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Social Impact Bonds: Current and Controversial

By Rachel Kaly

Goldman Sachs, a global investment banking and securities firm, announced on August 3 that it will be investing $9.6 million in a jail program to reduce recidivism rates at Rikers Island in New York City. Goldman will be paying MDRC (formally known as Manpower Demonstration Research Corporation), the social services provider for the program. In a New York Times article, David Chen explained the “social-impact bond” 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.”

Presently, almost 50% of male adolescents released from Rikers are back in prison within a year’s time.

Mayor Michael Bloomberg of New York City has promised MDRC a $7.2 million loan guarantee. This means that in the worst case scenario, Goldman only loses $2.4 million. Such a guarantee distinguishes the New York City program from others in existence.

The social-impact bond is modeled on a British program that began in September 2010, the first of its kind. Connecticut, Massachusetts, Ohio, and even the federal government are looking into using social-impact bonds to fund other social services in the future, such as homelessness, foster care, education, and healthcare.

The money given by Goldman will fund the “Adolescent Behavioral Learning Experience” program (ABLE), a measure supported by Bloomberg’s “Young Men’s Initiative,” whose purpose is to provide blacks and Latinos with better opportunities.

There are many potential benefits to the program. Tina Rosenberg of the New York Times says that it will set a precedent of “measuring outcomes, not output.” Indeed, various programs currently measure things quantitatively rather than qualitatively: instead of is counseling helping these prisoners? it’s how many prisoners are in counseling? This initiative, however, seeks to end such limited evaluations. The program also means that taxpayers are only paying for success; if the program doesn’t work, they get their money back.

On the other hand, there are cons to the plan. Mark Rosenman, director of Caring to Change, expressed his pragmatic concerns for the plan:

“Where does a nonprofit get the funding to provide the services from which they are to later show a monetized gain to government? How far out in time does the performance metric need to go before quantifiable economic value can be shown and the charity repaid its expenditures? What happens when a nonprofit is providing superb and highly effective services to individuals, but other institutions and variables deteriorate and affect its outcomes?”

There is also the issue of what goals will actually be set by these private, non-government financiers. If they get paid solely based on if they achieve X, then who says that X can’t be something simple and deceptively unimportant? An article in The Economist on the program sums up the problem: “But after a few years, if the bonds become all the rage in the non-profit sector, they will become another meaningless charade of pseudo-accountability that teams of grant-writers know how to plug in to get the money flowing, with the metrics selected such that the financial institutions are almost guaranteed of receiving their full payout. Basically, they'll become a means for government to use the prestige of financial institutions to claim to taxpayers that their money is being well spent.”

Unfortunately, we won’t know how effective these programs are for quite a while. The London program will not have sufficient data until six years from now. In spite of that, however, many countries and states are diving into the program and testing its efficacy. It will be interesting to see how the presidential candidates respond to this. There seem to be mixed opinions about such programs, and the candidates are consequently hesitant to hop right on the social impact bond wagon. President Obama’s 2011 budget called for only 0.003% of it to pilot social impact bonds, while Romney has remained pretty quiet on the issue. For something that might play a more prominent role in finance and human services, the candidates should really find something to say about them.

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