Goldman Sachs, hedge fund billionaire John Arnold and other philanthropic partners funded the largest ever social impact bond Wednesday, a $27 million effort to prevent young men in Massachusetts from going back to jail or prison.
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Social impact bonds are a hot new form of philanthropy where private donors provide money to fund social impact programs. If the tangible goals of the program are accomplished—in this case, more people stay out of jail or prison—then government funding pays back the donors with a modest profit. The government also wins, in theory, by saving money from the related reductions in the social services it must provide.
The Massachusetts Juvenile Justice Pay for Success Initiative was announced by the state's governor, Deval Patrick, as a "smart financial solution" to a difficult problem. Nonprofit group Roca will work with 929 young men between the ages of 17 and 23 in the state over seven years by providing personal outreach, life skills and employment training to help reduce recidivism.
Third Sector Capital Partners, a nonprofit advisory firm, collected $18 million for the project. That includes loans of $9 million from the Goldman Sachs Social Impact Fund; $1.5 million from The Kresge Foundation; and $1.5 million from Living Cities. Another $6 million in grants comes from the Laura and John Arnold Foundation ($3.7 million), New Profit ($2 million) and The Boston Foundation ($300,000).
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Success will be measured starting in five years by looking at reductions in the number of days men in the Roca program spend in jail or prison and improvements in employment, according to the announcement.
Goldman is essentially the senior lender for the bond and will be paid back the $9 million plus 5 percent annual interest if the project achieves its targeted impact of a 40 percent reduction in incarceration. "Junior" lenders Kresge and Living Cities will be paid their base plus 2 percent.
At higher levels of success—more than a 40 percent reduction in jail or prison time—the funders can receive a small return on their funding for assuming the upfront financial risk, including up to $1 million for Goldman Sachs. Arnold and other grant-makers plan to recycle any payback they receive into the program and Roca. Massachusetts has a total of $27 million reserved for potential payouts.
