Problem: Government often fails to provide incentives for employees and managers to innovate. This eliminates an important source of possible improvements in efficiency. Proposed solution and evaluation: 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. A program called the productivity bank has been a success 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. Citation: 1993 National Performance Review, Chapter 4. Keywords: efficiency innovations incentives