Social Impact Bonds No Cure All for Nonprofits

June 8, 2011; Source: Chronicle of Philanthropy | Along with the deep financial recession that’s painfully reshaped the “new normal” for nonprofits, there’s a slower but equally dramatic shift occurring in the nonprofit landscape. In a recent Chronicle of Philanthropy article, Mark Rosenman describes a decades-long evolution toward privatizing funds for nonprofit work. According to Rosenman, this trend has reached a new pinnacle of commercialization in the form of “social impact bonds.” Furthermore, he argues that while the goal to leverage increased capital for effective nonprofit work is laudable, this evolution is eroding our societal commitment to the common good.

Rosenman traces the origins of the shift to when the U.S. nonprofit sector started to generate noticeable revenue. As it grew to account for 5 percent of gross domestic product, the sector’s most “profitable” segments such as health care, insurance, and higher education began to privatize, through for-profit start ups and conversions.

The next wave of change was marked by increased use of market mechanisms to generate earned income, from corporate partnerships for “cause marketing” to “social ventures” through which nonprofits filled market gaps with market-driven services aligned with their missions.

More recently, new legal structures, such as L3C and B corporations, enabled hybrid organizations that could both generate private profit for investors and achieve tax benefits from fulfilling broader social goals.

The newest trend is social impact bonds. Through this “pay for performance” scheme, private investors buy into state or federally managed social impact bonds, which are reinvested in nonprofits that promise to achieve certain outcomes. If the nonprofit achieves cost savings as a key outcome, it receives a percentage of savings back. Investors receive a return on their principal. This is, in effect, a “futures market” for nonprofit outcomes.

While linking resources to long-term outcomes is good, there are questions about how the funding mechanism will work in implementation. For example, how much time passes before long-term outcomes are considered achieved? What about funding for other valuable nonprofit outcomes (e.g. civil rights) without clear economic yields? Rosenman describes these and others in detail.

Given the risk-averse, concentrated investment that social impact bonds are likely to foster, there will be continued need for other sustainable funding, including philanthropic grants, government contracts, and contributions. The biggest danger of the evolution toward commercialized nonprofit funding is that such investment becomes seen as a full substitute for our deeper responsibility to care for our most vulnerable people and communities.—Kathi Jaworski