Congress Should Legislate Innovation Capital Funds

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.