Step 3: Investing in Greater Productivity

One of the greatest obstacles to innovation in government is the absence of investment capital. The appropriations for most federal agencies last only one year: anything left over at the end of the year disappears. So it's difficult for organizations to scrape together enough money to make even small investments in training, technology, new work processes, or program innovations. We have recommended that agencies be allowed to keep half of any savings they can generate. In addition, we propose a source of innovation funds from which they can borrow. When managers and their employees are allowed to borrow for long-term investments, they have a real incentive to implement creative new ideas.

The IRS and Interior Department already have innovation funds. See Note 57 Treasury and Justice operate working capital funds that finance specific innovations, such as modernizing information technology and computer systems. And the Commerce Department has a Pioneer Fund that gives employees cash grants (rather than loans) of up to $50,000 to finance quality and productivity improvements. The money can be used for supplies, equipment, or expert services. Some funds have financed projects related to advanced technology, such as the development of public information on CD-ROMs.

State and local governments use this approach quite often. Many cities have long had some form of innovation fund. In Florida, Governor Lawton Chiles cut departmental budgets by five percent across the board, then gave half back to agencies that developed plans to invest in higher productivity and effectiveness.

The Productivity Bank: Paying Big Interest in Philadelphia

Mayor Ed Rendell says it's not hard to change incentives so that public employees save money.

"We tell a department, 'You go out there and do good work,' " Rendell told the National Performance Review's Reinventing Government Summit in his city. "'You produce more revenue. You cut waste. And we'll let you keep some of the savings of the increased revenue.'"

Traditionally, the mayor said, "every nickel that they would have saved would have gone right back to the general fund-- They would have gotten a pat on the back, but nothing else." Now, city employees save because their departments can keep some of the savings for projects to help them perform better.

When the Department of License and Inspection beefed up collection and enforcement efforts and generated $2.8 million more than expected in 1992, Rendell said, the city let the department keep $1 million of the savings to hire more inspectors and, in turn, exceed the $2.8 million in 1993.

The city also opened a Productivity Bank, from which departments can borrow for investment-type projects--that is, capital equipment--to produce either savings or enough revenues to repay the loan in five years. To ensure that departments don't apply frivolously, the city subtracts loan payments from annual departmental budgets. Successes already abound. The Public Property Department repaid a $350,000 loan to buy energy efficient lamps in one year--after saving $700,000 in energy costs.

At the federal level, one important use for such funds would be technology investments. These are often considered too expensive for agencies' operating budgets, even though they save money in the future. The Agency for International Development, for instance, needs a centralized information management system to coordinate its central office with its international field offices. Because its information systems lack essential data and are not coordinated, they provide inconsistent, inaccurate, and incomplete reporting that managers frequently do not trust. Agencies such as AID should have authority to create innovation funds for capital investment loans to reduce future operating costs.

Action: Allow all agencies and departments to create innovation funds.

See Note 58

Congress should authorize a two tier system of innovation funds: small loan funds within agencies; larger funds at the departmental level. These would be capitalized through retained savings from operational appropriations. For the new system to work well, Congress should allow all new and existing innovation funds to invest in joint projects with other agency funds, with state or local governments, or with industry.

If managed according to market principles, innovation funds would produce measurable improvements in agency efficiency and significant taxpayers savings. Strict repayment schedules, with interest, would discourage careless borrowing.

Action: The government should ensure that there is no budget bias against long-term investments.

See Note 59

Part of straightening out the govern--ment's books will involve adopting some financial distinctions that business uses. Federal bookkeeping rules discourage government investments in productive fixed assets, like computer systems. Right now, we count a $5 million investment to purchase a Local Area Network computer system in exactly the same way as we count $5 million spent on staff salaries. American businesses do it differently. Business depreciates fixed assets over time: If the $5 million computer system has a useful life of five years, then its $5 million acquisition costs will be spread out over five years. Poor choices of capital investment and the acquisition methods are currently costing the taxpayer millions of dollars each year.

Listen to Eleanor Travers, the director of Pathology and Laboratory Medicine for the Veterans--Hospital Administration. She told the National Performance Review meeting at the Department of Veterans Affairs in August 1993:

"Procurement of equipment is held up because capital dollars to purchase equipment are frozen. And you asked what dumb rules there were we could change. Allow our hospital directors and our top managers to use operating dollars when they find it's necessary to do leasing rather than purchasing . . . Please help us loosen up the capital fund so that we don't have to go to Congress and wait two and a half years for this line item to change."

The budget should recognize the special nature and long-term benefits of investments in fixed assets through a separate capital budget, operating budget, and cash budget. The separate capital budget will explicitly show expenditures on fixed assets, and will help to steer our scarce resources toward the most economical means of acquisition of the most needed assets. The cash budget reflects the effect of both the capital and the operating budget on the economy. Therefore, the discipline of the cash outlay caps in the Budget Enforcement Act must be maintained.