Undeterred by investigations into financial institutions’ efforts to manipulate interbank lending rates and pricing on municipal bonds, New York City, Massachusetts and other U.S. city and state governments are seeking new ways to enter into complicated deals with financial firms.
Or so we read in The New York Times, which reported this morning that Mayor Michael Bloomberg is set to announce a $9.6 million loan from Goldman Sachs to pay for a program intended to reduce adolescent recidivism among Riker’s Island inmates.
The details as we find them: Goldman will provide $9.6 million to a social services provider call MDRC, which will use the funds to design and oversee the recidivism program. If the program reduces recidivism by 10 percent, than Goldman will be repaid in full. If the program exceeds the 10 percent threshold, Goldman gets repaid more; if the program falls short of the goal, Goldman gets less. And to make matters a little more complicated, Bloomberg Philanthropies is guaranteeing the loan: If the program misses its goal, the mayor’s charitable foundation will provide MDRC $7.2 million to repay Goldman; If the program succeeds, the loan gets repaid by the city’s Department of Correction, and MDRC can use those funds to secure other social interest bonds.
Which is all well and good, and perhaps, as The Times seems to argue, an exciting experiment in social policy. And it didn’t take much digging to turn up some compelling reasons to give social impact bonds a try (from the Center for American Progress):
Social Impact Bonds provide a genuine way for government to direct funds toward interventions that work since activities that don’t achieve outcomes under a SIB will not receive taxpayer dollars.
Sometimes government agencies may find it difficult to shift funds away from ineffective programs because of poor data or political pressures. But with a Social Impact Bond, there are strong incentives and sufficient freedom for the external organization to direct funds to approaches that work—and the process of doing so is “depoliticized.”
On the other hand, the general prospect of finding new and complicated ways for governments to transact with sophisticated financial institutions is troubling, at least on the face of it, and we found ourselves at least somewhat in sympathy with Mark Rosenman, a professor emeritus at Union Institute and University in Cincinnati, who told The Times:
“I’m not saying that the market is evil, but I am saying when we get into a situation where we are encouraging investment in order to generate private profit as a substitute for government responsibility, we’re making a big mistake.”