Social impact bonds infuse private capital into public-sector activities, helping build a better safety net while reducing the state’s burden.

It’s midnight. A cop stands on a street corner giving ad hoc counseling to a man in crisis. The crisis may have been brought on by drug or alcohol abuse or a mental health issue, or he may simply be despondent over his station in life.

In a scene repeated every night in cities across America, cops are providing the counseling because our social welfare infrastructure in our cities cannot handle the demand for their services. What is needed is an infusion of capital to revive our overburdened social service infrastructure.

The catch? These problems are politically intractable. Cash-strapped governments often can’t take on big, risky, expensive problems that cut across political boundaries and ideologies. Thankfully, many private citizens are eager to do so.

Social innovations that partner government, philanthropy, and the private and nonprofit sectors are proliferating across the country. Entrepreneurial philanthropists are engaged in cutting-edge thinking, leveraging their giving to solve difficult problems in sustainable ways, and sometimes even return a dividend that can become another gift. Solutions include everything from microlending to impact investing to benefit corporations to the human capital performance bonds signed into law in Minnesota.

But the star of the social innovation show, and the tool for cities to fix their human capital, digital, and social service infrastructure, is a financial instrument you’ve probably never heard of—the social impact bond. Social impact bonds infuse private capital into traditionally public-sector activities, helping build a better safety net while reducing the state’s burden to care for vulnerable citizens.

Launched last year by New York City and funded by the Bloomberg Foundation and Goldman Sachs, the first social impact bond invested almost $10 million in a program for young men being held at Rikers Island. The program helps prepare inmates with the skills they need to return to the community, succeed, and stay out of jail. MDRC, an independent research firm will manage the intervention and the Vera Institute will rigorously evaluate the program. If it works, only then will New York City have to repay the bond.*

That idea—that investors, not the government bear the risk for big, expensive, risky endeavors—is central to the success of social impact bonds. Investors are rewarded if performance targets are met; if not, the government does not have to pay for services delivered.

President Obama included $100 million in the 2012 budget for federal partnerships with states and local governments to launch social impact bonds. The Department of Justice has funded some initiatives, including a project at the Urban Institute to study the mechanics of bringing social impact bonds to cities across the country, and the Department of Labor will soon announce up to $20 million in awards for social impact bonds.

The federal government is pushing this initiative hard, not only because of its potential to infuse capital into cash-starved cities, but also because the model requires that funded programs are based on strong evidence. After decades of the federal government funding well-intentioned but often unsuccessful programs, this administration has fully committed to evidence-based governance.

And cities are hungry to implement the model. Under the leadership of Dr. Jeffrey Liebman, Harvard University’s Kennedy School of Government has established the Social Impact Bond Lab to help cities implement SIBs. More than two dozen applied and many others are investigating the concept.

Putting Cities’ Social Innovations Under One Umbrella

What’s perhaps most exciting about this moment is that cities across the country are already exploring the social innovation concept—though without a unified strategy. Take the District of Columbia, for example. Just a few months ago, DC Mayor Vincent Gray awarded more than $4 million in grants to city agencies that were judged to have the most innovative plans for making the District more environmentally sustainable, but the city departments behind each initiative may not be aware of each other’s efforts. The District would benefit immensely from a strategy that contains such initiatives under a single social innovation umbrella, rather than uncoordinated, one-off attempts to infuse “innovation” into everyday work.

Call it the “Office of Urban Innovation.” The Office of Urban Innovation can solve problems that have stifled city innovation for years:

  • promoting innovations that have positive citywide benefits but are more costly than a single agency can bear
  • creating teams that span agencies—or even political boundaries—to transfer knowledge critical to program success
  • creating new partnerships with philanthropies, venture capitalists, private companies, and other governments

Think it can’t work? The United Kingdom has an Office for Civil Society that does all of those things.

Social innovation may prove to be the mechanism that moves American city governments into the future. And cops can go back on the beat knowing trained counselors are there for the man in crisis.

* Correction: An earlier version of this story suggested that Social Finance, a financial intermediary, arranged the contracts between New York City, the Bloomberg Foundation and Goldman Sachs.

Top image: New York City Police Officer, Photo by Flickr user David Hilowitz, used under a creative commons license. (CC by 2.0)

This post originally appeared on the Urban Institute's MetroTrends blog, an Atlantic partner site.

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