Newspaper article

Human Capital Performance Bonds: Breaking the Human-Services Mold

Newspaper article

Human Capital Performance Bonds: Breaking the Human-Services Mold

Article excerpt

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. …

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