City of Gresham Innovation Loan Program

Judith Ure

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The Problem

Funding new government programs and projects is becoming increasingly difficult. Citizens across the United States are becoming less accepting of paying increased fees and taxes for government services. In addition, public confidence in the ability of government agencies to resolve complex issues is decreasing. At the same time, governments need to reevaluate their functions and business operations to respond to changing social and economic circumstances. New programs that hold potentially significant benefits but require an initial investment are forced to vie for funding against such important and popular services as law enforcement, fire protection, and parks. These trends will likely continue and possibly worsen as tax reform measures continue to restrict available funding.

Governments at all levels are struggling to streamline operations and operate more efficiently. Continuous quality improvement, benchmarking, and employee empowerment are all movements that began in the private sector and have been imitated with varying degrees of success in public agencies. Employee creativity and innovation, the heart of such private sector efforts, are often missing in the top-down management structure of many government organizations. Government must find ways to capitalize on the expertise of its employees if it is to provide efficient, cost-effective services to the public.

In the public sector, the creativity and innovative ideas of front-line employees are often ignored as the pressures of day-to-day business consume management staff. Budget processes are sometimes slow and unresponsive, leaving good ideas to die for lack of attention. Often, these ideas, if enacted, would ultimately reduce costs or add revenue to the agency.

The Solution

The Innovation Loan Program, implemented by the City of Gresham, Oregon, provides an opportunity for public employees to see their ideas funded and implemented. Through a dedicated, no-interest, revolving loan fund, ideas originating directly from city employees are considered without the pressure of vying with other critical programs in the budget process. This program represents an effort to initiate new and innovative projects within the organization, with special consideration given to those with money-saving or money-making potential.

Employees of any city department can apply for a loan, and if selected they are awarded funds in addition to their regular department budget to initiate the program or project. There is one catch—the one-time loan must be repaid within three years. In the event that cost savings or enhanced revenue are not achieved through the innovation, existing budget appropriations within the department are reduced until the loan is repaid. The repaid loan funds are then made available for new initiatives. Because funding for the program is regenerated as the loans are repaid, employee initiatives can be implemented without increased appropriations. Long-term savings or revenue enhancement from these projects can further reduce the taxpayers’ burden over time.

Development

The idea for an Innovation Loan Program was initially suggested by Gresham’s current city manager. During routine meetings with city employees, she discovered that many good ideas that could potentially benefit the city were being ignored for lack of funding or due to management indifference. She realized that the best of these ideas often came from front-line employees who were very knowledgeable about specific agency functions and knew what it would take to make improvements, but who were not customarily involved in making management decisions. She asked her staff to develop a program that would reward these employees for creative thinking and empower them to implement their ideas.

Staff created an internal loan process that would make funding available directly to departments whose employees who were willing to submit and present their ideas through an internal review process. The preliminary concept for the loan was introduced to city council members, who communicated their support for the program. However, as some level of startup funding would be required to implement the program, the council indicated that they would consider the plan further during the city’s routine budget process.

Staff then prepared a budget proposal in the amount of $30,000 for initial funding of the program with a goal of ultimately building the loan fund to $90,000 through subsequent budget requests. As the money was requested from the city’s general fund, in competition with several other critical programs, the proposal underwent close scrutiny. The city’s budget committee was intrigued with providing a mechanism to implement employee ideas apart from the regular budget process, however, and the request was approved. The city council gave final authorization for the program by adopting the annual budget.

The appropriation for the Innovation Loan Program was placed within the city’s dedicated revenue fund to facilitate future accounting and to ensure that the funds would be reallocated as needed each year. The dedicated revenue fund is classified as a principal operating fund and, in contrast to the general fund, individually accounts for a variety of programs that are supported by specific revenue sources.

Once funding was secured and a means of accounting established, the program was assigned to the city’s budget division for further development. Budget division staff first developed application standards and criteria, then created processes for evaluating, selecting, awarding, and monitoring the loan program. Finally, the new Innovation Loan Program was publicized to employees. Each employee received a brochure outlining the program, and the city’s employee newsletter included articles describing the loan process. The city manager asked department administrators to encourage employees to submit applications as well.

