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Goldman Sachs Hopes To Profit By Helping Troubled Teens

Filed by KOSU News in Business.
March 24, 2013

In the New York City prison system, the outlook for juvenile offenders is bleak. They’re falling through the cracks, being arrested over and over, and being re-released onto the same streets only to be picked up again.

Right now, the criminal justice system is failing these 16- and 17-year-olds, New York City Department of Corrections Commissioner Dora Schriro says.

“Just about half of them are going to return to jail in less than a year of their release from our system. And so that means right now one out of two is failing. They’re being rearrested, charged with new crimes, and coming back,” she says.

So last year, the New York City department of Corrections did something no other city in America has ever done — they asked for private, corporate investors. Goldman Sachs opted to invest $9.6 million in the new Adolescent Behavioral Learning Experience program, a new curriculum that seeks to bring down the number of youth offenders going back to prison.

Social Impact Bonds

Alicia Glen, the director of the Goldman Sachs Urban Investment Group, says the company is investing the money over four years. It’s what’s called a “social impact bond.” Glen says it’s a a new way of thinking about financing social goods.

“Essentially what it is, is saying we can use private capital to finance a government-sponsored program,” she says. “So you have the private sector paying for the service, and then the government saying if the service works, we will pay you X dollars based on the level of impact that’s achieved.”

New York’s program is the first one in the U.S. Schriro says the city hopes that by teaching kids basic coping mechanisms, the city can reduce the number of kids getting re-arrested by 10 percent.

Glen says if the school can reduce the amount of recidivism, Goldman Sachs stands to see a return on investment. But there’s still a financial risk, she says.

“If this program doesn’t work at all, the city will not be repaying back our loan. So we hope and expect the program will work, and if we in fact … are right, that they can achieve a real reduction in recidivism, Goldman Sachs stands to make $2.4 million on their investment,” Glen says.

Who Should Take Responsibility?

Not everyone is comfortable with the idea of a big bank making a profit off a government program. Mark Rosenman directs the nonprofit Caring to Change, which helps nonprofits and charities decide how to get funding. He says this move might be detrimental to nonprofits currently working on these issues.

“I think it is building a new industry of intermediaries — of consultants, of lawyers, of accountants — lots of people who are going to be involved in structuring these bonds and who will drain off resources that would otherwise go to nonprofit organizations,” Rosenman says.

He also says letting private companies invest in social programs undercuts the role of government.

“We’re substituting private profit for public responsibility. We are in effect saying that the market can support these activities and make a profit and allowing government to walk away from supporting the activities,” Rosenman says.

Scarce Resources Makes For New Partners

But Schriro says New York’s Department of Corrections isn’t walking away from their responsibility — the agency just can’t afford to be picky when it comes to funding.

“There are scarce resources, and correctional systems and other public service agencies look to partners in the philanthropies. But those are fixed resources. We’re very very excited about the possibilities that the social impact bond provide,” she says.

It will be a little more than three years before the success of New York’s social impact bond experiment is clear. In the meantime, other US cities including Boston and Fresno are considering similar proposals.

Schriro says it is only fitting that big companies should invest in making their communities better.

“We all benefit from safe and secure communities,” Schriro says. “To have a viable criminal justice system is just as critical to those who work in a community as to those who live there.” [Copyright 2013 NPR]

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