Governments and non-profits struggle with shrinking tax revenues and donations, and the lack of funding puts social programs in jeopardy. A new movement tries to fill that gap with money from banks.
The twist? The people providing this money aren't donors; they're investors, and they stand to make a profit on social services. That’s why the first attempt at what’s called a social impact bond in America is being closely watched by scholars, bankers, and politicians alike.
The bond involves the incongruous pairing of one of the world’s best-known banks with one of New York's most notorious prisons. Goldman Sachs is lending $9.6 million to fund an educational program on Rikers Island for 16-18 year old offenders.
The program aims to change the young inmates' way of thinking, with the goal of enabling them to make the choices that will ensure they don’t get locked up again. But they face grim statistics -- About half are likely to be back in prison within a year after getting out.
This high recidivism rate carries high costs for the young offenders, their families, and their communities. It’s also alarmingly expensive for New York City to keep them in prison. That’s where the social impact bond comes in, becoming profitable only if the city saves substantial money through a reduction in re-incarceration attributable to the education program.
If the program leads to a 10 percent reduction in recidivism, Goldman recoups its investment. If the reduction in recidivism is greater than 10 percent, Goldman profits.
“Goldman doesn’t earn any return unless the city reaps significant savings on the decrease in recidivism,” explains Andrea Phillips, a vice president at the bank’s Urban Investment Group. (Not all of Goldman’s money is technically at risk. Bloomberg Philanthropies is kicking in $7.2 million to guarantee part of the loan. That has drawn critics, who say it prevents this social impact bond from being a pure test of using private capital for social good.)
The basic case for social impact bonds is they risk bank money instead of taxpayer dollars. A key worry is that it’s a bad and untested idea to mingle services for the poor with bank profits.
“I understand the discomfort with that,” says Susan Gottesfeld, associate executive director at the Osborne Association, a non-profit operating the program at Rikers. “But I feel that it’s not only government’s job, not only non-profit’s job to make sure that our society’s working. And if banks who make lots of money are interested in using that money to make something possible that otherwise would not be, we’re very open to that.”
Gottesfeld says she often hears from other non-profits asking for advice on how they can strike bank deals of their own.
This program will ultimately be judged by what it can do for young people like Louis Rivera. He now works near Coney Island, far better waters than those around Rikers Island, where he did time for attempted burglary. He says the program helped him turn himself around, and what he learned showed him how to give his two year old son Landon a better future.
“I wanna teach him that life doesn’t have to be that for him,” Rivera says. “Regardless of where you come from, because life’s not about the things you go through it’s about the choices you make when you go through them.”
Independent analysts are evaluating the program’s impact, with a report expected next year. If it’s a success for the city and Goldman, expect to see many more banks, governments, and charities buying in to social impact bonds.