[ by Melanie Gretchen ] Goldman Sachs is branching out into new avenues of success.  The Wall Street firm has gotten the green light from New York City to invest almost $10 million in a jail program, from which Goldman would profit if the program succeeded in significantly reducing recidivism rates. An Experiment to Save Money. New York will be the first city in the U.S. to test "social impact bonds," also called pay-for-success bonds, which are an effort to find new ways to finance initiatives that might save governments money over the long term.  The bonds were first used in the U.K. and Australia.  On Wednesday, Massachusetts announced that it was completing negotiations with 2 nonprofit groups to finance juvenile justice and homelessness programs, with the promise of repayment only if the programs work. For its part, the federal government – along with Connecticut, New York State and Cuyahoga County, Ohio, among others – is also considering using the bonds to identify new funds for human-services programs. The Investment. In New York City, Goldman will give the city a $9.6 million loan to pay for a new 4-year program intended to reduce the rate at which adolescent men incarcerated at Rikers Island reoffend after their release.  Currently, almost 50% of young men released from Rikers reoffend within a year. How the Firm Could Benefit. Social services provider MDRC will use the amount to design and oversee the program.  If the program reduces recidivism by 10%, Goldman would be repaid the full $9.6 million;  if recidivism continues to drop, Goldman could make as much as $2.1 million in profit.

"This promising financing model has potential to transform the way governments around the country fund social programs.  Social impact bonds have potential upside for investors, but citizens and taxpayers stand to be the biggest beneficiaries." -- Mayor Bloomberg, in a statement.

In addition to Goldman's contribution, Mr. Bloomberg’s personal foundation, Bloomberg Philanthropies, will provide a $7.2 million loan guarantee to MDRC.  On the other hand, if recidivism does not drop by at least 10%, Goldman would lose as much as $2.4 million, to be paid back in part by Bloomberg Philanthropies.  If that were the case, MDRC may use the Bloomberg money for other social impact bonds, said James Anderson, director of the foundation’s government innovation program. The Program. Adolescent Behavioral Learning Experience, or ABLE, is a part of the Bloomberg administration’s year-old Young Men’s Initiative, which seeks to improve prospects for black and Latino adolescents.  The jail program, which will offer counseling and education for an estimated 3,400 incarcerated adolescent men each year, will be run by 2 nonprofit organizations, Osborne Association and Friends of Island Academy, and overseen by MDRC. Setting a Precedent. Jeffrey Liebman, a professor of public policy at Harvard University who has written about social impact bonds, said the New York contract would be widely scrutinized:

"This will get attention as perhaps the most interesting government contract written anywhere in the world this year.  People will study the contract terms, and the New York City deal will become a model for other jurisdictions."

However, social impact bonds drew concern from the nonprofit and philanthropy field, who say monetary incentives could distort the programs or their evaluations.

"I’m not saying that the market is evil, but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake." -- Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati.

CI Note: Mr. Rosenman's point is especially sharp in light of city officials' statement that the mechanism would pay for prevention programs that are often too expensive for government to afford.  If social impact bonds are extended to finance programs on homelessness, foster care, special education or health care, as city officials hope, how much will the city come to depend on private funding?  Where and how could a conflict of interest begin and end? For further details, go to [NY Times, 8/2/12].