Academic journal article Law and Contemporary Problems

Not Your Older Brother's Bonds: The Use and Regulation of Social-Impact Bonds in the United States

Academic journal article Law and Contemporary Problems

Not Your Older Brother's Bonds: The Use and Regulation of Social-Impact Bonds in the United States

Article excerpt

For one thing, missions I would thoroughly reform. Missions I would quicken with the Wall street spirit. (1)

Herman Melville



Of the many pressing issues facing the United States, juvenile delinquency--especially the rate at which juvenile delinquents recidivate--is one of the most troubling. In New York, for example, sixty-three percent of juveniles released from a state corrections facility are rearrested within two years of release. (2) And the long-term numbers are worse: By the time they reach their twenty-eighth birthday, eighty-nine percent of (formerly) juvenile males and eighty-one percent of such females will have been rearrested. (3)

But what is one to do? Recidivism, like homelessness, is a seemingly endemic problem requiring a top-down, comprehensive solution that private charitable donation would likely fail to produce. And, in a stuttering economy, individuals and companies may lack extra capital to donate to charity (4)--especially if the tax benefits of such donations are unavailable.

So, it seems, government must step in to address problems such as juvenile-delinquent recidivism. Indeed, governments have a substantial financial interest in reducing the amount of juvenile crime, which accounted for $7 to $8 billion in U.S. government spending in 2007. (5) Yet governments suffer in recessions too, and accordingly may lack the resources necessary to adequately address social problems--especially those of politically powerless groups like at-risk youth. Thus, if neither private philanthropy nor the government can afford to fix the problem, are we simply out of options? Perhaps not.

Social-impact bonds (SIBs) may be the answer. SIBs are new financial instruments in which private investors bear the financial risk of social-welfare programs. As will be seen, SIBs provide a mechanism by which governments can infuse private sector social initiatives with powerful financial incentives. In this note, I explore the potential use and regulation of SIBs in the marketplace. I argue that the promising and potentially widespread use of SIBs to fund innovative programs targeted at important social issues poses challenging policy questions about how--if at all--the SIB market should be regulated.



Like traditional government or municipal bonds, SIBs--also known as pay for success bonds--utilize private capital to fund government projects. Unlike traditional municipal bonds, in which the private investor receives a fixed return on her investment, in a SIB structure the return to the private investor is contingent on the "success" of the program. (6) Moreover, in the case of a SIB, repayment of principal to the investor is also contingent. On the other hand, all parties stand to gain financially and otherwise if the SIB-funded project is successful: Investors might receive a return on their investments, governments might realize net savings, and, most importantly, constituents will (certainly) receive needed social services.

A. SIB Basics

The three parties discussed above--government, private entity, and society--are not the only stakeholders involved in a SIB. Indeed, "[t]here are seven stakeholder groups involved in a SIB: constituents (the direct beneficiaries of the social services), government, nonprofit service providers, investors, intermediaries (responsible for overall SIB project management), evaluation advisors (to help monitor and refine the program), and independent assessors (to determine if SIB targets are met)." (7) Among this group, the intermediary plays perhaps the most important role in a traditional SIB: It "raises capital from investors, selects the service providers, contracts with [the] government, works with the evaluation adviser and the independent assessor to set and measure performance targets, and partners with the evaluation adviser to monitor and analyze interim results and suggest midcourse corrections. …

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