Badger Bonds: A new way forward (American Enterprise Institute)

By Gerard Robinson | @gerard_924

Editor’s note: The next president is in for a rough welcome to the Oval Office given the list of immediate crises and slow-burning policy challenges, both foreign and domestic. What should Washington do? Why should the average American care? We’ve set out to clearly define US strategic interests and provide actionable policy solutions to help the new administration build a 2017 agenda that strengthens American leadership abroad while bolstering prosperity at home.

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What happens to the 2.2 million people living behind bars in the United States without a high school diploma? Some earn a GED, but few gain the degree, licensure or workforce skills necessary to participate in today’s knowledge-based economy.

Once out of prison, one-third are rearrested during the first year out, 57 percent within three years and over 75 percent within five years. Nearly half remain unemployed for up to a year. While that is a national snapshot, what does recidivism and unemployment look like for former inmates in Wisconsin?

Similar to the national trend, Wisconsin’s three-year recidivism rate declined from 43 percent to 30 percent for 140,911 inmates released between 1990 and 2009. Still, a lot of work needs to be done identifying successful programs and approaches to re-entry — and finding a way to fund them in a state where corrections-related expenditures are already high.

One potential solution: social impact bonds.

What is an SIB?

A social impact bond is a contract between government and private-sector investors seeking to solve a social problem. Goldman Sachs, a global investment firm and pioneer in the SIB arena, provides a good overview of why a public-private partnership matters to societal progress:

City, state and federal budgets may be declining, but the social challenges those governments face aren’t going away. To fill the gap, policy-makers are turning to a new financing mechanism called a social impact bond. It’s a public-private partnership designed to deliver ambitious social programs to underserved communities.

An SIB is technically not a government bond. Rather, it is a social impact investment. Here is the difference: A bond is issued by the federal, state or local government to raise money to pay for public services such as transportation or social service programs. Bonds are backed by the creditworthiness of a government entity, which makes them risk-free. At the same time, government bonds are subject to an ever-changing financial market. Fluctuations in interest rates, for instance, can negatively affect traditional bond investments.

This quandary encouraged lawmakers to search for an alternative to public-only financing and gave rise to social impact investing. The practice began in the 1960s as a way to infuse more venture capital into government-sector-driven social projects, and it matured into the SIB market that we have today. A statement from a pair of U.S. and United Kingdom leaders in social impact investing described the allure:

Poverty, homelessness, crime, unemployment continue to plague even the wealthiest of nations. Imagine if in addition to existing efforts, we could leverage trillions in private capital and bring the same level of focus and entrepreneurial dynamism that we see in the private sector to meet the pressing needs for better schools, more job opportunities, improved public services, safer streets?

We don’t have to imagine. It is already happening — and it is called impact investing. The idea is simple enough — to invest in efforts that not only provide a return on investment, but also target specific social needs. We can dramatically accelerate the growth of this important market by partnering with government to remove roadblocks.

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