New York tests social impact bond investing with Goldman Sachs

Thu Aug 2, 2012 3:10pm EDT

The entrance to the City of New York Rikers Island Correction Department facility is seen in the Queens borough of New York May 16, 2011. REUTERS/Shannon Stapleton

The entrance to the City of New York Rikers Island Correction Department facility is seen in the Queens borough of New York May 16, 2011.

Credit: Reuters/Shannon Stapleton

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(Reuters) - Goldman Sachs will invest nearly $10 million in a New York City jails program, using an innovative financial instrument in which private investments fund public social services, Mayor Michael Bloomberg said on Thursday.

Goldman will create one of the nation's first "social service bonds" to help fund a New York City program that aims to lower the 50 percent recidivism rate among youthful offenders jailed at the Rikers Island correctional facility.

Unlike similar proposals being developed elsewhere, most of Goldman's ‘Rikers bond' will be guaranteed by Bloomberg Philanthropies, the mayor's philanthropic group, which will back $7.2 million of the $9.6 million investment the bank plans.

Bloomberg called juvenile offender recidivism in New York City an "entrenched" problem.

"Helping young people who land in jail stay out of trouble when they return home is one of the most difficult and important challenges we face," he said in a statement.

The four-year program, in which private non-profit groups will provide education and intensive training and counseling to at-risk incarcerated youths, must reduce the recidivism rate by at least 10 percent for Goldman to recoup the investment.

If the recidivism rate drops further, Goldman could profit up to $2.1 million beyond its original investment, according to Samantha Levine, a spokeswoman for the city. If the program fails to reduce recidivism by 10 percent, Goldman could lose $2.4 million.

Social impact bonds partner local governments with non-profits and private investors in deals that require a government to pay out only if a social services group can meet a specified performance goal.

It is unclear how popular philanthropic bonds will be, given that profits depend on societal improvements [ID:nL2E8J1IT2]. But the notion of social impact bonds is politically attractive: cash-strapped municipalities risk little on innovative social programs and investors benefit from being seen as socially conscientious.

Goldman Chairman Lloyd Blankfein said his firm hopes to drive more private investors toward similar public-private philanthropic partnerships.

"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Blankfein said in a statement issued on Thursday.

The notion of social impact bonds was first tested two years ago in Peterborough, England. In 2010, the British government agreed to pay 5 million pounds, about $8 million, to a non-profit organization to reduce the recidivism rate at Peterborough's city prison.

Earlier this week, Massachusetts awarded contracts to two non-profit groups to create programs to address homelessness and juvenile crime.

(Additional reporting by Manuala Badawy; Editing by Paul Thomasch and Dan Grebler)

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Comments (2)
jlo1965 wrote:
New York’s whole upstate economy is built on prison industry.It’s no secret. In the governor first state of the state speach he stated we can no longer imprison on part of the population for another. This many seem like a great answer being held by many people as a positive step towards alleviating the mass incarceration problem in the state. Anytime financial gain of any kind is involved with imprisoment or the look at alleviating that problem opens the door for abuse. This program is unethical. Any consolidation of power has historically proven to be a step towards increasingly oppressive government authority. This recent shift into a facade of ” fixing ” a problem has merely laid the ground work for ever greater harm to those upon whom it is to be applied.

Aug 05, 2012 3:50pm EDT  --  Report as abuse
soohownow wrote:
And how many jobs could they really provide? USA the world leader in prisons? Why are we a prison planet?
Education not Incarceration

Aug 07, 2012 8:51pm EDT  --  Report as abuse
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