By Dana Kilbourne and Stuart Andreason

With 75 million baby boomers set for retirement nationally, and U.S. businesses re-shoring production, technically skilled workers are increasingly in high demand.  This has presented both a challenge and an opportunity for economic development and workforce development professionals nationally.

The skills, knowledge, and talent in the local labor force have become the most important criteria in business decisions to locate or expand in certain locations. Many communities have turned to workforce development systems to help train and upskill frontline workers and job seekers. New and innovative programs have promising results as well. Sector partnerships—or programs where training is closely linked to available jobs in high-paying, growing, and competitive industries have shown to produce significantly improved outcomes for workers and the businesses involved.

Workers make more money, get stronger benefits packages, and achieve better overall job quality. Businesses involved in the programs gain a competitive advantage as their workers are more skilled. They also see other cost reductions, including reduced employee turnover and fewer mistakes and accidents on the job.

Potential Investment Tools

Even though skilled labor has become increasingly central to economic development and business expansion efforts, workforce development initiatives have been challenged in recent years because of rapidly changing, and often declining, federal funding. While new federal legislation that funds workforce development, the Workforce Innovation and Opportunity Act, was passed in 2014, it did not provide new funding to existing programs. Many of the new and innovative workforce development programs, including sector partnerships, frequently have difficulty matching their programs to existing federal funding guidelines and participation restrictions. These programs must turn to philanthropic and business investment to fund their training programs, which can be a limiting factor as programs look to scale.

Several new models of financing could help attract new returns-seeking investment to workforce development programs and increase overall investment levels. The new models include incremental bonding on unemployment insurance or payroll taxes, social impact bonds, and income-share agreements as ways to drive new investments into workforce development.

The states of Missouri and Iowa have developed programs of incremental bonding revenue to train workers in large plant locations. These investment vehicles are structured very similarly to tax increment finance districts (or community redevelopment agencies in Florida). Where they are different is that, rather than focus on the new revenues created from real estate development and property tax, they focus on new revenues created through employment expansion and unemployment insurance and payroll taxes to fund training interventions.

A social impact bond is a new investment product that creates a mechanism using rigorous evaluation for investors to earn financial returns on programs that create social benefits that often do not typically have monetary returns. These types of benefits include the cost savings of reducing recidivism, stopping high school dropouts, or improving early childhood education, among many others. Social impact bonds across the country have included components of workforce development, but haven’t solely focused on these programs, though that may be changing; a number of projects may focus directly on workforce development in the near future, including one in the state of Massachusetts geared toward adult basic education.

Income Share Agreements

Income-share agreements have been promoted as a way to finance college education, and they are likely applicable to workforce development programs as well. An income-share agreement allows a program to “take a stake” in the future earnings of the students—typically in return for tuition-free enrollment in the program. If a student ultimately earns a great deal, the program earns more. If it is ineffective, it will make less.

These three models, among others, could provide opportunities for new investments in workforce development, help to scale effective workforce development programs, and broadly help to expand the funding available to the workforce development system. They may also provide new ways for investors seeking returns to participate in financing workforce development programs and develop funding systems where money can revolve and be reinvested in continued efforts. These programs are discussed in more depth in the Federal Reserve Bank of Atlanta Community Development discussion paper Financing Workforce Development in a Devolutionary Era, by Stuart Andreason.

Dana Kilborne, President & CEO, Florida Bank of Commerce, also serves as a Director of the Federal Reserve Bank of Atlanta, Jacksonville Branch and Secretary of the Economic Development Commission of Florida’s Space Coast.

Stuart Anderson is the Federal Reserve Bank of Atlanta Senior Community and Economic Development Adviser.