BILL ANALYSIS �
AB 1837
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Date of Hearing: April 22, 2014
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 1837 (Atkins) - As Introduced: February 18, 2014
SUBJECT : Governor's Office of Business and Economic Development
SUMMARY : Requires the Governor's Office of Business and Economic
Development (GO-Biz) 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.
Specifically, this bill :
1)Expresses findings and declarations including, but not limited to,
that it is the intent of the Legislature to establish partnerships
between government agencies, private investors, nonprofit
organizations, and for-profit service providers in order to
facilitate the use of social innovation financing to achieve social
benefits.
2)Requires GO-Biz to serve as the lead entity for the state's efforts
to explore social innovation financing and provide technical
assistance for local governments that are exploring the creation of
social innovation financing.
3)Requires GO-Biz to develop model provisions for performance-based
contracts.
4)Defines "performance based contracts" to mean contractual agreements
between government, private investors, and service providers where
private investors agree to provide up-front financing to service
providers to achieve pre-agreed upon social outcomes and the
government agency agrees to pay a return on investment (ROI) to the
investors if successful programmatic outcomes are achieved by the
service provider.
5)Defines "social innovation financing" to mean an investment
arrangement using private funding to finance a social program
administered by a nonprofit organization or a for-profit service
provider on behalf of a government agency pursuant to a
performance-based contract.
EXISTING LAW establishes GO-Biz within the Governor's Office for the
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purpose of serving as the lead state entity for economic strategy and
marketing of California on issues relating to business development,
private sector investment, and economic growth.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Purpose : According to the author, "In times of economic
uncertainty, ongoing budget liabilities, and volatile revenue
streams, one of the biggest challenges government encounters is
finding upfront resources to invest in innovation. Even when
innovative strategies have proven to be successful through research,
pilot programs, and data, finding upfront investment to expand
successful programs amidst competing priorities proves to be an
enormous barrier. The unfortunate reality is California misses out
on improved outcomes that save governments and taxpayers' money
simply because we can't find the startup money to fund successful
intervention.
California should be open to tools that encourage more investment to
accomplish measurable social benefit, save taxpayer money, and meet
public policy goals. Social innovation financing is one such tool.
By identifying the Governor's Office of Business and Economic
Development as the lead entity for social innovation financing, AB
1837 sets California on a path to better tap into private and
philanthropic resources, support local governments that are already
exploring these partnerships, and take advantage of future federal
funding for social innovation."
2)Framing the Policy Issue : This bill calls on GO-Biz to
operationalize the use of social innovation finance and
performance-based contracts to achieve measurable positive outcomes
that address significant social and community challenges. In
undertaking this charge, GO-Biz will also be responsible for
providing technical assistance to local governments.
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 on social
innovation financing that would benefit California if they were more
widely distributed. The analysis includes information on the
current use of social innovation financing and performance-based
contracting. Comment 7 includes amendment recommendations.
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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 governments 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
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 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 AB 1837 GO-Biz will examine these
types of issues and make recommendations on how state agencies can
best move forward in performance-based contracting
4)Innovating Performance-Based Contracts: As you will see in this
example from Massachusetts, the next generation of contracting is
performance-based in order to address larger social challenges and
often includes new methods for funding including social impact bonds
(SIBs). AB 1837 uses this tri-party innovation finance model as the
definition of performance based contracts.
Under the tri-party innovation finance model, government sets the
task and measurable objective, which a service provider (social
entrepreneur) agrees to meet with upfront funding by a private
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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
investor, usually at a premium rate. If the measurable outcome is
not achieved, no government money is expended. As an emerging
financing tool, there is often a need for a community intermediary
that is responsible for linking the three parties together.
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 in making
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 that reduce incidents of
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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 State receiving ($12 million) and Massachusetts ($11.67
million). Both grants were intended to capitalize SIB issued by the
states for projects 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.
2)The State's Administrative Role in Social Innovation: The core
strength of performance-based 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.
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Other key parameters include identifying projects that are
appropriate for performance-based contracts. The British
government, who were some of the first uses of SIBs, offers the
following list to its government officials who are considering the
use of social innovation financing, such as PFS contracts and SIBs:
Is the desired outcome clear and measurable at both the
beginning and of 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?
AB 1837 calls on GO-Biz to establish partnerships between government
agencies, private investors, nonprofit organizations, and for-profit
service providers to facilitate the use of social innovation
financing to achieve measureable social benefits. As the state's
leading agency in economic development and finance, GO-Biz seems to
be well placed to bridge the private and public sector divide and
develop a new California framework for utilizing social innovation
finance models and performance-based contracting.
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1)Technical Amendments : AB 1837 establishes a new duty for GO-Biz by
designating it as the state lead on the use of social innovation
finance and performance-based contracts. Additional programmatic
details may be useful including, but not limited to:
a) Add legislative intent related to the appropriate use of
performance-based contracting.
b) Direct GO-Biz to recommend implementation procedures for local
governments and state agencies undertaking performance-based
contracting. These procedures may include the importance of
writing a clear statement of work, issues to address in the
feasibility study, and how to set performance baselines and
measurements of success.
c) Establish an advisory committee to help guide the development
of the initiative.
d) Establish an account within the Economic Development Fund
where moneys which have been committed to the successful
completion of a performance-based contract can be held awaiting
results.
2)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 GO-Biz, 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) SB 593 (Lieu) Social Impact Partnerships: This bill requires
the Governor's Office of Planning and Research (OPR) to conduct a
Social Impact Partnership Pilot Program; and permits OPR to
identify and submit proposed social impact partnerships to the
Legislature for consideration with the May Revision of the
Governor's Budget each year beginning in 2015. Status: Pending
in the Assembly Committee on Rules.
REGISTERED SUPPORT / OPPOSITION :
Support
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None Received
Opposition
None Received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916) 319-2090