Ministers have pledged to get more than a third of Birmingham's 54,000 incapacity benefit claimants back to work.
Up to £83 million will be saved if the target is met - with much of the money spent in the city on regeneration projects.
Councils, employers, employment agencies and health services in major cities were urged to work together, by Work and Pensions Minister Margaret Hodge.
Ministers repeated pledges to cut the number of people claiming the benefit from 2.7 million to 1.7 million over ten years.
The amount they receive varies from £57.65 a week to £76.45 a week.
One in 11 Birmingham residents of working age is claiming incapacity benefit.
Mrs Hodge said: "There is a lot of money going into Birmingham through different funding streams.
"We want to bring those together so there is a much more coherent and focused attempt to help people into work.
"The Treasury has agreed that the money a city like Birmingham saves can then be re-invested in services to provide support for people on benefit."
But the reforms, announced yesterday, fall short of the tough action Ministers had been promising.
Existing claimants will continue to receive incapacity benefit at the same level as they do now.
Some will be obliged to attend interviews, but they will not be forced to look for work. Instead, the interviews will "ensure that they are aware of the opportunities available to them," according to the Government's Green Paper published yesterday.
However, new claimants will have to try to find work - or their benefits will be cut.
The Green Paper, published by Work and Pensions Secretary John Hutton, said: "We will ask everyone apart from those with the most severe disabilities and health conditions to engage in work-focused interviews, produce action plans and engage in work-related activity, or see their benefit level reduced."
They will receive an Employment and Support Allowance, which will actually be worth more than incapacity benefit.
The measures are a far cry from draft plans leaked last year, which included providing vouchers instead of cash to be spent on training courses and means-testing benefits for wealthy claimants. Reports that the reforms were scaled back because of a lack of backbench support have been denied by Downing Street.
But Tony Blair already faces a tough fight with many in his own party over school and health reforms.
Mr Hutton said cutting the number of people on incapacity benefit by one million would save £7 billion a year.
Ministers said they also wanted to increase the number of older workers by one million.
Other measures would include employment advisers being hired by GP surgeries within the next month as part of a trial scheme to help sick people back to work.
Single parents will have to visit jobs adviser every six months, twice as often as now.