Goldman will create one of the nation's first "social service bonds" to help fund a New York City program that aims to lower the 50 percent recidivism rate among youthful offenders jailed at the Rikers Island correctional facility.
Unlike similar proposals being developed elsewhere, most of Goldman's 'Rikers bond' will be guaranteed by Bloomberg Philanthropies, the mayor's philanthropic group, which will back $7.2 million of the $9.6 million investment the bank plans.
Bloomberg called juvenile offender recidivism in New York City an "entrenched" problem.
"Helping young people who land in jail stay out of trouble when they return home is one of the most difficult and important challenges we face," he said in a statement.
The four-year program, in which private non-profit groups will provide education and intensive training and counseling to at-risk incarcerated youths, must reduce the recidivism rate by at least 10 percent for Goldman to recoup the investment.
If the recidivism rate drops further, Goldman could profit up to $2.1 million beyond its original investment, according to Samantha Levine, a spokeswoman for the city. If the program fails to reduce recidivism by 10 percent, Goldman could lose $2.4 million.
Social impact bonds partner local governments with non-profits and private investors in deals that require a government to pay out only if a social services group can meet a specified performance goal.
It is unclear how popular philanthropic bonds will be, given that profits depend on societal improvements. But the notion of social impact bonds is politically attractive: cash-strapped municipalities risk little on innovative social programs and investors benefit from being seen as socially conscientious.
Goldman Chairman Lloyd Blankfein said his firm hopes to drive more private investors toward similar public-private philanthropic partnerships.
"We believe this investment paves the way for a new type of instrument that enables the public sector to leverage upfront funding from the private sector," Blankfein said in a statement issued on Thursday.
The notion of social impact bonds was first tested two years ago in Peterborough, England. In 2010, the British government agreed to pay 5 million pounds, about $8 million, to a non-profit organization to reduce the recidivism rate at Peterborough's city prison.
Earlier this week, Massachusetts awarded contracts to two non-profit groups to create programs to address homelessness and juvenile crime.