Federal funding for workforce development has declined over the past two decades, and middle-skill training programs constantly compete with academic and degree programs for state postsecondary dollars. These pressures are especially acute for new programs that have uncertain or long-term positive outcomes. One strategy for financing public investments that can help solve these challenges is the pay for success (PFS) model.

Pay for success is a financing mechanism that shifts a program’s up-front costs and risks from a traditional funder (often a public entity) to an investor. The investor is only paid back if an independent evaluation of the program demonstrates it has achieved predetermined outcomes. This process transfers considerable financial risk from government funders and ensures that they pay only for results.

Pay for success is making progress in workforce development

Over the past several years, PFS has made important inroads in workforce development.

The US Department of Labor helped jump-start the field in 2013, funding the first PFS projects in workforce development. It awarded two grants to use PFS to deliver training and employment services to people in the justice system (through the New York State Department of Labor) and people on parole (through the Massachusetts Executive Office of Labor and Workforce Development). Both programs refer their clients to work readiness training and transitional employment opportunities.

The reauthorization of the Workforce Innovation and Opportunity Act (WIOA) in 2014 established PFS and other “pay for performance” models as an eligible use of formula funding.

In June 2017, Social Finance and Jewish Vocational Services launched a social impact bond to fund immigrant and refugee workforce development in Boston. The project will support such services as vocational English classes, job search support, and coaching for 2,000 adults.

With funding from the US Department of Education, Social Finance and Jobs for the Future selected four programs in June to receive support to assess the feasibility of and develop PFS projects for K–12 career and technical education programs. The $2 million grant was the largest PFS grant in the Department of Education’s history.

Pay for success can solve problems with integrated career pathways programs

The integrated career pathways (ICP) training model could also benefit from a PFS approach. Integrated career pathways models integrate adult education into structured occupational training pathways that lead to industry-recognized credentials. This model prevents low-skilled adults from stalling out in their adult education before they can enroll in training.

Prominent examples of ICP programs include Washington State’s Integrated Basic Education and Skills Training program and Accelerating Opportunity. The National Skills Coalition identifies 18 states that have either ICP programs or funding, and interest in the model is growing as the evidence base on its effectiveness expands.

Urban Institute research suggests that ICPs have a consistently positive impact on educational outcomes (such as the credits and credentials participants earn) and a mixed impact on labor market outcomes. Our research shows that some states, such as Kansas and Kentucky, enjoy large positive earnings impacts. Other states have weaker earnings impacts (Illinois) or negative impacts (Louisiana).

These mixed results make the ICP model an uncertain investment. That risk is compounded because ICPs tend to require high up-front costs to support team teaching and wraparound services. Pay for success financing could lower the risk for traditional ICP funders by assuring them that payments will be made only if program outcomes are achieved. For PFS investors, such programs may be attractive because they could deliver significantly improved outcomes and cost savings to a jurisdiction.

Pay for success could help address the “wrong pockets problem” in ICPs, in which the entities that pay for a program’s costs do not enjoy all the benefits the program produces. This generates a misalignment of incentives and an underprovision of programs that have an impact across multiple domains. Pay for success can get around the limitations of interdepartmental procurement rules by empowering a single payor to work with the private investor to coordinate implementation. Different departments would participate in the project and contribute to the evidence-based payment.

Because ICP programs integrate the work of multiple education and training providers, they are plagued by the wrong pockets problem. Training and services must be coordinated between adult education departments, community colleges (frequently across credit and noncredit divisions of the college), wraparound service providers, and workforce agencies. Adult education departments are most concerned about the program’s benefits for high school equivalency attainment, while community colleges are primarily concerned with its benefits for credits and certificates earned.

Often, no entity is directly accountable for long-term employment outcomes, and the program benefits are dispersed across multiple agencies. Under the PFS payment model, the coordination of departmental contributions through a single payor could resolve those misalignments.

Pay for success funding in workforce development is sure to grow under the new WIOA provisions, but colleges considering the ICP model should consider adopting PFS to solve some of the model’s biggest challenges.