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Human Capital Performance Bonds: Breaking the human-services mold

Stacy Becker

If you’re even a teensy bit familiar with government budgeting, you know it has some serious shortcomings. But there’s an experiment brewing in Minnesota — the first of its kind in the U.S. — that could finally bring more sanity to government spending.

Last year the Minnesota Legislature, led by Rep. Keith Downey, R-Edina, and Sen. John Harrington, DFL-St. Paul, passed the “Pay for Performance Act.”

Pay for performance is often spoken of in a punitive sense, such as, “Teachers aren’t doing their job, so we should only pay for performance.”

But this legislation recognizes that those offering work-force training, mental-health treatment, supportive housing, chemical-dependency treatment, and so forth, create value, some of which is financial. The pilot program makes Minnesota the first state in the nation to officially recognize that nonprofits create financial value that can be captured and used to fund services.

The cornerstone is “Human Capital Performance Bonds,” the brainchild of Steve Rothschild, a former General Mills executive and founder of Twin Cities RISE!, an intensive work-force training program. The legislation authorized $10 million of appropriation bonds for the pilot.

The concept is simple. Nonprofit human-service providers generate value to society. Among the many benefits created, there exists a subset of financial benefits that can be measured and have actual cash value to the state. For example, when a work-force training provider helps someone get a better-paying job, the state receives higher income and sales tax revenues, spends less in public benefits and may spend less on incarceration.

The state would enter into a contract with a service provider to pay a given amount (based on projected financial benefits) when certain performance standards are met. Bonds are sold, creating a pool of funds to pay the service providers. As the state begins to reap financial benefits, it sets this money aside to pay back the bonds.

How to break the mold

These performance bonds depart from normal funding arrangements in three important ways. First, using bonds to finance social services is an implicit recognition by the state that benefits often accrue over a number of years.

For example, we don’t educate 5-year-olds because we hope they’ll be contributing members of society by the time they are 7. Currently the state tends to underinvest in social services, because budgeting rules recognize payback periods of only two to four years.

Second, budgeting tends to take place inside strict silos, carefully guarded by state agencies. But as the work-force training example showed, costs and benefits are spread over many agencies. The Department of Employment and Economic Development pays for the services. The Departments of Human Services and Corrections see reductions in spending as a result. And the state’s coffers grow from increased tax revenue.

Human Capital Performance Bonds provide a way of accounting for these costs and benefits. For the first time, the budgets of disparate state agencies will be considered from a single point of view — service providers’ impact on those budgets — and adjusted accordingly. This will help public agencies see and act upon the bigger-picture impact of human services.

Finally, the focus shifts from activity to outcomes. How can we identify and fund those services that contribute to the health of our communities over the long run? Government budgets are notorious for funding activities (i.e., seat time for school children) rather than outcomes (how much they learned).

What’s next?

The legislation establishes an oversight committee, led by Minnesota Management and Budget Commissioner Jim Schowalter, charged with answering these questions: How should we decide what services to include in the pilot program? What standards do we have for performance? How will we know when service providers meet those standards? The committee began meeting in February.

Rothschild created a nonprofit, Invest in Outcomes, with the sole purpose of launching and implementing the pilot program. Wilder Research was hired to look at a variety of service providers to see which of those services are good candidates for performance bonds. Not all are, especially for the purposes of a pilot test. The payback periods might be too long or the benefits might accrue somewhere other than state coffers.

Wilder has also developed an evaluation methodology in coordination with DEED and the Greater Twin Cities United Way, both of which have been developing efforts to measure the financial returns of work-force training programs. Invest in Outcomes is also working with the Nonprofits Assistance Fund on a working capital fund to help service providers with their cash flow needs.

The pilot will help answer many questions. Can we accurately measure financial value? Is this workable from all points of view — service providers, the state and bond investors? How can we improve the program? Can this idea be brought to scale?

It is this last question — scale — that offers so much promise. If the pilot is successful, it could open the door to hundreds of millions of dollars in new funding, expanding human services so that they are funded at an optimal level for society.

Stacy Becker is a public-policy consultant and Citizens League member. This article originally appeared in the March-April edition of the Minnesota Journal, the Citizens League’s bimonthly publication.

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