2013, the Dawn of the American Impact Bond?

A continuing resolution for the first months of fiscal 2013 is all but a certainty, which means federal allocations for juvenile justice (and pretty much all other discretionary youth accounts) are not going to see increases in the near future.

If you’re looking for some optimism in the world of funding, take heart in the fact that 2013 will be the pioneer year for social impact bonds (SIB) in the United States. And the American experiment will begin with juvenile justice.

Social impact bonds, simply put, allow governments to let private dollars do the start-up work on good ideas and reward only success. Investors and philanthropists come up with the funding to initiate a new project, and, if said project achieves stated goals, the government pays them back with interest.

Will the bonds emerge as a breakthrough in human service reform? That remains to be seen. Here’s a rundown of how we arrived at the dawn of the American SIB experiment.

March 2010: An organization in the United Kingdom called Social Finance launches the first social impact bond in collaboration with the British government. The group pulled around $8 million in investment money, mostly from charitable organizations accustomed to giving money away.

The funds are routed to fuel The One Service, which exists for one reason: helping prisoners exiting Britain’s Peterborough Prison prevent a return trip to the criminal justice system. The One contracts with several area social service groups focused on rehabilitation services, therapy, job training, and family and youth services.

The proposition is simple, but not easy. If the re-conviction rate of prisoners is 7.5 percent less than that of a control group established for this project, the British government will pay back the Social Finance investors with interest.

A higher variance in re-conviction rates will yield an even bigger reward for the investors. But if the re-conviction rate is within 7.5 percent of the control group, the British government does not have to pay the investors back.

The project demonstrates well the allure of SIBs to both sides. Major donors, corporations and foundations can take a large philanthropic stake in social services with some hope of seeing returns instead of simply granting the money. Governments can guarantee payment for a venture that is socially productive and potentially cuts the cost of the safety net, with no risk of throwing away taxpayer funds on an ineffective project.

Interim results on the venture won’t come out until 2014, although Tina Rosenberg of the New York Times wrote in June that the anecdotal evidence is cause for optimism.

February, 2011: President Barack Obama introduces his fiscal 2012 budget, which includes $100 million to fund seven social impact bonds for “among other areas, job training, education, juvenile justice and care of children’s disabilities.”

It is the first such mention at the federal level of social impact bonds. Congress did not bite on appropriating funds for the proposal, but the administration recently encouraged states to include SIB concepts in their plans for child welfare waivers.

January  2012: The Massachusetts Executive Office for Administration and Finance (EOAF) issued a request for responses for two SIB projects, one seeking to address chronic homelessness and another to address recidivism among juveniles leaving the state’s Division of Youth Services (DYS) facilities.

Three quarters of the youths that age out of DYS custody are convicted of a crime within five years and 67 percent are incarcerated again, according to EOAF Secretary Jay Gonzalez, figures that likely come from the last state juvenile recidivism study in 2006.

DYS Commissioner Ed Dolan said the agency maintains supervision of all incarcerated juveniles from their release until age 18; some deemed “youthful offenders” are monitored by DYS until 21.

“It’s two to three years after [they leave custody] that they get disconnected, and don’t have reasonable adults in their lives to help them out,” Dolan said.

Financial advisory firm Third Sector Capital Partners will serve as the intermediary in charge of drawing private investment for the venture, and the state recently selected two local nonprofits – Roca and Youth Opportunities Unlimited – to carry out the work.

The entities are still negotiating the benchmarks for repayment and reward, said Ryan Gillette, social impact bond manager for EOAF.

It will most certainly focus on “making sure people are not going back to jail,” Gillette told YSI, so re-conviction and re-incarceration rates will be prominent.  The state also hopes to tie incentives to employment and educational attainment outcomes.

August 2012: New York City Mayor Michael Bloomberg announces that the city would engage in an SIB arrangement with Wall Street behemoth Goldman Sachs, which would put up $9.6 million to lower the recidivism rates of adolescent males returning to the city from Riker’s Island. Goldman has tapped social services provider MDRC to run point on the project.

Goldman gets its money back if the project reduces recidivism by 10 percent; larger reductions mean up to $2.1 million in profit. It is similar to the Massachusetts project with two noteworthy differences:

-The age of jurisdiction in New York is 15, which means that most 16- and 17-year-old juveniles here have been convicted and incarcerated as adults. Many of the teens on Riker’s Island are housed in the same adolescent unit, but still: it’s a prison, not a juvenile facility.

-Goldman isn’t exposed to losses in the same way Massachusetts investors will be. Bloomberg’s own foundation, Bloomberg Philanthropies, is providing MDRC with a $7.2 million loan guarantee, which it can use to pay Goldman back if the program fails to yield the desired reductions in recidivism. That means the worst Goldman could really do here is lose $2.4 million.

“Yeah, we don’t anticipate there will be the level of protection there is in New York” for Massachusetts SIB investors, Gillette said.

Harvard professor and social impact bond expert Jeffrey Liebman called the New York arrangement “perhaps the most interesting government contract written anywhere in the world this year.

YSI humbly submits that it would be a lot more interesting if Goldman wasn’t covered on the back end.  Surely, other corporations and foundations will not receive that consideration from governments interested in SIBs, because there are exactly zero leaders of government in the country with Bloomberg’s combination of personal wealth and benevolence.

John Kelly is the editor of The Chronicle of Social Change

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John Kelly, Editor in Chief, The Chronicle of Social Change
About John Kelly, Editor in Chief, The Chronicle of Social Change 1212 Articles
John Kelly is editor-in-chief of The Chronicle of Social Change. Reach him at jkelly@chronicleofsocialchange.org.