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Men participate in the jail alternative program Roca Inc., part of the Massachusetts Juvenile Justice Pay For Success Initiative, which seeks to steer hundreds of Massachusetts’ highest-risk young men away from a return behind bars. (Charles Krupa/​The Associated Press)

Houston — The Laura and John Arnold Foundation (LJAF) today announced an $8.4 million grant to the Urban Institute that will fund the development of tools and resources to help governments tackle high-priority problems through the use of Pay for Success (PFS) financing. A growing number of cities and states are now using this innovative funding mechanism to help address a range of issues from decreasing the number of days children spend in foster care to reducing the number of individuals who return to prison. 

Under the PFS model, the government identifies a problem and specific target outcomes that will help to improve citizens’ lives and save taxpayers’ money. Private investors cover the up-front costs of a program designed to meet those outcomes, and the government agrees to pay for success.” In other words, it only repays the investors if an independent third party concludes that the program has achieved its predetermined goals.

LJAF’s funding will help to establish the Urban Institute’s Pay for Success Initiative, which will include a suite of technical resources that are designed for each of the parties in a PFS project — the government, service providers, evaluators, and funders. The resources include materials to help governments determine whether a PFS project is the most effective and cost-efficient way to address a particular issue, as well as tools to help structure deals, establish benchmarks for success, and identify a method to evaluate whether a project is successful.

These are exactly the resources that governments need to develop PFS projects,” David Merriman, Administrator of Job and Family Services in Cuyahoga County, Ohio, explained. We recently launched the nation’s first county-level PFS project to provide homeless families who are involved in the Cleveland-area child welfare system with services to support faster reunification. In doing so, we showed that moderately sized, local governments can be innovative and launch a PFS project if they have the right partnerships and technical assistance. Now other counties and cities will have the blueprints and supports they need to explore PFS.”

In addition to developing technical resources, the Urban Institute will create a PFS help desk and will conduct online and in-person training sessions focused on executing PFS projects and translating rigorous evidence into effective practices.

The goal of the Urban Institute’s Pay for Success Initiative is to ensure that as PFS expands, the projects are rooted in evidence and measured with integrity,” explained Urban Institute President Sarah Rosen Wartell. This new grant from LJAF will allow us to build the platform and provide the resources to guide, design, and assess initiatives all across the country.”

There are roughly 30 PFS projects in various stages of development in the United States, and PFS investments could total $1 billion over the next three years. The projected growth is due in large part to the funding model’s broad, bipartisan support. Policymakers on both sides of the political aisle have embraced PFS as a way to dramatically improve public services and ensure that taxpayer dollars are spent on programs that produce results.

As state and local governments work to improve public services by orienting spending around outcomes and prevention, we are pleased that the Urban Institute will serve as a central hub of information and support,” LJAF Vice President of Public Accountability Josh McGee explained. By providing these free PFS resources, we hope to make it easier for governments to identify programs that deliver better results to those in need.”

One key component of all well-designed PFS projects is rigorous evaluation. An independent entity is responsible for determining whether a program met its goals. If the third-party evaluator finds that the program is successful, the government repays those who made the original investment and may provide a modest return. If the program has not met its goals, the investors are not repaid.

LJAF is an investor in two PFS deals and has agreed to recycle any returns into future PFS projects. It supports the New York State Workforce Reentry Program and the Massachusetts Juvenile Justice Initiative, both of which are designed to improve public safety and reduce recidivism, thereby generating significant public savings. In addition, LJAF funded a pilot for the Cuyahoga County project, and it recently co-hosted a series of regional PFS summits with the White House and Nonprofit Finance Fund.

As one of the largest funders in the field, LJAF has invested more than $23 million in PFS initiatives. In addition to its support for the Urban Institute, LJAF provides funding for the following groups and projects:

  • Social Impact Bond Technical Assistance Lab at Harvard University’s John F. Kennedy School of Government
  • Policy Innovation Lab at the University of Utah
  • Nonprofit Finance Fund
  • Third Sector Capital Partners
  • Social Finance US
  • Frontline Services (Cuyahoga County)
  • Massachusetts Juvenile Justice Initiative
  • New York State Workforce Reentry Program