NYC to Test Social Impact Bonds

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Goldman Sachs

August 2, 2012; Source: New York Times

Goldman Sachs is investing $9.6 million in a New York City adolescent convict rehabilitation program through social impact bond financing. While NPQ has frequently taken note of the social impact bond concept (for example, see here, here, and here), which is similar to a futures market for nonprofit outcomes in which private investors “pay for success,” the New York Times reports that New York City will be the first city in the U.S. to test the concept. Goldman is counting on the venture’s success to reduce recidivism among young Riker’s Island inmates in return for a healthy profit (and perhaps an outsized public relations bonanza). A recent report in the Boston Globe, by the way, reports Massachusetts is launching a similar effort in the fields of homelessness and youth services.

Here’s how it works in NYC: the Bloomberg administration puts no New York City taxpayer money upfront, while Goldman provides the funding to MDRC, a social service agency which organizes and oversees a program called Adolescent Behavioral Learning Experience (ABLE), which provides counseling for approximately 3,400 adolescent inmates each year. Bloomberg Philanthropies, the multi-billionaire mayor’s personal foundation, is providing a unique angle on the social impact bond concept in this case by providing a $7.2 million loan guarantee in case the program fails. Mayor Bloomberg is upbeat about the potential public good social impact bonds can accomplish, stating that “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.”

Some nonprofit figures are less sanguine about the wisdom of inviting private investment to take the helm on traditionally public responsibilities. In this camp is Mark Rosenman (who NPQ has cited on this issue in the past), a professor emeritus at Union Institute and University in Cincinnati. Says Rosenman, “I’m not saying that the market is evil 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.” While the social impact bond history is too young to gauge its wisdom or effectiveness, the logic of it seems impeccable to some. Jay Gonzalez, the Massachusetts secretary of administration and finance, states, “The beauty of this is if they perform to get the results, then we pay. If they don’t, we don’t pay.”

What’s next? Will New York City rename Riker’s Island “Goldman Sachs Jail?” –Louis Altman

  • jay Dee

    i ilke to try this method in an incubator strategy: I am proposing three types of incubation for developing social entrepreneurship and jobss. I believe!

  • Hector Gonzalez

    First came the LIHTC (Low Income Housing Tax Credit). Now comes the Social Impact Bond. How sick are we as a society that we no longer “put up or shut up”? Thanks to our warped priorities (war, corporate welfare, subsidizing failed agricultural systems, for profit healthcare system, etc.) the money we used to spend on improving our society (New Deal kind of money) is no longer available. So we turn now to the private sector, to the companies and corporations that are at fault for so much of what ails us! And we agree to funnel them public dollars at high rates of return? “Great” for those “proven” non-profit entities (how many of them are just gatekeepers, propping up this failed economic system that we live under?) but where will the money come from to support those cutting edge and unproven start-ups? This becomes a self-fulfilling prophecy! Society continues to crumble thanks to the greed and corruption manifest in our for profit corporations. Well-intentioned non-profits with proven track records wanting to increase their presence to combat the ill effects of corporations then contract with the municipality and the very source of the problem (the corporation) for money to grow their program(s). Taxpayers then pay outrageous rates of return to the corporation(s) when the program (which has already proven to be effective) succeeds. The band-aid approach allows us to stumble along for a few more years but does absolutely nothing to get at the root of the problem. Upon seeing this “success”, the government quickly decides that it can further reduce the meager amount of public dollars that it currently provides for social programs (CDBG funds for instance) and funnels the balance into more corrupt and ineffective corporate welfare schemes, etc. This is nothing more than the continued externalizing and privatizing of the government’s responsibility. Government exists to fix problems that are too big for individuals or small groups of individuals to tackle on their own. What are we doing to everything we hold dear when we substitute the word “corporation” for the word “government” in my last sentence? This funding source represents the height of everything that is wrong with our society! Wake up people!