The Human Capital Performance Bond

Risk is shifted from the government to the nonprofit providers themselves. Rather than receiving their upfront funding from investors, nonprofits receive payments upon demonstrating measurable successes.


Habitat for Humanity volunteers from Mountain View Chinese Baptist Church of Mountain View, California, help construct homes at Musician’s Village in the Upper 9th Ward of New Orleans, Louisiana, Monday, Aug. 6, 2007. Photographer: Mario Villafuerte/Bloomberg News.


Steve Rothschild has cooked up a new take on the municipal bond for the state of Minnesota. This new bond wouldn’t be used to fund the construction of bridges or highways, nor would it have anything to do with local water utilities. Instead, an investment in this new type of bond would be an investment in individuals who are striving to improve their lives. It follows, then, that he’s calling his new model the “human capital performance bond.”

This new bond model being promoted by Rothschild – a former executive vice president of General Mills and, more recently, founder of a nonprofit called Twin Cities RISE! – is similar to that of the social impact bond (see full story on social impact bonds), currently being piloted in the U.K.

Social impact bonds (SIBs) organize a system in which private investors pay the upfront costs of nonprofit social providers’ programs. Investors see a return on that initial investment (paid to them by the government) if an independent assessor judges that the social programs in which they invested were successful.

This arrangement benefits not only the individuals in the programs, but the government as well – which would ostensibly see cost savings from, for example, lower recidivism rates, less dependence on low-income housing, or fewer welfare payments, depending on the particular program.

If, on the other hand, a social provider’s efforts are deemed unsuccessful, investors receive nothing. The SIB design ensures that governments only pay for social programs that are successful, by shifting the risk associated with a program’s failure from government bodies to private investors.


This brings us to the most important different between the SIB and the human capital performance bond (HCPB): In an effort to offer a more palatable risk profile to investors – important for the scalability of his bond, says Rothschild – the HCPB opts to shift risk from the government to the nonprofit providers themselves. Rather than receiving their upfront funding from investors, nonprofits receive payments upon demonstrating measurable successes (of the sort that will preserve or raise government revenue).

So, regardless of how the nonprofits perform, a bond-issuing government would theoretically continue its payments on the bonds until they mature (which means a low risk for investors), and the government would only draw from investors’ pooled capital to pay nonprofits after a demonstrable, money-saving success (which means less financial risk to the public sector than the status quo, wherein governments tend to base their funding of social providers on the number of people served, rather than on positive outcomes).

A public sector pay-for-success model comes with a good amount of allure in an era of widespread government belt-tightening, and the social impact bond concept has met with much interest in the U.S.

But the U.K.’s SIB didn’t inspire Rothschild’s HCPB design. The inspiration came from his own success with a pay-for-success model for Twin Cities RISE! — the nonprofit he founded in 1994 that provides job training for underemployed and unemployed adults and helps them find employment that pays a living wage. Part of the financing for TCR! comes from a deal that Rothschild worked out with the state of Minnesota: The state would pay TCR! for successes that brought with them economic benefits for the government.

The exact payments, and the thresholds required to receive them, were determined by an economist who analyzed what the economic gain would be for the Minnesota government (in the form of higher taxes and avoided subsidy payments for things like welfare and food stamps) each time an individual moved from an annual income of, say, $10,000 to $20,000, and stayed there.

TCR!’s pay-for-success program has been in place since 1997, and since then, the state of Minnesota has invested just under $5 million in the nonprofit. In turn, the government has recorded nearly $35 million in related economic value. Rothschild points out that that’s a return on investment of over 430 percent.

Emboldened by the success TCR! has had with its pay-for-success model, Rothschild began to consider how a similar system could be devised and expanded to address the formidable threats facing the public social sphere. With government bodies on all levels making deep cuts across the board, and philanthropy lacking the scale to pick up the slack, he began to conceive of a model that would pull in mainstream investor capital to plug widening social-sector gaps.

“The question became, ‘What is the best way to bring in investors?’ says Rothschild. “I considered a couple different options: First, venture capital or equity investment. But we need something that, if it works, can be scaled to a very large level – ultimately we need to get it to the billions of dollars. Social venture capital is relatively small, only in the hundreds of millions of dollars.”

He began to consider bonds.

“The benefit of a bond is that it scales really well,” he says. “If you add it up, there are trillions of dollars in bonds. Banks, financial institutions, and even social investors like foundations have part of their endowments in market rate bonds. I decided I wanted to make the investment as plain vanilla as possible, so investors would look at it like any other AA bond.”

And so the bond structure was the one that stuck.

Legislation surrounding the HCPB in Minnesota is still in the works. In May, a $20 million pilot proposal for the new bill passed the state’s legislature as part of a large finance bill. Governor Mark Dayton vetoed the finance package that contained the HCPB proposal, though he did note that he would support the HCPB program if it were part of a finance bill that he approved of. Rothschild is confident that within the next month or two, he’ll have the official go-ahead to get the HCPB pilot program underway.