Risky Business: How Nonprofits May Fare Under Minnesota's Performance Bond

Abstract

This paper explores Minnesota’s emerging workforce development pay-for-performance pilot, which was authorized by the 2011 state legislature. The charge of this work, which was commissioned by the Greater Twin Cities United Way, is to identify risks that this new model poses to participating nonprofit service providers. By design, the paper does not illuminate the many positive impacts that the model may create for the state, its organizations, and its people. Instead, it is the author’s hope that this research will be used to promote the development of an effective and successful pilot. The findings show that while the model may be able to address some problems facing the field of workforce development—namely, shrinking resources and poorly aligned outcomes—it also poses significant financial risks to nonprofits, primarily: 1) difficulty in obtaining and repaying working capital, 2) failing to achieve outcomes, and 3) contract risks. Through a literature review and in-depth interviews with nonprofit leaders, the paper also explores how nonprofits may respond to this risk. Initial findings show that they will likely employ a mixture of smart strategies, like shoring up operating reserves, as well as unavoidable gaming tactics, like creaming and output distortion. The paper concludes with recommendations for program designers and policymakers to consider as they continue to build up the model.