Create Innovation Funds

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.