, to go through everything 
from how somebody even comes to our program, to how they get 
placed in a job, really, with a partnership in government, not 
just as a contractor-contractee relationship.
    Chairman REICHERT. All right. Just jotting down some notes 
there while you were talking. Thank you so much for your 
answer.
    Mr. Doggett, you are recognized for your questioning.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    As I indicated in my opening statement, I believe we need 
to look for innovative ways like this. I wish we had more 
Bloomberg Foundations across the country to participate in the 
significant way that your foundation has and the mayor has in 
New York City.
    I am a little concerned, though, about the practicalities 
and reflect on the experience that my State and some others 
have had where we were told, if we would just privatize State 
services and turn it over to some multi-national consultant, we 
would save a tremendous amount of money, and what has, in fact, 
happened is that we have had one lawsuit after another as 
taxpayer resources have been wasted with some of those 
privatization efforts.
    Here the idea of bringing in bond lawyers, consultants, 
lawyers into the process at a time when we have so many 
immediate needs concerns me some. In this very committee, we 
face a situation where we will see major cuts, barring some new 
budget agreement, in education and social services next year in 
Federal funding through the sequestration agreement.
    The Nurse Family Partnership, funded through the Visiting 
Nurses, we could extend for about another year at the same 
price as is reserved in this bill, and, at the moment, we have 
no funding source for it whatsoever. I think it is a cost-
effective program that we need to extend.
    In fact, I think every program that we invest in needs to 
be evidence-based. We should be applying these standards on all 
government expenditures except for those that we set aside for 
what are truly innovative programs that we want--where we want 
to try out a new concept.
    Mr. Juppe, my understanding is that your colleague, Kyle 
McKay, at the Texas Legislative Budget Board, who testified on 
social impact bonds in front of the Senate Budget Committee 
earlier this year, reached similar conclusions to yours, that, 
in many cases, the cost of using the social impact bond 
outweighed any benefits the State got in modest impact on its 
cost. Is that right?
    Mr. JUPPE. Yes. That is correct.
    Mr. DOGGETT. And can you tell us some of the costs 
associated with establishing and implementing social impact 
bonds that need to be considered along with the benefits of 
those bonds?
    Mr. JUPPE. Well, yes. In addition to the direct service 
costs, you have the return on investment at whatever rate that 
is negotiated. You also have a cost for an independent third-
party evaluation to ensure the outcomes were met.
    And then, finally, you can also have additional costs for 
the intermediary in terms of a management fee or a contract for 
arranging for the financing, the contractor and the government 
to get together in that social impact bond.
    Mr. DOGGETT. It has been suggested that the benefit of 
social impact bonds--that they will help us grow the pie 
overall in terms of State or Federal funding for these 
programs, and certainly we need to do that. But you pointed out 
that the States may need to put aside funding to reimburse 
private investors for these projects.
    In terms of State budgets, will social impact bonds 
actually free up additional funds to invest in social 
initiatives?
    Mr. JUPPE. I think it is actually more likely that 
government at the State level would have to put aside the funds 
for the service, plus the additional costs associated with the 
social impact bond, and then have those funds appropriated each 
year and then, at the end of each year, encumber those funds 
for when the actual social impact bond program was completed. 
So I think there would be additional costs each year.
    Mr. DOGGETT. Ms. Gibbs has appropriately noted that these 
aren't a panacea even where they do work.
    Does turning over a decision to private investors about 
where those dollars will be invested in order to secure a 
return bias the process of determining what needs will be met 
and what needs will not be met?
    Ms. GIBBS. I don't--I don't see this as a privatization. 
The thing that is really important to remember is that the 
relationship of the government and the service is by a 
negotiated contract between government and a service provider. 
90 percent of the social services in New York City are provided 
in that manner now with non-profit organizations.
    So, fundamentally, government is making a decision of what 
it wants to purchase and under what conditions and the investor 
is--for social impact bonds is making a determination whether 
or not that is a risk--a relationship that the investor is 
willing to take.
    But, ultimately, the evidence around what the program's 
outcomes are, first of all, have to align to the governmental 
purpose and then, second, for the purpose of whether or not it 
is a SIB-able event, would have to show the government savings. 
And the contract itself is up to the government partner to 
enter into.
