Phila. looks into Pay for Success model for transitional work program for ex-inmates

Douglas Duncan went to prison at age 24 for robbing three Manhattan doughnut shops with a kitchen knife. He left 16 years later with a master's degree and no idea of how to find a job.

"Sing Sing gives you a lot of time to think and plan." he says. "I just didn't know how I was going to go about it. Who was I going to contact?"

But staffers at a nonprofit coached him on job interviews, perfected his resume, and - in the crucial first weeks out - got him work in landscaping. They helped him get an interview at a Long Island agency that works to curb youth violence. A year later, he still works there as a counselor.

In Philadelphia, where the prison population is over capacity and 40 percent of those released go back to jail within a year, city officials say they want to invest in a program like the Center for Employment Opportunities, the one that helped Duncan.

It's a proven model for reducing recidivism rates. Philadelphia, though, wants to fund it in an unconventional way: by tapping private investors who would cover the cost and be paid back by the government only if the program succeeds.

If it falls short, those investors, not taxpayers, would take the loss.

The model, known as Pay for Success, is a complex, bureaucratic process with the potential for straightforward, human outcomes. Pay for Success programs are being used to target teen pregnancy in Washington; to reduce homelessness in Cleveland; and to reduce asthma among low-income children in Fresno, Calif. In Pennsylvania, Gov. Wolf is interested, too.

If the programs hit their goals, the investors would get their money back, plus an additional return paid from what the government saves through the overall benefit, such as reduced use of beds in prisons or homeless shelters.

"The providers get the money up front, which is what they need in order to do their operations and to do them well," said Maia Jachimowicz, Mayor Nutter's policy director and part of a team that has been studying the model. "The city government kind of has this risk-free investment."

The first Pay for Success program, also known as a social impact bond, was launched in 2010 at a prison in Britain with the goal of reducing recidivism rates by 7.5 percent. Talk of trying a recidivism-based Pay for Success program in Philadelphia comes as advocates are questioning whether the city can reduce its prison population enough to not build a replacement for the 140-year-old House of Corrections, which is outdated and over capacity.

The British experiment created buzz among nonprofits and public officials. In the United States, eight Pay for Success initiatives have launched, all since 2012.

Philadelphia began looking into it after Nutter and an aide learned of it at separate conferences and, intrigued, asked their staff to learn more.

Ideally, Pay for Success benefits everyone involved, from participants (like Duncan), to the government, to investors. But that only happens if an independent audit shows the program hit its goals.

That didn't happen in the first U.S. attempt, which failed to reduce recidivism among youth at New York City's Riker's Island jail and was discontinued this month.

Pay for Success advocates say they can learn from that attempt.

"This model is working the way that it should," Jachimowicz said. "If you're not meeting the targets, the program will end and the government won't pay."

Investors might see it differently.

Peter York, CEO of Algorhythm, a Philadelphia tech company that helps nonprofits measure their impact, said he has concerns about whether investors will remain interested long-term. He said the model may trigger questions about whether a program hits its goals by design, or chance.

"Instead of fighting over paying for stuff up front . . . we're parlaying that debate now to the end," he said.

If that leads to an investor not getting a return, even though a program appeared to succeed, York said, it could "throw the whole investment community into a little bit of a tailspin."

For now, though, the concept has intrigued those who want to make a profit but also do something positive with their money. Investors in Pay for Success have ranged from wealthy philanthropists to Goldman Sachs to the Reinvestment Fund, a Philadelphia nonprofit that targets capital to revitalize low-income communities.

The Reinvestment Fund, whose investors range from large institutions such as the William Penn Foundation to individuals investing as little as $1,000, has already backed one Pay for Success program and is exploring other partnerships, according to Andy Rachlin, the group's managing director of lending and investment.

Rachlin said Pay for Success is opening new doors for the Reinvestment Fund, which historically has put its money into brick-and-mortar ventures such as new schools or affordable housing. He said Pay for Success makes it possible to invest - beyond pure philanthropy - in curing social problems.

"It makes these things that have previously not been investable, investable," he said. "Which is really powerful."

Every $1 spent on transitional employment programs such as the one Philadelphia is considering brings $1.70 in value through reduced use of correctional facilities and increased tax revenue, among other things, according to a study commissioned by the city.

But in the case of Philadelphia, much of that savings would go to the state due to the large number of Philadelphia inmates sent to state-run prisons. For that reason, the city has high hopes of recruiting a crucial partner on the project - the state - and in May submitted a proposal to Wolf's office.

The governor, coincidentally, signaled interest in the Pay for Success model earlier this year by asking municipalities if they had suitable projects.

"We feel like the stars are aligning," Jachimowicz said of the timing.

A partnership would have to be approved by both the state legislature and City Council. Jeff Sheridan, Wolf's spokesman, said that he couldn't comment on Philadelphia's proposal but that the state wants to move forward with a Pay for Success partnership soon.

Katie Martin, deputy policy director in the mayor's office, said city officials are hoping the state will try out the concept here.

"Philadelphia is a world-class city and should be on the cutting edge," Martin said. "We are the type of city where new ideas, new programs, and new initiatives should be started."

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