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HOUSE RESOLUTION NO.

20

REPORT TO THE
GOVERNOR AND THE
DELAWARE GENERAL ASSEMBLY ON

PAY FOR SUCCESS


METHODOLOGY

DECEMBER 29, 2017

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Introduction

House Resolution 20, passed by the Delaware House of Representatives on July 2, 2017, directed the
Office of Management and Budget, the Department of Finance, and the Office of the Controller General
to “evaluate the potential for the implementation of the Pay for Success methodology for the provision of
social services and economic development or investments within the State.”

As a result of this resolution, an informal working group was formed to study the Pay for Success
methodology and potential applications it may have. The working group also chose to examine a similar
methodology, Pay for Economic Success, that is targeted toward economic development.

This report details the findings of that group and the decisions, timelines, and milestones that would need
to be achieved in order to successfully adopt such a program in Delaware.

Pay for Success

Introduction

Pay for Success contracts have become increasingly utilized by federal, state, and local governments in
recent years. This innovative financing model leverages private investment to fund social programming in
coordination with a government entity, which negotiates a return to the private investors upon the
successful achievement of a program’s goals (which often include both financial and social value
creation). Governments are able to shift the risk of social program expansion to a private entity, private
investors receive a return on their investment if it is successful, and non-profits are able to expand
successful programming. These contractual arrangements are often referred to as “Social Impact Bonds”
though they do not necessarily involve the issuance of bonds by the governmental entity. The first such
arrangement was initiated by the United Kingdom’s Ministry of Justice in 2010 to focus on reducing
recidivism rates. Since then, the basic model has been utilized and adapted by others to suit individual
programming needs.

The Pay for Success methodology has been utilized to finance a range of programming since its inception
in 2010. Programs have been established to reduce recidivism, expand access to low cost early childhood
education, and improve job training opportunities, just to name a few examples. While there is significant
variation within each individual program, they follow a common three party model—a combination of a
government entity, private investor, and nonprofit program administrator.

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The idea of the model is that the private investor provides the upfront capital to fund the initiative, which
is run by a nonprofit (many times with prior expertise in similar program administration). The
government entity then agrees on the terms of investor repayment and/or return.

At this time, no immediate program is targeted for financing through this model. Rather, the working
group focused on how Delaware could establish a mechanism for repeated utilization of this model over
the long term, and how each subsequent project that may apply the Pay for Success model could be
administered.

One option to establish a long term mechanism for Pay for Success governance would be to appoint a
board of individuals to oversee program administration. This would include the selection of projects and
the selection of other elements of the administrative process that successful application of the model
entails. Another alternative would be to vest this authority with the OMB Director.

Each project would require several other entities to assist in the administration of the program, even if
those parties are not specifically part of program execution. Due to the complexity of the Pay for Success
projects, the working group recommends the state retain consulting assistance with specific expertise in
these types of projects to assist in the development of requests for proposals and to represent the state in
contract negotiations, if it does choose to move forward with their utilization.

As part of program management, there are two critical roles that must be identified: an intermediary and
an independent evaluator. The intermediary would be tasked with soliciting capital from investors,
contributing their expertise in program selection and design, and handling ongoing communications with
the private investors as the project continues. They would also be tasked with the dispensation of any
returns the investors are owed. The intermediary would also be responsible for the selection and ongoing
management of vendors who will provide the necessary services to achieve the desired program
performance. They may also be involved in contracting, vendor selection, evaluation design, and/or
financing structure. The group discovered that several such organizations exist, and would recommend a
request for proposals to help in the selection of such intermediary before the development of an individual
project.

Once a project is chosen, an independent evaluator would also need to be selected to oversee progress
towards the stated goals of the project, in order to make a ruling on whether the repayment milestones
have been achieved or not. The independent evaluator is necessary to ensure that the success of the
program, and the subsequent return on investment, is not determined by either the payee or the recipient
of those funds. The evaluator could also be selected through a request for proposals process, and would
likely be an entity with research expertise that makes them well suited to evaluate this type of work.