    So it is not privatization in a private investor who is 
implementing a program for profit. It is a fundamental non-
profit relationship with--the service provider remains in 
place.
    And in the case of the--New York City, we are a GAAP 
financing jurisdiction. We have to have a balanced budget every 
year with revenues in, paying for costs incurred. And under 
those rules, the lawyers determined that the contract payments 
would not have to be accrued--or recognized in our budget until 
they actually became due. So there was no obligation to put 
money up front.
    And, in fact, that is one of the beauties of the SIBs, is 
that the taxpayers do not have to put the money up front. The 
investors bring in the upfront money and, ultimately, the 
taxpayers only have to pay if it actually works.
    Mr. DOGGETT. Thank you very much.
    Thanks to all our witnesses.
    Mr. CHAIRMAN.
    Chairman REICHERT. Thank you.
    Mr. Young, you are recognized.
    Mr. YOUNG. Thank you, Mr. Chairman.
    I appreciate Mr. Juppe's critical feedback and thoughts on 
the SIB model, Ms. Gibbs' responses to some of those thoughts, 
and would entertain any other thoughts Mr. Overholser or Mr. 
Schaeffer might have about Mr. Juppe's concerns.
    Mr. OVERHOLSER. Yes. Thank you.
    I would agree very much with what Ms. Gibbs said about 
privatization. The 15 projects that we are working on--every 
one of them begins with a pay-for-success contract between 
government and a non-profit provider.
    And, in most cases, these are non-profit providers who 
already contract regularly with government and government is 
sitting at the table and has the decision rights about who the 
provider is and what the program design looks like. So this is 
certainly not an outsourcing to private decision-makers of how 
taxpayer dollars are being spent.
    There is a very useful distinction between pay-for-success 
contracting, which is what we just were describing, and then 
the SIB. The SIB is just a loan. What it says is that, instead 
of the provider taking on the risk of maybe never being paid, a 
group of philanthropists and perhaps some banks as well will 
provide them a special type of a loan.
    And the loan is not to government. The loan is actually to 
the project itself. The loan will never be repaid if the 
project fails to produce outcomes because there won't be money 
to repay the loan. And, so, therefore, these lenders are not 
like normal bond lenders. They are taking on tremendously more 
risk.
    It is not just the risk of the government failing to honor 
its obligation, which is called counter-party risk, but there 
is a much larger risk, which is, in a world where less--
considerably less than 50 percent of those social strategies 
that are put to the test under randomized control trial--
considerably less than 50 percent--some people would say 90 
percent of those programs bring about no discernible level of 
impact, meaning you cannot tell the difference between those 
who are in the program versus those who are not in the program 
very, very often. This is an extremely high risk of non-
performance that the government no longer needs to take and 
that providers no longer need to take.
    So when we talk about the economics, imagine you spend 10 
percent more to put one of these projects together because they 
are new and it is quite difficult now--I think they are going 
to become lower than that in the future--but imagine you spent 
10 percent more and, instead of 50 percent of them not working, 
20 percent of them didn't work. Well, in that case, government 
would end up spending 20 percent less money because, when it 
didn't work, government wouldn't need to spend.
    Mr. YOUNG. If I could very quickly interject.
    Has it been your experience, Mr. Overholser, as--working 
with the various counter-parties when putting together these 
series of contracts that constitute a SIB, that government has 
learned to calculate savings on a net basis, that is, net of 
management and transaction fees, number one? And have they also 
understood the difference between variable costs and fixed 
costs and, thus, factored that into future savings?
    Mr. OVERHOLSER. The answer is yes.
    Mr. YOUNG. Okay.
    Mr. OVERHOLSER. In every case, it is very important to have 
the economists come in and work through what are the true cost 
economics.
    Mr. YOUNG. Thank you.
    Mr. Schaeffer.
    Mr. SCHAEFFER. Yeah. I would--I would echo that, sir. You 
know, we have a current active SIB in New York State in which 
the State was very focused on ensuring the variable cost rate 
was considered, and as we consider a SIB in San Diego as well, 
they are laser-focused on that issue.
    Mr. YOUNG. You know, I would further add the issue of 
giving security to investors in an incipient, inchoate market 
is certainly very important, and I am glad that Mr. Juppe 
brought that up.
