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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; it’s 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 state’s 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. That’s a return on the state’s 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 we’re getting great returns, we can’t convince the legislature to invest more money into the possibility of earning it back because they just don’t 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 state’s 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 program’s 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.