The New York Times has featured the following article
on MDRC's new Social Impact Bond project.
August 2, 2012
Goldman to Invest in City Jail Program, Profiting if Recidivism
Falls Sharply
By DAVID W.
CHEN
New York City, embracing an experimental mechanism for financing
social services that has excited and worried government reformers
around the world, will allow Goldman Sachs to invest nearly $10
million in a jail program, with the pledge that the financial
services giant would profit if the program succeeded in
significantly reducing recidivism rates.
The city will be the first in the United States to test "social impact
bonds," also called pay-for-success bonds, which are an effort
to find new ways to finance initiatives that might save governments
money over the long term.
First used in Britain and now being explored in Australia,
the bonds are rapidly capturing the imagination of some public
officials in the United States: on Wednesday, Massachusetts
announced that it was completing negotiations with two nonprofit
groups to finance juvenile justice and homelessness programs, with
the promise of repayment only if the programs work.
The federal government, Connecticut, New York State and Cuyahoga
County, Ohio, among others, are at various stages of considering
using the bonds to harness new funds for human-services
programs.
In New York City, Mayor Michael R.
Bloomberg plans to announce on Thursday that Goldman Sachs will
provide a $9.6 million loan to pay for a new four-year program
intended to reduce the rate at which adolescent men incarcerated at
Rikers Island reoffend after their release.
The money is not a huge amount for Goldman, which last month
reported over $900 million in
second-quarter profit, and the investment promises a
public-relations benefit for the Wall Street bank. For the city,
the money allows the Bloomberg administration to demonstrate, and
test, several of its priorities: enlisting private sector help in
financing public needs, and tying program money to rigorous outcome
evaluations.
The Goldman money will be used to pay MDRC, a social services provider,
to design and oversee the program. If the program reduces
recidivism by 10 percent, Goldman would be repaid the full $9.6
million; if recidivism drops more, Goldman could make as much as
$2.1 million in profit; if recidivism does not drop by at least 10
percent, Goldman would lose as much as $2.4 million.
"This promising financing model has potential to transform the
way governments around the country fund social programs, and as
first in the nation to launch it, we are anxious to see how this
bold road map for innovation works," Mr. Bloomberg said in a
statement.
"Social impact bonds have potential upside for investors," he
added, "but citizens and taxpayers stand to be the biggest
beneficiaries."
In a twist that differentiates New York's plan from other
governments' experiments with social impact bonds, Mr. Bloomberg's
personal foundation, Bloomberg Philanthropies, will provide a $7.2
million loan guarantee to MDRC.
If the jail program does not succeed, MDRC can use the Bloomberg
money to repay Goldman a portion of its loan; if the program does
succeed, Goldman will be paid by the city's Department of
Correction, and MDRC may use the Bloomberg money for other social
impact bonds, said James Anderson, director of the foundation's
government innovation program.
Jeffrey B. Liebman, a professor of public policy at Harvard
University who
has written about social impact bonds, said the New York
contract would be widely scrutinized.
"This will get attention as perhaps the most interesting
government contract written anywhere in the world this year," Dr.
Liebman said. "People will study the contract terms, and the New
York City deal will become a model for other
jurisdictions."
But social impact bonds have also worried some people in the
nonprofit and philanthropy field, who say monetary incentives could
distort the programs or their evaluations.
"I'm not saying that the market is evil," said
Mark Rosenman, a professor emeritus at Union Institute and
University in Cincinnati, "but I am saying when we get into a
situation where we are encouraging investment in order to generate
private profit as a substitute for government responsibility, we're
making a big mistake."
Goldman approached the city after hearing that New York
officials and MDRC were interested in social impact bonds. In an
interview, Alicia Glen, the head of Goldman Sachs's
Urban Investment Group, said the company was confident that the
program would work.
"This is a new approach - no city has ever done something
exactly like this before - and we were able to get comfortable with
the risks, which other financial institutions may not have been,"
Ms. Glen said. "But we are confident that the city will identify
enough savings that we'll get a reasonable return on the
investment."
The Goldman money will finance a program called Adolescent
Behavioral Learning Experience, or ABLE, as a part of the Bloomberg
administration's year-old
Young Men's Initiative, which seeks to improve prospects for
black and Latino adolescents. The jail program, which will offer
counseling and education for an estimated 3,400 incarcerated
adolescent men each year, will be run by two nonprofit
organizations, Osborne Association and Friends of Island Academy,
and overseen by MDRC.
Currently, nearly 50 percent of young men released from Rikers
reoffend within a year.
City officials said they hoped the concept of social impact
bonds could also be used to finance programs on homelessness, foster care, special
education or health care. By using the mechanism to pay for
prevention programs that are often too expensive for government to
afford, the officials say they believe that they could save
taxpayers money over the long term.
"Government is paying for outcomes that the government wants to
achieve," Deputy Mayor Linda I. Gibbs, the program's chief
architect, said. "This is designed to provide a template for other
initiatives so we can do more."
New York's program is modeled, in part, after one in
Peterborough, a London suburb, that began in September 2010 and is
still years from being fully evaluated.
In Massachusetts, Jay Gonzalez, the secretary of administration
and finance, is a proponent of social impact bonds. "We've got to
change from the idea of, 'We just pay for stuff and hopefully get
the results,' " Mr. Gonzalez said in an interview. "The beauty of
this is if they perform to get the results, then we pay. If they
don't, we don't pay."