A trader works in the Goldman Sachs booth on the floor of the New York Stock Exchange Thursday, March 15, 2012. (AP Photo/Richard Drew)
Earlier this month, New York Mayor Michael Bloomberg announced the first-ever “social impact bond” in the United States. The bond, between the city of New York and investment giant Goldman Sachs, will finance a behavioral treatment program for incarcerated adolescents on Rikers Island. Unlike a traditional revenue bond, a social impact bond will pay a dividend only if the target outcomes are met—in this case, that the recidivism rate among the youth treated falls by 10 percent. If it does even better, Goldman Sachs will turn a small profit—with the city footing the bill.
“I think that the potential [for the impact of the bond] is pretty significant,” deputy mayor Linda Gibbs told The Nation. “When we were putting together the initiative, and I came across this, I really became intrigued with it because, quite frankly, it was a tough fiscal time. Our city agencies had been going through rounds of budget reductions, and it’s these types of programs that get cut. Homelessness could be an example of how we use this financing, as well as high-end medical expenditures.”
The initiative is based on a program in Peterborough, England, which used a social impact bond to fund a program that also sought to reduce recidivism. But there is one big difference between the Peterborough program and Bloomberg’s. In Peterborough, the investors were a group of individuals and charitable organizations, including the Rockefeller Foundation. (The results of the Peterborough experiment remain inconclusive). In New York City, the investor is a profit-driven private company that has a track record of making huge returns on other people’s financial troubles. To sweeten the deal for Goldman Sachs, Bloomberg has arranged for his foundation to guarantee most of the bond, allowing Goldman Sachs to face almost no risk. “This is not coming out of Goldman’s foundation, this is coming out of the investment side of their house. When they approached this, they looked at it from the perspective of meeting their standards of entering into an investment,“ Deputy Mayor Gibbs said.
Alicia Glen, managing director and head of the Urban Investment Group at Goldman Sachs, wrote in an e-mail to The Nation, “Goldman Sachs views this transaction as a double bottom line investment where the firm expects a blended social and financial return.” But some are skeptical about Goldman’s “social” motives. “Goldman Sachs has been very adept at getting involved in government policy that clearly serves its own self-interest,” said Dr. Julian Brash, assistant professor at Montclair State University and author of Bloomberg’s New York: Class and Governance in the Luxury City. “It sees this as a way to develop a market in these bonds at a time when financial capital is having a hard time finding profitable investments, banks are sitting on huge amounts of money, and everyone is looking for the next bubble.”
Goldman Sachs’s Glen sees a bright future for social impact bonds, writing, “Goldman Sachs believes that the Social Impact Bond structure holds promise for financing social interventions, particularly in a time of government fiscal constraints…. We know that there are governments that are looking at Social Impact Bonds as a means to fund a range of programs including homelessness prevention, early childhood education, workforce development, in addition to criminal justice.”