In 1994, Steve Rothschild resigned from his post as
executive vice president at General Mills to found Twin Cities
RISE!, a Minneapolis nonprofit that provides job training to
unemployed adults and helps them find jobs that pay a living
wage. Ever the figures-focused executive, he immediately began
wondering how the economic benefits of TCR! could be
quantified, and whether any of those cash savings could be
funneled back into his nonprofit somehow.
I started with the assumption that social improvement
would lead to economic value, Rothschild says.
Economic value is the same as cash; its no
different than economic value for a business.
The next year, Rothschild approached the deputy director of
the Minnesota planning agency with the seeds of an idea for a
radical new social services financing structure: What if the
state made TCR!s funding contingent upon its success,
assuming that its success could be shown to save the state
money? The states economist crunched the numbers
necessary to undergird the pay-for-success model, and
determined how much the state would gain in tax revenues and
save in welfare subsidies, food stamps, and other subsidies if
TCR! helped one person move from an annual income of, for
example, $10,000 to $20,000. The legislature approved the
pay-for-success model in 1996, TCR! implemented it in 1997, and
since then, Rothschild says, the state has invested $4.6
million in his nonprofit and has received $34 million back in
economic value. Thats a return on the states
investment of 624 percent.
Despite the economic and social benefits demonstrated by the
model, Rothschild has hit a wall in his push to grow his
successful nonprofit. Even though were getting
great returns, we cant convince the legislature to invest
more money into the possibility of earning it back because they
just dont have the cash, he says. Like many states
facing outsize budget shortfalls, Minnesota has been forced to
slash spending across the board. In July, the states
legislators slashed its $5 billion deficit only after a
20-day government shutdown.
It became clear to me that we have to find new sources
of revenue beyond what the state can appropriate through
current revenue sources, he says.
Rothschild has fixed his hopes most squarely on one
particular source of capital: institutional investors. He
believes that if an investment product could be designed to
allow investors to finance successful public social programs
like TRC!, those nonprofits would finally be able to scale up,
presumably expanding the reach of their social and economic
benefits. Investors funds would only be tapped by a
social program when an independent assessor determines that
programs outcomes to be a money-saving success, and
investors would be repaid their principal, plus a return, from
the same government coffers that are presumably benefiting from
higher taxes and fewer subsidies and other costs.