Two opportunities for PFS to add value to federal programs

Pay for success (PFS) is not the only tool in the toolkit for driving federal, state, and local government funding towards effective programs. But it can be especially useful to help governments overcome political or financial risks when effective preventative programs cost money now but ease financial burdens later, or when tested programs have skeptics in a legislature. 

This tool is proving useful to states and local governments as they work to improve outcomes in children’s health, reading and math, recidivism, employment, and the environment. However, states and cities have not yet been able to use federal funding for outcome payments, even when the anticipated improved outcomes have strong implications for federal programs and funding.

The federal government has supported the movement towards an outcomes-focused approach to policymaking and funding, though, including support for pay for success. The Social Innovation Fund (SIF) has facilitated PFS by funding feasibility studies and supporting transaction structuring and access to administrative data for high-quality evaluations within PFS contracts. Congress has also recently passed legislation authorizing the use of pay for success contracting in housing, workforce and job training, and education. The Departments of Education and Veterans Affairs and the Corporation for National and Community Service have all authorized demonstrations or pilots of pay for success across various issues and target populations.

With these new authorizations and demonstrations, incorporating federal funding into pay for success contracts for outcome payments is now a reality. As a result, we’re frequently asked how pay for success could provide value for programs funded by federal dollars. Two examples come to mind: higher education, and adult employment training coupled with high-quality child care.

Each year, Congress invests billions of dollars in higher education through the federal Pell Grant program, with a particular focus on lower-income students and families. However, these investments are largely based on enrollment metrics, with relatively little attention to educational or career outcomes. In short, we know how much we invest, but have very little idea of the return on that investment, even regarding short-term outcomes like degree completion.

Because the federal government guarantees federal student loans and absorbs the costs when students default, reducing those defaults would provide value to taxpayers.  Pay for success could be used by the federal government to expand a program like the Accelerated Study in Associated Programs (ASAP) at the City University of New York, which provides a range of intensive supports to ensure success for lower-income students, including additional tutoring, transportation assistance, and free textbooks. The expansion could result in increased degree completion, which likely also translates to a reduced student loan default rate.

Pay for success could also be used to expand high-quality early childhood care and education services, which, combined with adult training and job placement services funded through the Workforce Investment and Opportunity Act (WIOA), could  decrease long-term reliance on federal benefit programs. The services could deploy a two generation strategy: one part prevention using evidence-based preschool programming to prevent at-risk TANF children from the consequences of poverty's pathologies; the second part leveraging quality preschool as a family support to increase the efficacy of job training, since insufficient access to quality child care is often cited as a barrier for parents struggling to enter or return to the workforce.  Each of these interventions would have individual population-related impacts; the combination of improved child care and increased employment opportunities could reduce the need for families to rely on TANF and related federal programs, saving taxpayer dollars in the process.  

These are just two illustrations of the potential impact of reorienting federal funding from the promise of results to verifiable achievement of improved outcomes that measurably improve lives. There are many additional examples. The next step is working with Congress to address the  barriers associated with the engagement of federal dollars in pay for success projects or other outcomes-based contracting arrangements—barriers that include the wrong pockets problem and the limitations of the federal budget process.

Nicole Truhe is the Director of Government Affairs for America Forward. Bryan Boroughs is General Counsel and Director of Legislative Affairs for the Institute for Child Success.

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As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research. Photo via Shutterstock.