Goldman Sachs Bets on Reducing Crime | Bloomberg

By Esmé E. Deprez

May 08, 2014

Nelson “Johnny” Aguilar was at a Dunkin’ Donuts near Boston on a Sunday night in March when a shooting outside left a 21-year-old man with a bullet wound to the gut, police say. They arrested Aguilar, a 19-year-old with a long record, on three charges, including armed assault with intent to murder.

Goldman Sachs (GS) suddenly has an interest in such police blotter entries. The bank, which wagered more than $300 billion last year on investments such as yen rates and bond spreads, is betting $9 million that troubled young men like Aguilar can stay out of jail. It’s partially funding the $21 million Massachusetts Juvenile Justice Pay for Success Initiative, which is helping Boston-area nonprofit Roca rid the streets of gangs and crime. The money is not a grant. It comes through an investment vehicle that combines capitalism and charity: a social impact bond (SIB).

Roca is a 26-year-old organization that aims to get young men off the streets and into the legitimate economy with aggressive outreach, cognitive behavioral therapy, and job training. At Roca’s headquarters in Chelsea, Mass., classes prepare them for high school equivalency tests and teach skills including cooking and carpentry. Successful participants leave the two-year program with a steady job, a plan for long-term self-sufficiency, and another two years of follow-up.

Each participant Roca keeps out of jail for a year saves Massachusetts $12,400, according to state calculations. If the state can reduce its prison population enough to close an entire 300-person facility, and keep from expanding its jail space, it could save $47,500 per inmate a year.

Under the terms of the Goldman SIB, Roca will be given names of randomly chosen men ages 17 to 24 who are leaving the juvenile justice system or on adult probation. Roca is responsible for persuading them to join the program; most are under no obligation to participate. After the program has been up and running for four years, independent evaluators will calculate payments by comparing the Roca group’s recidivism rate against that of the men who didn’t receive services.

If the high-risk men assigned to Roca spend 22 percent fewer days locked up than their peers, Massachusetts would save enough money to repay Goldman Sachs’s investment. An even bigger drop in recidivism would hand Goldman a profit of as much as $1 million. If Roca fails and the men end up behind bars, Goldman loses its stake—though it earns 5 percent annual interest on the money regardless. “It’s not that different than if you were looking at any company” to invest in, says Andrea Phillips, vice president of Goldman’s Urban Investment Group. “You’re relying on a management team. You’re relying on their human capital, their folks who work at the plant and deliver and do what they’re supposed to do.”

The beauty of SIBs, say their proponents, is that everyone wins. States and municipalities get prevention programs that they may not otherwise be able to afford. Social service providers receive the stable, multiyear capital they need to bring about large-scale change. Investors get a chance to do, and be seen doing, good. Taxpayers aren’t on the hook if the programs don’t work out. “It’s very difficult for governments to find resources right now to fund upfront investments in projects and initiatives that produce savings only over longer-term horizons,” says Massachusetts Secretary of Administration and Finance Glen Shor. The SIB “is a chance to try something new. And it’s bringing a level of rigor and objectivity to measuring whether these investments work.”

SIBs got off the ground in the U.K. under the guidance of Ronald Cohen, a co-founder of London-based private equity firm Apax Partners, who wanted to put private capital to work on public projects, with returns tied to success. The first SIB in the U.S., announced in 2012, was also partly backed by Goldman. Proceeds of the bond have funded a program based at Riker’s Island jail in New York City that aims to prevent incarcerated young people from returning to crime. (Bloomberg Philanthropies, formed by Michael Bloomberg, majority owner of Bloomberg Businessweek parent Bloomberg LP, is guaranteeing 75 percent of Goldman Sachs’s $9.6 million investment.) Bank of America (BAC) created a SIB with New York State to rehabilitate older offenders.

Crime isn’t the only target: A SIB being developed in Israel would fund job training for ultra-Orthodox men, while Massachusetts is planning one to attack homelessness.

Massachusetts’ $21 million SIB is the biggest yet. With more than a dozen states and municipalities putting together deals, including Republican-led Ohio and Democrat-controlled Colorado, the SIB market will grow to $500 million from the current $80 million by the end of 2015, the Rockefeller Foundation forecasts. President Obama requested $300 million in his 2015 budget to spark more SIB deals.

In 2011, Massachusetts put out a call for ideas to use social impact funds. It picked Roca’s proposal, citing its record of success and emphasis on data collection and analysis. Goldman did months of due diligence, Phillips says, evaluating Roca and research on cognitive behavioral therapy. Massachusetts announced the agreement in January. Before the SIB, Roca had 14 youth workers serving about 375 young men, including Aguilar, the organization says. The funds from Goldman and other investors that began flowing this year will allow it to reach about 550 young men at any one time.

Sulai Rosa , a 27-year-old former gang member, earns $34,000 a year as a case worker for Roca. She got an early start on Monday, March 10, the morning after the Dunkin’ Donuts shooting, trying to keep the peace. She eventually learned that 15 of the 22 men in her caseload had links to various sides of the gang-related conflict. “Someone could have died,” Rosa told one of her clients. “Someone’s definitely going to die,” the young man replied. Thanks in part to Rosa’s efforts, there’s been no retaliation so far. (In April the charges against Aguilar in the shooting were dismissed for lack of evidence.)

Growing up in Chelsea across the Mystic River from downtown Boston, Rosa began hanging with Bloods at age 12. By 15, she says, she’d started her own chapter. She stabbed people and got stabbed, did and sold drugs, and stopped counting the number of times she got arrested after it reached double-digits. Then she met a Roca youth worker named Susan Ulrich, who got her to join the program. Rosa completed it five years ago. (While the SIB targets young men, Roca also works with women.)

Rosa pulls program participants out of bed and drives them to work beginning at 7:30 a.m. (“There’s a lot of cursing,” she says.) She takes their calls on nights and weekends and buys them lunch at TGI Friday’s. “You have to be tough with them and can’t show weakness—but try to be understanding, too,” she says. “I can’t push them too much because then they won’t trust me.” Beat cops and probation officers trust Rosa enough to share information about people on all sides of local gang conflicts. To protect her sources, she’s programmed her phone to delete text messages every 24 hours in case she loses it. “This is my way to give back to this community I once helped destroy,” she says.

To Mark Rosenman, a 30-year veteran of the nonprofit sector, SIBs symbolize government’s failure to provide enough money to tackle social problems. “The popularization of these private finance mechanisms in some program areas,” says Rosenman, an emeritus professor at Union Institute and University, “might eventually allow government to say, ‘Sorry, we couldn’t raise private capital for it,’ and to walk away.”

Roca’s founder and chief executive officer, Molly Baldwin, counters that the cost of doing nothing is too high to justify turning away funding, whatever the source. “That’s what Wall Street does: They make money. But why are we more uncomfortable with that than watching kids die in the street or go to prison and come out with worse outcomes?” she says. “If there was another way, I’d go for it. But there isn’t.”