Department of Labor Introduces "Pay for Success Pilot Projects"

Earlier this summer, the Department of Labor announced $20 million in funding for the second round of Workforce Innovation Funding. For the first time, this funding will be used to implement Pay for Success Pilot Projects – projects using a new financing model that targets limited government dollars to programs only after they have demonstrated successful outcomes. In piloting this new model, DOL will provide funding for workforce development projects that provide effective employment and training services that generate positive outcomes for clients, as well as long-term cost savings to the government.

The Pay for Success Model
In difficult economic times, the government often faces difficult decisions as it faces cutbacks and must allocate limited funds to a diverse array of programs and services. The Pay for Success (PFS) pilot, however, offers an innovative financing model that may help DOL – and the federal government at large – test a new strategy for government investment that has the potential to fund programs in a manner that is both cost-effective for taxpayers and beneficial for the clients and communities that utilize the services provided. The PFS model is designed to work in the following manner:

1. The government commits to funding programs based on the specific outcomes that are achieved within a given period of time. Potential outcomes may include, for example, having a certain number of participants in a workforce development program obtain employment within two months of completing a job training program. 
2. The financial capital needed to cover the operating costs of the program and the desired outcomes outcome is provided by individual investors or philanthropic organizations. 
3. The government provides funding for the program only if the specific outcomes are achieved. If the outcomes are achieved, investors receive a positive return on their investment. If outcomes are not achieved, however, the government does not provide funding for the program and investors incur a loss. 

In the PFS model, private investors absorb all financial risk, allowing the government to provide funding only for those programs that demonstrate positive results. Though there are many benefits of the program, the DOL solicitation highlights the model’s ability to fund effective prevention strategies that are often cut in federal budgets despite their potential to generate future cost savings. For example, providing effective job training may increase an individual’s ability to secure a job and, as a result, decrease federal spending related to unemployment benefits.


The Opportunity: The Workforce Innovation Fund PFS Pilot Project
Using the PFS model, DOL intends to provide funding for projects that demonstrate effective interventions and positive results in a cost-effective manner.  Specifically, DOL will provide funding for projects that address difficult workforce system issues, such as barriers to employment for high-risk populations, including homeless individuals, high school dropouts and former prisoners. In piloting this model, applicants will need to address the PFS partnership structure, which must include:

1. a state or local government agency that services as the grant applicant and lead entity
2. an intermediary responsible for achieving the target outcomes, contracting with service providers and locating investors 
3. investors willing to provide the capital needed to implement the program
4. an independent evaluator responsible for verifying and validating whether the target outcomes are achieved. 

The DOL solicitation provides detailed information and guidance about the structure of this partnership, as well as the implementation of the PFS model in general. DOL has created a website containing several resources about the Pay for Success model and how it will be used to support the Workforce Innovation Fund.  Included on the website are a Pay for Success FAQ document, as well as a PFS Readiness Self-Assessment.

Eligible applicants include: local and tribal governments responsible for workforce programs, as well as State Workforce Agencies. One to three grants are expected to be awarded in Spring 2013.  Grant applications are due December 11, 2012.

For more information about the Workforce Innovation Fund, including a list of the first round grantees that received a total of $147 million in grants, please click here.

Stay tuned to our blog for more information about the PFS model, including information about the challenges and successes of the PFS Pilot Project.