With government grants and other traditional funding sources shrinking, investors seeking to profit while also helping their communities are expected to play a larger role in financing nonprofits. Now, the challenge for nonprofits is to show these investors that they can earn a return on money put into social programs.
Jewish Vocational Service, a Boston nonprofit specializing in employment services, says it has completed a social-return-on-investment analysis that could become a model for other Massachusetts charities hoping to attract so-called social impact investors. The analysis detailed the costs and benefits of three workforce development programs, calculating the increase in graduates’ subsequent wages for every dollar spent on the program.
“We felt it was necessary to demonstrate clearly that a dollar invested in the services at JVS would create significant returns,” said Jerry Rubin, chief executive of Jewish Vocational Service. “What private investors go into purchasing a bond or a stock in a private equity situation without looking at the financials? Nobody.”
The social impact financing method, also known as “pay for performance,” has gained increasing attention in the United States as cash-strapped governments look for new ways to fund social services. The idea behind social impact financing is that if programs are successful at reducing social problems such as homelessness, unemployment, and poverty, then governments will enjoy big savings in social service costs.
Governments, in turn, can tap those savings to pay off investors with a decent return. If the programs fail to deliver promised results, governments owe little or nothing. Investors, rather than taxpayers, take the risk and absorb the costs of failed programs.
The method is already being tested in the United Kingdom, where Social Finance Ltd., which helps arrange financing for nonprofits, raised money from more than a dozen investors for a program to work with 3,000 inmates to reduce recidivism. A handful of states, including Massachusetts, have also begun exploring the idea in the United States.
Massachusetts officials are hoping to test the approach soon, and are close to closing a “pay for performance” contract with Roca Inc., a Chelsea group that wants to create an intervention program for young offenders, said Jay Gonzalez, the state’s secretary of administration and finance.
“The bottom line is investors — or in our case, taxpayers — are all understandably wanting to see results in a way that they haven’t really seen before,” Gonzalez said. “When allocating what are now more constrained resources, they want to know that their money is being spent more wisely and more effectively.”
Rubin said this is why Jewish Vocational Service decided to analyze its workforce development programs, which focus mainly on helping immigrants learn English, find jobs, or get the training they need to advance to higher skilled — and higher paying — positions. The analysis is thought to be the the first of its kind in the state.
It found that for every dollar put into the nonprofit’s employment programs, participants’ hourly wages increased by $2 to $3 within two years, and by up to $15 within a decade.
Rubin and other nonprofit officials said they believe the analysis provides a template for other nonprofits — especially those doing workforce development — to use the data they routinely collect on indicators such as job placement rates and wages to measure the cost-effectiveness of their programs.
Detailed and rigorous cost benefit analyses will increase accountability and attract financing to nonprofits, said Michael Durkin, president of the United Way of Massachusetts Bay and Merrimack Valley.
“At a time when trust of institutions is generally pretty challenged — and nonprofits amongst those — we’ve got to be able to communicate a story to donors about what impact their donations are having,” Durkin said. “The ability to tell your story not only with heartwarming anecdotes but with real numbers against a hard scale, that’s a real asset.”