Human Capital Performance Bond Pilot Signed Into Law

On July 20, Gov. Mark Dayton brought the 20-day Minnesota state government shutdown to an end by signing into law the budget bills passed in the early morning hours by the state legislature. The process of parsing through the next biennium's budget has begun and understandably many of the bigger budget items have been getting the most attention. However, tucked into the State Government Finance bill was $10 million appropriated for a pilot Human Capital Performance Bond program that is newsworthy for a number of different reasons.

Simply put, Human Capital Performance Bonds are a new way of funding nonprofits not through traditional charitable donations, but by attracting private investment funds through the sale of state bonds. As Investing In Outcomes, the organization led by Steve Rothschild that championed this idea at the capital, explains:

Proceeds from the bond sale will be deposited into a “performance pool.” High performing providers of state services qualify for performance payments as they create economic value for the state.

When the provider obtains an economic outcome the pool will provide it a performance payment. In this way economic value to the state commences at the same time as the provider is paid. The size and timing of payments will vary with the amount of economic benefit created by the provider.

As the legislation is written, it isn't clear yet what types of nonprofits or projects will be funded through the pilot project. The common denominator will be that the work performed by the nonprofit can show an economic gain - for example a person who was unemployed is now working, resulting in income taxes for the state and a reduction in costs to serve that individual through unemployment insurance - and that it would be a pay-for-performance mechanism. Only when providers meet the agreed upon outcome would it get paid for its work.

Although there has been interest in Massachusetts and Pres. Obama has called for similar projects at the federal level, Minnesota is the first place in the United States to test this new funding mechanism. The only other similar pilot has been happening in the UK working to reduce recidivism rates at the Petersborough Prison just outside of London. (Social Finance, the group that is spearheading the effort in the UK, recently published an initial evaluation of the project to date.)

We're interested in hearing for you about your thoughts on Human Capital Performance Bonds. What is your opinion on how this will impact the nonprofit or philanthropic sector? Certainly, there are still a lot of unanswered questions, but one thing is sure - this is a new way to fund nonprofits that will have an impact.