NEW YORK (Reuters) - Kim Hartke, who served 14 months in jail for stealing a car to pay for her addiction, turned her life around in part because of financing provided to an Oregon social services program from an innovative type of bond.
Today, the 53-year-old Hartke is a professional painter, a skill she developed through a training program offered by Central City Concern. The Portland, Oregon non-profit that provides healthcare, counseling and housing to people affected by poverty, homelessness and addictions.
Some of the funding for Central City Concern came from a series of loans Calvert Social Investment Foundation has provided to the organization over the past several years. The $2.5 million in loans are packaged into bonds--really structured notes--that the foundation sells to individuals looking to invest in charitable causes.
The Calvert Foundation bonds are part of a new trend in social investing that is gaining some favor with cash-strapped states and communities that are looking to private investors to help pay for badly needed social services programs.
This new approach employs the sale of philanthropic bonds like the ones issued by the Calvert Foundation. It also involves local governments partnering with non-for-profits and private investors in deals that require a government only to payout if a social services group can meet a specified performance goal.
This new type of financing is being called "pay for success contracts."
On Wednesday, Massachusetts jumped into the fray by awarding two contracts to non-for-profits, which will look to raise money from private investors as part of the financing deal. The investors will get paid back with interest, if the not-for- profits meet their goals of reducing homelessness and juvenile crime.
The state of Massachusetts is set to finish negotiating the terms of the contracts within the nonprofits in the next couple of weeks.
Investors, generally philanthropists, are not looking for a high rate of return, but a successful program that improves lives.
It is unclear just how big the market for these impact contracts will be given that the repayment is contingent upon a societal need being met. But supporters of the strategy hope Massachusetts' decision will encourage other states and cities to take a similar approach.
"Through this innovative public-private partnership financing arrangement, the Commonwealth will pay only if better social outcomes are achieved at lower cost, a true win-win for taxpayers," said Jay Gonzalez, Massachusetts' Secretary of Administration and Finance.
Public officials in Minnesota said they are also considering offering pay for success contracts to fund programs aimed at: assisted living facilities for the aged; alcohol or drug addiction and job skills.
The idea of pay for success contracts--sometimes called social impact bonds--got its first real test two years ago in Peterborough, England. The city used this approach to help reduce its prison costs.
In 2010, the British government agreed to pay 5 million pounds, or $8 million, to a nonprofit organization to reduce the recidivism rate for a group of inmates by 7.5 percent over a six-year period.
But since the Peterborough did not allocate any money upfront to the group, the non-profit Social Finance had to raise funds from outside investors to achieve its goals. The investors -- philanthropists, foundations and other institutions -- will only get a return on their investment if Social Finance can meet its goal.
Skeptics, however, question how to assess the social outcomes and say these social impact bonds and pay for success deals are most likely applied to programs deemed less risky and with a high probability of achieving positive results.
Meanwhile, the impact bonds sold by the Calvert Foundation may be more secure when it comes to repayment, but they do not generate big returns. The notes distributed by Incapital boast coupons that range between 0.5 percent and 2 percent, depending on maturity.
The low yields on the bonds sold by the Calvert Foundation, which is backed by Calvert Investments, a $12 billion money manager, are akin to a U.S. Treasury 10-year note.
The Calvert Foundation says its bonds, which have raised more than $160 million in the past seven years, have created more than 200,000 jobs worldwide and supported more than 5,000 nonprofits.
"Impact investing is about making financing available to organizations that have a social benefit and a business model that allows them to repay a loan. Rather than using philanthropy for those purposes, we are using financing," said Lisa Hall, chief executive officer of the Calvert Foundation.
Taxpayers, investors and service providers are hoping to benefit from the pay-for-success contracts and social bonds, while those in need reap the rewards.
"We are trying to find a way to monetize Benjamin Franklin's maxim: an ounce of prevention is worth a pound of care," said Tracy Paladjian, CEO of U.S.-based nonprofit Social Finance Inc.
(This story corrects paragraph 17 to delete rating on Calvert bonds; the bonds are not rated securities)
Reporting By Manuela Badawy; editing by Jennifer Ablan, Matthew Goldstein and Leslie Gevirtz