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Enabling legislation granting the executive branch the authority to establish a Pay for Success board to
select projects would be required. The General Assembly would also have to appropriate funds towards
an escrow account to ensure a guaranteed repayment upon achievement of milestones (recognizing that if
milestones are not achieved, the State would not be required to expend these funds). The entire process,
from introduction of legislation to the securing of funding and commencement of the initial project,
would take approximately 12 – 24 months, depending on the urgency of the challenge to be solved.

Legislation and Oversight

Any legislation put forth may want to include the establishment of a governing body (board or
commission). Such legislation would outline the membership of a Pay for Success board, and designate
board responsibilities including the evaluation of proposals for Pay for Success projects.

The board should be comprised of individuals with expertise in the various areas a Pay for Success
project may cover. There should be representation of the nonprofit community, the business community,
and State government. These members would be tasked with evaluating proposals for projects and also
with evaluating requests for proposal submissions for both the intermediary and the independent
evaluator. They should also be given flexibility to seek advisement from other individuals or parties if
expertise on a given matter is needed.

Public body requirements should also be clearly applied to the board, ensuring it maintains compliance
with open meeting and Freedom of Information Act laws. Staff may be provided to the board from
existing state agency personnel.

The legislation should also outline the steps through which a project must proceed in order to be eligible
for consideration of funding, and the order in which these must occur. This includes the selection of the
intermediary to assist the board and manage day to day operations of the process, the granting of power to
the board to recommend projects to the Governor for consideration, the selection of the independent
evaluator, and the allocation of funding. The group recommends funding for the program be allocated by
the Joint Finance Committee during the annual budget appropriations process. Funds from the State
would not be spent immediately upon program commencement, but practice requires they be set aside in
order to give investors reasonable assurances that they will be repaid once milestones are met.

Implementation Steps for Pay for Success Methodology

Once enabling legislation has been enacted and a board has been established, the first task of the board
should be to procure the aforementioned consulting assistance to help draft a request for proposal for the

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intermediary. The consultant would also be available for selection of the intermediary, contract
negotiation and assisting the State in developing evaluation criteria.

The Pay for Success model requires a good deal of technical expertise in order to function effectively,
from the solicitation of private investment capital, to the design of the contract, to the alignment of
milestones with appropriate fiscal impacts. Given this demand and the complexity of the Pay for Success
model, the group felt that it would be appropriate to seek out an organization with such expertise. The
working group met with one such organization to learn more about the service, which included an
overview of the process of a Pay for Success contract and all points at which an intermediary is needed to
ensure the program is running as efficiently as possible, to maximize efficacy for the State, the investors,
and the program administrators.

The intermediary also plays a key role in soliciting the private investment needed to start the program and
serves as the ongoing liaison with those investors, ensuring a smooth operation of the process from start
to finish. The intermediary would also be responsible for the selection and ongoing management of
vendors who will provide the necessary services to achieve the desired program performance.

The board could select an intermediary through a request for proposal process each time it seeks to select
a new project, or could engage with an intermediary over a longer time frame for multiple projects. The
latter alternative was seen as more efficient by the group. Because Pay for Success projects could
encompass a multitude of policy priorities, a single intermediary would be required to have expertise in a
number of areas. The Board could also choose to solicit bids under both conditions and compare the cost
of this service in different forms.

Once an intermediary is selected, they could assist in choosing an initial project to utilize the Pay for
Success methodology. Such a project could be identified after soliciting proposals from community non-
profits and other community leaders. Evaluating these proposals and eventually selecting a project to
proceed with would require expertise in applying the Pay for Success model, in order to determine the
likelihood of success for a given proposal. The intermediary, who presumably would possess this
knowledge given the requirements described above, would be well suited to act in an advisory role and
work with the other involved parties to develop a final recommendation.

Upon recommendation of a project by the board, the final decision on proceeding with the initiative
should rest with the Governor. The group arrived at this decision after consideration of several factors.
The need to align the project with long term strategic goals of the state is imperative for the success of the
program, and the need to secure funding commitments as early as possible, initially through the
Governor’s Recommended Budget, is also crucial to program viability. By allowing the Governor to

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approve any project before it proceeds, achievement of these key elements of the project would be greatly
enhanced.

