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Mar 3, 2011

The Essential Role of Nonprofits in Workforce Development

I just finished my column for Columbus Business First, in which I wrote about economic development and nonprofits. Rather than take the familiar track of how many jobs nonprofits create through their employment and spending, I focused on their essential role in workforce development. Here are some excerpts from the column.

The Problem:

You know the story: Economic growth in the face of reductions in federal and state spending will require substantial private investment. Even then, true prosperity needs to raise the living standards at the bottom of the income distribution as well as the top. This will happen only if more Americans can be linked with the opportunities created by economic growth.

Unfortunately, the skills of the population do not match well with the skills needed by expanding companies. Many have studied the reasons for this mismatch but a few statistics highlight a major underlying problem. In Ohio, only 71 percent of students graduate from high school. Of those, only 57.5 percent go on to college. Of those, so few graduate that only 23.3 percent of Ohio adults over the age of 25 have completed a college degree. What can we do to link to the future economy the 77 percent with no college degree and the 29 percent with no high school degree?

Surely, reversing these discouraging numbers must start with the basics:

-literacy training

-substance abuse therapy

-training in good workplace habits.

It is obvious to me that nonprofits are the best-qualified to do this. They have the passion and focus driven by mission. And they are low-cost, lean and mean service providers.

But here is the rub: most nonprofits are poorly capitalized, which makes them unlikely to be able to step up to the challenge on their own. Program development costs money. And not all new programs are successful. But there is a tremendous amount of private capital available for productive investment.

The Solution:

Two new ways in which capital is being funneled to nonprofits are:

-social impact bonds

-Limited Liability Low Profit Corporations (L3C).

Social impact bonds are not really bonds, but financial commitments. Specifically, they are government payments to private investors who finance nonprofit programs that reduce government costs. The amount of savings determines the return paid to the investors.

Suppose nonprofits take their programs in literacy training, substance abuse therapy, and training in good workplace habits. Match them with employers who are having difficulty finding qualified workers. Get private investors to invest in the nonprofit programs and have the employers make payments to the investors based on their savings from reduced turnover and recruitment costs.  That is the essence of a social impact bond.

L3C corporations are a hybrid of for-profit and nonprofit that also provide a way for a nonprofit to supplement traditional grants with private investment capital. These special entities need to be authorized by state law. To make foundation grants permissible, the L3C corporate form creates a vehicle for receiving Program Related Investments (PRI) , which are foundation investments in for-profits that qualify as grants for tax purposes under Section 4944c of the tax code. Background information and legal descriptions can be found on the L3C Resource page in our Resources section.

The national movement created by Social Venture Partners is another effort to link private capital into nonprofit initiatives to produce measurable social benefits.

As the national environment increasingly claims the private market has better solutions, these new ideas to tap private capital to support nonprofit program innovation are an intriguing way to make nonprofits a regular player in the “private market.”