As my last column on the Harbor Point Project began to make its rounds on different sites, I started to see some disturbing commentary. A lot of people feel that as cities pursue development dollars and the jobs that come with it: income inequality is just a natural by-product.
Here is their rationale. Technology has cut into the job supply of low wage earners and its just common sense that income inequality in cities will continue to grow, as job growth will cater toward the highly educated. This school of thought also believes there’s nothing that any level of government can do about it.
That same article highlighted the findings of the U.S. Conference of Mayors in that the economic prosperity of the U.S. as a whole is directly linked with the economic prosperity of metropolitan economies.
We need cities to succeed and a widening gap between the rich and poor are city killers.
Alan Berube of the Brookings Institute explained in a recent white paper that when a city has extreme poles of wealth – where the rich are very rich and the poor very poor – you’re likely to see problems spring up that strike at the health of these metro areas. Look at a few issues that could arise:
- The School system can become so out of whack that it devolves into 2 separate entities where low-income students will be place at a perpetual disadvantage because there are no mixed-income alternatives.
- A city’s tax base can erode to the point where the number of citizens paying in will not be able to sustain needed city services.
- And with such extremes, a city could be unable to produce housing and neighborhoods for the middle-class – forcing the middle class to move out of the city.
Like it or not, U.S. metropolitan areas are the straw that stirs the drink, which is the American economy.
New innovative ways are being introduced to help urban areas
I shared with you that development alone doesn’t help everyone. The key to the successful cities of tomorrow will be how they find innovative ways to fix urban ills.
We are all aware that the current processes in Baltimore are not working. We see that everyday on the news or read it on-line. Local governments have become too preoccupied with winning the media message rather than looking at pragmatic solutions. Plus, many cities and states just don’t have the coffers to fund change.
So we need to look outside the box.
A new innovative financing mechanismhas been gaining momentum over the past few years. What it does is monetizes social policy. Yes, you read that correctly.
The Federal Government calls it Pay for Success (PFS) while the private sector refers to it as social impact bonds (SIB) – even though they are not really bonds so don’t get scared. Under either name, PFS/SIBs are public/private partnerships that shift the risk of new social investments from the government to private entities such as commercial banks, philanthropists and venture capitalists.
Once you look at how it’s set-up, it seems it could actually work.
Here’s how a social impact bond works
Social impact bonds originated in Great Britain for a prison initiative back in 2010. Over the last 4 years a number of U.S. municipalities have shown interest in pursuing this funding approach.
In a social impact bond, the government will create a measurable and desired outcome in a population and pays an outside organization—an intermediary— if that organization achieves this set goal.
Investors bring the funding so that the intermediary can hire and manage service providers. A third-party evaluator will determine if the agreed upon goal is met.
If the venture is successful and all goals are met, the government will pay the intermediary. The intermediary will then “pay” the investor an agreed upon return for the initial risk they took on. If the outcome is not met, the government doesn’t have to pay and is off the hook.
What would be the best way to use them?
Kristina Costa, a speechwriter and policy analyst in economic policy at the Center for American Progress, gives the premise of what’s needed for social impact bonds to be successful:
- Outcomes can be clearly defined and historical data are available
- Preventive interventions exist that cost less to administer than remedial services
- Some interventions with high levels of evidence already exist
- Political will for traditional direct funding can be difficult to sustain
Here’s an example that’s been implemented in Massachusetts. The state recently announced a $27 million seven-year “social impact bond” aimed at lowering recidivism (the percentage of former prisoners who are rearrested for a similar crime).
Recidivism amongst former prisoners is high because many ex-offenders have never finished high school and their prior incarceration serves as a major black eye on most employment applications.
The project targets at-risk young men in specific Boston area communities that are in the probation system or exiting the juvenile justice system. The state is partnering with Roca, a non-profit that aids ex-offenders by delivering them education and life skills and job training.
Massachusetts will make pay the intermediary, Third Sector Capital Partners, if the third-party evaluator determines that the non-profit’s program has lowered the number of days that the targeted population spend in prison, have experienced improved job readiness, and have increased employment numbers. A specific goal is a 40 percent decrease in days of incarceration.
Investors include Goldman Sachs and several Boston area foundations.
Financial innovation is not always a bad thing
Yes, financial innovation was at the heart of the economic downturn a few years back. However, if processes are regulated and used for positive outcomes, then it serves an important purpose going forward.
The key is to motivate private funding to help public and social concerns where the funding might not otherwise be available. And more importantly, with specific measurable goals, there would be accountability to programs and problems that normally receive funding with no way of telling what or what doesn’t work.
This is an option we need to explore in the near future.
Jason spent eight years at T. Rowe Price serving in various roles from investment counseling to retirement planning. In 2005, he became Senior Security Analyst at Wells Fargo Corporate Trust in their Residential Mortgage-backed Securities division. He has contributed to several financial newsletters and the Motley Fool website while completing his thesis and Master’s Degree in Government from the Johns Hopkins University Advanced Academic Program. He resides in Baltimore.