An outside-the-box idea for Minnesota nonprofits

  • Article by: LORI STURDEVANT , Star Tribune
  • Updated: April 16, 2011 - 9:25 PM

Bonds would be sold, and the return on investment would be measured. Tricky but innovative.

For years, DFLers have referred to state spending as "investment." It comes as a surprise to some of them that someone took their lingo seriously.

That someone would be Steven Rothschild, a former General Mills exec who became a local nonprofit rock star when he founded Twin Cities RISE! in 1994.

Last year it provided job training and placement to some 700 disadvantaged people, mostly African-American men.

Since 1997, RISE! has been paid by state government under a performance contract. It receives state funding only when it places trainees in decent-wage jobs with benefits, and again when those workers stay employed for at least a year.

On that basis, Rothschild reports, RISE! has produced a 13-year return on investment of a whopping 624 percent.

That's a return that ought to inspire more investment. It would in the private sector, he reasoned. It likely would in the public sector too, if the state weren't tapped out.

Instead, Twin Cities RISE! and programs like it are facing a cut in the 8 to 10 percent range this year, as the state retrenches. It appears likely to keep retrenching as the consequences of an aging population and their rising health care costs hit its balance sheets.

Rothschild isn't one to wring his hands when faced with such a forecast.

He's come to the Capitol this year with one of those outside-the-box ideas that politicians always say they're looking for: How about selling state bonds to private investors, using the bond proceeds to fund proven high-performing nonprofits like his, and splitting the return on that investment between private investors and the state?

The response at the Capitol has been everything from a warm embrace to wary skepticism -- with the skeptics mostly people who've long called state spending an investment.

Some would say that makes them hypocrites. I'd say that makes them appropriately cautious. What Rothschild is proposing could become a big deal with big unintended consequences.

But it also could be the salvation for life-changing work that's due to be short-changed if things don't change.

A test seems in order. That's what Rep. Keith Downey, R-Edina, put into a House omnibus funding bill. It's a pilot project -- an authorization for a $20 million issue of "human capital bonds," aka appropriations bonds.

These would be 10-year notes backed not by the "full faith and credit" of the state, but by the state's good name and legislators' word.

A board would be established to dole out the proceeds to deserving nonprofits and measure the public return they generate. If the return beats the debt service on the bond, the investors get paid and the state keeps the rest.

And if the return isn't that good? That's one of the things that has the skeptics worried. The state's credit rating could be at risk.

Even if the return is good, they worry about using the state's borrowing power to benefit private investors first and the public second. Shouldn't the public have a greater claim?

They add: Isn't the state's bonding capacity already committed to infrastructure improvements? Rothschild's idea would put help for the poor in debt-capacity competition with bridges, water treatment and flood-control projects.

That's a tough league.

What if the state's return comes in the form of bad possibilities that did not occur, such as reduced prison recidivism? That kind of return is hard to convert into a check to an investor.

Downey doesn't pooh-pooh the DFL concerns. But the Edina Republican sees brighter possibilities: New revenue to fuel good works that does not involve the GOP bugaboo, a tax increase.

And a new return-on-investment measurement regime that could serve not only the nonprofit sector, but also the public one.

Downey and Rothschild insist that bonding would only supplement existing government contracts and grants to eligible nonprofits, and never replace them.

I tried not to chortle in response.

But I listened up when they said a human capital bonding pilot project would develop a new way of measuring the financial return on spending -- er, "investment" -- in a lot of things government does to help people become self-sufficient and productive.

Government spending has a bad name in this country in part because people have no empirical way of knowing what good comes of it. Developing a quantified assessment of the return on human-capital improvement efforts would be a good thing.

Letting a well-run, tightly limited pilot study -- and not mere skepticism -- inform policymakers' judgments isn't bad, either.

Lori Sturdevant is a Star Tribune editorial writer and columnist.

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