Christine Stuart photo

Connecticut lawmakers have authorized legislation to allow the state to move forward with a contract that would allow private investors to make money, if Connecticut’s ex-offenders land a job.

Gov. Dannel P. Malloy said he’s comfortable with his policy and budget office negotiating what is being called “social impact bonds,” or “pay-for-performance bonds.” The new investment tool asks private investors to assume the risk of funding a program that reduces prison recidivism and gets more people back to work contributing to the tax base. If the program is successful, investors receive a return on their investment.

“Our ability to finance in traditional methods the ongoing work that needs to be done is limited by the growth in the economy, and therefore our bonding capacity, as well as our ability to pay those bonds,” Malloy told a group of advocates, service providers, and social finance executives, Tuesday.

Malloy said he would prefer private investors take the risk rather than the state. If the program is a proven and data-driven, then investors will see a reasonable rate of return in exchange for success, he said.

Under Steve Rothschild’s “human investment performance bond” method, the nonprofit provider and the state would assume the risk. The nonprofit provider would only receive payment for its services after it’s proven to be a successful program.

Malloy is more interested in social impact bonds where the private investor assumes the risk.

Michael P. Lawlor, the governor’s top criminal justice adviser, said when he was hired Malloy gave him three directives — reduce crime, reduce spending in his office, and restore confidence in the criminal justice system.

“If we can achieve those goals with other people’s money — and I don’t mean taxpayer money this time — let’s do it,” Lawlor said.

Rep. Diana Urban, D-North Stonington, said that when she hears people arguing about big government vs. small government, she thinks they’re missing the point. Urban, an economist, said government — no matter what its size — should be focused on the results.

Social finance is focused on results because that’s how it’s determined how much money is paid or saved.

“Every elected official would rather spend taxpayer money on things that have a direct benefit to taxpayers and that is ultimately our goal,” Lawlor said.

He said Social Finance U.S. has been working with his office, but nothing has been finalized yet.

Tracy Palandjian, co-founder of Social Finance U.S., warned that social financing is not a panacea for all of society’s ills.

“It is a grand experiment that we are working on together, and clearly not a proven concept,” she said.

Antony Bugg-Levine, CEO of the Nonprofit Finance Fund, said there’s no single way to fund social services.

He said implementing social financing means forcing change upon social service agencies that already have a fragile infrastructure. He warned that it’s not going to happen overnight. He also warned that getting a group of nonprofits to work together to find funding to accomplish a single goal may be difficult because they’re often competing against each other for funding.

With nonprofits already stretched thin, implementing the data collection necessary to make it work also will present a challenge, Bugg-Levine said.

But the economy doesn’t look to be recovering anytime soon, so many who attended the half-day conference sponsored by the Connecticut Association of Human Services and a handful of other organizations felt that the time was right to experiment.