In 2012, Mayor Michael Bloomberg announced that New York City would be the site of a new experiment very dear to his billionaire’s heart. He declared that Wall Street megabank Goldman Sachs would provide a loan of nearly $10 million to pay for a program intended to reduce the rate at which adolescent men incarcerated at Rikers Island reoffend after their release (currently almost half reoffended within a year). The city government was short of money, so Goldman Sachs would step in to do what anemic public investment could not accomplish on its own: keep young men out of jail.
If the program succeeded, the giant bank would profit. The more recidivism dropped, the more taxpayers would have to pay Goldman Sachs. On the other hand, if recidivism didn’t drop significantly, Goldman would lose its investment.
So far, it’s too early to tell whether or not the program, which focuses on cognitive behavioral therapy, will meet its goals, but according to reports from the Department of Corrections, fighting has already been reduced at Rikers, so Goldman may just cash in.
The Rikers experiment is an example of a new trend in what are called “social impact bonds.” Burning questions about who profits and who loses in these schemes have become the subject of debate asl the trend catches hold. Let’s explore.
1. So what exactly are social impact bonds?
Social impact bonds, a.k.a. pay-for-success bonds, are billed as an “innovative” way of linking private investors, nonprofits and government to deliver social services with demonstrable outcomes. Private financiers or foundations pay for the costs of a new program, and the government later repays the investors, often with a bonus, if program accomplishes its goals.
While social impact bonds are still a fairly new concept — the first such bond was launched in the U.K. in 2010 — lots of people are buzzing about them. The New York Times reports that in 2011, the term was one of the top 10 philanthropy buzzwords.
Advocates say that problems like homelessness, juvenile delinquency, and preventive healthcare can be improved through these bonds, and claim that they will save governments money. Big players like McKinsey, Goldman Sachs and the Rockefeller Foundation are getting into the game, boasting that such innovative financing schemes are a big win for everybody. President Obama has expressed enthusiasm for the concept, and the Center for American Progress, the Democratic Party-affiliated think tank, has released research supporting the idea.
2. When I hear “innovative financing” and Wall Street banks in the same breath, shouldn’t I be nervous?
Yes, you should. There’s a long, nasty list of innovative schemes pushed by Wall Street and billed as ways to save governments money that have drained city and state coffers.
As Alexander Arapaglou and Jerri-Lynn Scofield have pointed out on AlterNet, big banks have hauled in boatloads of money from their flawed, and even fraudulent, schemes directed at public funding needs, such as financial contraptions and deals involving complex derivatives and whatnot that were supposed to help governments pay for things like bridges and waterworks. As you might imagine, these products often didn’t work as the banks advertised, and cities and states frequently get hosed.
In the case of a social impact bond, a government must budget money to pay back the private financier or foundation for the program. If the program doesn’t work, the government doesn’t owe anything, and the money loaned could be considered a charitable donation. But if it’s successful, the taxpayer, through the government, is forced not only to pay back the loan, but to pay for the profits of the investor. Some people object to the idea of private profit provided by taxpayer dollars.