Capitalism and Corrections: Wall Street loan for youth inmate rehab

Introduction

Venture capitalists to the rescue of locked-up youth?

The world of juvenile justice is abuzz over news that Goldman Sachs will provide New York City with a $9.6 million loan — a so-called “social impact bond” — to finance rehabilitation programs for youths locked up at the Rikers Island correctional complex. Mayor Michael Bloomberg’s goal is reducing Rikers’ young offender recidivism rate of more than 50 percent.

In the innovative heart of Silicon Valley, Stanford University’s School of Business has delved into the concept of firms ponying up such social impact bonds as way to improve the outcome of public services, including corrections. To get an idea of what CEOs hot on socially responsible investing have to say about private investment in social programs, check out some lectures posted through the business school’s Center for Social Innovation.

In Britain, where the social-impact-bond idea was pioneered, the company Social Finance explains “building the market” on its website.

Essentially, as Reuters points out, “social impact bonds partner local governments with non-profits and private investors in deals that require a government to pay out only if a social services group can meet a specified performance goal.”

There’s more context for Bloomberg’s deal.

New York, like California, has spent huge quantities of money over the years on juvenile lockup, with poor returns and plenty of abuse of young inmates. Bloomberg cut a budget deal this year that will shift its minors in lockup away from public institutions in upstate New York to local responsibility, where the mayor claims the city can do better, for less.

The Rikers plan is this, according to the New York Times: Goldman Sachs gives the money to New York, which pays MDRC, a company that evaluates and designs social services. It will be tasked with designing the new four-year Rikers adolescent rehab program.

If MDRC’s program is able to cut Riker’s youth inmate recidivism by 10 percent, Goldman gets its loan repaid. If recidivism is cut by more than 10 percent, Goldman could make more than $1 million profit from its loan. If the 10 percent goal isn’t met, Goldman loses at least $2.4 million.

A million-plus profit is a sneeze by Goldman standards, of course. But perhaps the Wall Street giant is looking at potential public-relations returns to soften its greed-first image. As Goldman’s head of urban investment told the New York Times, the company was able to “get comfortable” with the terms of the Bloomberg deal.

So is there collateral in this somewhere?

The mayor’s own Bloomberg Philanthropies will provide a $7.2 million loan guarantee to MDRC, to repay that much of Goldman’s loan should the new rehab plan fail. There’s no risk that the mayor isn’t good for the money. But if the plan fizzles, it’s the notion of social impact bonds that could take a hit.