JUDY WOODRUFF: One would be hard-pressed to think of any connection linking Rikers Island, Goldman Sachs, and a private charitable foundation. But they’re all part of a new way to finance government social services through private investment.
The NewsHour’s economics correspondent, Paul Solman, looked into the project as part of his ongoing reporting Making Sense of financial news.
PAUL SOLMAN: New York City’s infamous Rikers Island jail, responsible for the bulk of the city’s billion-dollar corrections budget, it’s home to 88,000 inmates a year, many of them regular repeat offenders.
JUDITH RODIN, Rockefeller Foundation: A complete turnstile.
PAUL SOLMAN: Rockefeller Foundation president Judith Rodin has been as despairing as most social reformers about so-called turnstile recidivism and its costs, both to the taxpayer and to society.
JUDITH RODIN: These people don’t get put back in prison for doing nothing, so there’s all the social costs of what next crime they commit during this period and throughout the remaining periods that make them go back, and back, and back numerous times.
PAUL SOLMAN: But, in 2010, Rodin heard about a new financial approach to recidivism: social impact bonds.
JUDITH RODIN: This team of investment bankers formed an organization in the U.K. called Social Finance and asked themselves the question, could we create a bond, just like a typical bond structure, but where the payout would be based on a social outcome and performance?
PAUL SOLMAN: Here’s how it works. Investors lend money to a social service nonprofit with a successful track record. They get an interest-paying bond in return. The nonprofit then uses the investors’ money to expand its program. If the program meets its goals, saving the government money by, say, keeping people out of jail, the government pays back the investors out of the money it has saved.
Judith Rodin loved the idea. So her foundation joined the bankers and invested in a six-year bond to reduce recidivism at the United Kingdom’s Peterborough prison.
JUDITH RODIN: We believe that we will make 9 percent on this, and we’re not doing it to be charitable. We’re doing it because it’s an investment.
PAUL SOLMAN: Dora Schriro runs New York City’s huge corrections system.
DORA SCHRIRO, New York City Department of Corrections: This opportunity to find a new funding stream is exceptional.
PAUL SOLMAN: One of her most costly problems, young repeat offenders.
DORA SCHRIRO: The adolescents, they make up about 6 percent of our population. Person-to-person, they represent some of the most serious felony charges that we admit into our system in the course of a year. Four out of five are charged with violent felony crimes, and they’re young.
And on top of that, despite the severity of the charges, relatively few end up being sentenced to the state’s correctional system.
PAUL SOLMAN: That’s because teenage offenders receive lesser sentences than adults.
DORA SCHRIRO: Which means they’re back on the street in a relatively short period of time. And how well they fare and so how well the city fares when they come back into our neighborhoods really rides on what we can do with them in the amount of time that we have.
PAUL SOLMAN: Enter high finance’s do-good innovation, the social impact bond, to support programs like this one to reduce recidivism.
MAN: The mistakes that you did to get here, did you learn from that?
PAUL SOLMAN: So investors are funding here the Osborne Association, a proven expert in successful cognitive therapy, also known as behavior modification. And the key to this scheme is that nonprofits like Osborne have demonstrated that they can actually reduce recidivism. But they haven’t had the funding to try to do so on a large scale.
WOMAN: It does take courage to stand down when you have those emotions, to think, stop and think, and not just act out of passion.
PAUL SOLMAN: It’s one-on-one, it’s costly, and the city has no legal obligation.
ALICIA GLEN, Goldman Sachs: The city of New York is not required to provide therapy to kids who are on Rikers Island.
PAUL SOLMAN: But Alicia Glen, who worked in legal aid and New York’s Housing Authority, is now a partner at Goldman Sachs. She saw an investment opportunity for the firm that promised a double payoff, social and financial.
ALICIA GLEN: We are funding $9.6 million dollars to a nonprofit. We are making a loan to them. The repayment of that loan and our return, our interest, is entirely dependent on whether or not the actual program works. If the program doesn’t work, the city is not obligated to pay. That is a huge shift in the way you would finance a social services program. That is really groundbreaking.