Following the selection of a project by the Governor, the board, in concurrence with the intermediary and
any State support staff, would need to select the independent evaluator who would oversee the progress
made towards the milestones of the program. This evaluator should be selected through a request for
proposal process, the conditions of which should include that a respondent demonstrate their capability in
analyzing and designing measurements for public policy programming. Ideally the evaluator will have
experience with similar studies. An academic institution or research based organization such as a think
tank would be well suited to provide this type of expertise.

The independent evaluator would also be expected to help develop the milestones by which the success of
the program, and thus the repayment of investor capital, shall be determined. These should be designed in
concert with the intermediary, who will be able to apply their expertise to ensure the milestones are
designed in a way that reflects measurable progress on the goals set for the project while also securing
investor interest (i.e. not so unattainable that it chills interest in the opportunity). They should also be
designed with significant input from the State, which will be able to evaluate whether achievement of the
milestones would generate value sufficient enough to cover the repayment amounts that the program
would warrant.

The development of achievable, measurable, and cost savings milestones that reflect important State
policies is perhaps the most important element of the Pay for Success methodology. They should be
carefully considered, and only finally agreed upon once all involved parties feel comfortable with them.
Final approval should rest with the board, and that approval should occur before the project proceeds
further.

Once a project has been selected, an independent evaluator has been chosen, and milestones have been
agreed upon, the last remaining element of implementation is the establishment of the funding
mechanism. The intermediary will be the primary entity responsible for soliciting investment from private
sources, and will begin to do so at this point. The state will be responsible for setting aside funds to repay
private investors once milestones are met.

For the purposes of ensuring investor confidence is at an adequate level to generate sufficient demand for
the fundraising opportunity, a significant portion if not all of the funds needed to pay back investors in the
event that all milestones are met should be set aside as early as possible. This can first be signaled through
the Governor’s Recommended Budget proposal, ahead of being formally accepted by the Joint Finance
Committee.

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Once funds have been secured, the project can commence, and the board, in concert with the
intermediary, independent evaluator, and State staff support can monitor progress towards achievement of
the program goals.

Questions/Issues Surrounding Pay for Success

The working group discussed and identified certain remaining questions and issues, including but not
limited to the following:

Project size: There is still a great deal of uncertainty among the group about the minimum size for a Pay
for Success project. There is a concern that the costs of the consulting assistance, the required
evaluation(s) as well as for the intermediary may prove to be a significant overhead as compared to total
program costs. Indeed, initial discussions indicated a floor for such a project may be in the $10
million/year range which may not be currently realistic in Delaware given other budget demands.
Ultimately, the State can determine how much overhead it wants relative to the value created in a given
Pay for Success project.

New projects vs “scaling up”: More deliberation will be needed on whether it is more advantageous to
apply the Pay for Success methodology to a new project or to “scale up” an existing program that has
demonstrated results, recognizing that new projects are likely to be riskier and therefore will require
higher returns for the investors.

Local non-profits: The report called for in HR 20 was to examine “Strategies to ensure that during project
selection there is meaningful involvement from the local and regional non-profit and social services
community as well as the business community.” Because arranging for program vendors is the
responsibility of the intermediary, the group had no specific strategies. However, it remains a goal of the
group to encourage, but not require, the use of local non-profit service providers in a Pay for Success
program.

Conclusion

The Pay for Success methodology, when applied effectively, can be a useful tool for allowing a
government entity to expand programming aimed at improving social welfare and developing the State’s
economy. These arrangements are complex, however, and require a significant amount of expertise at
multiple levels of program design in order to function effectively. A number of these challenges have
been examined by this working group in order to develop a road map to success, which has been outlined
here.

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Given that the state’s expertise will improve with each attempt at a Pay for Success initiative, it may be
advisable to pursue a pilot program allowing the State to gain operational experience prior to making any
long-term, ongoing policy decisions related to Pay for Success policies. A pilot that closely resembles a
successful Pay for Success initiative tried in another jurisdiction may also be worth considering. This
would provide a template for program and milestone design, while providing greater confidence in
investors that the program can be successful.

Pay for Economic Success

In addition to using Pay for Success (PFS) funding to support social programing, the working group also
looked at using a similar structure to support economic development activities.

