by Keith Cherry
The election of Barack Obama and the current financial crisis are reshaping the financial-business landscape of the country and are poised to create new institutions and institutional arrangements between the public and private sectors and the citizenry. As the economy declines, publicly funded mental health and substance use treatment services stand to be severely affected, and the complex web of community based service providers delivering these services may begin to unravel.
Many have been promoting a new kind of philanthropy known as “social investing” which applies commercial financing principles to the pursuit of social goals such as behavioral health services. Policy makers might consider how social investing could be included in recapitalization efforts offered to U.S. banks and other financial service companies as one way to mitigate the current strain to our nation’s already fragile behavioral health infrastructure.
Social banks, whose main goal is to finance projects of high social and environmental value, are the cornerstone of social investing. They operate in a manner similar to commercial banks, using investors’ capital to make loans that will hopefully provide desired returns to the bank and the bank’s shareholders. The central difference is that social banks seek to provide financing to people and organizations that traditionally are unable to access, qualify for, or afford typical commercial bank loans, and the loans focus on borrowers who want to use the money to provide social services or improve the economic prospects of disadvantaged people. However, social banks do not hand out free money and they require borrowers to provide appropriate documentation, like business plans that outline the social impact of their organizations and reasonable strategy for the repayment of loans.
The financial crisis provides a unique opportunity to rewrite the rules of banking, and either requiring or encouraging banks that tap federal recapitalization to create social banking programs or establishing stand alone social banks underwritten by recapitalization dollars are worth contemplating.
Social investing can be particularly important for public behavioral health services that are traditionally funded in a variety of ways and highly sensitive to fluctuations in state revenue. Of particular concern is substance use treatment, largely supported by state discretionary spending. As it stands, most states expect severe revenue shortfalls in the coming years (see page 5). Staff cuts, state hospital closings and program consolidations and cancellations are likely fallouts of these shortfalls. And while Congress is considering increasing the federal Medicaid match (FMAP) to help states during this time of crisis, many will continue to have difficulty accessing credit markets, particularly for short-term borrowing. Although federal recapitalization program may re-open credit markets, states rely on mechanisms such as Revenue Anticipation Notes (RANs) and Tax Anticipation Notes (TANs) to collateralize their borrowing. As state tax and revenue collection declines, so does borrowing power. Thus, short-term loans that are generally used to cover payroll and other immediate expenses are put at risk.
Beyond states, social banking could be a real alternative for the many small non-profit and for-profit organizations that provide behavioral health services across our country. As important facets of the overall system, many of these organizations could easily struggle as they have little or no access to short or long-term financing. Many rely on state or federal grants to solely fund outreach positions, for example, and have no other way to cover the payroll costs should this revenue be interrupted. On a positive note, social banking could assist community providers in establishing new or innovative programs that in times of state financial distress may not be funded. Finally, assuming that an agency has reliable revenue streams to support it, long-term social borrowing can underwrite the costs of new treatment facilities and other behavioral health infrastructure projects that are always in heavy demand and in short supply.
Social banking is not an alternative to the current mix of federal, state, and local funding that supports our country’s public behavioral health system. However, the recession we are experiencing highlights the fragility of this system and points to the need for innovative solutions that can work in both the short and long term to supplement traditional revenue mechanisms. Providing additional capital markets that behavioral health providers can access to sustain and expand their important work is one such solution.