    Based on my field research in the United Kingdom and their 
work on SIBs, their development of SIBs, they emphasize the 
importance of allocating money--a pot of money that would offer 
that additional security--though not essentially necessary, 
additional security that a contract would not be broken in the 
future by a future Congress or government. So that has been 
incorporated into Young-Delaney.
    Is there anything additional, Mr. Overholser, that you 
would add, based on your experiences, to prevent investors 
from, you might say, gaming the system, that is, trying to 
reach proven--reach outcomes, that they get their outcome 
payments, but not, in fact, improving the lives of services? 
What has been done in the past to prevent this?
    Mr. OVERHOLSER. I would begin by saying that the current 
system is also--you could call it gamed in the sense that the 
name of the game is to follow the rules that were written in a 
recipe that probably is very obsolete and that the new game is 
to try to get the needle to move on a set of metrics that we 
hope are well chosen.
    Very importantly, we must continuously measure outcomes. 
Very importantly, we must use randomization as opposed to other 
methods because other methods will invite what some people 
would call creaming.
    And, very importantly, it is helpful to have a market 
basket of metrics rather than a single metric. As my old 
friend, the cofounder of Capital One, used to call it, ``Beware 
of mono-variabilitis.'' We don't want to just have one--one 
variable.
    Mr. YOUNG. Thank you. I yield back.
    Chairman REICHERT. Mr. Renacci, you are recognized for 5 
minutes.
    Mr. RENACCI. Thank you, Mr. Chairman.
    I want to thank the witnesses for testifying today.
    Mr. Overholser, just this year Cuyahoga County proposed a 
way to help homeless children stay with their own families and 
avoid the foster care system through the use of social impact 
bonds. The county spends about 35 million annually on foster 
care.
    I understand the administration has been working with your 
company. Are you able to share any details on the progress of 
that program?
    Mr. OVERHOLSER. You are speaking of Cuyahoga County?
    Mr. RENACCI. Yes. Cuyahoga County.
    Mr. OVERHOLSER. Yes. We are very excited about that 
project. We are making great progress there. And we have, we 
think, something that is going to be a winner, but we are not--
we have not yet come in for a landing. So I am not able to 
share all the details.
    The basic idea there is that homeless mothers tend to have 
children who are highly involved in the foster care system. And 
if you think about it--we thought this was a homelessness 
project until we discovered that investments on the 
homelessness side actually can affect what is happening over on 
the foster care side.
    So this is a mechanism that makes it possible to do work in 
one area of government that brings about savings in another 
area of government and to build a feedback loop. That is that 
wrong-pocket problem.
    The government is very, very poor--does a very poor job, I 
believe, at being able to take advantage of these interagency 
relationships, and that is what we are most excited about in 
Cuyahoga.
    Mr. RENACCI. Thank you.
    And this is a question for anybody on the panel because I 
am trying to get a feeling. I mean, what we have here is an 
intermediary. There is a bond that is the source of funds to do 
this program and then, if the program is successful, the bonds 
are paid back with a premium of whatever, 10, 11, 12 percent.
    How about the thought--and I just--what is the downside of 
just contracting for success? What is the downside of 
eliminating the bond procedure and just contracting for 
success, eliminating all the fees and coming up with an 
outright contract that says, ``If you do this, you get paid. 
And if you don't do this''--or, ``If you do this, you get paid 
with a fee. And if you don't do this, you don't get paid,'' 
just without--so I would love to hear from any one of you as to 
what your thoughts are.
    Ms. GIBBS. Okay. I am sorry, Sam.
    I would say, from--from a government manager's perspective, 
I, in fact, see social impact bonds as part of a broader family 
of performance-based contracting. And the world of performance-
based contracting, where people are paid in some fashion, their 
payment is contingent on outcomes, can be everything from 100 
percent at risk, only paid if you hit a milestone, or can be a 
bonus on your payment.
    So the difference in those scenarios where it is a 100 
percent milestone, it tends to be very input-oriented. You get 
a payment if you complete an interview with a client. You get a 
payment if a client enrolls in a training class. You get a 
payment if a client completes a training class.
    The nature of social impact bonds is that they are very 
much more focused on those longer-term social outcomes, the 
real good that you are trying to get after. So I would 
distinguish it that way. Because nonprofit providers simply 
can't take the gamble around those longer-term outcomes. They 
don't have the cash flow to wait for those. They need the--they 
need the revenues now.