Implementation Steps for Pay for Economic Success Methodology

“Pay for Economic Success” would apply the underlying principles associated with Pay for Success that
leverage private investment to stimulate job creation, increase workforce skills, and support early stage
businesses. In concept, private investors would make substantial financial investments in Delaware
businesses, with an expectation of State backed financial returns once pre-defined outcome targets
(employment growth, revenue gains, etc.) are met.

Delaware has already enacted multiple incentive programs to stimulate job creation. These programs
include State tax credits as well as loans and grants funded through allocations to the Delaware Strategic
Fund. These initiatives are meant to incentivize business expansion within Delaware by addressing a
variety of considerations, including the skill and cost of labor, capital expenditures and development of
infrastructure.

Yet, Delaware’s economy is continuing to evolve and focus more heavily on entrepreneurialism and the
ability of small, scalable companies to grow and create jobs in the State. Recent efforts, such as the
creation of the Delaware Innovation Space, continued development of incubator and lab space at the
University of Delaware’s STAR campus, and the State’s restructuring of its economic development
efforts show a clear commitment to this transition and ensure that Delaware is a viable, welcoming option
to create and grow a business.

To achieve growth for small businesses, the economic development incentives offered by the State must
align with the needs of early-stage companies. As discussed by the members of this working group, these
needs include a timeline that allows for an early-stage company to grow responsibly and in a sustainable
way, benefits that are substantial enough to influence a business’ decision making, and an awareness and
understanding of the program by the business community.

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Pay for Economic Success may have the potential to meet these needs and complement Delaware’s
existing economic development efforts for early-stage companies to incentivize job creation while
reducing the financial risk to the State.

Much like the Pay for Success program, Pay for Economic Success would require the following
organizational decisions:

Administrative Body: Proper program administration would require there be an organization or body
tasked to assist with defining program objectives, evaluating and selecting opportunities, contracting with
program participants, and ensuring program benefits are received. While this body could be a newly
formed Board or Commission, it may be advisable to consider whether or not this service could also be
provided by the State Division of Small Business, Development, and Tourism, or other State
organizations which are already knowledgeable of and skilled in State economic development practices.
This administrative body would be responsible for designing initiatives that incentivize and prioritize
additional private sector investment, including an evaluation of whether the private sector investment
would occur with or without State assistance.

Intermediary: The Pay for Success program requires a third party intermediary to help partner investors
with non-profit entities able to provide public services. The intermediary also guides the administrative
body as it develops program goals. In order to implement a Pay for Economic Success program, an
intermediary could serve to identify and guide targeted companies by marketing the suite of economic
incentives available. This service could be provided in part by the public-private Delaware Prosperity
Partnership (DPP). For-profit businesses may have existing relationships with potential investors, but
simply lack the proper incentives to drive investment into this State. In these cases, the incentives offered
by a State-run Pay for Economic Success program would allow the business to leverage existing investor
networks and reduce the need for a third-party intermediary. From a program development standpoint,
options for attracting private investment may include: allowing the targeted business to attract its own
investors, leveraging the connections of the Delaware Prosperity Partnership or other State organizations
to generate opportunities, or hiring a third party intermediary to find and match businesses with investors.
These options are not necessarily mutually exclusive and may differ from program to program based on
program goals.

Contracting: When implementing a Pay for Economic Success contract, a determination would need to
be made as to:

• Who has the authority to authorize State contracts (Board, Commission, State Organization, etc.),

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• Which private parties are required to sign the Pay for Economic Success contract (the investor,
the targeted company, or both),
• The duration of the allowable contract (4 years, 7 years, etc.) and
• How and when success payments are distributed.

Evaluation: The focus on evaluation in a Pay for Success contract hinges on the need for an experienced
third-party evaluator to assist in the development of incontrovertible, measurable, and clearly defined
goals of the program. The independent evaluator is a reliable resource that the State, the investor, and
non-profit would entrust to provide objective assessments of complex program goals. In a Pay for
Economic Success program, the role of an evaluator is necessary but may require a different level of
subject matter expertise and/or independence depending on the defined measure of success. In a more
traditional economic development model, calculating increased employment or growth in tax revenue
may be more straightforward than the measurement of other metrics established in Pay for Success social
programs.

