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Philanthrocapitalism: What Is It, and How Can it Transform Government?

Mark Zuckerberg has ushered in a new form of philanthropy that has the potential to bring about positive change.

Mark Zuckerberg is now a big-time philanthropist. Two months ago, Facebook’s chief executive and his wife Priscilla Chan launched a plan -- the Chan Zuckerberg Initiative -- to give away most of their wealth. It’s not clear what specific causes the initiative will target or what it will do. But what it does is not nearly as important as how it does it. Without spending a dollar, it has already brought disruptive change to philanthropy.

How? It’s all about the organization. The initiative is set up not as a traditional tax-exempt nonprofit, but as a for-profit company. It is not bound by the rules that charitable and tax-exempt foundations are. Organized as a limited liability company (LLC), the initiative can call on a variety of capitalistic tools, such as funding nonprofit organizations, making private investments and participating in policy debates. Traditional nonprofits still do good work, but the Chan Zuckerberg Initiative makes “philanthrocapitalism” the center of gravity for a modern charity.

Zuckerberg and Chan are expected to plow more than $45 billion worth of Facebook stock into their initiative. That’s a lot of money for just two people. For comparison, that’s also about what California will spend on K-12 education this year. But to a big city or state budget director, $45 billion is hardly a long-term game changer. 

Yet those of us in state and local finance shouldn’t ignore the initiative or what it represents. Philanthrocapitalism could bring disruptive change to our front door, and in a good way.

Think for a moment about South Carolina and the devastating floods that rampaged through that state this fall. To prevent another such disaster, state and local officials say they need $2 billion to invest in stormwater infrastructure. This is a classic scale problem. Local governments there will need to borrow money to make those investments. But investors who are willing to put money into state and local infrastructure -- usually through municipal bonds -- won’t invest without a plan from the government to pay them back in full. It’s tough to have such a plan for stormwater infrastructure because it’s not always clear who should pay to “use” stormwater drainage and how. So in South Carolina, and many other places, stormwater investment is a huge economic and political challenge.

That’s where philanthrocapital could come into play. The initiative or similar LLCs could guarantee loans from other lenders. It could buy stock in a public-private partnership. It could corner the market on goods and services needed to develop stormwater infrastructure. What if the initiative leveraged a small amount of its capital to encourage other investors to buy into small- to mid-sized stormwater systems? Beyond stormwater, a philanthropic LLC could leverage money for rural broadband, government cybersecurity or any of the dozens of other infrastructure needs where the market is a bit undersized and the revenue sources aren’t clear. The potential benefits to health, safety and commerce are huge.

Consider another scenario. Underfunded pensions are a huge problem for many public schools, especially districts that aren’t part of a statewide plan. Zuckerberg clearly cares about public education, as evidenced by his $100 million investment in Newark, N.J., public schools a few years ago. What if the initiative backstopped some of the most financially stressed, small public school pensions? Insuring that retirees get pensions they’ve earned could give school boards the financial and political latitude to pursue new models for curriculum, staffing and mentoring students. Tying up just a few hundred million of philanthrocapital could transform dozens of struggling school districts.

Of course, philanthrocapitalists such as Zuckerberg could pursue disruptive change through the political process. Many of them made their fortunes in social media. They believe in the power of that medium to change public opinion. That could mean a variety of challenges, both positive and negative, for state and local finance.

Zuckerberg and his peers have ushered in a new playbook and a new agenda for philanthropy. Let’s hope positive change through meaningful partnerships with state and local governments is a core part of that agenda.

This story originally appeared on Governing.

Justin Marlowe is a research professor at the University of Chicago’s Harris School of Public Policy. His research and teaching are focused on public finance, and he has published five books — including the first open-access textbook on public financial management — and more than 100 articles on public capital markets, infrastructure finance, financial disclosure, public financial technology, and public-private partnerships. He is an admitted expert witness in federal and state courts, and has served on technical advisory bodies for the state of Washington, the California State Auditor, the Governmental Accounting Standards Board, the National Academy of Sciences, the Bill and Melinda Gates Foundation, and many other public, private and nonprofit organizations. Prior to academia, he worked in local government in Michigan. He is a Certified Government Financial Manager and an elected Fellow of the National Academy of Public Administration, and he holds a Ph.D. in political science and public administration from the University of Wisconsin-Milwaukee.