BILL ANALYSIS Ó
SB 593
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Date of Hearing: June 24, 2014
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
SB 593 (Lieu) - As Amended: June 10, 2014
SENATE VOTE : 35-0
SUBJECT : Social impact partnerships: pilot program
SUMMARY : Authorizes the Governor to enter into social impact
partnerships, with the funding approval of the Legislature, to address
issues currently not addressed in other state programs including, but
not limited to, child abuse, job preparedness for youth, and high
recidivism rates among the state's prison population. Specifically,
this bill :
1)Makes legislative findings and declarations including, but not
limited to:
a) Over six million people currently live in poverty including
22% of children;
b) The recidivism rate in California is among the highest in the
nation with just over 65% of those released from prison returning
within three years;
c) While there are 55,000 children in California's foster care
system, by age 19 only 57% have received high school diplomas or
GEDs;
d) That there are not sufficient resources to address these
challenges through traditional funding sources;
e) This Act will authorize the state to contract with
nongovernmental organizations to provide services to a targeted
population and if those service providers are able to meet
predetermined program goals, the state will pay the provider for
the service, plus an agreed upon rate of return; and
f) In a time of limited public funds and a decrease in
philanthropy, the social impact partnership model is being used
across the nation to address key social problems.
2)Defines "social impact partnership" and "pay for success contract"
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to mean a contract for services to address a defined demographic
group's particular needs for which payment will be made after the
predetermined measurable results have been achieved.
3)Authorizes the Governor to enter into a social impact partnership
contract if the agreement contains all the following conditions:
a) The payment for services is conditioned upon the achievement
of specific outcomes based on defined performance measures;
b) The determination that the specified outcome has been achieved
is to be determined through an independent evaluator;
c) Specifications for how success will be measured and payment
for services are earned;
d) A calculation for the amount, and the timing of payments that
will be earned by the service provider during each year of the
agreement, if performance outcomes are achieved;
e) A statement that the contract will result in significant
performance improvements or budgetary savings if the performance
outcomes are achieved, if applicable.
4)Requires contracts for social impact partnerships to be submitted to
the Legislature as part of the Governor's proposed budget and that
funding for the contract be included in the Governor's proposed
budget for the state agency that is assigned to administer or
oversee the contract. Payments for contracts approved by the
Legislature for prior fiscal years are subject to appropriation,
according to the terms of the contract.
5)Authorizes the use of social impact partnerships for the following
activities:
a) To address policies and programs not currently funded by the
state;
b) To address particular components of state programs in order to
improve outcomes or lower state costs;
c) To improve outcomes in programs designed to reduce recidivism
in the population of the formally incarcerated;
d) To reduce the incidence of child abuse and neglect through
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prevention and treatment, to improve the stability of at-risk and
foster children through behavioral health and other
trauma-informed care, and to improve educational outcomes and job
preparedness for at-risk and foster children.
6)Prohibits social impact partnerships from being used as a
replacement for an entire program or to cause the displacement of
any state employee.
7)Specifies that if the state enters into a social impact partnership,
the state must enter into two additional in the same fiscal year.
8)Sunsets the provisions of the bill on January 1, 2020.
EXISTING LAW designates the Department of General Services (DGS) as
the state's lead entity for overseeing the state's activities related
to contracting and that the State Contract Code serves as the basis of
contracts between most public entities in this state and their private
sector contractors and subcontractors.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the Author, "As California begins to
contemplate how to restore funding to solve complex social policy
goals, Social Impact Partnerships can and should be an additional
tool to our state government. A Social Impact Partnership is a
performance-based contract between an NGO and the state government,
specifically outlining program goals with quantifiable targets. If
the NGO meets all agreed upon goals, only then will the State
reimburse the NGO for the agreed upon costs plus a rate of return
agreed upon by the Legislature and the Administration. And, if the
goals are not met, the government pays nothing.
SB 593 would allow the state to solicit and then submit Social
Impact Partnerships to the Legislature for consideration. If the
Legislature appropriates adequate funding, the state would enter
into the Partnership with specific requirements. Once an independent
evaluator determines whether performance targets have been met,
including performance metrics, independent evaluation and
significant performance improvements and budgetary savings, the
contract would be funded.
