Evidence of a New Economic Reality for Non-profits (and how Social Impact Bonds might help)

Social Finance - Fri, 06/21/2013 - 12:10

By Justin Bertagnolli

The Nonprofit Finance Fund (NFF), a leading US-based community development financial institution (CDFI) recently released their annual “State of the Nonprofit Sector Survey Results[1].” The report highlights critical shifts in the financial stability of the social sector and underscores a new economic reality: funding from traditional sources is declining and the number of people in need of service is rising.

Antony Bugg-Levine, CEO of the Nonprofit Finance Fund has stated, “Nonprofits are changing the way they do business because they have to: government funding is not returning to pre-recession levels, philanthropic dollars are limited, and demand for critical services has climbed dramatically.”

In light of this new reality, community organizations are pursuing new channels of funding, seeking alternatives to government and philanthropic dollars. In this new landscape, Social Impact Bonds have emerged as one potential solution.

Trends in the social sector: 

Despite signs of economic recovery and increased employment—trends that are traditionally accompanied by a decrease in need for social services—survey data has shown that the need for services continues to rise. Of the 6000 organizations surveyed by the NFF:

  • 78% saw an increase in the demand for their services in 2012, and 85% expect the demand to increase in 2013
  • 52% were unable to meet the demand for services in 2012
  • An additional 1% of the total population in the US (3 million) fell below the poverty line between 2007 and 2010

Data from the NFF survey has also demonstrated that the stability of funding for these organizations is also increasingly uncertain. According to the report, over 30% of organizations received less government funding in 2012 than they did in 2011.

Community organizations, however, are not backing down from this challenge. Instead, 49% have added or expanded existing programs to meet the needs in their community, and 41% of organizations have increased the number of clients that they served in 2012. This speaks volumes about how community organizations are adapting through creativity, determination, and unpaid overtime.

Unfortunately, not all of these adaptations are sustainable solutions for the long-term.

Can SIBs Help?

At such a financially uncertain time, SIBs are poised to play a critical role in addressing the decline in funding for social sector organizations. We believe that SIBs could help service providers in three tangible ways.

  1. SIBs are poised to aid organizations in overcoming the “funding gap”. Unlike grants or donations, SIBs could not only provide stable funding across multi-year projects (typically 3-7 years), but they could also provide organizations with greater funding flexibility to be adapted as necessary.
  2. SIBs could help organizations in the establishment of targets and metrics of success. Social service providers are increasingly demanding accurate measurement of impact as well as program-specific evaluation. According to the NFF survey, over half of respondents were required by their funders to measure their long-term impacts. Despite such a reality however, many organizations lack the capacity to implement such measurement. Of the organization surveyed for the NFF, 69% stated that they did not have enough staff or time for rigorous measurement. It is our belief that such a challenge can be overcome through the use of SIBs, as these pay-for-success contracts “make measurement matter”.
  3. SIBs could encourage collaboration across sectors. As a result of the SIB design process, multiple stakeholders are brought together to align their priorities with community outcomes. With clear outcomes established by all, prevention-focused interventions can be designed, or selected, to address the root causes of issues. As a result of this process, we expect SIBs to enable greater collaboration and data-sharing across sectors, and ultimately, create better outcomes for clients.

A Final Word:

Organizations most eligible for SIB financing are those that are already rigorously measuring outcomes and operating proven, client-centred programs. 

While the shifting economic landscape has dramatic implications for the way social service providers support their communities, it is our belief at Finance for Good that, SIBs could help service providers overcome their current challenges by providing new and stable funding, improving infrastructure for measurement, and enabling better collaboration with government and funders.

[1] The NFF is a community development financial institution that surveys US based service providers annually on how they are adapting their organizations and finances to economic conditions. Although different, many parallels can be drawn from this survey data and the Canadian social environment.

Editor's note: Justin Bertagnolli is a Co-Founder and current VP of Program Development at Finance For Good, one of the organizations working toward the establishment and implementation of the first Social Impact Bond in Canada.