Goldman Sachs will invest almost $10 million in a new program aimed at reducing the recidivism rates of teenagers entering Rikers Island. It makes New York the first city in the nation to test "social impact bonds," which allow private investment in social service programs, which are typically funded by the government. 

This is an effort to save governments money over the long term.

Under the Goldman Sachs-funded initiative, called ABLE, male inmates aged 16 to 18 will receive education, training and counseling intended to reduce the likelihood of them reoffending after their release.

"New York City is continually seeking innovative new ways to tackle the most entrenched problems, and helping young people who land in jail stay out of trouble when they return home is one of the most difficult and important challenges we face," Mayor Michael Bloomberg said. "As the first city in the nation to launch a social impact bond, we are taking our efforts to new levels and we are eager to see the outcome of this groundbreaking initiative."

Goldman Sachs will fully fund the ABLE program over four years, structuring its $9.6 million investment as a loan to MDRC, a social services group that will run the program. MRDC will contract with the city, but if the program does not meet its targets for reducing reincarceration, the city will not pay anything. 

If the program reduces reincarceration by 10 percent, Goldman will break even on its investment.  It can earn even more, as much as $2.1 million, if the reincarceration rate drops more than 10 percent. But on the flip side, if the rate doesn’t drop by at least 10 percent, the company could lose as much as $2.4 million.

Goldman Sachs CEO Lloyd Blankfein said, "We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector."

This is the first time social impact investing of this kind is being used in the country, according to Deputy Mayor for Health and Human Services Linda Gibbs. “This is a great deal for government because there’s no risk essentially. The risk is born on the private investor’s side and the government pays only if the tax payers actually achieve savings,” she said.

Bloomberg Philanthropies will commit $7.2 million to the MDRC during the same four-year time period of the Goldman investment to guarantee the loan.

Gibbs admitted the charities backing of the funding is a unique and innovative component of this whole initiative. “It could be five, ten years down the road you don’t need as much as of security to this,” she explained, but as this is the first time, “it allows us to test this financing model and it reduces some of the risk that investors have.”

Nearly half of the adolescents who leave city jails currently return within one year.

“There’s no silver bullet. You have to continually adapt,” said Kendra Chiu of Outreach, a non-profit that serves youth involved in the criminal justice. Chiu said a lot of the success is dependent on outside factors like family involvement, coordination with the court system, probation officers and schools.

Social impact bonds, also called pay-for-success bonds, were first used in Britain and are being explored in Australia and in the U.S.

Massachusetts is negotiating with two nonprofit groups to finance juvenile justice and homelessness programs with the promise of repayment only if the programs work.

Soffiyah Elijah is the Director of the Correctional Association and advocates on behalf of inmates at Rikers Island and thinks if the money can help expand programs during a time when the government is cutting back, the investment is good. But Elijah acknowledged that private money funding public sector programs could be problematic. “That’s the kind of concern that we see with the privatization of prisons, but as I understand we will not have the private sector being the service provider,” she said.

Goldman Sachs will have no control over how the programs are run.