SB 593 is a no-risk proposition for our state and I ask you to help
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me add California to the growing list of governmental entities that
are pursuing Social Impact Partnerships."
2)Framing the Policy Issue : This bill establishes a framework for
undertaking social impact partnerships between state government and
a service provider to meet the unique needs of certain targeted
populations, including foster youth and individuals released from
prison. The measure calls for several pilot projects to be
undertaken in order for the state to better understand how to best
operationalize the use of performance-based contracts, as well as
achieving measurable positive outcomes for the individual
participating in the pilot projects.
In deliberating the merits of the measure, Members may wish to
consider the state's limited resources to address complex social
problems, and the significant amount of work that has already been
done by impact investors, foundations, and other states in the area
of social impact partnerships that could benefit California. This
bill is similar in topic to AB 1837 (Atkins), which passed the
Assembly Committee on Jobs, Economic Development and the Economy
(JEDE) in April. The analysis includes information on the current
use of social impact partnerships and pay for success contracts by
the other states and by the federal government. Comment 8 includes
amendment recommendations.
3)Federal Lessons on Performance-Based Contracting : Performance-based
contracting is designed to ensure that contractors are given the
freedom to determine how best to meet the government's performance
objectives, while allowing a government to only pay for those
services that meet the pre-determined quality and performance
levels. This is not a new concept, but it is growing in popularity
as governments face tighter budgets and become more open to using
private sector innovations to address social challenges where "one
size" will not fit all.
Performance-based government service contracting was initially
pioneered at the federal level in the early 1990s at the Department
of Defense with, according to the Office of Budget and Management, a
great deal of success. By the mid-1990s, the federal government, in
partnership with four industry associations, initiated a number of
pilot projects. Services covered ranged from janitorial and guard
services to computer maintenance and aircraft technical support. As
a result, 15 agencies converted 26 contracts with an estimated value
of $585 million to performance-based methods. The agencies reported
an average 15% reduction in contract price in nominal dollars, and
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an 18% improvement in satisfaction with the contractor's work.
Moreover, "reduced prices and increased customer satisfaction
occurred at all price ranges, for both nontechnical and professional
and technical services." [A Report on the Performance-Based Service
Contracting Pilot Project, May 1996]
Although a documented success, this early research also identified a
number of key challenges government faces when using
performance-based contracts, including identification of which
service contracts were best suited to the model, preparation of a
sufficiently focused statement of work, and ensuring quality
standards were being met. SB 593 would authorize up to 15 pilot
projects, which should offer a suitable opportunity to evaluate
these types of issues, as well as address the needs of targeted
populations.
4)Innovating Performance-Based Contracts: As you will see in this
example from Massachusetts, the next generation of government
contracting is utilizing performance-based models to address larger
social challenges. Through the selective use of differing service
delivery models, the needs of specific targeted groups and subgroups
can be met at what is expected to be a lower overall cost to
government. At their foundation, a successful performance-based
contract has been evaluated by the contracting agency to determine
the long-term cost for traditional service methods and/or failing to
act. These costs can then be compared to the cost of delivering the
service through the proposed social impact partnership model.
Overall, studies have shown that properly structured
performance-based contracts can save time, money, and deliver
significant community and social impacts.
Under these innovative social impact models, the government sets the
task, timeline, and measurable objective, which a service provider
(social entrepreneur) agrees to meet with upfront funding of either
its own or by a private sector investor, which may be a foundation
or other socially responsible investor. If the social entrepreneur
is successful in achieving the measurable objective, the government
pays the performance-based contract, usually at a premium rate that
includes a predetermined rate of return. If the measurable outcome
is not achieved, no government money is expended. Collectively,
these types of models are often referred to as social innovation
financing with the individual models being described with a variety
of terms, sometime interchangeable, including social impact bonds
(SIBs), pay for success contracts, and pay for performance
contracts.
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In 2012, Massachusetts announced plans to use social innovation
financing to address two challenging problems: chronic homelessness
and high recidivism rates among juvenile offenders. Supporters of
these initiatives described the use of social innovation financing
as directing "government funds toward smart initiatives that deliver
real-world results." More details on these two initiates are
described below.