For example, if employment growth was a primary metric, the evaluator may need access to the following
information:

• The baseline level of employees and related salaries (individual or in aggregate)


• The level of growth required by the contract
• The current level of employment (and relevant data)
• Documentation as to whether or not new hires had been previously employed as contractors for
the targeted company
• Documentation as to whether or not new hires had previously been employed in Delaware or
were otherwise paying Delaware income taxes.

While a targeted business would be expected to supply and self-certify all relevant data, the evaluator
would need to be able to independently verify this information. For example, the evaluator may need
confirmation of employment data from the Department of Labor or verification of employee income taxes
or withholding payments paid to the Division of Revenue. Because taxpayer filings made to the
Department of Labor and Division of Revenue are typically protected by State confidentiality statutes, to
the extent increased employment or tax revenue are goals of a Pay for Economic Success program,
statutory authorization should be provided to allow these agencies to share certain data with an evaluator.

Funding and Cost Containment Measures: As with any economic development program, funding will
need to be allocated to support contractual obligations. Because it may take many years for a for-profit

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business to meet program goals, contractual appropriations/funding set-asides bring with them a variety of
pros and cons. Options discussed by the working group include:

• Full Appropriation and Set-asides: One alternative is to appropriate and encumber 100% of
annual contract obligations up front. Encumbered funds would act as a good faith guarantee to
investors that the State would be able to meet any future obligation. In addition, budgeting to an
annual appropriation also would ensure that the General Assembly and Executive branch fiscal
officers will not encounter large, unfunded obligations in future years that could otherwise limit
their budgetary discretion. On the down side, if contract goals are not achieved until many years
after signing, any idle funding constitutes an opportunity cost to the State and limits its options
for other expenses. In the event of a failed contract, the State would retain all set aside funds, but
still incur the cost of having resources tied up that could have been allocated to other priorities.

• Sinking Funds: Another option is to create a sinking fund which would allow the State to
annually appropriate a portion (rather than the full value) of each Pay for Economic Success
contract obligation. While this approach would not fully eliminate the possibility of a large,
unfunded future obligation, annual deposits into a fund would mitigate the financial risk in any
one fiscal year. This process may also moderate any perceived burden from having unnecessarily
tied up State funds in years where payouts are not made.

• Pay-as-you-go: A third choice would be a pay-as-you-go program, where funds were only set
aside after program milestones were met. One option would include setting aside growth in
withholding tax revenue paid by the individual business as it is received, and only in years where
milestones are met. This methodology is intended to alleviate the downfalls of reserves created
by full appropriations or sinking funds. However, policy makers must take into account that
these funds are still recognized in State revenue projections, so any set-asides would still limit
fiscal resources in the years in which they are allocated. Moreover, any program that is intended
to demonstrate success would result in assessments being conducted and benefits being paid on a
lagged basis. Verifying the growth activity and processing the benefit may take a year and a half
or more from when the annual activity began. As such there may be a mismatch between set-
asides and the actual activity causing the State to allocate more or less than is necessary in a given
year. Pay-as-you-go programs may also inadvertently mask the size of program funding and
underlying obligations. It may be possible to mitigate the risk of a pay-as-you-go program by
establishing caps or maximum payouts in advance, however it is unclear whether such limitations
would negatively impact the attractiveness of the program.

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Program Efficiency: As with Pay for Success, it is important that any program or associated contract
identifies the most efficient and effective methods for accomplishing stated goals. Unlike Pay for Success,
pay for Economic Success carries with it many characteristics of existing economic development policies.
Prior to implementation, it would be advisable to benchmark program goals against existing State
initiatives. This should include a more comprehensive analysis of the State’s existing economic
development incentive programs and what gaps Pay for Economic Success can help fill, particularly for
scalable enterprises ready to create new jobs. This will help policy makers determine whether or not
existing programs could be used (as-is or modified) to accomplish the same goals rather than creating new
programs.

Project Selection: With Pay for Success projects, the administrative body would propose a final project to
the Governor for selection and approval. Depending on program scope and determination, this may be
less necessary under a Pay for Economic Success process as project goals related to economic
development may be less nuanced. However, executive level reporting would become extremely
important in order to understand any progress or hurdles faced by the initiative, as well as possible
unfunded liabilities or budgetary impacts.