    Mr. RENACCI. But--not to interrupt, but aren't they taking 
a gamble on the bonds? I mean, that is where----
    Ms. GIBBS. Not the nonprofit providers. The only one who is 
taking the gamble financially is the investor.
    Mr. RENACCI. Well, it is the same. That is what I am 
getting at. It is intermediary. It is somebody outside of the 
government that is taking the risk.
    Ms. GIBBS. The service--the government and the service 
provider are not. The investor is.
    And the other big difference, of course, is that the social 
impact bonds bring in new--new cash now versus, if it is a 
performance-based contract, you have to appropriate the dollar 
value of that contract in the year that you contract it and 
with a pretty--pretty much knowledge that 80 or 90 percent 
minimally will be paid and potentially 105 to 110 percent will 
be paid, depending on the incentive structure that you have 
built into your contract.
    Mr. RENACCI. Anybody else want to take a run at it?
    Mr. SCHAEFFER. Ms. Gibbs gave most of my answer, but I 
would echo sort of from the vantage point of our project, you 
know, we are looking at jail and prison bed days, which is a 
metric that we have no other contract that measures, but it is 
ultimately the real social good--or one of the two real social 
good that CEO is achieving.
    So as opposed to, say, looking at something like job 
placements, which was really important--it is what helped Mr. 
Romo turn his life around--we are taking a longitudinal look at 
what CEO's impact is 3, 4, 5 years into the future. And SIBs 
are a great mechanism for looking at those longer-term 
impactful measures rather than the shorter-term government 
contract.
    And I would add, too, as a provider, we would be very happy 
to take government contracts that paid us for the full cost of 
our services. It has nothing----
    Mr. RENACCI. If you were successful.
    Mr. SCHAEFFER. If we are successful.
    Mr. RENACCI. And if you aren't successful, you didn't get 
paid.
    Mr. SCHAEFFER. We get paid up front in this deal. It would 
be too much a risk for us to take to not enter into something 
that--where it had such variability.
    Mr. RENACCI. Yield back.
    Chairman REICHERT. Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Chairman.
    And I am pleased that we are holding this hearing. At the 
beginning of social impact bonds, I am of a firm belief that 
the government shoulders the--I am interested in social impact 
bonds to see if they can leverage public dollars with private 
investment to expand high-quality prevention programs to 
improve key social problems.
    The topics of the initial social investment bonds are of 
particular interest to me. The State of Illinois has advanced a 
pay-for-success program to increase support for youth involved 
in both the child welfare and juvenile justice systems to 
improve their outcomes.
    Further, part of the President's pay-for-success budget 
proposal was up to $10 million via the Department of Justice's 
Second Chance Act, a program that I worked bipartisanly to 
enact into law to implement the permanent supportive housing 
laws.
    However, I also want to ensure that social investment bonds 
do not take away funding from existing programs and services 
that provide critical support to our citizens. I also want to 
make sure that the return on investment is reasonable and not a 
windfall to the investment community.
    Mr. Juppe, social impact bonds have been touted as a way to 
fund innovative programs, but you have suggested that the 
opposite might be true. In other words, pressure from private 
investors who want limited risk might steer funding to more 
proven methods.
    If this is true, do you think it is more appropriate to 
provide direct funding for these proven programs?
    Mr. JUPPE. Yes. Absolutely. I would agree that it would be 
more cost effective to provide direct contracts. There is 
plenty of examples where governments can, you know, undertake 
requests for proposals, requests for information with vendors 
to develop innovative strategies.
    Maryland is currently undergoing negotiations with private 
vendors for the construction and operation of a Purple Line 
extension between New Carrollton and Bethesda and, as such, is 
structuring those contracts in negotiations with various 
interested parties to determine the most cost-innovative 
strategies for constructing that line and operating it. So 
certainly you don't have all the additional expense of a social 
impact bond, which, as we have heard, is really relating to the 
financing of the services.
    Mr. DAVIS. Are you concerned that the returns provided to 
investors from social impact bonds may not be commensurate with 
the risks they are bearing?
    If mostly proven programs are funded, does this 
significantly reduce the risk of a project failing to meet 
performance measures?
    Additionally, do you worry that the complexity of the 
contracts that involve the SIBs might make the balance between 
risk and reward unclear as well as uncertain?
