Two interesting articles, reporting from the North American Government Finance Officers Association and an interview with the new Big Society Capital CEO, Cliff Prior.
Third Sector
Social investment has been much hyped in recent years, but it remains an enigma to many. The new chief executive of the social investment wholesaler Big Society Capital tells Liam Kay how he intends to demystify this market.
There are some huge numbers flying around the New Fetter Lane offices of Big Society Capital these days. Some are talking about the £1.5bn the social investment market is now worth; others about the £1bn potential of social impact bonds. Many in the charity sector have bemoaned the lack of financial support from government for their work, but this is not a problem that has afflicted social investment. In fact, every few months seems to bring another government pronouncement offering even more support.
But being the darling of the government brings pressure to succeed, and much of that pressure falls on the shoulders of Cliff Prior, the new chief executive of Big Society Capital, the social investment wholesaler set up by the coalition government in 2012 with a total £600m from dormant bank accounts and high-street banks.
The Perils of “Benefit Bonds” & Social Impact Bonds
GFOA
At “Just Say No: Financial Products and Strategies to Avoid,” a Tuesday session at GFOA*’s annual conference, the panelists discussed the pitfalls of newer, more “innovative” financial instruments that local governments have access to.
Pension and OPEB obligation bonds were discussed first. The prospective benefit of these “benefit bonds” is that the investment income that the government earns on the bond proceeds would exceed the interested paid out to the bond buyers. Gaining this benefit requires the government issuer to correctly time the market so that the time period of the borrowing takes place during a time period in the economy when the returns on investments exceed cost of borrowing—something that is easier said than done. Further, benefit bonds can even lead to poor decision-making about future benefit levels. This is because the bonds cause the government’s benefit liability funding ratio to appear to be improved – the bond proceeds are used to fund the liability. However, this doesn’t take into account the offsetting liability of the need to repay the bonds. Hence, this illusory improvement might offer improved benefits to plan participants.
*The Government Finance Officers Association (GFOA), founded in 1906, represents public finance officials throughout the United States and Canada.