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Promoting Social Impact Bonds

Principal Ryan Puckett worked with RecycleForce to promote the strategy of using Social Impact Bonds (SIBs) in the state of Indiana. The result was an op-ed in the September 6, 2012 edition of The Indianapolis Star.

Investing Private Funds Into Re-entry Programs

By Thomas Gray

In August, New York Mayor Michael Bloomberg announced the launch of a program at the Rikers Island jail complex with the goal of reducing the recidivism rate of young offenders. This is a social problem that Indianapolis and municipalities across the country are looking to tackle. The unique twist in this program is the source of financing for the program — Goldman Sachs will invest nearly $10 million in the program through social innovation bonds.

Also called social impact bonds or pay-for-success bonds, SIBs draw upon private investment dollars to address entrenched social ills, such as recidivism, homelessness and substance abuse. These private dollars are used to fund nonprofits groups, which tackle these social problems and, in turn, produce measurable results such as lowering the recidivism rate. The cost savings realized by the government through these efforts are paid to the private investors and represent their return.

This idea is in its infancy, but its potential is tremendous. There are many different sources of private capital: pension funds, foundations, hedge funds, all of which in this era of low-interest rates are in search of higher returns. For some investment funds, reducing these social problems would benefit their business operations as well. For example, insurance companies might be drawn to reducing crime, especially if it had an impact on such crimes as burglaries and car theft.

While the New York City program is being touted as the first of its kind in the United States, SIBs were first used in Britain and are being explored in Australia. In this “age of austerity,” SIBs could prove to be a powerful tool to help facilitate social innovation. This funding stream allows governments to engage in preventative strategies that could unlock dramatic future savings.

Another advantage of SIBs is that the risk of failure is transferred from public funding to private investors. Essentially, private investors endure the risk and afford municipalities the opportunity to test new strategies.

Nonprofit organizations that receive SIB funding are promised a sustained flow of financial support that allow them to operate at scale over a longer period of time. In the case of the Goldman Sachs investment, the nonprofits delivering the services are guaranteed funding over a period of four years.

The cost of corrections consumes a huge portion of state and municipal budgets: the Indiana Department of Corrections budget is more than $670 million a year and combined criminal justice budget consumes more $500 million of the Indianapolis/Marion County budget. In these tight budgetary times, government officials at all levels need to think outside the box on how to produce sustainable savings. SIBs could be one answer to this dilemma, as they provide the initial investment to begin the process of restructuring budgets.

In the case of re-entry and lowering the number of individuals incarcerated, the concept of SIBs has an overlooked upside. We largely ignore this population. We hide the facilities out in the countryside. We make it extremely difficult for felons to re-enter the workforce. However, through SIBs, possibly, we will be forced to recognize these individuals and realize that they have value.

Gray is vice president of Indianapolis-based RecycleForce.

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