Here’s how it works: Private investors put up the money to fund a new social program, such as a preschool for low-income families. The program is monitored by an independent evaluator and the government pays investors based on whether the program meets its goals. If the program fails to produce results, investors will not be compensated.
Can These New Bonds Save Your State?
Ideally, social impact bonds, also known as pay-for-success bonds, allow local and state governments to receive more financing to innovate and expand successful programs. For investors, the bonds offer an opportunity to provide better returns in a low-rate environment and a chance to fund programs that benefit their communities.
Cities and state governments are still strapped for cash. According to the Center on Budget and Policy Priorities, while state governments’ revenues have improved recently, reserves need to be replenished and program funding remains below pre-recession levels. The National League of Cities reports American cities have experienced annual revenue declines in their general funds since 2006. Could social impact bonds help governments fill these budget gaps, especially in hit-hard areas like education?
Social impact bonds have gained momentum in a short time. These types of bonds started in the U.K. in 2010. Last August, New York City issued the first social impact bond in U.S., which raised $9.6 million to fund a new four-year program that aims to reduce the incarceration rate of repeat-offender teens at Rikers Island. Salt Lake City received $4.6 million for a preschool education program in June. Investment bank Goldman Sachs was the manager of both bond offerings.
“Social impact bonds are an entirely new way of financing things that have been paid for by philanthropy or taxpayer dollars.”
“Social impact bonds are an entirely new way of financing things that have traditionally been paid for either through philanthropy or by taxpayer dollars,” Alicia Glen, head of Goldman Sachs’ urban investment group, told The New York Times.