Q&A with Greg and Jen:

What we learned in issuing social impact bonds

Published: January 2023

In fall 2020, the Bush Foundation issued $100M in social impact bonds and used the proceeds to create two community trust funds that directly invest in Black and Native American communities in our region. The grants will go to individuals in an effort to build stability and generational wealth.

Through an open RFP, the Foundation selected two organizations to steward the funds and design and administer the grant programs: NDN Collective, based in Rapid City, SD, and Nexus Community Partners, based in St. Paul, MN. The community trust fund stewards are in the process of opening for applications in 2023.

Foundation President Jennifer Ford Reedy and Chief Financial Officer Greg Keane answered some questions about the social impact bonds approach and process. (Keane is retiring from the Foundation on January 31, 2023, after 16 years of service.)

What is a social impact bond, and how does it work? 

Greg: A bond, social or otherwise, is a tool to raise money by borrowing from investors, typically in order to fund specific projects. In our case, the foundation made a commitment to pay the bondholders a certain amount of interest over a period of time, with the principal—$100 million—to be repaid after 30 years, in 2050.

As part of the process, we reached out and obtained a second party opinion that would certify our bonds as social impact bonds, meaning that our bond proceeds would be used to have positive social impact. And that's attractive in the marketplace—more and more investors are looking to do good with their investments, along with making a good financial return.

Are social impact bonds a tool commonly used by philanthropic foundations?

Jen: No, we didn't actually know it was possible until we read an article in the New York Times in June 2020 saying that the Ford Foundation and a number of other foundations had done it. It was mind-blowing. I had never thought about a foundation issuing debt—about leveraging the foundation’s assets in that way.

A whole lot of people sent me that article. I think it was kind of a wow moment for a lot of folks. After reading it, immediately Greg and John Otterlei (recently retired Chief Investment Officer) started looking into whether this was something that could be possible for us. We found that yes, it would work. But even after other foundations’ role modeling, it felt like we were exploring a space that was new for us and for a lot of the entities we work with too.

Jennifer Ford Reedy

Jennifer Ford Reedy, President, Bush Foundation

“Every part of it was looking at the opportunity for impact. There are moments that you can really grab and go out in a bigger, higher-risk way and say, 'We think this is the best way we can serve the community right now.'”

What are the benefits and risks of issuing social impact bonds for foundations?

Jen: Our resources at the Bush Foundation are the community's resources. We are stewarding these resources on behalf of the community. So, any decision about how we manage these assets is done through the lens of “What's the best thing for the community?” For us to decide that we're going to spend way more than we usually do—and to do that we're going to borrow some money now and pay it back over time—we have to believe that choice will have a greater positive impact than sticking with the status quo.

It means we believe that increased spending at that particular moment could have an outsized impact, and we really felt like that was true. We feel that there is an extraordinary opportunity for impact right now. 

From a financial standpoint, issuing a bond would also have to benefit the community long-term more than just spending the assets we have in hand. And we believe that's also true. That's a function of what interest rates are and how much we think we can make over time.

Every part of it was looking at the opportunity for impact. There are moments that you can really grab and go out in a bigger, higher-risk way and say, “We think this is the best way we can serve the community right now.”

Greg: It was the summer of 2020, right after George Floyd's murder in Minneapolis. If there ever was a time to really double down and make a big impact, that was it. I think that's what really got Jen and the board behind it with no doubt. And on the financial side, we were able to borrow through the bond offering at less than 3% when our investments were making 9%-plus. Those forces came together and really made a huge difference.

Jen: There was a feeling that if we could make a difference now on racial equity, which is such a core challenge across so many issues in our region, then every other dollar the foundation uses for good in the future would have more impact.

Greg: In terms of risks, there are a couple. One risk is that you issue a bond and borrow a bunch of money, then you have difficulty repaying it and it seriously damages your credit and your ability to borrow in the future.

But the biggest risk is that we don't use the money well in the best interest of the community. Part of our social impact bond commitment is to publicly report how we've used the money in order to address that risk.

What was the process and timeline of issuing the bond? 

