Social impact bonds come to Richmond as an innovative weapon against housing blight

A boarded up house in Santa Fe, Richmond. (Photo by Alice Kantor)

At a Richmond city council meeting, on September 23th, the city approved the deployment of staff to work with a local non-profit in implementing “social impact bonds.”

The bonds would allow for underfunded social programs such as housing rehabilitation to receive fast and large scale financing.

“I think it’s a good program and we should move forward with it,” said City Council member Nat Bates before the resolution was unanimously approved.

The initiative, led by Jim Becker, the CEO of the Richmond Community Foundation, a local non-profit, and backed by private bond attorney John Knox,  provides an innovative way to leverage private funds for a housing rehabilitation program.

Under the social impact bonds initiative the city will issue long-term low-interest-rate bonds that private investors can buy to fund social programs, starting with the rehabilitation of blighted houses in Richmond.

“The concept of creating clean, safe and decent housing in affected neighborhoods isn’t new,” said Becker. “What’s new, is the way we finance it.”

The money from the bonds is directly transferred to the Richmond Community Foundation, which launches the housing program.

The Richmond Community Foundation has experience in collaborating with private corporations and the city.

The implementation of social bonds in Richmond, if approved by the City, would be a first in California. While many associations in the state are currently looking at the possibility of social impact bonds, the City of Richmond would be the first to issue them.

The first social bond to be issued in the US was in early 2012 by the City of New York, underwritten by Bloomberg Philanthropies, and sold at $9.6 million to Goldman Sachs in order to support a prisoner rehabilitation program. New York state and Massachusetts also invested in the plan. The first Richmond bond is expected to be issued at $2 million. Lasting five years, the initial bond would be recycled three or four times, as money from the sale of rehabilitated houses is reinvested. According to Becker, two hundred units could be restored over the five years.

Social impact bonds are experimental and therefore risky. Mismanagement of funds, shifts in housing market conditions, and difficulties with repairs and other delays could decrease the housing program’s investment revenue in Richmond.

Sometimes also called Pay-For-Success programs, social impact bonds have the investor receive a return on his investment only if the social program is successful.

In the case of the Housing Rehabilitation program, revenue could be compromised, said Knox, “if the rehab’ project is over budget or takes too long, if we’re not able to acquire enough houses and sell them. We could buy houses and the housing market could tumble.”

But the socially beneficial impact would still attract investors to the program, said Knox. “There are investors who are willing to make investments in non traditional bond investments in order to accomplish socially beneficial things.”

How do social impact bonds work?

Knox cited Wells Fargo and Bank of America as potentially interested investors.

If successful, the bonds program could be expanded to other socially beneficial ventures.

At a Northern California summit on Children and Youth, last year, the Richmond Community Foundation presented to other foundations the promise of social impact investing.

“We believe the program could show to communities, across the country, that this idea can really work,” said Becker.

The Bond Ordinance is to be presented at the City council meeting on November 18^th 2014. If approved, the Bond Ordinance would allow the City to issue bonds. The ordinance is generic, not specifying an amount for the bonds nor a specific social program. Other bonds could later be issued for other social programs, if the housing program proves successful.

“We’re very excited,” said Becker, “we believe it will be very successful.”

The areas of the city targeted are the Iron Triangle, Santa Fe and Coronado.

The City’s credit rating is AA-, according to Standard & Poor’s.

The underwriter of the bonds is RBC Capital Markets, a Canadian investment bank and the City’s usual underwriter.