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Pay for Success Contracts

May 30, 2015

Governor Hickenlooper signed HB 15-1317 to authorize the state to enter into Pay for Success contracts. Thanks to the Colorado Children’s Campaign and the coalition of nonprofits and businesses that advocated for the bill’s passage. Special thanks to Representatives Garnett and Rankin and Senators Johnston and Martinez Humenik. The bill was signed at the Adams County Early Childhood Center on May 20, 2015. 

Summary

Under HB 15-1317, PFS contracts enable governments to partner with service providers and investors or philanthropists to fund and provide interventions to increase economic opportunity, support healthy futures, and promote child and youth development. PFS contracts are typically used for preventative programs and are intended to generate reductions in government spending for other programs.

The bill authorizes the state Office of State Planning and Budgeting (OSPB) to enter into PFS contracts with a lead contractor, which can be one or more organizations or local governments, to provide interventions directly or through subcontracts. A new state Pay for Success fund containing the government’s cost savings would be used to pay the lead contractor if the contract’s performance targets are met. The bill requires an independent evaluation to determine if the intervention met the performance targets. The lead contractor uses its funding or otherwise raises private capital to pay the costs of delivering services.

Reasons for support

Unlike a typical government/nonprofit contract, Pay for Success contracts encourage private or philanthropic engagement and investment in public service delivery. Rather than risking taxpayer dollars if these interventions do not succeed, either the lead contractor or the investors bear the risk if the program does not meet targeted outcomes. By transferring these risks, Pay for Success contracts encourage greater flexibility and innovation in service delivery. 

By focusing on prevention, these contracts have the potential to generate government cost savings by avoiding larger remediation costs down the road. These contracts provide a larger return on investment for programs that have clear data and a measurable and replicable impact on societal issues. Successful interventions can be replicated and scaled up to have a larger societal impact over time. 

The term Social Impact Bonds (SIBs) is used as a synonym or a specific reference to the funding mechanism for PFS contracts. Both SIBs and PFS contracts encourage partnerships between public, private, and philanthropic sectors to provide upfront capital, focus on program effectiveness, and potentially increase the capacity of programs by partnering with government.

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