social impact bonds on homelessness
TRANSCRIPT
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Social Impact Bonds on homelessness
Diana Parisi
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There were 564,708 homeless people in USA in September, 2016. Each homeless person costs the
taxpayers $40,000 per year.
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Why so many homeless people are
out there?◦Discharge of tens of thousands of mentally ill individuals
from upstate psychiatric hospitals to New York City communities during the 1970’s
◦ Reduction in the number of single-room housing units◦ Eviction◦Domestic violence◦ Loss of a job◦ Income below the poverty line ($12,082 as of 2015)◦Health issues◦ Criminal history
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2016 Presidential budget for the
homelessThe budget intended to help homeless people in 2016 was set to $5.5 billion. These resources are meant to:◦ Educate homeless children and youth ($71 million)◦ Health care ($ 371 million)◦ Assist people in transition from homelessness ($65 million)◦ Treatment systems (treat substance abuse: $41 million)◦ Homelessness prevention ($ 33 million)◦ Runaway youth ($123 million)◦ Creation of new housing units ($ 2.48 billion)◦ Emergency food and shelter ($100 million)◦ Employment assistance ($38 million)◦ Other causes (homeless veterans, police enforcement of crimes
committed by homeless: over $1 billion)
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Social Impact Bonds
◦ A SIB is a financial agreement among several parties.◦ The bond targets a certain social issue (in this case,
homelessness).◦ Social bonds carry equity-like risks with bond-like returns◦ It operates over a fixed period of time◦ The bond is profitable only if there is an improvement in the
social cause outcome. It is not tied to government’s savings◦ An independent party will validate the outcomes of a social
project.◦ The bond’s credit rating is the same as the governmental
entity’s credit rating.◦ The first SIB was launched by the UK-based Social Finance Ltd.,
in September 2010. Those social bonds were created to reduce recidivism. The term was set for six years, and the results of the program are promising
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How SIBs work
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Intermediaries Large investment banks such as:
◦ Goldman Sachs◦ Bank of America Merrill Lynch◦ Others
Not for profit organizations:◦ Social Finance Ltd.◦ Others
Foundations◦ Rockefeller Foundation◦ Others
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Duties of the intermediary
◦ Develops Social Impact Bond contract◦ Makes arrangements with the governmental agency◦ Markets the SIB to investors◦ Raises funds from investors◦ Analyses data to understand target population needs and
costs◦ Monitors and manages the actions of the service provider◦ Makes sure the government will not default in case the
project is profitable◦ Receives payments from government (only when project
is successful)
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How does the bond issuer ensures the government
will not default
◦ Setting escrow accounts◦ Analyzing the credit score of the governmental entity◦ Introducing flexibility in the outcomes of the cause,
since unplanned obstacles could arise during the project’s implementation
◦ If the governmental entity defaults, it is at risk of lowering its credit score, and jeopardize future multi-year contracts
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Investors◦ Issuers (intermediaries) of the bond◦ Philanthropies◦Wholesale investors ( a finance professional with a
minimum yearly income of $250,000 or a net worth of at least $2.5 million)
◦Wealth management funds ◦ Brokerage firms◦ Pension funds (since October 22, 2015, after the U.S.
Department of Labor allowed pension funds to invest in social and environmental causes)
◦ Trust funds◦ Corporation◦ Retail investors need to apply through their financial
advisors. However, not every social bond provides this opportunity
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Service providers◦Not for profit organizations◦Well known and reputable in their area of expertise◦ Receive long-term funding from private investors ◦Use the funding to implement the social project◦Might lose tax-exempt status or incur a federal tax
liability (if is demonstrated that they used investors’ money for private purposes)
◦ If successful at the project, will likely be elected for future projects
◦ If project will be unsuccessful, the organization’s reputation will be damaged
◦ Therefore, the organization has 100% interest in the project succeeding
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Social Impact Bonds advantages
Social impact bonds are not affected by:◦ Interest rate risk◦ Reinvestment risk◦ Market risk
It is a good portfolio diversification tool, by providing investments that are not correlated with other securities
Creates new temporary jobs If the SIB fails, the investors can write it off as a loss for
tax purposes Taxpayers benefit from SIBs
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Social bonds disadvantages Social bonds are vulnerable to:◦Default risk◦ Inflation risk◦ Event risk (a natural disaster occurring which could
delay or stop the project)◦Outcome risk ( will all homeless people remain in
the new permanent housing?)◦ Exit risk (probability of a project’s member quitting
early) Investors could lose the entire investment, in case the
outcome of the social cause did not achieve the targets.
