Why Get the Milk For Free When You Can Buy the Cow?

Or maybe it’s “Why get the milk for free when you can buy the milk?” That’s sort of what this article made me think about.

The idea goes by one of two names: pay for success bonds or social impact bonds. Either way, nonprofit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus — but only if agreed-upon benchmarks show that the program is working. If it falls short, taxpayers owe nothing.

The New York Times goes on to describe all the pros – incentivizing performance measurement (and the concurrent ending of ineffective programs – and the cons (bad performance measurement and refusing services to the hardest to help in order to pad statistics), but I kept coming back to one fundamental question.  Isn’t this what the nonprofit sector already does for free?

As I’ve probably mentioned a million times, one of the most innovative aspects of the first Prosperity Partnership Regional Economic Strategy was its inclusion of “social capital and quality of life” as a economic foundation. When I talk to folks, I define social capital for them as “those intangible things that make our region a great place to live and work: arts & culture, the environment and the social safety net.” Of course, all three of those things are stewarded in large part by the nonprofit community.

A lot of great thinking and writing has been done on the role and impact of “the social sector” (as nonprofits like to be called), but I always think about three major impacts of nonprofits: 1) they aggregate individual resources toward solving public problems; 2) they provide public services for lower cost than government and/or provide services that government can’t or shouldn’t; and 3) they serve as a laboratory for innovation of best practices in addressing social issues. A great example of the latter point is in education, such as the work that Geoffrey Canada and Harlem Children’s Zone piloted which is now being replicated across the country.

Now, when you think about investment in nonprofits, you have to remember that there’s always government investment, even if the government is not directly funding a specific organization or activity. That’s because – for 501(c)3 organizations – all of a nonprofit’s activities are tax-free and gifts to them are tax deductible; which means that the federal government (and often state and local government as well) is making “tax expenditures” on that nonprofit’s behalf (revenue that the government forgoes in order to support/incentivize a public good). Ostensibly, those tax expenditures are being made because the government wants nonprofits to address those three roles I described above.

But let’s put that aside for a moment and pretend that the government doesn’t pay anything for nonprofits to do their work. In that scenario, the country benefits “for free” from the work and innovations of the nonprofit sector, and from the generosity of the private individuals and foundations who fund them. So, isn’t this proposal just having the government pay for work that is done anyway? In fact, this approach might actually create a disincentive toward experimentation and risk-taking in social ventures, since less proven ideas are less likely to be successful and therefore provide a return on investment. Yet, it’s exactly that kind of bold innovation and change that needs to occur to finally make a difference.

Clearly, the reason that folks are excited about this idea is that the benefit to the nonprofit community is huge. Foundations can “get [their] money back and then be able to reuse it….[and], if social impact bonds work, they have the potential to attract for-profit investors — and vastly expand the pool of capital that’s available for social programs.” No one would ever claim that nonprofits already have access to enough capital, especially for new or out-of-the box approaches. And especially not now when states and local jurisdictions are moving more of the burden for basic social safety net issues onto already strained nonprofit budgets.

So it’s not that I don’t want to make sure nonprofits can be more successful. It’s just that there’s just something strange about this approach that I’m not quite sure I buy. For example, I wonder if you couldn’t get just as much bang for the buck if instead you increased the tax exemption for investments in nonprofit organizations that can prove their impact, either through their own performance measurement or who through evaluation by some sort of third party performance measurement organization.

And that has been a very long discussion of nonprofit theory and tax policy on a Friday afternoon. Happy Presidents’ Day weekend!

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