Goldman Sachs is investing $9 million in an anti crime program.
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Wall Street giant Goldman Sachs has pledged to put $9 million into a $21 million Massachusetts Juvenile Justice Pay for Success Initiative. The program is intended to rid the Boston streets of gangs and is being promoted together with the Boston non profit ROCA (Rid the Streets of Gangs and Crime).
A social impact bond (SIB) is a type of investment that combines capitalism and charity and an SIB is what Goldman has put up. SIBs are also known as Pay for Success Bonds and Social Benefit Bonds. They are, in effect, a social contract between a private investor and the public sector in which the investor commits to pay for what is hoped will be an improved social outcome that will save a government money, in exchange for a share of the savings. The first SIB was introduced in England in March 2010.
The SIB which Goldman issued comes with the condition that over the next four years ROCA will be given a list of randomly chosen men between the ages of 17 and 24 who are being released from juvenile detention or are being placed on probation. ROCA must convince these men to join their program.
After the term expires, ROCA’s success rate with the youths will be checked by an independent evaluator against those people who did not take part in its program. ROCA will then be paid based on its success.
The idea of the SIB is that a firm like Goldman invests in a social or government program, such as fighting crime through activism, and even be able to turn a profit. Like with any investment vehicle there is the risk of losing money, but in this case if ROCA succeeds and the State of Massachusetts saves money on inmate incarceration then it will pay off the SIB plus interest to Goldman Sachs.
Founded in 1988, ROCA is an outreach program that offers job training and cognitive behavioral therapy to young men in danger of becoming life time criminals. It has classes that prepare participants for high school equivalency tests and that teach skills like carpentry. The program lasts for two years.
According to the State of Massachusetts, it costs $12, 400 a year to incarcerate a criminal. That is money saved when someone takes part in the ROCA program and succeeds. If 300 fewer people a year are in prison, a number that would allow the state to close one of its prisons, then it would save $47, 500 per inmate per year, or $14.25 million total a year.
Goldman could make as much as a $1 million profit on its investment. If there is only a 22% drop in the incarceration of ROCA participants then Massachusetts will at least be able to refund Goldman the full amount of the SIB. While a failure by ROCA in its crime fighting efforts would mean that Goldman would lose its initial investment, the firm is still guaranteed to earn a 5% return on the SIB for each of the four years of its duration.
Vice president of Goldman’s Urban Investment Group, Andrea Phillips said, “It’s not that different than if you were looking at any company. You’re relying on a management team. You’re relying on their human capital, their folks who work at the plant and deliver and do what they’re supposed to do.”
Massachusetts Secretary of Administration and Finance told Bloomberg News, “It is difficult for governments to find resources right now to fund upfront investments in projects and initiatives that produce savings only over longer-term horizons. [The SIB] is a chance to try something new. And it’s bringing a level of rigor and objectivity to measuring whether these investments work.”
Proponents of SIBS claim that they encourage innovation and help to find solutions to social problems, such as crime. SIBS can provide the funding that is not always available in government budgets for much needed programs. Governments can now partner with firms, such as Goldman Sachs, without putting the risk on tax payers that comes with the issuing of public bonds.
But SIBS do have their detractors. For example, savings to a government that result from a program must be used to refund the SIB and pay interest on it, rather than be used for other government programs. Also, money must be allocated in a budget to pay the annual interest on a SIB, without any guarantees of a program’s success.
The former mayor of New York and the owner of Bloomberg News, Michael Bloomberg, has guaranteed 75% of the $9.6 million that Goldman Sachs has put up in the ROCA SIB.