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Forging A Bond

Talk about an intense matching grant. According to the Chronicle of Philanthropy, Massachusetts (my place of residence from age 0 to 18) has begun consideration of “a financing approach for social-service projects that would require charities and philanthropists to obtain private financing and show results before getting state money.” In other words, public support would be contingent on a match from private donors and a “match” (in the form of results) from the non-profit itself.

Reuters reports that “President Barack Obama’s 2012 budget plan includes $100 million for these ‘social impact bonds,’ which more closely resemble private loans than debt.” For example? In the UK, the Rockefeller Foundation invested half a million dollars in an 8 million dollar project to reduce recidivism; were the project to succeed the Foundation “could reap the equivalent of up to a 13 percent annual interest rate payment.”

As Sean Stannard-Stockton explains: “organizations would get government support based on the results they actually achieve. In the interim, foundations, donors, and even private investors would provide money to run the programs. If the programs produced results … the donors could get their money back and possibly more than that if the results were better than expected.” He points out that a return-on-investment style program (also called “pay for success”) encourages private foundations to focus on what will make a distinct difference and “creates a contract that specifies the rate of return based on the level of proven social results.”

On a state level, Massachusetts is still in the investigation stage; and on a federal level, the program may not produce measurable outcomes for another several years. But I tend to be, by turns, excited and concerned and intrigued by the mingling of philanthropic aims and free market thinking — or rather, applying ideas more typically associated with the for-profit sector to the non-profit sector in order to encourage innovation or push for results.

On the one hand, as Jay Gonzalez (Massachusetts Secretary of Administration and Finance) explained these financial incentives, and returns on investment, could ultimately “deliver services more cost-effectively and to stretch every taxpayer dollar.” Moreover, they could engender closer and more concrete bonds among non-profits, governments, and private foundations — implying that grassroots social change is a project in which we all have a stake, and from which we all may benefit.

But on the flip side, the introduction of “traditional” financial investment into the workings of non-profits does raise some thorny questions. Might that direct greater funding to organizations that produce fast and quantifiable results, rather than those who take a truly innovative approach or those that focus on smaller populations? And do we lessen the import of a donation by terming it an investment — and by rendering its “return” into a purely financial form?

Clearly, arguments exist on both sides and I am certainly interested to see what Massachusetts determines. What are your questions, thoughts, and impressions on “social-impact bonds?” What works and what doesn’t?

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