What Can Venture Capitalists Do for Recently Released Prisoners?

New York state is about to find out.

National Journal
Elahe Izad
March 6, 2014, 1:41 a.m.

On Fri­days, people re­cently re­leased from pris­on head to Cen­ter for Em­ploy­ment Op­por­tun­it­ies in New York City for an ori­ent­a­tion ses­sion. It’s the start of a year-long re­la­tion­ship in which they work on a trans­ition­al work crew, learn how to search for a job with a crim­in­al con­vic­tion, and fig­ure out how to hold down steady em­ploy­ment.

“People who are at the highest risk are closest to re­lease [from pris­on]. If you can get over that hump, we think that’s keep­ing people from re-of­fend­ing,” says Marta Nel­son, Ex­ec­ut­ive Dir­ect­or of CEO New York City.

While the pro­gram may seem like any oth­er re­cidiv­ism-pre­ven­tion ini­ti­at­ive, what makes it a one-of-a-kind is how it’s fun­ded: by private, high-net-worth in­vestors.

In Decem­ber 2013, Gov. An­drew Cuomo an­nounced the start of New York’s Pay for Suc­cess pro­gram, the first state-led so­cial-im­pact bond. Private in­vestors put up $13.5 mil­lion to ex­pand a so­cial pro­gram with a proven track re­cord, and they ex­pect a re­turn on their in­vest­ment if the pro­gram meets spe­cif­ic per­form­ance stand­ards. The state ends up sav­ing money it would have oth­er­wise spent on in­car­cer­at­ing people, and in­vestors can even earn a profit.

“The bot­tom line is it does not mat­ter where you work — a For­tune 500 com­pany, in the gov­ern­ment, or a non­profit — we’re all tax­pay­ers and we all have to pay to in­car­cer­ate people,” says Al­phonso Dav­id, Cuomo’s deputy sec­ret­ary for civil rights.

The pro­gram fo­cuses on people at a high risk of end­ing up back in pris­on; CEO has re­duced re­cidiv­ism among its par­ti­cipants up to 22 per­cent, ac­cord­ing to a study by MDRC, a non­par­tis­an so­cial-policy re­search or­gan­iz­a­tion. The Pay for Suc­cess in­vest­ment al­lows CEO to serve an ad­di­tion­al 500 people every year.

“It pays non­profit pro­viders or ser­vice pro­viders like us what it ac­tu­ally costs to do what we do, and al­lows us to go out and do it without be­ing con­cerned with how to raise money, day to day or week to week,” says Nel­son.

It costs a lot of money to put and keep people in pris­on. New York spends an av­er­age of $60,000 per in­mate and $3.6 bil­lion a year on pris­ons. Ideally, pub­lic money would be go­ing in­to pre­vent­ing re­cidiv­ism, which is 40 per­cent in New York state. But of­ten that’s not the case.

“There is a grow­ing body of evid­ence on a lot of these top­ics about ef­fect­ive in­ter­ven­tions, but those in­ter­ven­tions are too costly, too risky, too big, or the re­turned be­ne­fits are too far in­to the fu­ture for gov­ern­ment to be will­ing to fund it it­self,” says John Ro­man, seni­or fel­low at the Urb­an In­sti­tute.

In New York, private in­vestors put up money, which gets paid up-front to CEO at reg­u­lar in­ter­vals. These sorts of fin­an­cing struc­tures are pop­u­lar in the United King­dom, and are start­ing to catch on in the U.S. The Labor De­part­ment awar­ded $12 mil­lion to New York to start it.

Bank of Amer­ica and Mer­rill Lynch se­cured money from more than 40 in­vestors, who put in an av­er­age of $300,000 each, in­clud­ing former Treas­ury Sec­ret­ary Larry Sum­mers and the Sorensen Found­a­tion.

“They all say what ex­cited them is this is a vehicle that will al­low them to in­vest in people’s lives ac­tu­ally im­prov­ing, and that’s a source of re­turn,” says Tracy Pa­landji­an, CEO of So­cial Fin­ance, which brought all the parties to­geth­er in the com­plex ar­range­ment.

CEO must re­duce re­cidiv­ism by at least 8 per­cent or in­crease em­ploy­ment by at least 5 per­cent for in­vestors to get their money back. But they can get more if the pro­gram ex­ceeds those mark­ers. The max­im­um pay­out to in­vestors is around $21.5 mil­lion, some of which comes from the Labor De­part­ment grant and some from the state. New York would still stand to save $7.8 mil­lion. The first re­pay­ment will be in four years.

“The source of the re­turn is not a tra­di­tion­al zero-sum trans­ac­tion in the sense that the in­vestors profit comes at the profit of someone’s loss,” Pa­landji­an says. “It’s about cre­at­ing value to­geth­er, so even after the gov­ern­ment re­pays in­vestors, they’re still net.”

One of the best meth­ods to re­duce re­cidiv­ism is to fo­cus on people at a high risk for end­ing up back in pris­on, and cre­at­ing highly spe­cial­ized coun­sel­ing for their in­di­vidu­al needs, says Thomas MacLel­lan, the Na­tion­al Gov­ernors As­so­ci­ation dir­ect­or of home­land se­cur­ity and pub­lic safety. For some, that’s em­ploy­ment. For oth­ers, there could be phys­ic­al and men­tal-health chal­lenges first.

Un­der­ly­ing any kind of anti-re­cidiv­ism pro­gram is the need for good, sol­id data, MacLel­lan adds. Pro­ponents of so­cial-im­pact bonds ar­gue that the private sec­tor forces ef­fi­ciency and over­sight in the way that gov­ern­ment doesn’t. But it’s still on states to fig­ure out what mat­ters most to them when it comes to pub­lic safety policy.

“Com­pound­ing this whole thing is the value. For some states, it’s lock­ing them up and throw­ing away the key,” says MacLel­lan. “Cor­rect­ive sys­tems are re­flec­tions of value, and not re­search and sci­ence.”

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