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Goulston & Storrs Congratulates Client Roca, Inc. on its Central Role in Commonwealth of Massachusetts' Landmark $27M Social Innovation Financing Project

January 29, 2014Press Releases

Goulston & Storrs congratulates its client Roca, Inc., on its central role as a partner in the Commonwealth of Massachusetts' landmark Pay for Success (PFS) initiative, the largest of its kind in the US. The $27 million initiative was announced today by Governor Deval Patrick. Under the PFS initiative, nonprofit service provider Roca will serve 929 young men in Massachusetts through intensive outreach, life skills and employment training to reduce recidivism and help the men become assets and resources in their communities. Under the terms of the PFS initiative, investors fund the expansion of Roca's services. If Roca's programs reduce recidivism and increase employment for the young men Roca serves, the Commonwealth will make success payments to investors that reflect the government’s savings on the costs of incarceration and other expenditures.

PFS contracts are referred to also as Social Impact Bonds, and, as described in the Commonwealth's press statement, are "designed to combine nonprofit expertise, private sector funding and rigorous evaluation to transform the way government and society respond to chronic social problems." This burgeoning area of public-private partnership is also called Social Innovation Financing.

The Commonwealth, through its Executive Office of Administration and Finance, has entered into agreements with Roca, Inc. and financial intermediary Youth Services Inc., which will harness private sector financing to expand greatly the services that Roca provides to young men at high risk of incarceration. The new initiative solidifies Massachusetts as a leader in implementing the groundbreaking financing structure for social services. More importantly, the project will provide hundreds of young men access to Roca’s transformative intervention model for increasing education and job training and reducing incarceration rates. Goulston & Storrs represented Roca throughout the negotiation of the project structure and agreements.

“We are delighted to have helped Roca be on the cutting edge of this new way of bringing much needed funding to its important work,” said Peter Corbett and Peter Kochansky, the Goulston & Storrs Directors who led the firm’s efforts.

Social Innovation Financing

Social Innovation Financing aims to attract private capital to allow results-oriented private non-profit organizations to expand their provision of social services, by securing a government pledge to repay investors if the programming leads to government savings. Banks, foundations, or individuals make loans or recoverable grants to the non-profit service provider (or, as is the case in the Massachusetts project, to a financial intermediary that administers the project), and the loans fund the organization’s provision of services. If the organization achieves results that save the government money, a portion of those savings are used to pay back the investors. Private sector lenders bear the risk that government savings don’t materialize; if the organization does generate public savings, lenders recoup their investment, often with interest or a success premium. This financing structure can provide a steady source of revenue for non-profit organizations at a time of uncertain government and philanthropic funding, while leading non-profit social services providers to become results-oriented and data-driven.  

Project Background and Measures of Success

The $27 million Massachusetts juvenile justice project realizes the vision that led to the passage in 2012 of state legislation authorizing a state trust fund to promote pay for success contracts. The Commonwealth’s Executive Office of Administration and Finance issued two Requests for Response. One RFR sought proposals from service providers and financial intermediaries for the provision of youth services to reduce incarceration rates and promote education and employment for high-risk young men, and resulted in the selection of Roca as the service provider and Third Sector Capital Partners, an affiliate of YSI, as the financial intermediary. Goulston & Storrs began advising Roca on the initiative prior to Roca’s submission of its response.

The other RFR sought providers of permanent housing to reduce homelessness, and resulted in the selection of another of Goulston & Storrs’ clients, the Massachusetts Housing Shelter Alliance (“MHSA”), in partnership with the Corporation for Supportive Housing, and the United Way of Massachusetts Bay and Merrimack Valley, as the service provider. MHSA and its partners are working closely with the Commonwealth to finalize the agreements for the homelessness pay for success contract.

When the Commonwealth issued its youth services RFR, Roca, based in Chelsea, Massachusetts, knew that its twenty-five years of experience in juvenile justice work and its proven intervention model to reduce recidivism made the organization a good fit for the first state-level Social Innovation Financing program in the nation. More than half of the young men exiting the juvenile justice system in Massachusetts return to prison within three years, but Roca will work to reduce that number over the next six years. Roca was selected as the service provider for the program in 2012.

The Commonwealth, Roca, and financial intermediary Youth Services Inc. have entered into a Pay For Success Contract pursuant to which the Commonwealth will provide Roca with referrals of young men considered at high risk of incarceration as they age out of the juvenile justice system and become subject to the adult criminal justice system. Through the juvenile justice project, Roca will work to enroll approximately 929 young men in its programs over the first three years of the contract, and will provide support and job training to them through its highly-successful four-year intervention model. YSI will pay Roca 85% of its costs in providing the services from loans made by banks and foundations; Roca will fund 15% of initial project costs by deferring its service fees.

The incarceration rates and actual employment rates will be evaluated in comparison to a control group of young men not served by Roca. If the Roca cohort has a lower incarceration rate than the control group, the Commonwealth will make success fees to the project’s investors based on the number of prison bed-days avoided and the cost savings from those reductions. The Commonwealth will also make success payments if Roca’s group achieves increased employment in comparison to the control group, and if Roca achieves other measures of success regarding job readiness.

If Roca succeeds in lowering incarceration rates, the Commonwealth will pay Roca and its investors up to a total of $27 million. At that high rate of Roca success, the Commonwealth will achieve gross savings of $45 million compared to the costs of paying for each re-incarceration that Roca’s services prevented.

All parties expect that this groundbreaking Massachusetts project will lead to good outcomes for all participants—private investors will fund an expansion of Roca’s services; investors will receive a return on their investment; and success payments will be disbursed by the Commonwealth only if objective, pre-established performance standards are met. Most importantly, more young men will have access to Roca’s life-changing programs.

Roca and Goulston & Storrs: Longtime Partnership

A client of the firm for many years, Roca has worked with Goulston & Storrs on a variety of matters including contracts, intellectual property, corporate governance, and employment matters. When the opportunity to bid for the Commonwealth of Massachusetts' landmark PFS initiative arose, Roca again turned to the public-private partnership expertise of Goulston & Storrs.

Goulston & Storrs Directors Peter Corbett and Peter Kochansky guided Roca through its successful RFR bid and the negotiation of the funding and services contract with the Executive Office for Administration and Finance (“A&F”). "Social Innovation Financing combines the legal work we do on a daily basis for our real estate, corporate and financial institution clients with the tangible community impact we seek when we work with our pro bono clientele," Kochansky said. "Not only are the financial structures involved intriguing from a legal perspective, but this project is a win-win for all parties."  Read our case study featuring Roca.