Program Fails But Social Impact Bond Experiment Succeeds

Although it failed to produce the desired results, the nation's first social impact bond worked the way it was supposed to, attracting private capital to an effort to reduce juvenile recidivism in New York City and shifting the cost of the program to investors when the program failed to deliver, the New York Times reports.

Launched in 2012 by social policy research organization MDRC and the Osborne Association, a leading prison reform organization, and financed by a $7.2 million investment from Goldman Sachs — with a $6 million guarantee from Bloomberg Philanthropies — the Adolescent Behavioral Learning Experience (ABLE) program aimed to reduce recidivism among 16- to 18-year-olds at the city's Rikers Island facility by at least 10 percent using an evidence-based intervention focused on improving social skills, personal responsibility, and decision making. Under the terms of the SIB agreement, the city agreed to pay Goldman back only if the program met its target, which would have enabled the jail to close a section and save taxpayer money. If recidivism rates fell below the threshold target, Goldman would have made a profit on its investment and the city would have received a share of the savings.

According to the Times, the program ran into trouble from the outset when wardens at Rikers had difficulty separating teenagers who were selected to participate in the program from teens in the control group. Subsequently, the program's budget was cut after the teenage population at the jail fell below the level stipulated in the contract. Three years into the four-year experiment, an evaluation conducted by the Vera Institute of Justice found that the program did not lead to any statistically significant reduction in juvenile recidivism, leading the city to pull the plug and walk away without spending a dime of taxpayer money. "These vehicles are structured in such a unique way that they carry very little risk for the government," said Kristin Misner-Gutierrez, director of social services in the Office of the Deputy Mayor for Health and Human Services, who was involved in the development of the "pay-for-success" program.

To date, seven social impact bonds have been set up in the United States; Goldman has been involved in four, including the Rikers experiment and a $17 million pre-K program for disadvantaged children in Chicago. "We continue to be enthusiastic about using capital this way," said Andrea Phillips, a vice president in the firm's Urban Investment Group.

At the same time, social impact bonds carry potential drawbacks. MDRC president Gordon Berlin told the Times that designing social policy around measurable results and narrow incentive mechanisms to attract private-sector funds could result in reduced funding for harder-to-measure efforts and a scaling back of much-needed services. "If the government objective is to save money, it limits the use of programs like these to things that are very expensive, like prison beds, hospital beds, foster care beds. The choice of projects might be affected."

"Nonprofits are starved for funding and governments have little money to finance innovation," said Berlin. "Maybe people are loading a little bit more on this than they should."

Eduardo Porter. "Wall St. Money Meets Social Policy at Rikers Island." New York Times 07/28/2015.