It is difficult to quantify a social issue (you don’t know what you don’t know).
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Santa Clara County, California: social bond on
homelessness
◦ Santa Clara had 6,556 homeless people in 2015, 2,800 of them being long-term homeless.
◦ Bond launch date: September 2015◦ Goal: house at least 200 chronically homeless people for a
year or more.◦ Duration: 6 years◦ Capital raised: $6.9 million◦ Maximum outcome payment: $8 million (15.94% ROI or
about 3% annual ROI)◦ Service provider: Adobe Services◦ Intermediary: Third Sector Capital Partners Inc.◦ Major investors: Google, The Health Trust, The Sobrato Family
Foundation, etc.◦ Independent evaluator: University of California, San
Francisco, School of Medicine
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PAYMENTS TO BOND
INVESTORS
Payment to Lender per Program Participant Milestone Participant Milestone
$1,242 3 months of continuous tenancy
$1,863 6 months of continuous tenancy
$2,484 9 months of continuous tenancy
$6,831 12 month of continuous tenancy
$1,035 Each month after the first year of continuous tenancy
SOURCE: Third Sector Capital Partners and Santa Clara County
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How will the cause be implemented
◦ The service provider will offer mental, behavioral, and health counseling to homeless people
◦Will build 210 housing units◦ The repayment to the investors will start as soon as
homeless people will attain 3 months or more of continuous tenancy
◦ Performance of the bond: data not yet available
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Additional information
◦ Adobe Services can discontinue the project in case it is not proven successful after first several years
◦ If the project is successful, the county will save $3.1 billion in six years, or $30,000 per homeless per year
◦Many homeless people do not remain in permanent housing mainly due to mental illnesses ( fear of other people living near by, fear of the unknown, fear of small spaces etc.)
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Denver, Colorado: social bond on homelessness
◦Denver has 6,200 homeless people and spends $7 million per year for homeless people’s needs
◦Bond launch date: February 2016◦Goal: counsel and house at least 250 highly vulnerable
homeless people for a year or more◦Duration: 5 years◦Capital raised: $8.7 million ◦Maximum outcome payment: $11.4 million (6%
annual ROI on average)◦Service provider: Colorado Coalition for the Homeless◦ Intermediary: Social Impact Solutions◦Major investors: Walton Family Foundation, The
Northern Trust Company, The Piton Foundation, etc.◦ Evaluator: Urban Institute
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Payments to bond investors:
◦ Investors will receive $15.12 per each person for every day that a homeless individual spent in a housing unit minus number of days spent in jail.
◦ For example: if 50 homeless people spent 10 days in housing, the investors will receive $7,560.
◦ The payments will begin from day 1 of a homeless person spending in the housing
◦ Performance of the bond: data not yet available
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How will the cause be implemented
Efforts to:• Manage mental illnesses• Reduce interaction of homeless men and women
with the criminal justice system Crisis intervention Substance use counseling Peer support Skills building Etc.
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Massachusetts: social bond on homelessness
◦Massachusetts had 21,135 homeless people in 2015◦Bond launch date: December 2014◦Goal: house at least 800 chronically homeless people for a
year or more.◦Duration: 6 years◦Capital raised: $3.5 million◦Maximum outcome payment: $6 million (5.3 %
maximum possible ROI) ◦Service provider: MHSA (Massachusetts Housing and
Shelter Alliance)◦ Intermediary: MASH (Massachusetts Alliance for
Supportive Housing)◦Major investors: Santander Bank N.A., Merrimack Valley,
etc.
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Payments to investors
◦ The homeless person must spend at least 1 year in the housing, or the returns to investors are $0.
◦ Investors will get paid every quarter after the first year that the program is successful
◦ Investors will receive $8.22 per day per housed homeless
◦ Time a person spends in housing is cumulative ◦ For example, a homeless person spends 200 days in
the housing in year 2015, and 165 days in year 2016. That will count as one full year.
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How will the cause be implemented
◦ The project will provide 500 units of housing over the 6 year period
◦ The targeted population will be individuals who are homeless a minimum of 5 years
◦ Provision of medical and mental health services , substance abuse treatment
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Massachusetts social bond results◦ Since the year 2014, the cause successfully has placed
over 250 homeless people in permanent supportive housing.
◦ The outcome attained significant cost savings in emergency room visits and detox clinics used by homeless.
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