Process Study of the U.S. Department of Labor's "Pay for Success" Pilots in Two States: Development of the Grants Applications and Initial Implementation.

This report is the first of two from a process study of the U.S. Department of Labor's (DOL's) two pilot projects testing use of a Pay for Success (PFS) financing model. The report explores the early planning and operational experiences of the two projects (in Massachusetts and New York) which each received 4-year grants of approximately $12 million from DOL in 2013. Both projects focus on serving ex-offenders and are intended to reduce participants' recidivism and improve their employment outcomes. Both use a PFS model that involves: private for-profit and philanthropic investors who pay the costs of delivering the intervention; an intermediary organization that developed and manages the project; a "payor" (in this case, state government agencies) which will reimburse investors and provide them with potentially significant returns if specific outcomes are met or exceeded; a rigorous random assignment evaluation (as required by DOL) to determine those outcomes; a service provider to deliver the interventions; and an independent validator to verify the outcomes. Payouts to investors are based on the relative reduction of days in prison and increases in employment and earnings for participants, as compared to control group members who did not receive the interventions. Both pilots have similar but distinct approaches for specifying under what circumstances and when payouts will be made to investors.

The report examines the projects' development of working partnerships and management structures, securing private and philanthropic capital and financing mechanisms, establishing the service intervention, setting up the evaluation design, and establishing outcome measures, outcome targets and payment amounts. Data sources include in-person interviews with the key partners in each PFS pilot, as well as reviews of grantee documentation and performance data that was reported to DOL. Preliminary observations of respondents focused on the value of support from high-level State leadership; the need for extensively educating partners about technically complex concepts and design issues related to the random assignment evaluation and payouts; the need for carefully structured and detailed contracts, as well as for strong management and communications processes; the value of a diverse funding based including philanthropic involvement; the difficulties in determining how to measure the outcomes of the service interventions and the potential budgetary savings associated with them; and the value of the technical assistance provided by the Harvard Social Impact Bond Lab.

Organization/Authors: Abt Associates; Glen Schneider, Tyler Moazed, Beth Gamse, Marjorie Levin, Stephen Whitlow

Key words: Pay for Success, PFS, Social Impact Bond, SIB, Pay for Performance, PFP, recidivism, innovation, random assignment, random control trial, RCT, process study, Massachusetts, New York, MA, NY, investors, payouts, private sector, philanthropy, ROCA, CEO, ex-offenders, youth, offenders, parolees, work experience, experimental, Goldman Sachs, Bank of America, Social Finance, Third Sector Capital, Harvard