Prior to implementing a Pay for Economic Success policy or program, the operational decisions above
will play a critical role in the success or failure of any new initiative. Below is a list of questions and
concepts that may act as an additional resource to help guide policy development.

Questions/Issues Surrounding Pay for Economic Success

In designing a Pay for Economic Success program, there are many details that need to be considered. The
following is a list of questions that should be answered prior to program inception:

1) What is the specific program goal? Does this vary by entity or business?
2) Is the definition of the program goal tightly constructed to deter abuse and ensure policy
objectives are met?
a. For example: If employment growth is a goal, do any of the following impact results:
i. Can contractors of the for-profit business who become employees qualify
towards “new employment” goals?
ii. When measuring State benefits, how are “new” employees treated if they were
previously employed or paying income taxes in Delaware?
3) Is the program inducement sure to incentivize new behavior or is it possible that State funds will
be used to subsidize investments that would have occurred anyway? If that outcome is possible,
what safeguards can minimize the impact?

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4) Do existing State incentives already exist and meet proposed needs (Strategic Fund, tax credits,
etc.)?
5) Are appropriate metrics available to validate whether milestones have been met?
6) Are there confidentiality laws that would prevent State organizations from being able to audit or
authenticate program results?
7) What level of funding is available to support this program?
8) Should there be rules established to cap the value of funding received by any one investor or
targeted company?
9) Should there be rules established to cap the value of program liabilities in aggregate or in any one
year?
10) When are payments made and by whom?
11) What is the mechanism for managing cost (fixed annual appropriation, earmark of revenue
stream, established payment cap, etc.)?
12) Would other, more efficient economic development mechanisms result in the same outcome?

Conclusion

Although the administration of Pay for Economic Success initiatives may share some basic similarities
with Pay for Success, they are separate and distinct ideas with dramatically different objectives. Pay For
Economic Success goals, as discussed within the working group, are aligned to existing economic
development practices. Pay for Economic Success is intended to expand the current suite of incentives
and drive innovative, entrepreneurial, scalable enterprises to locate and grow in Delaware. In order to
achieve the goals of the program and result in the maximum benefit to the State, payouts for Pay for
Economic Success contracts must be structured in a way that job creation is measured and realized prior
to the incentive being paid to the company.

Prior to implementation of any new program, it may be beneficial for policy makers to work with the
Delaware’s Prosperity Partnership and the State Division of Small Business, Development, and Tourism
to identify common goals, roles, responsibilities and program efficiencies.

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Appendix A

HR 20

DIRECTING THE OFFICE OF MANAGEMENT AND BUDGET, THE DEPARTMENT OF FINANCE, AND
THE OFFICE OF THE CONTROLLER GENERAL TO EVALUATE THE POTENTIAL FOR APPLICATION
OF PAY FOR SUCCESS METHODOLOGY IN THE STATE OF DELAWARE.

WHEREAS, Pay for Success is an approach to contracting for the delivery of services that ties payment for
service delivery to the achievement of pre-determined and measurable outcomes for a given population over
a certain period of time; and

WHEREAS, Pay for Success projects facilitate the creation of public-private partnerships that bring pay-
for performance to the social sector, allowing this State to improve the impact, efficiency, and effectiveness
of vital social services programs while redirecting inefficient or duplicative spending to other areas; and

WHEREAS, the movement towards Pay for Success contracting is a means of ensuring that high-quality,
effective social services are working for the citizens of this State;

WHEREAS, the Pay for Success methodology represents an outcome-based performance agreement entered
into by the State with an intermediary, however, the paying party is not committed to paying for services if they
do not achieve the desired outcomes; and

WHEREAS several states and local governments throughout the country have entered into Pay for
Success contracts to provide services and encourage investment into economic development; and

WHEREAS, Pay for Success can be particularly advantageous for this State as a way to realize
greater accountability and efficiency by allocating resources to programs with demonstrable outcomes, as well
as an effective way to apply capital to strategic for-profit economic development initiatives with proven
outcomes; and

WHEREAS, Pay for Success contracts are usually accompanied by financing agreements that include
upfront capital investments from private investors to support the delivery of services or economic
development activities throughout the life of the project, such private investors being repaid if contractually
agreed upon outcomes are achieved; and

WHEREAS, Pay for Success financing agreements also provide private investors the opportunity to make
upfront capital investments into business and economic development opportunities located in Delaware and to
have a portion of that investment repaid by the State, if contractually agreed upon outcomes are achieved; and

WHEREAS, before entering into a Pay for Success arrangement the State should thoroughly research
best practices instituted in other states and local governments and what social services and economic
development projects would be most suitable for such an arrangement.