    Mr. JUPPE. Yes. Absolutely. I would agree with that. 
Certainly as--there is no standard nationally or within States 
for how you calibrate the risk and the return on investment.
    And, as we have seen, for example, in Peterborough, it has 
been cited as a very complex arrangement and it is unclear 
entirely how the outcomes will relate to the--you know, the 
payments to the investors.
    For example, in the first year, the recidivism rate has 
been reduced by 8.4 percent. I believe the first-year cohort 
required a reduction in recidivism of 10 percent to provide a 
payment.
    So there is no payment for this first cohort, but it sounds 
like in 2016 there could be a payment if the first- and second-
year cohort realizes a reduction of 7\1/2\ percent.
    So it certainly skews the outcomes, definitely, and--as 
well as the--there is the concern between how you calibrate the 
risk and the return.
    Mr. DAVIS. Thank you very much.
    And, Mr. Romo, let me congratulate you on finding a job and 
for all of your efforts to create a new life for yourself.
    What was the biggest barrier you felt that you needed to 
overcome in order to secure a job?
    Mr. ROMO. Thank you for the question.
    I really believe that the tools that CEO provided me with 
and the mentality that I allowed myself to believe, that, you 
know, I wasn't going to be successful anymore due to the time 
that I did behind prison--I feel that it was--it was--it was 
helpful and very important because we come out with a low self-
esteem and no--no guidance. Don't know how to really find 
certain--certain responses to be successful and make the 
transition back into society positive.
    Mr. DAVIS. Thank you very much.
    Mr. Overholser, you suggested that social impact bonds 
could reduce the waste of $720 billion per year. That budget 
figure includes tax relief for working families through the 
earned income tax credit and child tax credit, Pell Grants for 
college students, healthcare for veterans, school lunch 
programs, and long-term care for seniors through Medicaid.
    Do you consider any of those programs wasteful?
    Mr. OVERHOLSER. I consider them--I consider them programs 
that could have higher and better use of the same amount of 
funding. And so my interest is in creating a mechanism that 
reallocates money towards their highest and best use.
    And so many of these programs, yes, could--could have 
different strategies used that, when put to--to the test, can 
be shown to be a more efficacious use of that funding.
    Mr. DAVIS. Thank you, Mr. Chairman.
    Chairman REICHERT. Mr. Griffin.
    Mr. GRIFFIN. Thank you, Mr. Chairman.
    And I am proud to be an original cosponsor of Mr. Young's 
bill, and I just want to applaud all the work that Mr. Young, 
in particular, has done on this issue.
    I want to ask you, Mr. Overholser, a little bit--if you 
would comment a little bit about the value that investors add 
to a particular enterprise. We heard some talk about directly 
funding.
    It seems to me that the value here of the overall program 
lies in the value that the investors add to the intervention or 
the enterprise because, when the government just cuts a check 
to a nonprofit, there is a different sort of pressure, if any, 
put on that nonprofit to perform than if you get an energetic 
investor who uses their own money and shows up at the door 
every day to check on the progress.
    So it seems to me that the investors want to get their 
money back and redeploy it elsewhere and they bring energy and 
oversight in a detailed way, what the government almost never 
provides.
    If you could comment on that, if you would. And it seems to 
me that is a huge--that is a big--there is a big difference 
there between the government just cutting a check to somebody, 
and that--therein lies the value--the reason we are having the 
whole hearing, it seems to me. Can you comment on that.
    Mr. OVERHOLSER. I would agree with most of what you are 
saying. And I guess my view is I would prefer an end game where 
it is direct contracting.
    I would prefer to have a world where government procurement 
is changed in that the actual human beings working in 
government acquire the skills that currently we are needing to 
bring in from the outside.
    And I would--I would love to get to the point where 
providers themselves are on a solid enough financial footing 
that they don't need to seek private financing because of their 
concerns about maybe this thing won't work.
    So I see a world, frankly, that doesn't have social impact 
bonds. It just has pay-for-success contracting. That is where I 
would like us to get. I believe that, in order to get there, 
there is a period of time where it is very helpful to tap into 
what the private side can bring.
    That is not present currently in government. And absolutely 
we are finding that bringing in experts in how to use data 
better, bringing in experts in how to assess risk better into 
these--into these project teams is very valuable.