PAUL SOLMAN: And the thinking on the part of the city is that if it works, they will save so much money that they can pay you back?
ALICIA GLEN: Correct. If 10 percent fewer kids go back to prison, we get our capital back, our $9.6 million dollars.
Between a 10 percent reduction and an overall 20 percent reduction, we get our capital back and a return. That return is capped at a total of $2.1 million dollars on top of our principal.
PAUL SOLMAN: So, again, investors pony up to expand a proven program that could save the city big money, an estimated $20 million dollars if recidivism drops by 20 percent. And Glen points out:
ALICIA GLEN: Any savings the city realizes above that — so if it’s a 25 percent reduction in recidivism, a 30 percent reduction in recidivism, in other words, if the program we have financed really, really works — then we do not capture any of that savings. That all goes back to the city of New York.
PAUL SOLMAN: If it works?
ALICIA GLEN: If it works. If it doesn’t work, they don’t have to pay. So it really is a win-win for the taxpayer.
PAUL SOLMAN: Win-win-win-win, Rockefeller’s Judith Rodin hopes.
JUDITH RODIN: The government gets a proven intervention. The second win is, the social organization gets to go to scale, because the government is buying their services wholesale, rather than them running little boutique programs. So that’s the win for the social service. Win number three, government is always seeking new sources of capital.
PAUL SOLMAN: Capital to augment its own money?
JUDITH RODIN: Correct, and maybe allows it to deploy some of the money it was spending there towards other things that would be harder to capitalize from outside.
The fourth win is for the investor. Innovative finance, Paul, I think, is the next big step in solving social problems.
PAUL SOLMAN: But wait a second. This is too good to be true, right? There must be skeptics. And, as if on cue, here’s Professor Mark Rosenman, an expert on charitable giving.
MARK ROSENMAN, Caring to Change: If the concern is criminal activity and the possible repeat of it, why not prevent its emergence? Why not invest in better early childhood education and public schooling and job training?
PAUL SOLMAN: Well, because we are shortsighted and we’re strapped, and given those facts, this is better than nothing.
MARK ROSENMAN: If you are perpetuating a model that is dysfunctional at its core, I don’t believe it is better than nothing, although it’s a great way for a new industry to make money. These social impact bonds will create an industry of intermediaries and deal-makers and brokers and accountants and lawyers. And they will be making a lot of money, and I’m sure taking that money off the top before it ever makes it to underpaid nonprofit workers or the beneficiaries of the program.
PAUL SOLMAN: There are other reasons for skepticism as well. Yes, this is a radical innovation. But isn’t Goldman Sachs’ loan guaranteed by the mayor of New York, Michael Bloomberg, through his private foundation, a luxury other cities are unlikely to boast?
ALICIA GLEN: Well, yes, the Bloomberg Foundation is providing a 75 percent principal guarantee of our loan that is part of our collateral package.
Never really in the history of doing public-private partnerships to experiment with interesting financial vehicles have people not sought and/or had some form of credit enhancement in a transaction.
PAUL SOLMAN: Collateral?
ALICIA GLEN: Collateral. At the end of the day, if, in fact, the intervention doesn’t work, we can still lose 25 percent of our capital. So we have real skin in the game.
PAUL SOLMAN: But people in our audience are going to be watching you and thinking, I know why Goldman Sachs is doing this, for publicity. They have been tarred and feathered for years now.
ALICIA GLEN: Well, I’m sure there are a whole subset of people who would think that, but, you know, that actually doesn’t square with what the history of our business has been. We have over $2 billion dollars of our own capital invested in impact investing.
But I know, as a human being who has been a lifelong New Yorker, that I can’t sleep at night thinking that 50 percent of kids who go to Rikers, many of whom haven’t even been convicted, are winding up coming back into jail because nobody is doing anything about it. And if we can figure out ways to finance services to make a different outcome for those kids, then that’s what we need to be doing.
PAUL SOLMAN: But will the outcome actually be different? On that question hinges the future of a brand-new and potentially positive development in modern finance: the social impact bond.
JUDY WOODRUFF: In his next piece, Paul takes a closer look at the program at Rikers Island.