A New Way of Governing: Pay-for-Success

The California legislature is considering a new approach to alleviating social programs. Senate Bill 593, which passed the Senate earlier this year, is now being considered in the Assembly. Under the bill, government would utilize the private sector to generate expertise, resources, and evidence-based solutions to address such issues as homelessness, child abuse, recidivism, and education. Reason’s Len Gilroy explains that this is not your usual public-private partnership:

"Pay-for-success" isn't exactly what comes to mind when thinking of how California government spends tax dollars, so we take special notice when legislators in Sacramento pass bills based on the concept. …

California would determine the results it is seeking to achieve in those ares – a specific reduction in the recidivism rate, for example. Private investors and philanthropic groups would then finance the work of nonprofits to deliver new, evidence-based social service programs on behalf of the state under a performance-based contract model.

If the privately funded programs achieve the state's goals, improve outcomes and save public funds by seeing fewer released offenders returning to prison, for example, then the investors will later receive success payments from the state.

But if the programs don't deliver results, taxpayers don't pay, and it is the private investors who may lose their money. This risk keeps the focus squarely on delivering bottom-line results.

Gilroy notes that several states have already adopted pay-for-success plans this year, including New York, Massachusetts and Illinois. Meanwhile, South Carolina, Ohio, Michigan, and Colorado are also in the process of implanting such programs. While putting such programs in place is complex, Gilroy concludes:

The status quo isn't working. That's why it's so encouraging that California policymakers are willing to partner with the private sector to drive better performance in government. If the private sector wants to pay for the state to experiment with programs that improve social outcomes and reduce costs, it could be a major win for both the programs' recipients and taxpayers.