Chronic Homelessness - Massachusetts will partner with social
entrepreneurs to provide stable housing for several hundred
chronically homeless individuals. The goal of the initiative is
to improve the well-being of the individuals while simultaneously
reducing housing and Medicaid costs.
Juvenile Justice - Massachusetts will partner with social
entrepreneurs to support youth aging out of the juvenile
corrections and probation systems and to help them make
successful transitions to adulthood. The juvenile justice
contract will be designed with the specific goal of reducing
recidivism and improving education and employment outcomes over a
6-year period for a significant segment of the more than 750
youth who exit the juvenile corrections and probation systems
annually.
Currently, several other states and local governments have already
initiated or will be initiating projects that include
performance-based contracting models including:
New York City, which is seeking to reduce recidivism among
young adults;
The State of Minnesota, which wants better outcomes relative
to workforce development and supportive housing;
New York State, which is addressing recidivism through
employment opportunities for high-risk adult and juvenile
ex-offenders re-entering society; and
The City of Fresno, in partnership with the California
Endowment, which is seeking solutions to reduce incidents of
asthma.
1)Recent Federal Activity : In 2013, the U.S. Department of Labor
awarded nearly $24 million in pay-for-success (PFS) grants, which
are one type of performance-based contracts, to states including New
York ($12 million) and Massachusetts ($11.67 million). Both grants
were intended to capitalize SIBs issued by the states for projects
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that increase employment and reduce recidivism among formerly
incarcerated individuals.
President Obama's FY2014 budget proposed expanding the federal
government's support for PFS initiatives, reserving up to $195
million for programs in the areas of job training, education,
criminal justice, housing, and disability services. The President's
FY2014 and FY2015 Budgets have also proposed a $300 million
incentive fund at the Department of the Treasury to help state and
local governments implement PFS programs in partnership with
philanthropies. In January 2014, the White House Office of Science
and Technology Policy released a Request for Information designed to
accelerate the development, evaluation, and adoption of high-impact
learning technologies using "pull mechanisms," including PFS-based
contracts.
All this suggests that additional federal funds will become
available. California should be ready to access these moneys in a
manner that is thoughtful and appropriate for the state. The pilots
in SB 593 could assist the state in becoming more successful in a
national competition.
2)The State's Administrative Role in Social Innovation: The core
strength of performance-based contracting and pay-for-success
contracting is that it puts government in the position of
objectively evaluating performance. By clearly defining the set of
numbers and other metrics against which success will be measured,
personalities and other subjective influences are taken out of the
contracting equation.
At first glance, the shift to performance-based contracting would
appear to remove a large share of responsibility from the
government. The reality, however, is that the state's
responsibilities under a pay-for-performance contract are not
lessened, just changed. Under a solutions-based approach government
procurement officials must be more clear about their ultimate
objectives, set a specific benchmark and measurable metric, while
still defining acceptable quality levels. Identifying these types
of conditions often requires additional training of staff and, at
least initially, closer oversight of contracting activity.
Other key parameters include identifying projects that are
appropriate for performance-based contracts. The British
government, who were some of the first to use the social impact
partnership model, offers the following list to its government
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officials who are deliberating on whether the project is suitable
for a pay for success contract:
Is the desired outcome clear and measurable at both the
beginning and the end of the contract so that progress can be
easily measured?
Can evidence be provided that the quality of the outcome is
improved?
Is there evidence that effective programs are available to
meet the anticipated outcomes?
Is the desired outcome appropriate for private sector
solutions?
Are there real financial savings, as well as social benefits?
Is there a proper alignment between the government entity
funding the contract and the financial savings that will be
accrued?
Here is an example of how some of these principles might apply to a
real project. The government's stated objective is to reduce
recidivism of prison inmates. The statement of the work must
therefore include, among other things, a clear and detailed
statement about which formally incarcerated populations are the
intended clients; what constitutes baseline and success (2%
reduction or a 10% reduction); over what period of time; what costs
are associated with the population for no action taking place; and
if the recidivism rate drops, which government entities save money?
If part of the objective is for the formally incarcerated
individuals to become employed, then other issues need be specified,
such as whether job training is included or is the task to find jobs
at their current skill level, what salary level must be obtained,
and do the jobs need to be part of established career ladders?