NOW, THEREFORE:

BE IT RESOLVED by the House of Representatives 149th General Assembly of the State of Delaware that
the Office of Management and Budget, the Department of Finance, and the Office of the Controller General are
hereby directed to evaluate the potential for the implementation of the Pay for Success methodology for the
provision of social services and economic development or investments within the State.

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BE IT FURTHER RESOLVED that in conducting such evaluation, the Office of Management and Budget,
the Department of Finance, and the Office of the Controller General are directed to consider any
relevant aspects of implementing a Pay for Success model in this State, including:

1. Potential for implementation of Pay for Success model into existing social services programs,
and for-profit economic development opportunities that could generate new sources of revenue for the State.

2. The amount of time that will need to be dedicated to selecting an appropriate program or
project; drafting, evaluating, and executing all necessary documents; and program or project evaluation
both throughout the life of the program or project and upon completion.

3. How to structure the Pay for Success program to allow for effective administration, oversight,
and appropriation of funds.

4. Strategies to ensure that during project selection there is meaningful involvement from the local
and regional non-profit and social services community as well as the business community.

5. Contracting expertise necessary to assist or represent the State to negotiate and enter into a Pay
for Success agreement.

6. Guidelines for selecting and contracting with independent professionals with the
requisite expertise to adequately measure and validate whether pre-determined and measurable Pay for Success
metrics have been achieved.

7. What would be necessary to lawfully authorize a Pay for Success agreement and any other
considerations the Office of Management and Budget, Department of Finance, and the Office of the Controller
General find integral to the implementation a Pay for Success model in this State.

BE IT FURTHER RESOLVED that a report shall be submitted to members of the General Assembly and
the Governor no later than December 31, 2017.

SYNOPSIS
Pay for Success arrangements, whereby a government enters into a contract that ties payment for service
delivery to the achievement of measurable outcomes, are an innovative tool being used by state and local
governments. This Resolution tasks the Office of Management and Budget, Department of Finance, and the
Office of the Controller General with evaluating the potential for the State to enter into a Pay for Success
contract with a report due to the members of the General Assembly by December 31, 2017.

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Appendix B

Pay for Success Flow chart

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Appendix C

Examples of Social Finance Programs

Example 1: The Peterborough Project


The Peterborough Project, administered by the UK Ministry of Justice (MOJ) was the first ever major
government project to utilize the social finance model. It ran from 2010-2015, was successful in
achieving its goals, and resulted in a positive return for private investors.
The Peterborough Project used a SIB to fund an intervention program called the One Service aimed at
reducing reoffending by recently released prisoners from HMP Peterborough in Cambridgeshire,
England. The One Service was a non-mandatory support service offered to prisoners being released after
having served a short prison sentence (less than twelve months). The One Service actually brought
together multiple non-profit entities specializing in an array of services, including social workers to
counsel on reintegration into the community after release, mental health services, family counseling
services, and job training.
Success of the program and goals for milestone payments would be determined by the reduction of
recidivism rates amongst program participants relative to the observed recidivism rate at a national level
for a similar population of released offenders (those who had served fewer than 12 months in any UK
prison). For the purposes of the study, the recidivism rate would be determined by the number of people
who commit an offense within 12 months of their release (the time during which One Service
programming was being offered). RAND Europe, an independent, non-profit research institute was
selected to evaluate the results and determine the reduction rates observed.
RAND measured outcomes across two separate cohorts of approximately 1,000 participants, with the first
cohort recruited from 2010-2012, and the second recruited from 2012-2014. Payment of a 3% annual
return was to be made at the conclusion of the bonds term if either cohort achieved a 10% reduction in
recidivism relative to the national average for the same periods, or if the two combined cohorts achieved a
total reduction of 7.5%.
The first cohort was observed to have achieved an 8.4% reduction in occurrences of reoffending, which
was not high enough to trigger an immediate repayment. The second cohort was observed to have
achieved a 9.7% reduction in recidivism, which was again beneath the 10% threshold, but meant that
together the two cohorts had achieved a total reduction of 9%. Since this was above the 7.5% target set
for both cohorts, the program was deemed to have met its milestone, and investors were repaid their
principle investment plus a 3% annual rate of return (paid at the end of the program, but annualized at that
time).
It is important to note that the capital necessary to make the repayment of principle was earmarked by the
MOJ at the beginning of the program, and the 3% annual return payment was guaranteed by the Big
Lottery Fund (again, this was the pre-determined source of revenue for the payment, though the funds
were not earmarked at the outset).

