Last week, Bank of America Merrill Lynch ... announced it had raised $13.5 million from over 40 private and institutional clients, financing a reform initiative for previously incarcerated New York state criminals. The proceeds will provide training and employment programs for 2,000 newly released ex-cons in hopes of reducing recidivism. If successful, the state will save millions in incarceration and criminal justice system costs; a portion of those savings will then be paid to BofA’s philanthropic-minded investors, a market-rate financial return for those who helped finance the state’s reform program.

Social-impact bonds, or “pay for success bonds,” raise private investor dollars to fund social programs that reduce public sector costs, aids society in some way, and generate fixed income-like payouts to investors. The BofA/New York partnership is the most significant social-impact bond to-date globally. It also makes New York the first state in the U.S. to launch such a project.....

.....In the BofA deal, if the program reduces recidivism by at least 8% and/or increases the former prisoners’ post-release employment by five percentage points, then investors get their money back. Further drops in recidivism or employment gains, could, in the best case, earn returns of up to 12.5% annually over the project’s five-and-a-half year term. The state would, only in that optimal case, realize up to $7.8 million in savings, even after the investors walked away with their cut.

The Center for Employment Opportunities (CEO), a nonprofit focused on finding employment for former prisoners, was selected by New York State for the project. CEO’s programming was independently evaluated by the social-impact evaluator MDRC, as contracted by the Department of Health and Human Services, with results showing a reduction in recidivism of 16% to 22% during the years 2004 to 2008.....

.....In 2012, the U.S. saw its first social-impact bond when Goldman Sachs and New York City agreed to a deal that would provide programming for teens imprisoned on Rikers Island. The goal was also to reduce youth recidivism.....

.....This year will prove critical for the future of social-impact bonds, as a dozen projects across the country come on-line. But the most important test will occur when the bonds mature and the state’s total savings – and the investors’ total returns – are finally tallied up.....

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