A New Investment Opportunity: Helping Ex-Convicts

Every year, the government spends billions of dollars on programs designed to help America’s neediest citizens. In many cases, whether these programs work is anyone’s guess.

Less than $1 out of every $100 of federal government spending is “backed by even the most basic evidence that the money is being spent wisely,” wrote Peter Orszag, the former head of the Office of Management and Budget, and John Bridgeland, the former director of the White House Domestic Policy Council, in a 2013 piece in The Atlantic.

In their article, Orszag and Bridgeland advocate for a “moneyball for government,” arguing that an era of fiscal scarcity should force Washington to become more results-oriented.

A new partnership among New York State, 40 private investors, and a nonprofit called the Center for Employment Opportunities seeks to apply this sort of thinking to an area of policy that has been particularly resistant to interventions: lowering the recidivism rate in an era of growing prison populations.

The investors, including private philanthropists and former Treasury Secretary Larry Summers, have put up a total of $13.5 million to fund an expansion of the work that an organization called the Center for Employment Opportunities (CEO) already does with people coming out of prison. CEO’s model is simple:  It prepares people who have criminal records for the workplace, gives them up to 75 days of temporary employment, and then helps them find jobs of their own. With the $13.5 million, CEO will work with an additional 2,000 clients, targeting the highest-risk people.

But the expansion of the program isn’t charity: The project is a so-called “Pay for Success” initiative, modeled after social-impact bonds, which were first used in the United Kingdom five years ago. The basic idea is that investors fund a program that has a promising approach, putting in place extensive data-collection points so that they can track the program’s results. The investors are betting on the idea that the program can do a better—and less expensive—job of providing a given service than the status quo. If they’re right, and the program meets certain expectations—in this case the benchmarks for success are to reduce recidivism by eight percent and increase employment by five percent—the government will have saved money in less prison spending. The government then pays back the investors with its savings. If the program succeeds, investors can earn a return. If it exceeds those goals substantially, investors can get a bigger return, which in this case is capped at 10 percent. The state at no point spends more money than it would have spent incarcerating the 2,000 individuals anyway.

The Pay for Success strategy isn’t just a way to test CEO’s model. It’s a way to bring careful, data-based monitoring of a program’s effect into government spending.

There are dozens of programs that seek to help people re-enter the community once they’re released from prison. They provide job training and housing assistance and college-preparation classes and counseling. But a lot of people still end up back in prison. About 700,000 individuals are released from prison nationally each year; the national recidivism rate is about 40 percent.

CEO can make a dent in this, its backers say, because it gives its clients something more: a job. Clients come in, go through a week of job-readiness training, and then get a pair of steel-toed boots and a spot on one of CEO’s five-to-seven-person crews. The crews rotate through the city, cleaning courtrooms and performing maintenance on community-college buildings and public-housing properties.

Getting clients back into the workforce, even temporarily, is a key part of CEO’s program, Sam Schaeffer, the executive director of CEO, told me. People who have never worked, or who haven’t worked in decades find themselves furnished with a metro card, a place to be every morning, and a supervisor to report to.

“You’re earning a daily paycheck, and all of a sudden you’re getting on the subway, with that metro card that you couldn’t afford two weeks ago and you're reading the paper, and you’re sort of like, ‘Yea, I can do this,’” he said.

Charles Russell was released from prison 14 months ago, after serving 25 years for murder in the second degree. It wasn’t his first time in prison—he’d previously served four years for drug-related charges. When he was released last year, Russell says it took some time to adjust to the strange changes in society: the people walking down the street who appeared to be talking to themselves but were actually on Bluetooth devices, the people engrossed in their cellphones as they walked. He tried a few re-entry programs when he first got out. None helped him find a job.

Before coming to CEO, Russell had been a finalist for an interview and had been asked about his conviction. When he told her he’d been convicted of murder in the second degree, he said, the potential employer backed off and said her supervisor wouldn’t let her hire him.

A criminal record “is like an elephant in the room, it constantly haunts you,” he told me.  When I met him, Russell was dressed in a gray suit with a green striped tie, looking more like a grandfather than someone who had committed a Class A felony. CEO helped him become more confident, he told me.  It trained him for job interviews, and helped him figure out how to talk about his conviction, emphasizing his accomplishments and behavioral record in prison, rather than what put him in there. Being back at work after so long “is humbling,” he said. “It keeps you out of trouble and gives you some money to eat with.”

The crews are made up of five to seven people at once, so members can encourage each other and learn from the supervisor, who rates them on how well they cooperate with co-workers, whether they’re on time, how they present themselves, and the effort they make at their jobs. Clients begin by working four days a week, receiving a paycheck at the end of each day, and meet with a counselor every fifth day to talk about their job search and what they need to do to get ready to join the workforce.

Clients receive fewer days of scheduled work after they put in 30 days of work, and top out at 75 days—CEO wants them to know there’s an end date and that they need to find their own job eventually. But it also helps them during that time period. At first, they are counseled to buy some slacks with their first paycheck, and then a tie, and then a button-down shirt, so they have an outfit that they can use for interviews, said Terry Ellis, an account manager at CEO who works directly with clients on their job searches. He coaches them on how to sell themselves and tells them whether they’re using too much slang in interviews.

Wanda Velez, one of the few women going through the CEO program, told me that she practices interviewing in front of a mirror to make sure her shoulders aren’t slumping, as her counselor told her they sometimes did when she got discouraged.

The average time to job placement is three months, Schaeffer told me. After 180 days, 61 percent of participants are still working full-time, after one year, 53 percent are.