    I would also say that the time span of these projects is 
longer than the--than most political cycles. And so something 
quite unique about the public-private partnership setup is 
that, if you have private partners who are working on a 7-year 
timeframe, they are going to bring a continuity of focus to a 
project that is absolutely required if you have work that needs 
7 years to conduct.
    And so the--the cadence of government decision-making, the 
political cycles are shorter than the absolute truth of what is 
required to bring about the long-term changes we are looking 
for in our communities.
    Mr. GRIFFIN. I agree with some of what you said, though I 
am not sure we ever get to this ideal. I mean, you were talking 
about all the things that you----
    Mr. OVERHOLSER. We may never get there. So it is more the 
ideal----
    Mr. GRIFFIN. Yeah. My kids want to live in a world of 
unicorns and glitter, but that is just not happening.
    And we have had decades of either underperformance or 
failure or--I mean, it seems to me this is--this is reaching 
outside of the system to bring in proven innovators--even 
though a particular idea may not be innovation, we are bringing 
in people who have been successful and who have a stake in the 
success of this enterprise.
    Mr. Schaeffer or Ms. Gibbs, or if anybody else wants to 
comment, it would be great in my limited time
    Mr. SCHAEFFER. Yeah. Absolutely, sir.
    CEO would like to believe--and I think we do do a great job 
on all our contracts. And you are right. To the most extent, it 
is government cutting us a check and, on a quarterly basis or 
yearly basis, I will report back the outcomes.
    There is something to what you are saying, I believe, in 
the high-profile nature of this project, in which we are 
putting our neck out there a little bit, the government is 
taking a risk, the investors are taking a risk, and that shared 
interest, I do believe, is driving performance from the 
leadership of our organization to the case management level.
    In Mr. Overholser's world, I would absolutely agree. That 
is a place that we want to aspire to, and how quickly we can 
get there, I think, is on all of us to try to figure out.
    Mr. GRIFFIN. Skin in the game is what you are talking 
about.
    Mr. SCHAEFFER. That is the right metaphor.
    Mr. GRIFFIN. I am out of time. In an ideal world, we 
wouldn't run out of time.
    Chairman REICHERT. Thank you, Mr. Griffin.
    Mr. Crowley, you are recognized for 5 minutes.
    Mr. CROWLEY. Thank you, Mr. Chairman. Thank you for holding 
this hearing today.
    I appreciate the comments from both sides here this 
afternoon. And it is great to see some friends from New York 
here as well. I am proud that New York, both the city level and 
on the state level, have been so involved in the undertaking 
of--in some of these projects.
    There is a lot we are still learning about the effect of 
social impact bonds and these types of projects, but I 
appreciate the fact, as I said before, that New York City, New 
York State, our leaders are trying new approaches to solving 
complex problems.
    New York State started with a project to reduce recidivism 
and increase employment among high-risk formerly incarcerated 
individuals.
    And, Mr. Schaeffer and Mr. Romo, thank you for sharing your 
experiences with these projects.
    In New York City, we have also had an undertaking in an 
effort to reduce recidivism, particularly teen recidivism at 
Rikers Island, which is in my district. I have seen firsthand 
the challenges with respect to recidivism at Rikers and the 
need to find solutions that focus on prevention and long-term 
strategy.
    So I am very glad that we have former Deputy Major for 
Health and Human Services, Linda Gibbs with us here as well 
discussing New York City's efforts in these areas.
    So thank you all for being here.
    These are problems for which there is no easy answer, and I 
welcome efforts to try and address these challenging social 
issues. Often we get in the business of reacting to problems 
rather than trying to prevent them in the first place.
    In many cases, it is hard enough ensuring funding for the 
services that are needed just to respond, such as in the case 
of assisting individuals leaving incarceration. We appreciate 
funds for just the immediate need, but don't take the time to 
stop to consider new and different ways of looking at the 
overall big picture.
    So I am heartened to see that our witnesses today, whether 
using social impact bonds or not, are trying to encourage new 
thinking and new approaches to societal problems. And there are 
a lot more ideas out there and more not-for-profits, State 
agencies, think tanks, and other groups trying to put ideas 
into action, which I applaud.