Jen: We started thinking about it in June 2020, and at our August board meeting we presented the concept of social impact bonds, along with some options for what we could do with the money. My recommendation, which the board embraced, was to use the money for a reparative action—basically saying, “This 10% of our resources we're going to give to Native American and Black American individuals for wealth building.”

After the August meeting, Greg and John pursued the logistical details of getting the bonds issued. By the next board meeting in November, they had gotten everything for the bond issuance in place and ready to go. Making the bond issue happen involved bankers, lawyers, accountants, ratings agencies, and potential investors doing due diligence on all aspects of our work. Not just the finances and investments, but how we do governance, how we think about programmatic decisions, etc. 

It was a really interesting, intense process of having outside folks examine us and how we operate to rate us for how confident people could feel about investing in us. At the same time, they were evaluating whether this is something that's truly going to have a positive impact. So it was quite a lot in that three- to four-month period.

Greg: Between July and November 2020, we were amassing internal resources to learn about and actually do a bond offering, and assembling the external parties required to do all the partner work of legal, tax, and underwriting. 

Getting a bond out the door involves a lot of vendors, suppliers, and folks who can provide services around the bonds. We chose a locally rooted investment bank, RBC, but we sought out secondary bond underwriters as well. We deliberately looked for BIPOC-led partners to share in the bond offering and get the financial benefit of offering our bonds along with RBC as the primary bookrunner.

We received $100 million in November of 2020. We invested the proceeds in very low risk vehicles—short term bonds themselves—to protect it. Fifty million was paid in late December 2022 to the first of the two steward organizations, and the second half will be disbursed in May 2023. So, on the front end, we protected the funds from investment loss until the steward organizations were ready to take and distribute them to their respective community members. Looking ahead, we have a bond payable due in October of 2050, and we will pay 2.754% interest a year between now and then.

Is this $100 million in addition to your usual payouts, or are you just accelerating payment in a time of need and reducing your future payout to repay it?

Jen: We are functioning right now as if it is completely on top of our commitments. But we keep in mind that we have flexibility to adjust some of our management decisions if, for example, our investment assets completely tanked at some point. We are managing it in the most aggressive way we can, but watching to make sure that we're always considering: Do we still think this is the right thing for the community? And then being willing to adjust if the situation changes.

Greg: We've done a lot of modeling of different investment return and payout options. Because our endowment performance has been so good over time, we hope we’ll have the luxury of this being an additional $100 million of payout, but we'll be paying attention to that long-term investment performance over time. We established a debt management policy internally stating that at least 10 years before the bond is due to be repaid, we will create a debt repayment strategy based on how things have gone up until then.

What are some of the legal and tax implications of issuing a social impact bond for a foundation?

Greg: For CFOs and CIOs, there are things to be aware of around the investment of the proceeds in the short term and how that income is treated from a tax standpoint, and how the bond interest expense is treated from a private foundation and IRS standpoint. There are handfuls of traps and opportunities to take the most advantage of the money. 

Debt can create unrelated business income, which can bite you if you're not paying attention to it. More specifically, income from investing bond proceeds can be taxable to the foundation. We’ve learned there are ways to manage it, and it’s best to do legal and tax planning upfront around all the implications of a bond offering for a private foundation.

Jen: One of our requirements from the IRS is that we pay out each year an equivalent of 5% of our assets. Interest can be counted toward your payout. So, after we've done this borrowing, we could pay out less in grants because we have to pay that bond interest. We have chosen not to think about bond interest that way. We're going to do what we normally do, and pay the bond interest on top. 

But that's an area where any foundation could make a different choice. So, there are options for how you could choose to manage the financial impact of the bonds depending on how different organizations are modeling it and thinking about long-term financial management.

Were there any challenges in selling the idea to board members or stakeholders?

Jen: The board was ready. We already had an organizational commitment to racial equity that was integrated into all our program and operations decisions. The board was at a moment of asking, “What can it look like for us to do more? How can we think bigger about impact?” This included a specific discussion of risk, and our ability as a private foundation to take on risk on behalf of the communities we serve. This idea represented an opportunity to dig deeper and take on more risk for the region by borrowing and supporting people to buy houses or go to school or do things that they would typically have to borrow to do. Instead, we're taking on that risk and distributing that money. 

