Thursday, July 21, 2011

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.


bookgrrl said...

Pay for performance works! I worked for another nonprofit Steve Rothschild founded, Twin Cities RISE! (TCR!). TCR! worked with adults living in poverty with multiple barriers to employment (criminal history, chemical dependency, education, childcare and transportation issues, etc.) to develop the hard and soft skills to get (and keep) living wage jobs. TCR!'s government funding only applied once a TCR! student had completed our training, gotten a job that fit the criteria (living wage, benefits, advancement potential) and had completed an entire year on the job. If TCR! didn't meet it's mission, the government didn't provide funding to pay for the student's training and services. TCR! students who complete the training program, work to find employment, and once employed in a qualifying job, stay at that job at least a year never pay a penny to attend TCR! classes.

This program was amazingly successful at helping people living in poverty to get and keep living wage jobs, creating new tax payers to pay it forward into the system. I believe our "graduate" retention rate was about 83% after one year on the job.

mwera said...

Thanks for your comment. Like you said, TCR! is a pioneer in terms of pay-for-performance contracts here in Minnesota, which is similar to the way Human Capital Performance Bonds would pay participating nonprofits.

I'm curious to know what you think of bonding to raise the funds to pay nonprofits, though. Is it a good practice in your opinion for the state to take out debt provided that the work the bonds would pay for results in cash gains for the state?

John said...

Obama's fy 2012 budget involves "pay for success" bonds. Would the hucap bonds qualify for this funding?

mwera said...

John, you're right that the Obama administration has proposed the idea of social impact bonds that would also work on a pay-for-performance basis, but nothing has been approved by Congress yet. As I understand it, social impact bonds (SIB) are slightly different from the HCPB in that the investors who purchase the SIB's bear more of the financial risk if the outcomes aren't met. With a HCPB, the investors are all but guaranteed a return on their investment, albeit at a lower interest rate than a SIB might produce.

Michael Friedman said...

TCR also charges clients for the costs of services when the client fails to follow through, and will file conciliation court claims (with a letter threatening about the impact of future credit rating)against some clients to enforce the debt. From a donor accountability standpoint, it is a problem how difficult it is to find information about this practice on their web site and the CRC should question the transparency. I would not want to donate to an organization that may leave some clients worse off then before they sought help. It is consistent with this mindset that TCR is promoting these bonds, as they create an incentive for nonprofits to orient towards clients most likely to succeed (think of how health insurers market, or how NCLB influences school "pushout") and avoid situations where the odds of success are lower but the societal gain higher if that success does happen. A nonprofit should have no disincentive to serve all equally, and should be rewarded for working with the most difficult. The incentive for individual donations to nonprofits is to transform lives. In regard to government spending, the bonding concept may not undo this goal but certainly has the potential to mute it.