State to launch public-private experiment to fund human services

Illinois’ troubled child welfare system could soon become an investment opportunity for charities, banks and wealthy citizens under a public-private partnership experiment set to launch Tuesday.

The project, first commissioned by former Democratic Gov. Pat Quinn and embraced by his Republican successor, Gov. Bruce Rauner, aims to remake the way the state delivers services to people in need.

Rather than the government paying providers directly, investors will cover the costs of coordinating and supplying services, with the potential for a return on the investment if their efforts meet goals designed to improve outcomes and save the state money. The idea is among a number of so-called social impact bond initiatives that have cropped up across the country as states search for new ways to pay for costly social services in an era of slashed budgets.

If successful, the program could become a model for transforming the way human services are delivered in Illinois, freeing providers from the uncertainty of the state budgeting process, which in some years — like this one — has left many caught in the middle of a political battle between the governor and legislature.

But as the program launches, state officials can offer few details about how it will be structured, what it will cost taxpayers and how its successes or failures will be measured, saying the answers to those questions will be sorted out in the months ahead.

“The flexible upfront funding means we don’t have to worry every year,” said Rick Velasquez, who chairs the Conscience Community Network, a group of six Chicago-area nonprofit providers that will deliver the youth services funded by private investors. “Now we can focus on quality.”

Billed as a “pay for success initiative,” the Department of Children and Family Services will launch the pilot program with a focus on youth in four counties, including Cook and Lake, who are in both the child welfare and juvenile delinquency systems and typically experience poor outcomes, such as ending up with long stays in costly state institutions.

Under the model, private investors will cover the upfront cost of services — such as case management and family therapy — that might save the state money by reducing recidivism and better preparing troubled kids for the transition to adulthood. If the program meets its objectives, the investors will be reimbursed, and earn a profit. If not, the investors absorb the loss.

“It’s an exciting opportunity for our state and provides us with a way to save money, be more effective and better serve youth,” said Andrew Flach, a spokesman for DCFS. “Instead of just writing checks, we’re ensuring that we’re getting outcomes we’re asking for.”

DCFS officials could not say how much money the program might save the state, which currently spends around $94.9 million — or about $123,000 per youth — in residential care and incarceration expenses for children who are wards of the state and part of the juvenile delinquency system. Flach said the program won’t cost any more than what the state already pays, but did not provide information about the possible rate of return for investors, saying those figures hadn’t been determined yet.

“Under this model, it’s like a money-back guarantee for taxpayers,” said Jeff Liebman, a professor at Harvard Kennedy School and director of the Social Impact Bond Technical Assistance Lab. “If the services don’t deliver results, then the state doesn’t pay.”

But the notion that social impact bonds are a clear win-win for taxpayers has been challenged by some who’ve examined the model.

“It is important to understand that the (social impact bond) mechanism imposes costs beyond the cost of providing services,” including paying a return to investors and the cost of evaluators, wrote Elizabeth Lower-Basch, a public policy expert at the Washington-based Center for Law and Social Policy, in a paper that explores the potential risks and rewards of the model. “If you can make a case that convinces investment bankers that it will pay for itself, you ought to be able to convince the public that it will pay for itself and just pay for it,” Lower-Basch said in an interview with the Tribune.

Susie Brown, public policy director for the Minnesota Council of Nonprofits, said it “is a costly way to move a dollar to help a kid,” adding that “without the details being really clearly spelled out for the public to understand, then we may be kidding ourselves that this is a great return on investment.”

This relatively new financial model originated in the United Kingdom almost a decade ago.

Last year, Chicago launched a program using close to $17 million in social impact bonds — combined with state and capital improvement funds — to enroll more low-income children in pre-kindergarten over four years. Some aldermen criticized the program for the high rate of return the city could end up paying investors.

In recent years, similar programs have been implemented in Massachusetts, Ohio, Oregon and Utah.

So far, the model has had mixed results, experts said.

While some British initiatives and a pre-K program in Utah have proved effective, another that aimed to reduce the number of offenders who return to prison on Rikers Island in New York failed this summer, said Rob Fischer, co-director of Case Western Reserve University’s Center on Urban Poverty and Community Development.

“The (New York) program didn’t produce the intended results, but the idea is getting pretty hot,” said Fischer, who is researching the model. “States are adding programs weekly. It’s a way to leverage investment that we didn’t have before.”

The launch of Illinois’ program will be a two-step process, with the first part beginning Tuesday, when 50 youth in Cook and Lake counties as well as downstate Franklin and Jefferson counties will be enrolled in a test phase. This phase will cost about $1 million and will be funded by contributions from the Conscience Community Network and four other organizations: Chicago Community Trust, the Laura and John Arnold Foundation, Nonprofit Finance Fund and Illinois Juvenile Justice Commission, which is funded through federal grants, Flach said.

Also involved in the project is Third Sector Capital Partners, a Boston-based nonprofit advisory firm, whose role will be to help create the program and find additional investors. Founded by former venture capitalist George Overholser, Third Sector has been a pioneer in this new model.

In the six-month test phase, the provider network — which includes Maryville Academy, Omni Youth Services, One Hope United, SGA Youth and Family Services, UCAN and Youth Outreach Services — will test its plans and ensure that its operations are working properly. That will set the stage for DCFS and the provider network to enter into a contract that will include benchmarks for determining whether or not investors will be paid back.

Once a contract is in place, 200 additional children in more counties will be added each year for a period of four years, Flach said.

Whether or not the program is a success will be left up to evaluators at the University of Michigan, who will monitor the program and report back to the state.

The mechanism allows government to work with providers in a more outcome-focused way, supporters said. “This model is about strong and robust evaluation,” Velasquez said. “It offers a much higher level of accountability than you would typically see.”

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