Project Pay for Success: How Emerging Finance Tools Are Supporting Workforce Development
Sponsor Federal Reserve Bank of Richmond
Start Date 2019-00-00
Notes Topic Overview Pay for Success (PFS) is a public policy tool that may be used in the workforce development sector to test new programs guided by predetermined outcomes for a target population or a community. PFS is a contractual arrangement that ties payment for delivery of services to specific, measurable outcomes. Through the contract, it ensures quality and effective services that hopefully will lead to long-term positive change for both the individuals and communities. For example, outcomes may be measured by participants in job training programs finding and sustaining employment, and ultimately experiencing wage increases. As Figure 1 indicates, in a PFS contract, the payor for outcomes is usually government (local, state, or federal). In this case, the government entity enters into an agreement with the investors to pay for services with an agreed-upon result, and provides funding to the investors if and when the services are delivered and the result is achieved. Investors may be commercial, philanthropic, or community development organizations that provide the capital to designated service providers. An independent evaluator determines at the end of the contract whether the agreed-upon outcomes have been met. Because evaluation results determine whether or not investors are repaid and may contribute to evidence on the effectiveness of the intervention, early PFS projects in the United States have included rigorous evaluation methods. Whereas governments typically fund pilot programs up-front to test new ideas and outcomes, PFS only funds services or projects that bring about results consented to in the contract. Because payment is not made until the specific outcome is achieved, taxpayers no longer bear the risk of paying for pilot programs or other services that may or may not be effective. Figure 1. Social Impact Financing Social Impact Financing I 7a. Repay principal + ROI RISK 7b. In exchange for anticipated ROI, investors bear the risk that outcomes may not be achieved 1. Make l INTERMEDIARY ong-term investments Over the past few years, there has been an increase in substantive commitments from the philanthropic community and the federal government, enabling state and local governments to partner with high-performing service providers with access to private investments. As shown in Figure 2, since 2011, more than 20 projects have launched and nearly 50 more are in development.1 Private investors create financial and social impact incentives for service providers to deliver the outcomes that capitalize the highest return on any taxpayer investments. As is the case in any financing scenario, different funders tolerate varying levels of risk, such that some may be less apt to finance projects that target the most challenging social issues. Research on the challenge being addressed and rigorous evaluations throughout the process deter practices that eliminate hardest-to-serve populations from the equation.