The board was compelled that wealth gaps are a generational issue and a root cause of many other inequities, and that bigger and different interventions are required by institutions with wealth to make real change. It was a very big decision for the board and they took it seriously. They wrote a note about their reasoning and intent that will be available to future board members to explain why they took such a significant action at that moment. 

What would it take for other foundations to follow your lead? What would they need to have in place to be successful?

Greg Keane

Greg Keane, Chief Financial Officer

Greg: They'd have to have a commitment to doing good with the money, because that leads everything. I think they'd have to have their boards and committees ready for new, different, or creative things because that's where the buck will stop in a hurry. They’d also have to have the board's confidence on the investment side of the house that they're doing well and can handle another complicating factor to their endowment. 

You'd have to have a strong set of investments already. You would preferably have no debt to begin with. That would set you up for a very high bond rating based on your financials to get the lowest possible interest rate.

And you need to be ready to drop everything and do it. Because for a bond transaction, you want to capture the market when it's ready and get the interest rates you desire when they're available. You don't want it to be a three-year process. You really have to knock down the walls for three or four months.

A final consideration: We were advised that a social impact bond offering works best for $50 million or more. It's tougher to get investors interested in small bond offerings, and the costs can be high for a small offering.

Were there any particularly helpful partners or resources you learned from along the way?

Jen: RBC walked us through everything. It makes all the difference to have a partner who's really holding your hand and saying, “OK, now you need this, now you do this, this will look better this way.” RBC was really good to work with and really good at working with the other partners we brought in. There are great organizations out there, and one of the things they do is hold hands with organizations like us to be able to walk us through the process. 

Our colleagues in the field (particularly at the Doris Duke Charitable Foundation) were also extremely helpful. Being able to benefit from their experience was really big. One of the benefits of working in philanthropy is that we're not competing, we're collaborative. This was one of those examples of times where that was so beneficial to us because we had other foundation colleagues helping us think through what this could mean for us.

“I hope that 30 years out we'll be seeing new cycles of prosperity within families, where they’ve been able to build a new business or pursue educational opportunities in ways that then create opportunities for them and change the opportunities available to their kids.”

Jennifer Ford Reedy

Greg, as you prepare to retire, how do you see the $100 million social impact bond fitting into the whole body of your work with the Bush Foundation? Does it feel like a capstone?

Greg: Absolutely. It was an emotional high to have gone through the roadshow of talking to investors, culminating in getting a social impact bond rating and $100 million to do good. That's a high for any foundation folks. 

Jen: The work involved with this exemplifies so much of what's awesome about Greg and the way he contributes around creative problem solving and figuring out how to make things work with a 100% focus on, “Is it good for the community?” If the answer is yes, we'll figure out how to do it, no matter how complicated. That's how he approaches big and small decisions. But this was probably the biggest of all. 

Let’s fast forward to 2050, when the bond repayment comes due. If the vision for this $100 million comes to fruition, what will our region look like then?

Jen: We are using the proceeds to address racial inequity in wealth. And wealth is generational. A huge part of why we have the degree of wealth disparities that we have right now along racial lines is because of historical actions. Because your opportunities and your ability to weather challenges are so tied to the resources that your family has. It means that the past is always with us in some ways. So we and the steward organizations are using this money to make a significant difference right now for individuals and families in our region to create or take advantage of opportunities to build wealth.

I hope that 30 years out we'll be seeing new cycles of prosperity within families, where they’ve been able to build a new business or pursue educational opportunities in ways that then create opportunities for them and change the opportunities available to their kids. This challenge is generational and so, if we are successful, the impact will be generational as well. Kids born in our region for decades to come will have a different level of financial security and support to reach their full potential and, in turn, for our region to reach its full potential. 

Mo Perry interviewed Greg and Jen for this piece and captured their conversation in this Q&A.