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Paying for Success: The Santa Clara County Experience

June 16, 2014 | Gary Graves, Chief Operating Officer for Santa Clara County

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When I first heard about Pay For Success (PFS), I was skeptical. The idea of having to issue these “social impact bonds” and pay back investors for funding social programs seemed risky. In Santa Clara, many of our social programs are focused on meeting community needs, let alone being able to ensure cashable savings. I was reticent to make any commitment that meant Santa Clara County would have to eventually come up with money to pay back these investors.

When I first heard about Pay For Success (PFS), I was skeptical. The idea of having to issue these “social impact bonds” and pay back investors for funding social programs seemed risky. In Santa Clara, many of our social programs are focused on meeting community needs, let alone being able to ensure cashable savings. I was reticent to make any commitment that meant Santa Clara County would have to eventually come up with money to pay back these investors.

As I began to understand PFS more deeply, I started to appreciate the value of this new and innovative type of contracting. These were not traditional “bonds” where the county would be indebted to investors. Instead, the county’s funds would only be used to pay for successful social interventions. It quickly became clear to me that PFS provides a unique opportunity to tackle significant social challenges for the county by leveraging “social impact financing” from philanthropic and/or commercial sources while moving toward more efficient government contracting that focuses on improving measurable social outcomes.

In January 2013, the board of supervisors voted to approve a “dual track” exploration of two potential PFS applications: 1) to find preventive interventions that might save the county money, and 2) to improve accountability and outcomes for high-priority social problems. To assist us in our exploration, we enlisted Third Sector Capital Partners to both help us assess our readiness to engage in PFS and conduct a landscape analysis of potential interventions that may be a fit for PFS. We ultimately narrowed our focus to two promising PFS social intervention areas in chronic homelessness and acute mental health care. Shortly after, in August 2013, the board approved the decision to move forward with deal construction for these two projects and hired Third Sector to lead the work in identifying service providers and funders, as well as negotiating contract terms.

Of the two projects, we are currently furthest along with the chronic homelessness project, which will use a Housing First approach to provide permanent supportive housing—a combination of affordable housing and supportive services—for the most costly and needy members of the chronically homeless population. We hope that PFS will be the ongoing source of payments for successful outcomes for the chronically homeless. We also hope that PFS can be as a catalyst for the construction of additional permanent supportive housing in Santa Clara County by demonstrating the value of permanent supportive housing. While the project may not realize any near-term fiscal savings for the county, we decided to pursue PFS due to its outcomes-focused rigor and accountability, which could help the county identify preventive interventions. We released an RFP on April 21 to identify a lead agency to assist the county and Third Sector in finalizing the project’s service model and financing structure, securing operating capital, identifying additional service providers, and creating the contract that will memorialize the deal.

The acute mental health care project will likely involve an improved coordination of care for patients who are frequent users of the county’s mental health facilities. We are working to capture financial savings by efficiently guiding patients through the mental health system to the most appropriate and efficient sources of care. The county is still conducting analysis to understand what intervention can be most effective in these circumstances, and we are planning to release an RFP to select a lead agency for this project in the coming months.

While my hope is that both these projects will be hugely successful in making a difference for vulnerable populations in the county, the ultimate outcomes are still unknown. This entire process is an opportunity for us to pilot an experimental way to focus public money on social outcomes. Even if PFS does not apply to all of our major social issues, we intend to continue exploring alternative innovative, outcomes-driven approaches.

The bottom line is that I value PFS and see it as a way to bring together multiple diverse stakeholders to collectively work on solving our most pressing problems in the community. The more minds that focus on solving these problems, the greater chance of success we will have at eliminating them.

Gary Graves is currently the chief operating officer for Santa Clara County. Mr. Graves directly supports County Executive Jeff Smith and the board of supervisors in the management of Santa Clara County’s $4 billion organization. He has an oversight role in the resource allocation process and is also focused on the efficient and effective delivery of county services. He has also been instrumental in the implementation of AB-109/Public Safety Realignment. Mr. Graves holds a BA from Bucknell University and an MPA degree from the State University of New York at Albany. Mr. Graves also attended the state/local executive training program at Harvard University.