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Example 2: The Utah High Quality Preschool Program
In 2013, Salt Lake County initiated a social finance program aimed at expanding the Utah High Quality
Preschool Program, which delivered a targeted curriculum aimed at increasing school readiness in low
income children aged 3 and 4. The Granite and Park City School Districts, which already this program
available on a smaller scale, were targeted to administer the initial expansion.
The investment partnership was organized by the United Way of Salt Lake, who received and upfront
loan of $1 million from Goldman Saks and the J.B. Pritzker Foundation, with the promise of an additional
$6 million in future years. This purchase helped to fund the first cohort of the expansion, which would
allow 450-600 children who would not have previously been able to attend the program due to capacity
limitations to enroll. The program has since received the additional $6 million, and now has five cohorts
either already running or planned (funding already secured), and will reach over 3,500 students in total.
The metric chosen was whether or not a child who went through the program and deemed to be at-risk
(likely to need special education services) would need state-provided remedial services any year from
kindergarten to first grade. Since the cost of one year of remedial services was calculated to be $2,600,
investors were offered a “Success Payment” equaling 95% of this total ($2,470) each year from
kindergarten to sixth grade per child who went through the program and did not need remedial services in
a given school year. In subsequent school years, seventh through twelfth grade, investors would receive
Success Payments equal to 40% of the savings ($1,040) per child per year that remedial services were not
utilized. Investors were also promised a 5% base interest rate on their investment.
The United Way of Salt Lake was chosen to oversee the program and evaluate success. In 2016, initial
results were released- out of the 110 students who went through the first cohort and were deemed at-risk,
only one needed special education services during kindergarten. These students and all participating
students will continue to be tracked going forward.
The Utah State Legislature passed a bill to expand this program in 2014. The legislation attempted to
create a grant program funded through PFS contracts to broaden the scope of the expansion statewide. It
created a dedicated fund for the state to set aside money to make payments on these grants. To date, the
expansion remains in development by the state.

Example 3: The Massachusetts Pathways to Economic Advancement Project


The Massachusetts Pathways to Economic Advancement Project was launched in early 2017. It seeks to
deliver services to adults in the Greater Boston area over the next three years. The purpose of the
initiative is to address barriers to employment for limited English speakers, enabling individuals who
have the skills to obtain available jobs, but not the English literacy, to become qualified for those
positions.
Massachusetts partnered with the Jewish Vocational Services (JVS) organization to administer the
training. JVS is a non-profit that provides employment services in the Greater Boston area, and has for
some time. Under the arrangement, they would expand their offerings in four areas- Rapid Employment,
English for Advancement, Skills Training, and Bridges to College- to serve 2,000 more individuals than
they would have previously had the capacity for.
Social Finance organized a network of interested investors, who committed over $12 million to the
project over the three year life span that is planned. Quarterly analysis is done by the Economic Mobility

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Corporation, a non-profit specializing in data analysis of social programs. Participants in JVS’s services
are evaluated using three criteria- earnings, successful transition to higher education, and program
engagement. Repayments are made in tiers based on the number of individuals who achieve one or each
of these milestones, with the maximum repayment totaling $15 million on top of the principle investment
made.
This program is in its very early stages, and so there has not yet been any evaluation of success
completed. Funding to guarantee payments will be made if milestones are met is provided through a
dedicated fund, the “Social Innovation Financing Trust Fund” established by the state in 2012.

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