Can New York's Juvenile Jails Become a Cash Cow for Goldman Sachs?

David Chen reports on New York City's first-in-the-nation experiment with "social-impact bonds", also called pay-for-success bonds, which have already been tested in Britain and Australia and are gaining fans in the United States from governments searching for new ways to finance human-services programs. 

In the program announced today, "Goldman Sachs will provide a $9.6 million loan to pay for a new four-year program intended to reduce the rate at which adolescent men incarcerated at Rikers Island reoffend after their release," writes Chen. If the program hits certain targets, Goldman could make a tidy profit of $2.1 million; if it falls short, the financial services giant could lose $2.4 million. 

"The money is not a huge amount for Goldman, which last month reported over $900 million in second-quarter profit, and the investment promises a public-relations benefit for the Wall Street bank. For the city, the money allows the Bloomberg administration to demonstrate, and test, several of its priorities: enlisting private sector help in financing public needs, and tying program money to rigorous outcome evaluations," notes Chen. 

"This promising financing model has potential to transform the way governments around the country fund social programs, and as first in the nation to launch it, we are anxious to see how this bold road map for innovation works," Mr. Bloomberg said in a statement.

"Social impact bonds have potential upside for investors," he added, "but citizens and taxpayers stand to be the biggest beneficiaries."