Massachusetts Announces Nonprofit Partners in 'Pay for Success' Experiment

The Commonwealth of Massachusetts has announced the selection of seven nonprofit social service providers to tackle the problems of chronic homelessness and juvenile recidivism in the state under a new program that rewards the agencies only if their programs prove effective.

First announced in January, the Social Innovation Financing program will operate on a "pay for success" basis in which the participating nonprofits must demonstrate that by providing stable housing for the homeless and keeping youth from being reincarcerated, they have saved the state money. Those savings will be shared with the service providers and the philanthropic investors who fund the upfront costs of the programs; if the programs fail, the investors likely will lose their investment.

Massachusetts is the first state in the nation to use a competitive procurement process to secure social innovation financing for social services. The state legislature authorized spending up to $50 million on the initiatives earlier this year, although the exact amounts to be allocated in this funding round have yet to be determined, the Boston Globe reports.

The chronic homelessness initiative will be led by the Massachusetts Housing and Shelter Alliance, in partnership with Third Sector Capital Partners, the Corporation for Supportive Housing, and United Way of Massachusetts Bay and Merrimack Valley. Service providers to be funded through the initiative will be announced in the coming weeks. Third Sector will partner with New Profit Inc. to oversee the youth recidivism initiative, with Roca and Youth Options Unlimited tapped as service providers.

Initial investors in the program are likely to be philanthropists and foundations that want to see documented social progress as much as financial returns from their investments, Third Sector Capital Partners founder George Overholser told the Globe. "There will be profits, yes," said Overholser, "but always at a very modest level. The returns are well below the market rate, compared to the risk."