...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....

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