Goldman Sachs officials are proud, very proud, that their firm made the first investment ever in a public-private "pay for success" program.
In 2012, the financial giant entered an agreement with the city of New York to loan $10 million of start-up cash to establish a cognitive-behavioral-therapy program for juveniles incarcerated on Riker's Island. At the time, half of the adolescents who left New York City's Department of Correction returned within one year. The goal of the cognitive-therapy intervention was to reduce recidivism rates. The city pays back the loan with interest when recidivism rates drop, decreasing costs of jail time. If all goes well (and so far, it has), a successful reduction in reincarceration could net the Goldman's client investors millions of dollars in return.
Goldman Sachs' entrance into this kind of financing—most often known as social-impact bonds—could change the way both Wall Street and governments do business. "There's been value in everybody coming to the table ahead of time to identify the outcomes we're looking for," says Andi Phillips, vice president of the firm's Urban Investment Group. "How do we know we've achieved them--what drives payment?"
Over the last several years, Goldman Sachs has spearheaded three other social-impact bonds: a quality preschool expansion for at-risk 3- and 4-year-olds in Salt Lake City; a work and life-skills training program for young men leaving prison in Boston; and another preschool expansion in Chicago. All are based on the same pair of concepts—that upfront investments in evidence-based interventions for at-risk individuals can save lots of money down the line, and that there is no reason why a for-profit company shouldn't cash in on those savings.