Create Innovation Funds BACKGROUND Innovation capital is a source of money to invest in redesigned work processes, new information technology, or other equipment and ideas that help improve the quality and responsiveness of government services. Innovation capital may also be used to enhance productivity or generate cost savings. Innovation capital provides funding for both capital-intensive projects such as large information technology projects, and smaller, service-oriented improvements, such as training staff in business process reengineering. It is intended that these funds would be repaid, with interest, to the sponsoring entities. The timing, amount, and availability of innovation capital calibrates the ability of federal agencies to build capacity to govern and improve performance. The increased availability of innovation capital acts as an incentive for federal managers and employees to develop and implement their creative ideas on how to make the government work better and be more responsive to citizens. The current budget formulation decision process that ultimately leads to an appropriation has not resulted in sufficient new innovation capital to achieve those goals. Given the current and outyear budget realities, it looks unlikely that significant new appropriated funds will be available. Consequently, alternative funding sources and approaches must be considered. NEED FOR CHANGE The budget process today does not foster many of the larger innovation projects, such as information technology, modernization, or energy and water conservation, which need injections of funds (pulse funding instead of level funding) in the initial years with smaller amounts of ongoing funding for the outyears. This characteristic of capital investment requirements does not match well with the existing budget process. Consequently, numerous high- priority modernization projects are delayed, scaled down, or blocked when the budget process does not result in sufficient new appropriated funds. Smaller projects requiring innovation capital may also run into barriers to fast accumulation of sufficient funds to start or move key projects forward when new appropriations are not likely. Another historic barrier to capital accumulation includes legislation that prevents partners at different agencies or levels of government from matching funds with their counterparts or with private industry for projects where there are shared goals or interests. The accumulation of innovation capital is also stymied by legislative barriers to saving and redirecting unobligated balances from end-of-year savings. There are no effective incentives helping to stimulate and reinforce the desired continuing innovative or entrepreneurial behavior. Unobligated balances or end-of-year operational savings either are lost, can't be pooled, or are otherwise not available for investment in potential high-payoff projects. The normal budget process is too lengthy to foster sustained, creative, innovative behavior by institutions or employees. More flexible and timely methods are needed for investments in innovation. Also, unless shielded or protected in some manner, these funds are raided for contingencies not related to innovation. There is a potential concern about diversion of funds or potential violations of the Impoundment Act if end-of-year savings are redirected without coordination with appropriate congressional oversight committees. The following examples illustrate variations of the innovation fund concept: --Under General William Creech, the Air Force Tactical Air Command created a $10 million innovation fund one year to fund reinvention ideas through grants. The funds were an appropriation set-aside.[Endnote 1] --In the Department of Commerce's Pioneer Fund, employees apply for cash grants up to $50,000 to finance innovative quality and productivity improvement projects. Funds can be used for project supplies, equipment, and expert services. The source of funding is an annual appropriations set-aside. The Treasury's Internal Revenue Service and the Department of the Interior have or have had similar funds. --Both the Departments of the Treasury and Transportation currently operate working capital funds (WCFs). The Department of Veterans Affairs has proposed one. These funds require separate legislation and have a specific charter, which focuses on such purposes as information technology modernization. The charter, as implemented by appropriation language, has the potential to make a WCF quite flexible by lifting apportionment controls while adding other operational safeguards. --In the Department of Justice's fiscal year 1992 appropriations bill (Commerce, State, Justice, and related agencies), permanent language was added to take the unobligated balances from the last five years and transfer them into a department-level WCF as start-up funding for investments in capital equipment and other nonsalary purposes. --Most federal agencies use secretarial and administrator's reserves under Title 31 USC 1512 for small budget contingencies and to accumulate administrative savings. --In Florida, Governor Chiles cut budgets 5 percent across the board and returned half to those agencies with approved plans that increased productivity or effectiveness. --The City of Philadelphia uses an innovation fund that issues loans to government organizations that must be repaid after five years at double the amount borrowed. The County of Los Angeles has a similar fund and approach. --American Express uses a matching fund approach for its technology research group with 40 percent from the corporate technology (innovation) fund, 40 percent from the interested business unit, and 20 percent from another business unit that has a vested interest in the outcome of the proposed application. --Texas Instruments uses "wild hare" grants to internal entrepreneurs. These working capital funds have proven to be successful in parts of government such as the Treasury and the Department of Transportation. Some of the principles distilled from their experience for a successful WCF follow: --agency users of the WCF have a choice of whether or not to use the fund and have alternatives for the service; --the WCF has flexibility to adjust its operational cost structure and pricing strategies to adapt to changes in demands for their services; --certain financial reporting safeguards must be built in; --a minimum initial investment for start-up costs and one- time seed money that is sufficiently large for significant investments is essential; and --a level of fees and interest charged and repayment schedules must generate sufficient profits for the WCF to become self-sustaining in a short period of several years. The following recommendations create a two-tier system of complementary, market-like innovation capital investment vehicles. Each tier serves a different market segment as defined by dollar size, geographical scope, and technical complexity or risks. These mechanisms are designed to meet requirements for innovation capital within each agency and governmentwide to support improved responsiveness, productivity, and quality of service to customers. The recommended new approaches do not assume significant amounts of new or recurring appropriations, but instead either rely on other sources for funding or are designed to repay the initial start-up costs. Smaller and less risky projects can be funded at the agency levels, and cross-agency WCFs would be used for the more technically and financially challenging project levels. The retained savings approach at the agency level is significant because of its reliance on major changes to the incentives influencing behavior of federal managers and employees. Under this approach for the agencies, the major beneficiaries will be the general public as the revitalized incentive structure starts to work within the federal government operations. The self-interest forces will reward innovation by employees redesigning their operations to be more efficient and effective. A major advantage of this reliance on changed incentives is its ability to overcome the resistance from the "not invented here" syndrome. Another advantage results from avoiding creation of another layer of bureaucracy or separate program to handle innovation. In addition, when used in combination with the departmental working capital funds, the executive branch will have greater managerial flexibility for more risky or cross-agency projects, and a suite of powerful tools to build and sustain self- regulating, self-renewing organizations for the long term. ENDNOTE 1. Appropriation set-aside is defined as funds taken off the top of a department's apportionment from current year appropriations.
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