BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 593
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          SENATE THIRD READING
          SB 593 (Lieu)
          As Amended  August 18, 2014 
          Majority vote  

           SENATE VOTE  :35-0  
           
           ECONOMIC DEVELOPMENT  7-0       APPROPRIATIONS  17-0            
           
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          |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. 








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          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  








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          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.








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          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