January 29, 2014 / 8:30 PM / 4 years ago

UPDATE 1-Massachusetts uses largest 'social impact bond' to tackle crime

By Richard Valdmanis

BOSTON, Jan 29 (Reuters) - Massachusetts said on Wednesday it will fight youth crime in the state by using the nation’s largest “social impact bond” - an alternative way to fund government programs that taps private investors like banks.

The $18 million bond is backed by Goldman Sachs, The Kresge Foundation and others. It comes as several U.S. states and cities explore using the funding tool, pioneered in the United Kingdom in 2010 and designed to eliminate wasteful public spending during a time of tight government budgets.

“This is groundbreaking,” said George Overholser, chief executive officer of Third Sector Capital Partners, which organized the project. “Under this program, we have gotten private people to take on the risk of non-performance instead of the taxpayer.”

A social impact bond is nothing like a traditional bond. It uses initial money from private backers to fund a specific project. The government only pays into the program if it produces measurable results. If the program fails, the initial backers risk losing their investments. Social impact bonds are sometimes called “Pay For Success” initiatives.

In this case, investors have provided $18 million to expand the work of non-profit youth intervention group Roca in parts of Massachusetts, including Boston - which is experiencing a surge in gun violence - and Springfield.

Goldman Sachs provided half of the funding, according to Overholser, and the bank will receive annual interest of 5 percent if the project meets its target. Other backers would receive 2 percent annual interest.

The project is meant to allow Roca to engage nearly 1,000 young men who are either on probation or exiting the juvenile justice system in the hopes of reducing repeat criminal violations and prison terms.

The project’s target is to cut incarceration days among that group by 40 percent. At that level, Massachusetts would be required to pay $22 million over the seven-year life of the project, roughly equal to the money it would save through the decrease in incarceration days.

“By working with our partners at Roca, the Pay for Success initiative will allow us to marry smart financial solutions with programs proven successful in helping high-risk youth become employed, stay employed, and break the cycle of violence,” Governor Deval Patrick said in a press release.

Roca’s programming aims to reduce recidivism and increase employment through intensive street outreach and targeted life skills, education and employment programming.

In December, New York state announced a $13.5 million social impact bond to finance training and employment of ex-prisoners, making it the first state in the country to use the funding method.

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