Bringing Social Impact Bonds to California

This post is part of the capital markets open letter project by MBA students at Presidio Graduate School.

Open Letter To Governor Jerry Brown From Katherine Athavale, Katie Branagh, Norman Rossman, Dale Wannen

Dear Governor Brown:

We are writing you to ask your support for an innovative new way of financing positive social outcomes: the social impact bond. As you are well aware, the state of California continues to feel the negative ramifications of this tumultuous economy. Once again in September, the state’s revenues fell short by about $300 million. This puts us about $700 million below expectations in the early stages of the fiscal year. In this difficult economic climate, California needs social programs that get the best results at the lowest cost. Government and politicians cannot afford to finance programs that don't accomplish goals and are seen as wasting taxpayer dollars. Social Impact Bonds transfer risk from the government and taxpayers to private investors.

A social impact bond, or SIB, as you may know, is a vehicle for funding social programs in which private investors provide funds to service providers to meet program goals. The government then repays investors a portion of the government savings created by the program. If there are no results, then there is no repayment and no wasted taxpayer dollars. For example, Social Impact Bonds are currently being used at Peterborough Prison in the United Kingdom to fund programs to rehabilitate prisoners. The Ministry of Justice will repay investors a portion of the government savings created from housing fewer inmates if the programs reduce re-offending by 7.5 percent or more.

Although most SIBs are currently designed to target social issues, our student team envisions environmental applications as well. After a moving presentation from the Earth Island Institute about the dangers facing wetlands, and the lack of project funding due to California budget cuts, we began researching how SIBs can be applied to protect these fragile ecosystems. Our research suggests that wetlands can create government savings by preventing flood damages to coastal communities. A portion of these savings can then be used to repay the investors who funded the wetland protection and rehabilitation projects. Additionally, we have learned that coastal rehabilitaion projects can create more than twice as many jobs per million dollars invested than the oil and gas and road construction industries combined.

In recent news, President Obama allocated about $100 million of the federal budget to Social Impact Bonds, or as he calls them, “pay for success” bonds. Massachusetts has also begun initiating programs funded by SIBs. California has long been a leader in social and technical innovation; let’s lead the way with SIBs as well. Please consider adding this innovative funding mechanism to the California state budget.

Thank you for considering our request, Governor Brown. Your response on this matter would be greatly appreciated.

Sincerely,

Katherine Athavale, Katie Branagh, Norman Rossman, and Dale Wannen
MBA students, Presidio Graduate School

P.S. For further information about how California can use SIBs, please see  Social Finance, Inc.’s response to Massachusetts’ request for information about social impact bonds. Additionally, at the end of the semester we would be honored to provide you with the results of our research concerning the application of SIBs to the issue of wetland protection and restoration.