Goldman Sachs, Arnold Foundation, Bloomberg Support Innovative New Philanthropic Strategy

In 2011, the city of Peterborough, England came up with a novel strategy fund socially beneficial programs known as a Social Impact Bond. The goal, in this case, was to reduce recidivism, or re-incarceration rates, among the most at-risk populations of inmates in their prison. Traditionally, there has been some government funding for this sort of thing, and the non-profit sector runs programs as well, but the new strategy here was to provide a results-based incentive for non-profits.

Recognizing that reducing recidivism rates saves the city money by lowering the economic burden on taxpayers who no longer have to pay to house as many prisoners, and increases the overall economic output and tax base, the city set up a new financing structure: If the non-profits addressing this issue achieved measureable success, the city could repay a new social impact bond with interest. If recidivism rates did not improve, however, the bondholders would be stuck footing the bill—the idea is risk/reward adjustment to increase competition and innovation, and ultimately lead to better outcomes.

There has been some criticism of social impact bonds, mainly because it’s too soon to know the results (Peterborough is scheduled to release its first financial and programmatic reports this year), so there’s no telling if it will actually yield better results or ultimately lead to more funding for these programs. But that hasn’t stopped the idea from spreading to this side of the pond. The first major social impact bond in the U.S. was floated in New York City in 2012 with financing from Goldman Sachs, with $7.2 of the $9.6 million total guaranteed by Mayor Bloomberg’s private charity, Bloomberg Philanthropies. It also prompted the Rockefeller Foundation to hold a nationwide search for proposals from state and local governments, and has most recently led to the largest social impact bond measure to date, which was announced earlier this week by Massachusetts Governor Deval Patrick. 

Another recidivism reduction effort, The Massachusetts Juvenile Justice Pay for Success Initiative is a $27 million program, largely funded by philanthropy from the financial sector. Third Sector Capital Partners, a nonprofit advisory firm, has been putting together contributions for the initiative, and got Goldman Sachs to put up a $9 million loan. The Laura and John Arnold Foundation, which has initiatives that focus on justice and accountability, also put $3.7 million toward the project.

The program, which will be administered by the non-profit group Roca, has a target of reducing re-incarceration rates by 40% among those it serves. If this goal is achieved, Goldman will receive its $9 million back plus 5% annual interest, with a $1 million cap on net gains. Lenders contributing smaller sums will have similar deals, but their interest rates are lower. According to CNBC, the Arnold Foundation and others plan to put any gains from the program back into funding for similar Social Impact Bonds.

Social impact bonds have also been used to fund preschool in Utah, but so far most seem to be focused on recidivism. Should they prove successful, however, we will likely see more initiatives funded this way, and more philanthropists jumping into this space.