SB 593 authorizes the Governor to enter into pilot social impact
partnerships, with funding approval by the Legislature. Entering
into these partnerships should be helpful to California in meeting
unique and specifically challenging needs of certain population
groups, while being able to control costs and outcomes. Being
consistently successful, however, in designing and overseeing these
type of contracts may take time and require one or more pilots.
1)Similarly Focused Bill : SB 593 is similar in focus, but different
in construct than SB 1837 (Atkins), which passed JEDE on a
bipartisan basis in April 2014. Both measures propose the use of
social innovation finance models that would allow the state to enter
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into performance-based contracts to serve significant needs of
targeted groups. AB 1837 asks the Governor's Office of Business and
Economic Development to review and make recommendations on how the
state and local governments can best utilize these contracts. SB
593 authorizes at least three pilot projects per year, for five
years to test the use of performance based contracts.
Amendments taken in JEDE to AB 1837 included the importance of
setting clear guidelines for entering into performance-based
contracts, such as writing a clear statement of work, elements of an
effective feasibility study and cost savings analysis, and how to
set performance baselines and measurements of success. The
Committee also voted to establish an advisory committee to help
guide the development of guidelines and oversee program outcomes.
Finally, the amendments established an account within the Economic
Development Fund where moneys which have been committed to the
successful completion of a performance-based contract would be held
awaiting final results. SB 593 includes none of these policies and
procedures.
2)Implementing Amendments : Should the Committee chose to move forward
on initiating pilot projects to evaluate the use of social impact
partnerships, staff recommends the following issues be addressed in
the legislation:
a) Provide a new definition for "social impact partnership."
b) Provide for a more general definition for "pay for success
contracts."
c) Provide for the overall review of how effective the pilots
were in utilizing social impact partnerships to address
significant community development challenges.
d) Clarify how pay for success contracts differ from the state's
current contracting rules. As an example, will the pilots be
competitively bid, awarded to the contractor submitting the
lowest responsible bid, or will procurement preferences apply.
e) Eliminate the requirement that if one contract is entered
into, then two additional contracts are required to be entered
into in the same fiscal year.
f) Clarify that the Governor is prohibited from entering into a
contract without funding approval by the Legislature.
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3)Related Legislation : Legislation related to this measure includes
the following:
a) AB 495 (Campos) California Community Investment Program: This
bill establishes the California Community Investment Program,
within the Governor's Office of Business and Economic
Development, for the purpose of assisting low-income
neighborhoods attract private sector investment capital. Status:
Pending in the Senate Committee on Business Professions and
Economic Development.
b) 1837 (Atkins) Social Innovation Financings: This bill
requires the Governor's Office of Business and Economic
Development to lead the state's efforts in expanding the use of
social innovation financing and performance-based contracts to
address significant social issues, including, but not limited to,
homelessness, prison inmate recidivism, and workforce
development. Status: Pending in the Senate Committee on
Business, Professions, and Economic Development.
c) SB 9 (Price) Office of Social Innovation and Entrepreneurship
Development: This bill would have established the Office of
Social Innovation and Entrepreneurship Development within the
Office of the Governor to establish partnerships with government
agencies, private investors, nonprofit organizations, and
for-profit service providers to facilitate the use of social
impact bonds, as defined, to address social service needs.
Status: Held in Senate Committee on Governance and Finance,
2013.
REGISTERED SUPPORT / OPPOSITION :
Support
GRACE (Gather, Respect, Advocate, Change, Engage) (sponsor)
Bay Area Council
Board of Supervisors County of Los Angeles
California Hospital Association
California Philanthropy
Catholic Charities of Santa Clara County
First 5 LA
Homeboy Industries
Los Angeles Junior Chamber of Commerce
Northern California Grantmakers
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O'Connor Hospital
Orange County Business Council
Para Los Ninos
Saint Louise Regional Hospital
San Diego Grantmakers
San Jose Silicon Valley Chamber of Commerce
Service Employees International Union-United Healthcare Workers
Seton Medical Center
Shields for Families
South Los Angeles Reintegration Council
Southern California Grantmakers
St. Francis Medical Center
St. John's Well Child and Family Center
St. Joseph Center
St. Vincent Medical Center
The LAX Coastal Chamber of Commerce
Opposition
California Right to Life Committee, Inc.
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916) 319-2090