    I am glad that this hearing is giving us a chance to think 
about how best to support these efforts and encourage further 
innovation. Innovation doesn't mean diverting efforts away from 
what governments and not-for-profits are already trying to do 
and the funding that they need to do it, but I am sure there 
are lessons we could learn from what is being tried and use 
that information to improve our social programs. And if these 
initiatives are focusing attention on problems that need more 
solutions, that is helpful as well.
    I know, in addition to the work being done now in helping 
formerly incarcerated individuals find employment, New York 
State is moving forward with projects to address other 
challenges that could have greater effect down the road.
    They are trying to address early childhood health and 
wellness, diabetes prevention, school-based health centers, and 
providing alternatives to placement and attention for high-at-
risk youth.
    And none of these problems are going to be solved 
overnight, and there probably isn't going to be one right 
answer for every State or city or for every particular--for 
every problem that is out there. The good news is that we have 
a lot of people both in this room and outside of it who are 
interested in working on a solution.
    Mr. Schaeffer, in your written testimony, you phrase the 
effort behind social impact bonds as catalyzing all levels of 
government to address some of these challenging issues, and I 
think that goes to the heart of what we are considering here 
today.
    I look forward to continuing to work with all of you and 
with all of my colleagues on the committee on both sides of the 
aisle here in Congress to keep exploring ways to promote 
innovative policy ideas and to keep supporting the 
organizations that are doing this work all throughout our 
social policy programs beyond the incarcerated as well. But 
thank you for your work.
    And I yield back, Mr. Chairman.
    Chairman REICHERT. Well, that ends--concludes our 
questioning and our hearing.
    I want to thank you all for being here today and sharing 
your testimony with us. And, as you have heard, there is a lot 
of interest here. And, therefore, we held the hearing today to 
help us learn a little bit more.
    And there is a number of things that--I kind of like to sum 
up things from my previous experience. You know, prevention is, 
of course, one of the things that, in my past life as a law 
enforcement officer for 33 years, is key, I think, to the 
success of our society.
    And I know that you are all looking for answers to prevent, 
well, young people, for example, from being homeless and find 
them loving homes. And we are working on that together here on 
this committee--subcommittee and as a full committee, you know, 
and keeping them off the streets and out of drugs, off of 
alcohol and out of the drug scene, gangs, et cetera.
    That is all preventing people from ending up in, you know, 
a place where Robert was and--but, you know, Robert, those 
experiences build a man. And you have become quite a man. And 
so we are very proud to have you. It takes courage to be here 
today to tell your story. We are happy you had the courage to 
come and do that because it will help people.
    And I know that is where you are today, not only, you know, 
striving to be a good American with a job and support a family, 
but you also want to help those who need help, help them from 
where you came. Right?
    So I think we do need to take a look at these things. I--in 
my previous career, I had the responsibility of being a part of 
a team who investigated a series of murders in the Seattle area 
called the Green River serial murders.
    Back in those days in the 1980s, those young women on the 
streets were called prostitutes. Today we know that that is not 
a correct word. They were criminalized. They were victimized at 
home. They ran away. And they were victimized again on the 
street and then they were victimized again by the system.
    We have grown as a society and we recognize that these 
young ladies and sometimes young boys, young girls, are not 
criminals. They are victims.
    And so our system needs to change in that regard as we look 
at those young girls and young boys on the street who are being 
victimized as victims and provide those services to them and--
just in the same way that we provide services that we talked 
about today.
    So when we talk about innovative, it is almost sometimes 
just a realization and a growth and a maturity of our community 
in recognizing that some criminals are not criminals. They are 
victims, and they need our assistance, they need our help, and 
they become productive citizens.
    Sometimes the Federal Government--I always like to joke 
when I go back to my district. I know I am going long, but I am 
on my soapbox.
    I go back to my friends at home and I say, ``I am from the 
Federal Government and I am here to help,'' and they laugh.
    We are from the Federal Government, and this committee--
this subcommittee is committed to helping in any way that we 
can. And your testimony today is going to help us decide how we 
can do that.
    So I am required to say, if Members have additional 
questions for the witnesses, they will submit them to you in 
writing, and we would appreciate receiving your responses for 
the record within 2 weeks.
    Committee stands adjourned.
    [Whereupon, at 3:28 p.m., the subcommittee was adjourned.]
    [Submissions for the record follow:]

American Federation of State, County and Municipal Employees (AFSCME), 
                               Statement

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