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Cynder Sinclair: Pay for Success Attracts New Evidence-Based Funding for Nonprofits

It’s no secret that nonprofits are always looking for new funding sources. Most social programs find that resources just don’t keep up with demand for services. Fifty percent of nonprofits surveyed by the Nonprofit Finance Fund said they can’t meet the current demand — and demand is soaring.

Social sector leaders know they must look for ways to change their approach to raising capital if they’re going to thrive or even survive. Just “getting by” is not an option for them — “tried and true” fundraising doesn’t work in the new reality.

Even the federal government recognizes the need for new ways of funding nonprofits. Government officials are the first to acknowledge a strong nonprofit sector is essential for producing vibrant communities. Yet, the more the government cuts funding, the more nonprofits must pick up the slack.

As this reaches a tipping point, President Barack Obama is calling for development of cross-sector teams comprised of nonprofits, government, business and investors. He points out that nonprofits are a driver of job creation and an incubator of social innovation. With diminished charitable giving, reduced government budgets and increased demand for services, Mr. Obama says it’s time to optimize public dollars by attracting new sources of funds.

As a result, new capital sources are emerging called impact investing. The latest model for this new method of funding is called Pay for Success. The first project started in New York City in 2012 as a Social Impact Bond. The current federal budget calls for quadrupling the funds for this project to $500 million.

Pay for Success leverages philanthropic and private dollars to fund preventive services provided by nonprofits and other non-governmental entities up front, with the government paying back investors only after the interventions generate results that save taxpayer money. At a time when public dollars are scarce, this model provides funding for service providers to test new and proven innovations at low risk to the taxpayer.

The Office of Management and Budget explains that Pay for Success strengthens nonprofits, philanthropic, faith-based and other community organizations on multiple fronts:

» Preserves funding for many programs that meet critical community needs;

» Encourages investments in program outcomes, not just outputs;

» Facilitates access to capital and other resources to enable nonprofits to support innovation and scale what works;

» Supports important administrative changes to help existing resources go further in transforming lives and communities.

Proponents of the model are hoping to adapt it to produce positive outcomes in health care, the environment, prison recidivism, workforce development, elderly support, subsidized housing and disability services. Emphasis will be on measuring outcomes rather than outputs. Organizations participating in Pay for Success must prove they are making a measurable difference in their target population, resulting in savings for taxpayers and return for social impact investors, thus connecting performance outcomes to financial return.

The latest development will target an asthma program in Fresno. Social Finance Inc. and Collective Health announced on March 25 that The California Endowment has awarded them $660,000 in grant funding to launch a demonstration project to improve the health of low-income children with asthma and reduce the costs that result from emergency treatments. Based in Fresno, the project will incorporate rigorous data collection and evaluation methodologies in order to demonstrate the dual social and financial benefits of up-front investment in asthma management and prevention. This project will lay the groundwork for Social Finance and Collective Health to design and launch their first health-focused Social Impact Bond in the United States.

While the appearance of new funding sources is good news to nonprofits and it’s encouraging that government and private investors are stepping up to help make vital services available, this represents a new way of conducting business for many nonprofits. No doubt they will welcome the change, but taking advantage of this type of funding will require nonprofits to look at their work a little differently. Instead of just doing their good work because they know it makes a difference, they will now have to prove it. Some are already on board with this type of performance measurement; others are wondering how they can afford a measurement system. Thankfully, measurement capability is becoming more affordable and accessible to nonprofits. The new movement of social scientists measuring social impact bodes well for everyone.

— Cynder Sinclair, Ph.D., is a local consultant to nonprofits and founder and CEO of Nonprofit Kinect. She can be contacted at 805.689.2137, or .(JavaScript must be enabled to view this email address). The opinions expressed are her own.

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