Social Impact Bonds: An Unlikely Solution to Solving Issues

With state nonprofit funding at a premium, many groups have turned to an outside-the-box resource for funding, social impact bonds. Still a relatively new source of private funding, the first example of a social impact bond was in 2010, in Peterborough, England. It was during this time that a group of private investors funded a program designed at keeping newly-released prison inmates from being reincarcerated. In this first example of social impact bonds, the program reduced reincarceration by 9%, when compared to a control group. This success allowed the investors to get their money back, plus interest.

One of the keys to the success of social impact bonds is because of the commitment decisions makers have to focus on the data. With investors keeping a watchful eye, this requires the individuals running the programs and to keep a watchful eye on spending and to make sure that key performance indicators continue to shine. Because both parties have money to lose if a program fails, it has shown that there is a strong commitment from the programs receiving funding, much more so than if the funding was coming a local or federal government.

With a long term strategy and the success of the private bonds at stake, projects funded by social impact bonds have seen higher success rates, primarily because of the diligence and planning put in. Unlike government funding that has the potential to be created by individuals or parties looking to earn a vote, private bonds require long-term thinking, to ensure the program is successful and to allow the loan to be repaid.

While still relatively new and not widely utilized, you can expect to see private, social impact bonds grow in popularity over the next decade. As socially responsible companies are becoming increasingly popular (think TOMS shoes), it's expected that private investors will not only be drawn to the low-risk investment, but also the ability to provide a positive impact on local communities.

About the author: Based in Baltimore, MD, Elissa Levan is a seasoned municipal lawyer and partner at Funk & Bolton, P.A.. She is also extremely involved in her community, as she frequently represents other jurisdictions with respect to individual matters such as land use, contracts, public sector, and public ethics. In addition to her career, Elissa is passionate about health, wellness, and women's rights.