Senate Panel Holds Hearing on Social Impact Bonds

On May 1, the Government Performance Task Force of the Senate Budget Committee held a hearing on social impact bonds. The panel invited four witnesses to testify, two of whom were supportive and two critical of social impact bonds (SIBs).

Witness Testimony

The first two witnesses were proponents. The first, Dr. Jeffrey Leibman, Director of the Harvard Kennedy School Social Impact Bond Technical Assistance Lab, said SIBs improve decision making by empowering private investors to put money into proven programs. He suggested that the “market discipline” this produces would compare favorably to political or bureaucratic decision making models that are more typical for public programs.

Liebman also said that SIBs would enable a shift from remediation to prevention-oriented programs. They would also would also foster sustained, multi-year collaboration which he said is made harder by high turnover among government employees.

The second witness was Mark Fisher, Social Justice Director at the Department for Work and Pensions in Britain. Fisher gave an overview of what is happening in his country, noting that there are “currently 15 SIBs in the UK, with over 50 in the development pipeline. These cover policy areas including troubled families and children in care, unemployment, housing and homelessness, criminal justice, health, drug addiction, and education.”

The first witness with a more critical perspective was a state legislator, also named Mark Fisher, a Republican still in his first term in office. Fisher was presumably chosen to testify because of his small-government leanings and because he is from nearby Maryland, which had considered social impact bonds.

Unfortunately, this Fisher had no apparent expertise with social impact bonds and was forced to spend time talking about legislation (HB 517) introduced in 2013 by one of his colleagues, Del. Sandy Rosenberg, from an entirely different part of the state (and the other party).

Fisher’s main point was that social impact bonds “are well-intended, but they unnecessarily bloat bureaucracies.” He added that in parts of the state where educational outcomes are lagging (he named the city of Baltimore), tuition vouchers would be a better alternative.

A more in-depth critique came from Kyle McKay, a former legislative analyst for the Maryland state legislature who wrote a fiscal analysis questioning the effectiveness of SIBs and arguing that they would produce no budgetary savings because of the cost of consultants, lawyers, and various financial intermediaries. He said that possible savings from programs that did not meet outcomes would be offset by a risk premium added to the cost by outside investors. He also said that outcome indicators would be subject to possible distortion and/or corruption.


In the follow up discussion, Sen. Kelly Ayotte (R-NH) asked for more information on whether SIBs save money. Dr. Liebman said that 90 percent of the costs of a program in Massachusetts covered program services and that the other 10 percent covered additional services that still had value, such as the cost of determining whether the program was actually working. He said the intermediaries were also bringing additional expertise to the project (if not, the project would not reach the targeted outcomes, which need to be higher than a comparison group).

Sen. Sheldon Whitehouse (D-RI) suggested that it might not be necessary to keep outside investors once they have shown what programs work. Mr. Fisher from Britain suggested that the discipline provided by outside investors may be a key component and may still be needed on an ongoing basis.

Kyle McKay noted that investors are actually choosing models that have already been extensively evaluated, which is what you would expect from investors who are trying to minimize their risk.

Sen. Sheldon countered that Congress is not good at expanding programs that have been consistently evaluated in positive terms, usually because these analyses are trumped by politics or cost. He suggested that the private investors might be needed, even if they only back proven strategies, although he repeated his belief that this role should only be temporary.

Dr. Liebman replied that our knowledge of what works is too often based on isolated, and often dated, examples. He said the private role may be needed on a continuing, real-time basis.

Sen. Angus King (I-ME) was skeptical, not just of social impact bonds, but of government contracting in general. A former governor, he viewed SIBs as an admission that government itself is not doing a good job and that government itself should be held accountable for results. Dr. Liebman replied that governments should and are trying to measure their own results, but that outside nonprofits and other providers are still important and their results must be measured too (a view echoed here).

The committee chairman, Sen. Mark Warner (D-VA), suggested that SIBs might still leverage innovation. He cited venture capitalists as a model. Sen. Whitehouse echoed that, saying that the private sector could provide a “prototyping function” and a “business perspective” on bad ideas that are driven by ideology. Sen. Ayotte said that government is very bad at eliminating programs that are not working and instead simply “adds more layers.”

During concluding remarks, Mr. Fisher from Britain indicated that comparing the cost effectiveness of various models is something they will continue in his country. He said that to be successful, the models must be kept relatively simple, but he thought there were quite a few opportunities that were not that complicated.

Related Debate

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