Municipalities Turn to ‘Social Impact’ Bonds

New York City and Massachusetts are turning to a mixture of philanthropy and profit to fund projects tackling homelessness and inmate recidivism, using a program that can offer investors returns as high as 13 percent.

It’s the first embrace in the U.S. of a public-private funding method known as social-impact bonds. Also called pay-for success contracts or social-innovation financing, the model allows governments to transfer the risk of expanding prevention programs to investors. Taxpayer money is spent only if the results exceed a measurable goal set by both parties. “This makes it possible to invest more in prevention, which are often the first programs that get cut in fiscal stress,’’said George Overholser, chief executive officer of Third Sector Capital Partners, a nonprofit financial-advisory firm in Cambridge, Massachusetts.

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