Human Capital Bond, Minnesota

Where is the case study from?

The State of Minnesota , in the USA

What the nature of the innovation?

The Minnesota State Government Finance Bill was signed on July 20 2011. It included $10 million appropriated for a pilot Human Capital Bond program. This is the first place in the United States to use this funding method. The Human Capital Bond is different to the developing UK Social Investment Bond approach. A municipal bond will be issued in the municipal bond market by the state of Minnesota, under the bonding authority of the State. Bond proceeds would provide a pool of capital that would be used to support pay-for-performance (payment by results) based programs delivered by pre-qualified service providers.

The purpose of the scheme is to provide additional capital for the state's highest performing human service providers (mostly non-profits) from private investors (banks, pension funds, individuals, foundations), and to raise funds for services for groups that lack a 'political constituency' to lobby for their needs - such as ex-convicts.  The services funded by the bond are outside of the general programme of services offered by the state.

Organisations wishing to deliver services with the proceeds of the bond must apply to join a pool of organisations that are able to demonstrate the impact of their services on outcomes - such as moving from welfare to sustainable work.  Providers must provide outcome data from their history to be certified.   It is aimed at the highest performing organisations only.  By producing savings through preventative programmes the participating organisations will generate savings for the state, which will be used to pay back the bond.  The risk lies with the social enterprise as their payment is by results, however they are able to apply to an independent working capital fund for a low interest loan to cover their upfront costs.

There is provision in the  Bill to allow the state finance department to track participating individuals through their social security number to calculate the increased revenue and reduced saving resulting from interventions.  This is the key means by which evaluation will be undertaken.

The scheme will be governed by an Oversight Committee which will be appointed by the Commissioner of Management and Budget. Its members will include three state commissioners, a non-profit executive whose organization is a participant and other distinguished members who have expertise. It will certify providers to participate, negotiate with the state for payments to the providers, report on results and oversee evaluation.

What triggered the innovation?

Minnesota has budget problems that are not likely to be resolved in the near future.  A 25-year forecast by the state economist predicts that state revenues will grow at a reduced rate of 3.9 % a year while health care costs escalate at 8.5 % and education barely stays even with inflation at 2 % growth. This means that everything else, including early childhood education, job training, anti poverty and drug rehabilitation programs and infrastructure spending will decline at about 3.9 % per year. Ten years from now there will be 35 % less to invest if these trends persist. The aging population will further reduce state revenue growth while dramatically increasing spending on pensions and healthcare. Solutions of increasing tax or introducing spending cuts are seen as only temporary answers. Only private investors are regarded as having the financial capacity to invest to make up part of the gap.

Minnesota's Human Capital Bond approach is based on Twin Cities Rise!, a successful, 13-year pay-for-performance contracting program in the State.  It worked with unemployed people to move them into work, and achieved a 126% return on investment.

The idea of state bonds was championed by Steve Rothschild, founder of Twin Cities Rise! and President of Investing in Outcomes, an organisation incorporated in December 2010 with the purpose  to develop, pilot and evaluate the Human Capital Performance Bond (HUCAP) in the State of Minnesota.

What are the key lessons?

• By making this a market rate investment, rather than a social investment, not only is the infrastructure mostly in place for the financing to occur, but the pool of potential investors is much larger.  This also makes scaling up more plausible.

• Getting cross party political support has been key to getting this measure through the state legislature.  The Republican Party was quick to embrace the approach, but it was a Democratic Governor that signed it off.

Further information and contact:

www.investinoutcomes.org

Steve Rothschild

Founder Invest in Outcomes and Twin Cities Rise!

investinoutcomes@gmail.com