Lessons Learned in Minnesota’s Stalled Pay-For-Performance Financing Initiative

The Minnesota Legislature authorized an innovative social impact financing pilot in 2011 to issue state bonds for pay for performance based contracts to expand effective social services.  A report released by Propel Nonprofits (formerly Nonprofits Assistance Fund) examines why, while pay for success initiatives have moved forward in other states, Minnesota has failed to issue the appropriation bonds authorized in the Pay For Performance Act of 2011.

The lead author of Pay-For-Performance Financing to Expand Cost-Effective Social Services, Professor Judy A. Temple from the Humphrey School of Public Affairs, completed interviews and reviewed documents to identify the key lessons learned and what has hindered implementation. After outlining the background and activities related to this unique pay for performance model – Minnesota was the first state to pass legislation authorizing social impact financing through a state bond – the report concludes with seven lessons learned and recommendations to move ahead to find new ways to fund successful programs.

The seven lessons learned after four years of effect to implement the Minnesota bond pilot are:

1. Social impact financing initiatives require a strong public sector champion;
2. Administrative costs associated with social impact financing are high;
3. Strict adherence to the appropriations bond model limits flexibility in the selection of particular services to fund;
4. The complexity of funding streams from multiple levels of government limits the ability to capture savings;
5. The assumption of risk and risk-aversion are important limiting factors;
6. Issues of cash flow need to be considered closely, especially from the service provider’s perspective; and
7. There are alternative ways of thinking about the government’s role in promoting social impact financing.

“Our interest in this topic comes from our mission to support the financial health and sustainability of nonprofits that could be affected by a new payment structure,“ said Kate Barr, President & CEO of Propel Nonprofits, “The goal of our report is to understand what has stalled the pilot and set the stage for social impact investing models that strengthen nonprofits and their ability to do good work. While some of the lessons learned specifically apply to the appropriations bond model, others are universal issues in all pay for success initiatives. But at the heart of the report’s lessons learned and the recommendations are unique critical structural and model distinctions found only in the Minnesota Pay for Performance bond pilot versus other versions of Social Impact Bond or Pay for Success transactions that have been implemented elsewhere.”

The report concludes with recommendations for two possible directions to take in Minnesota in order to attract social impact investments to expand effective programs.