But even some time at a paid job can be motivational, Schaeffer said. Charles Russell, for instance, made $15 every two weeks in prison. Now, he makes more than triple that every day. It reminds him that the real world, no matter how tough, is better than inside.

“My worst day out here is better than my best day inside,” he told me.

Being on a crew of people going through the same difficulties as you are is helpful too, Bryant Mack, another client, said. Mack has been out of prison for five months, and is currently living in a homeless shelter. But he still tells people on his crews to keep going.

“Every day it’s a struggle,” he told me. “Some people sink into hopelessness; you have to give them hope.”

A 2012 evaluation by MRDC, a group that evaluates social policies, found that CEO reduced recidivism by 16 to 22 percent and was particularly helpful for people with a high risk of recidivism.

The idea behind Pay for Success was launched in 2010 in the United Kingdom with the Peterborough social-impact bond. Five foundations invested 5 million pounds to fund intensive support work for people being released from Peterborough prison. Initial results showed the people who had received counseling had 8.4 percent fewer convictions than the control group, indicating that investors will receive a return when the program ends next year.

From there, areas including Massachusetts, New York, Salt Lake City, and Denver launched Pay for Success initiatives. There are currently 50 Pay for Success projects being launched in 10 different countries, said Tracy Palandjian, the chief executive officer and co-founder of Social Finance, a nonprofit that develops Pay for Success partnerships, including the one at CEO. Across the U.S., there are a total of eight projects, channeling almost $100 million to address issues including early-childhood education and homelessness.*

“It’s been only five years since we’ve had this tool, yet it’s gotten a lot of people excited about its potential,” Palandjian said.

Investors aren’t necessarily looking for a big payout—in many cases, they won’t get one.

Their motivation is part philanthropy, part a push for government accountability, she said.

Investors want to show the government that it can track whether certain programs are successful, and that using data can lead to big results. “If Pay for Success as a tool could begin to orient the public system towards results, that would be a good thing,” she said.

It may be strange to hear the idea of philanthropists talking about what they want out of an investment, but Palandjian says most philanthropists are looking for a closer evaluation of where their money goes anyway.

“I think there is a frustration that we are spending billions and billions of dollars trying to address social problems without obvious evidence of how the spending is moving the dial in outcomes,” said Jeffrey Liebman, a Harvard professor who established the Social Impact Bond Technical Assistance Lab to help these projects move forward. “There is a hunger for approaches that would help us learn more rapidly evaluate what works.”

CEO’s Pay for Success program sets up a unique partnership between government and service providers that makes both more accountable, Liebman said. Traditionally, the government gives a grant to a non-profit such as CEO, and assumes it will do its job. The CEO project uses government data to evaluate whether the right clients end up at CEO’s offices. If 80 percent of high-risk people coming out of state prison end up at CEO for a few weeks in a row, and then one week, only 65 percent do, stakeholders get on the phone and try to figure out what went wrong, Liebman said.

“I’ve never seen government work with a provider to use real-time data to make a program run better,” he said.

Still, the track record of Pay for Success programs so far is mixed. New York City’s first attempt at a Pay for Success program sought to reduce recidivism among adolescent inmates at Rikers Island. Launched in 2012 and scheduled to run four years, the program was shut down in August after an independent evaluator saw no tangible reductions in recidivism. Another program in Utah that targeted at-risk kindergartners was initially hailed as a success, but experts have since questioned the validity of the data.

Some observers have begun to question the premise of Pay for Success, wondering if social-impact bonds are just a fancy way to outsource government work to the private sector. After all, there’s a difference between what Pete Orszag and John Bridgeland argued in this magazine, that the government should more closely track what works and what doesn’t, and Pay for Success, which asks the private sector to do the work itself, and allows the private sector to reap the benefits.

And using data to measure results can be trying, as the failure of No Child Left Behind showed. With too much hope placed on results, service providers may try to teach to the test, rather than affect meaningful change. It’s no mistake that most of the initial Pay for Success programs have been in criminal justice, where the goals and results are easy to agree upon—reduced recidivism, increased employment—and where state parole and payroll data, rather than tests, will evaluate results.

Still, many of the investors involved in Pay for Success so far are philanthropists who aren’t looking for a big return, but are instead looking to use Big Data to evaluate their investments.

“The accountability is what they like,” Palandjian said.

One of the strange things about Pay for Success is that, if all goes well, it’s not a scalable model. Since there has to be a control group, the projects are always testing one initiative against current practices. If the initiatives prove successful, then the government could adopt them, and investors wouldn’t need to seek data-driven solutions, because they’d all be implemented.

“It will be nirvana, investors won’t get a return, and our organization would cease to exist,” Palandjian said. “That would be great.”

But in the meantime, the Pay for Success model is a good option for non-profits like CEO, who are looking for funding to prove that their model works well. These nonprofits don’t have to worry as much about finding their next government contract in an era of dwindling funds, or about begging the public for donations. If they’re confident their program works, they can turn to the private sector and Pay for Success.

That’s why, for Schaeffer and CEO, participating in Pay for Success was a no-brainer. In the past, he said, there’s been little funding for programs that aim to reduce recidivism. Now, there’s increased recognition nationally “that a criminal history doesn’t entirely define a person or their value as a potential employee,” he said. Pay for Success takes away some of the monetary barriers that have previously existed, at the same time that employers are becoming more willing to hire individuals with criminal records. Now, with the additional data available through the program, reducing recidivism is going to become even more possible, he said.

“Everything is put in place to help us be successful at what we do,” he said. “We want to have evaluation as a continuous tool to get better.”

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* This article originally stated that all eight projects are taking place solely in New York state. We regret the error.