This will be the state’s biggest social impact project ever. How will Philly fit?

Pennsylvania is getting ready to launch two statewide recidivism initiatives  — on the dime of private investors.

The twin initiatives will be public-private partnerships designed to achieve two goals at once: create positive social impact and cut government spending.

It’s a burgeoning social impact strategy called “pay for success” (PFS), and once Pennsylvania’s long-awaited PFS projects are launched, the state will join a small cohort of governments in the U.S. to have done so (and become the first to work on two simultaneously).

The world is eager to solve public sector problems with private sector solutions. Pennsylvania now has two in the pipeline, and how much the city of Philadelphia will be involved is being determined right now.

Here’s how PFS works: Private sector investors, such as philanthropic entities and high-impact investors, fund organizations that have been contracted by the government to achieve specific social outcomes. Those investors can only collect reimbursement and interest from the government if specific social outcomes are met.

The big idea is that governments only pay if providers deliver, protecting taxpayers by shifting the risk almost entirely to funders. That should be a relief, considering past statewide PFS projects have cost investors $9.6 million in New York and $17 million in South Carolina.

But PFS isn’t free. There are transaction costs. PFS deals can’t be done without an intermediary organization to help raise funds, develop the projects and measure results. For that, Pennsylvania has partnered with Massachusetts-based nonprofit Social Finance, which brokered the first state-led PFS project in New York in 2013.

PFS contracts have been procured by these two nonprofits, according to Governor Tom Wolf‘s press secretary, Jeff Sheridan:

• Center for Employment Opportunities: A NYC-based nonprofit that provides formerly incarcerated adults with life skills education, transitional employment, full-time job placement and follow-up counseling. CEO has scaled its model across 10 cities — including Philadelphia, where it’s funded by the GreenLight Fund.
  • The CEO model has cut adult recidivism rates by 22 percent, and Social Finance has determined every $1.00 invested in CEO will return $1.70.
• Youth Advocate Programs: A Harrisburg-based nonprofit that provides “holistic community-based” programming to youth who would otherwise face “costly, and potentially harmful out-of-home placements,” Sheridan said.
  • YAP is half the price of a detention center, and 84 percent of participants avoid arrest while in the program.

Social Finance declined to comment on the details of the deals, but Communications Director Alexandra Zaroulis confirmed that the organization is working with the state, CEO and YAP.

CEO and Social Finance have a productive history: The two are working together on New York’s PFS project, and both have ties to Philadelphia.

The city of Philadelphia has been chasing down a PFS project of is own since July 2014. Under former mayor Michael Nutter, Philadelphia commissioned Social Finance to conduct a feasibility study analyzing the city’s PFS options. Leaders at Social Finance determined three primary conclusions for the city:

• Philadelphia’s best chance for success is a PFS project reducing adult recidivism with CEO.
• A project cutting juvenile recidivism would be the second best option.
• Either project would likely require a partnership with the state.

According to Maia Jachimowicz, Nutter’s policy director at the time, the last conclusion was the most encouraging. In an ideal state-city PFS partnership, the state would accrue 70 percent in public savings, while the city would save 30.

Just months before Philadelphia’s feasibility study was released, the state had issued the Request for Information (RFI) surrounding a PFS project of its own.

“We were really encouraged that the state at the same time was pursuing a lot of this work,” said Jachimowicz, now with D.C.-based nonprofit Results for America. “We were like, ‘The stars could not be more aligned.'”

The City of Philadelphia immediately responded to the state’s RFI, proposing an unprecedented partnership that would include buy-in from both the city and state. That suggestion was echoed repeatedly in RFI submissions from Accenture, Deloitte, IBM, District Attorney Seth Williams, GreenLight Fund.

A state-city partnership on PFS was also suggested by Social Finance.

“Given the fact Social Finance was the one who did our feasibility study and they’re the ones moving forward, they have the body of knowledge to be informing the state about [a partnership with Philadelphia],” said Ashley Del Bianco, director of the Philadelphia Office of Grants.

Del Bianco said as far as she knows, nobody in city government has heard anything from the state yet regarding whether or not the city will be involved.

"Philadelphia is certainly part of our efforts."

That might be because the projects are still in their early stages. It may only be a matter of time until the state calls upon the city to participate.

“Both of these projects are targeted statewide,” Sheridan said, “and Philadelphia is certainly part of our efforts.”

To what extent the city will be involved is yet to be determined, but that level of inclusion will also factor into the role regional philanthropy plays in the state’s PFS projects.

According to Philanthropy Network Greater Philadelphia Executive Director Maari Porter, philanthropy has played a role in every PFS project to date, either by investing directly, helping scale providers with grants or by bailing out investors if providers can’t deliver.

For example, when the first U.S.-based PFS project in New York City ultimately failed, Bloomberg Philanthropies put up $6 million to float the $7.2 million lost by Goldman Sachs.

Encouraged by the state’s progress, Porter said local philanthropy will have to be involved in both Pennsylvania PFS projects.

“Even if you get national [financial institutions], they will want to see not only philanthropy but also regional and local philanthropy,” she said. “Those are the folks who really understand the context, the region, the issue and the players really well. That’s an important part of the equation.”

According to Jachimowicz, funding is also the easiest part of the equation.

“By and large, my sense of it is financial institutions have been eager and excited to pursue this type of work rather than taken aback by it,” she said.

It seems as though all the pieces are in place. The next steps taken by Pennsylvania and Social Finance will determine how the city of Philadelphia will be involved in the state’s largest social impact experiment to date.