August 15 Get Out of Jail for Free: A Look Back at America’s First Pay For Success Initiative

It’s been a year since the termination of new york city’s adolescent behavioral learning experience (able) project, america’s first social impact bond (sib).

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Initiated in 2012, and financed with a $7.2 million Goldman Sachs multiple-draw term loan to intermediary MDRC, the project sought to reduce the recidivism rate among 16- to-18-year olds entering Rikers Island jail in calendar year 2013. The loan was backed by a $6 million guarantee by Bloomberg Philanthropies.

The Pay For Success (PFS) model, of which SIBs are a subset, allow private investors to lend money to civic entities for program funding, at no cost to taxpayers. When an independent certifier determines the program’s metrics for success have been achieved, the funds are repaid. And if the program fails, it does so at no financial cost to taxpayers.

The first-ever SIB, a project very similar to ABLE, was carried out in Peterborough, England, with a 10% recidivism rate triggering immediate repayment to investors. The Peterborough project reduced recidivism by 8.4%, falling short of its goal. However, if recidivism rates remain reduced, the Ministry of Justice will repay investors over time.

So why should you care about something that didn’t work? Because the first social impact bond in this country was actually a success, and may be the only means for the U.S. to locate long-term solutions to create social change. If we can do so, investors and taxpayers stand to benefit.

Here’s what’s important to take away from ABLE: Pilots are never the best episode in a series. The PFS model relies on a complex set of interrelated contracts. In ABLE’s case, intermediary MDRC balanced a loan agreement with Goldman Sachs, a grant agreement with Bloomberg Philanthropies, and contract agreements with both New York City and The Osborne Association, ABLE’s service provider. This multiparty structure and its contractual underpinnings meant that if the program took on unforeseen, negatively-impactive variables, a domino effect could occur. This happened with ABLE: the service provider’s control group fell apart, and its budget was slashed “when Rikers’s teenage population unexpectedly fell below the level written into the contract,” according to The New York Times. Further, the service provider had not worked in a prison environment before, and discovered it needed twice the number of facilitators it initially believed it did.

To this end, it might be fair to deem ABLE as PFS in beta. There were aspects of the program that disallowed flexible, adaptive management, yet future PFS initiatives will have different structures and models. None of this should stand in the way of the notion that PFS can work.

America’s prison system is broken. What ABLE stands to affirm, or reaffirm, has far less to do with the potential of PFS and much more to do with the wretched state of America’s prison system. The U.S. harbors 25% of the world’s prisoner population, despite having only 5% of its population. The 2.4 million people currently incarcerated would, when combined, be America’s 4th-largest city, just ahead of Houston. It costs U.S. taxpayers nearly $80 billion dollars per year to house its prisonersa sizable investment. One might think that for that amount, prison would work. And yet over two-thirds (68%) of state-level prisoners were re-arrested within three years of their release, and 77% within five years.

What investors were asking from ABLE was dubious, given statistics such as these.

And here’s why ABLE, and, by extension, PFS, should be seen as success:

Taxpayers paid nothing. This can’t be stressed enough. When the general public sees failure and knows, more importantly, that they paid for that failure, negative public response is all but guaranteed. This matters to investors because in essence it closes the door on inventiveness, which in turn curtails opportunity.

ABLE created a space. Innovation creates prosperity. At present, SIBs account for roughly 1% of impact assets under management. What the now $40 billion annual green bond market has done with brownfield sites, PFS can do for issues of poverty, hunger, education, and, yes, recidivism. Recent initiatives in Connecticut and South Carolina bring the grand total of SIBs in the U.S. to 11. Further, PFS is gaining bipartisan support in Congresssomething virtually unheard of in the present political climate.

While the Rikers program fell short, other, more recent social impact bonds have been a success, both for investors and society. Australia’s first-ever PFS initiative has been a success for both investors and the country. The $7 million bond, aimed at reducing the number of children in foster care, has yielded a 7.5% ROI.

Being in finance means realizing that the future is made of nows, and seeing how those nows make the future. This holds true for both making money for those I work with and leaving the world better than I found it. PFS is a workable and important means to both ends.