The success of a $4.6 million social impact bond in Utah shows that the relatively new form of financing solutions to social problems can work, according to Goldman Sachs and other stakeholders.

October 9, 2015
Author: Liz Farmer

Back to the Drawing Board. Again.

Proponents for an initiative in California that would allow governments to curb pension benefits are starting over after rejecting earlier ballot language given to the measure by State Attorney General Kamala Harris. Former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio, who both pushed through voter-approved pension cuts in their cities, said that Harris’ wording of their original measure was designed to derail it by making it unappealing to voters. That measure proposed giving voters the power to approve things like pension benefit enhancements and called for new employees to be enrolled into 401(k)-style plans.

The attorney general's office writes the titles and summaries of all statewide ballot initiatives. On Oct. 6, Reed and DeMaio unveiled two slightly different pension initiatives that contain elements of their first proposal and are sending them back to Harris for review. Reed and DeMaio say they will move forward and collect signatures on just one of those measures, depending on how the AG summarizes them. The proposals would place different limits on pension benefits but both would prohibit the government from paying more than half the total cost of retirement benefits, unless voters approve an increase.

This isn’t the first time Reed has tussled over ballot wording with Harris, a Democrat who has political support from labor unions. Two years ago, Reed sued her over what he called a "misleading and unfair" description of his first attempt at a statewide pension initiative. That proposal would have allowed local governments to cut pensions for their workers' remaining years on the job. Reed withdrew that initiative.

Los Angeles County’s Association of Deputy District Attorneys, an opponent of the measure, quickly fired off a statement this week calling Reed and DeMaio a “dangerous duo” out to circumvent the courts. “What Reed and DeMaio can't get around, and what they can't handle,” the association said, “is the truth.”

Cha-Ching! Success!

Nothing talks like money does and this week, the financiers of a Utah preschool program became the first Social Impact Bond (SIB) investors to see a return on their investment. The United Way of Salt Lake announced it had cut a check for $267,000 to investment bankers who funded public-preschool expansion in Utah. The early payment came because initial results showed the program is working already at reducing the number of kids who need special education in grade school.

Of the 595 low-income three- and four-year-olds who attended preschool financed by the SIB in the 2013-14 school year, 110 of the four-year-olds were identified as likely to use special education in grade school. Results showed that of those 110 students identified as at-risk, only one used special education services in kindergarten. That equals a $281,000 cost savings for the school district, the state and Salt Lake County. The so-called success payment is 95 percent of that cost savings.

Goldman Sachs and J.B. Pritzker committed $7 million to the pay-for-success program, which will fund expanded preschool services for five years. Researchers will continue to monitor the 110 students through sixth grade. Investors will get more success payments based on the number who avoid use of special education in each year.

The news comes two months after the first-ever social impact bond program in the United States shut down early. An evaluation nearly three years in on a program aimed at reducing recidivism at Rikers Island Prison in New York City found the project had no impact on the number of repeat offenders.

Emergency Response

Moody’s Investors Service said this week that most South Carolina cities and counties dealing with an emergency response to massive flooding at least don’t need to worry about their credit rating. That's mostly because the state’s local governments tend to hold a lot of money in reserves, which gives them flexibility and cash to pay for the costs of handling a natural disaster. (Typically, federal government refunds for such expenses can take months.) The median general fund balance as a percentage of revenues stood at a high 34.4 percent for the state's cities and counties, according to Moody’s.

The state’s liquidity remains ample as reserves continue to build, Moody’s added. South Carolina’s general reserve and capital reserve funds were both fully funded for the fiscal year ending June 30, 2015 at the constitutionally required amounts of $319.5 million and $127.8 million, respectively.