BILL ANALYSIS Ó SB 593 Page 1 SENATE THIRD READING SB 593 (Lieu) As Amended August 18, 2014 Majority vote SENATE VOTE :35-0 ECONOMIC DEVELOPMENT 7-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Medina, Campos, Daly, |Ayes:|Gatto, Bigelow, | | |Fong, Fox, Linder, | |Bocanegra, Bradford, Ian | | |Melendez | |Calderon, Campos, | | | | |Donnelly, Eggman, Gomez, | | | | |Holden, Jones, Linder, | | | | |Pan, Quirk, Ridley-Thomas | | | | |Wagner, Weber | | | | | | ----------------------------------------------------------------- SUMMARY : Establishes the Social Impact Partnership pilot program and authorizes the Governor to establish social impact partnerships with private entities in order to address significant social issues including, but not limited to, child abuse, job preparedness for youth, and high recidivism rates among the state's prison population. These partnerships are to be formalized through a pay-for-success contract, which sets the evaluation metrics, quality standards, and timelines. If the conditions of the pay-for-success contract are not met, the state pays nothing. The bill requires that the terms and conditions of the pay-for-success contract be submitted to the Legislature as part of the Governor's budget. Contracts are prohibited to move forward until the Legislature has approved the funding. FISCAL EFFECT : According to the Senate Appropriations Committee: 1)Unknown future cost pressures, likely in the millions, related to funding any proposed social impact partnership contracts. Any potential costs or savings would depend upon the provisions in any future contracts for services pursuant to these partnerships. Funding and approval of these projects are required to be included in the annual budget act. SB 593 Page 2 2)Administrative costs to the state agency assigned to administer the program, potentially in the hundreds of thousands, to solicit, evaluate and select proposals for social impact partnerships. Because this type of contract would be new both for state staff and for many of the potential proposals, the amount of time needed to develop the solicitation document and respond to inquiries from interested parties may be considerable. Given the potential range and complexity of social impact partnership proposals, consultation with outside experts may also be necessary. Additional time would be dedicated to preparing a report for the Legislature. COMMENTS : This bill establishes a framework for undertaking social impact partnerships between state government and a service provider to meet the unique needs of 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 proposes at least three pilot projects to evaluate the effectiveness of the model. Amendments taken in Assembly Appropriations remove any conflicts between this bill and AB 1837 (Atkins) of the current legislative session, which authorizes the Board of State and Community Corrections to administer a program to provide funding to local governments to utilize social innovation financing models to reduce recidivism rates among formerly incarcerated individuals. 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 governments to only pay for those services that meet the pre-determined quality and performance levels. This is not a SB 593 Page 3 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. The United States Department of Defense was an early pioneer in the use of performance based contracting. One early study suggests that the model resulted in an average 15% reduction in contract price, and an 18% improvement in satisfaction with the contractor's work. Although a documented success, this early research also identified a number of key challenges government faced 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. Under this bill, state agencies participating in the pilot projects will have an opportunity to examine these types of issues and make recommendations on how best to move forward with performance-based contracts. Innovating Performance-Based Contracts: Since the 1990s, performance-based contracts have evolved to better address social service and community development challenges. One of the key changes is the funding method, whereby a third party finances the initial service contract and is then paid at a premium rate by the government upon successful completion of the contract. If the measurable outcome is not achieved, the third party financer receives no money. Several states and major metropolitan areas are currently using or are preparing to use social innovation financing including Massachusetts, to address both chronic homelessness and high recidivism rates among juvenile offenders. Recent Federal Activity: As noted above, the federal government has been using performance-based contracting for over two decades. The Obama Administration awarded nearly $24 million in pay-for-success grants, which are one type of performance-based contracts, to states including New York ($12 million) and Massachusetts ($11.67 million). 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 pay-for-success contracts and other types of social innovation financing. SB 593 Page 4 All this suggests that additional federal funds will become available. Implementation of this bill and AB 1837 will help California prepare to access these moneys in a manner that is thoughtful and appropriate for the state. Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916) 319-2090 FN: 0004790