1. Allow agencies to create innovation capital funds. (3) The Director of OMB should propose legislation as part of the President's fiscal year 1995 budget to allow agencies to create innovation capital funds, based on type M (no year) accounts for retained savings from operational funds such as end-of-year savings at the agency level. Another potential funding source is all or some portion of unobligated balances from programmatic funds that could be folded into these accounts to supplement any current year contributions to start-up costs or one-time seed money. Initially they could be funded by prior year unobligated balances going back multiple years, such as in the Department of Justice. For implementation, each agency should develop its own investment proposal selection process, and specific investment criteria such as return on investment, payback period, extent of matching fund or in- kind support, technical merit, and budget realism. Project funding decisions should be made by managerial and operational peers rather than by administrative or budget staff. Each stage of the funds' operations should use safeguards. These should include, but not be limited to, sound peer review of proposals, effective project management oversight that relies on various measurable indicators of progress and regular reviews, and post-project audits. The shielding of these funds from diversion and allocation of the accumulated savings under the proposed governmentwide legislation is crucial. If too much is siphoned off for other priorities, the potential positive influence on federal employee behavior from changing the incentive structure to encourage innovative thinking and behavior would be minimized. The following illustration preserves some degree of agency and managerial flexibility on how a balance can be struck among these conflicting objectives: --deficit reduction (no less than 25 percent); --innovative investments by the agency or organization that receives the appropriation (no less than 10 percent); --innovative investments by the agency or organization that created the savings and that receives the allotment from the level of organization that receives the appropriation (no less than 25 percent); and --contribution to the pay and awards (gainsharing) for the lower level organization that created the savings (no less than 10 percent). Each agency should develop a formula for how to reward both individuals and teams who originated the savings. The savings could be segmented to ensure that the incentives reach all parts of each agency. The Office of Personnel Management (OPM) maintains a list of experiments on these approaches in agencies such as the Department of Defense that can serve as models. In addition, the General Accounting Office (GAO) has conducted studies about successful sharing of productivity gains that can then be used by management for higher priority projects. Once this recommendation to change the incentive structure is implemented, employees will have more freedom to exercise independent judgment. Since both their individual pay and organizational budgets benefit, self-interest becomes harnessed to reengineering efforts. Upper management and the public benefit by avoiding future program cost increases since the benefits from the investments of innovation capital help reduce pressure for future tax increases. The general public would also benefit from the resulting service innovations and productivity increases. The administration's recent executive order reducing agency administrative costs is already underway. The retained savings recommendation, when fully implemented, should greatly aid agencies' abilities to meet those reduction targets while maintaining and enhancing their abilities to provide services to taxpayers and fulfill their missions. The recommendation could be tested in one or more pilot programs and be evaluated by interagency groups and congressional staff to accelerate the spread of the use of these funds governmentwide.
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