Application Process

The Innovation Loan Program is administered by the budget division. Each year, the division solicits participation in the program and distributes application packets to interested employees. This information outlines the purpose and goals of the program, describes the process for requesting and rewarding funds, and provides a schedule of events.

To apply for a loan, employees must first determine if their ideas meets certain threshold standards:

• The project must be innovative.
• The project must help the city council meet its goals for the community.
• The project must represent a one-time expenditure, rather than an ongoing expense.
• The department must commit to repaying the loan within three years.

If an idea meets these standards, the employee prepares and submits a detailed proposal. Although the proposal can be presented in any written format, it must assess needs, address costs and benefits, describe the repayment plan, and provide a means for tracking data and measuring success.

Budget division staff then analyze the submitted proposals and provide a summary, which is presented to a formal review board for consideration. To ensure unbiased evaluation, the review board consists of members of the city’s citizen finance advisory committee, a group of seven citizens appointed by the mayor and city council. Committee members represent both business and private interests within the community who advise elected officials regarding city financial matters throughout the year and serve with the city council as members of the budget committee.

Each year, during a public meeting, the finance advisory committee reviews the submitted Innovation Loan Program applications and considers the amount of loan funds available for award. Members then judge the proposals using a series of criteria and weighting factors:

• the total amount of dollars saved and/or the total amount of increased revenues to be generated over the life of the project (25 percent)
• the efficiency, effectiveness, and/or service quality that the project will provide (45 percent)
• the ability to track and report on the progress of the project (10 percent)
• the ability of the department to repay the loan, in the event that the anticipated cost savings or increased revenue does not materialize (20 percent).

Following discussion, the committee selects one or more applications that members determine best meet the goals, standards, and criteria of the program and formulates a recommendation. Budget division staff prepare the necessary documentation to transfer funds from the dedicated revenue fund into the appropriate departmental budget. Oregon budget law requires that all monetary transfers from sources other than the general fund be made through a supplemental budget process. Therefore, staff next forward both the finance advisory committee recommendation and a supplemental budget to the city council for final consideration.

During a televised business meeting, the city council holds a public hearing, votes to award the loan funds based on the finance committee’s recommendation, and adopts the supplemental budget as proposed. At this time, employees who submitted successful applications are given an opportunity to describe their proposals and receive public recognition for their efforts.

Finally, as loans are made, recipient departments become responsible for reimbursing the dedicated revenue fund for the loan program. For each year of the repayment plan, an expenditure equal to one-third of the loan amount is deducted from the department budget and transferred back to the Innovation Loan Program. This amount is identified as a special line item and the department, assisted by budget division staff, determines where it will make the corresponding adjustment. Departments generally reduce other line item requirements where savings are expected to result from implementation of the loan initiative. Alternatively, if the proposal is expected to produce revenue, a line item in the department’s resource category is increased. Either way, the loan repayment is automatically deducted from the department budget during each fiscal year following the loan approval until the funds are repaid. If the initiative does not bring about the expected savings or revenue enhancement, the department must cut spending elsewhere to stay within its authorized appropriation.

Implementation

During the first year the Innovation Loan Program was in effect, employees submitted three applications:

• A total of $4,150 was requested by a secretary in the city manager’s office to purchase computer hardware, software, and employee training that would provide the ability to perform desktop publishing functions. The proposal estimated that a minimum of $1,656 would be saved each year by eliminating the need to contract with private vendors for this service.
• A total of $5,200 was requested by an engineer in the Community Development Department to purchase a computer and printer to improve employee efficiency. Savings of $6,500 per year were projected from a reduction in staff time necessary to perform routine job functions.
• An amount of $30,000 was requested by a public utility worker to purchase street maintenance equipment that would separate street debris and reduce disposal costs at the landfill. Annual savings of $22,000 were estimated with a total of $330,000 for the 15-year life cycle of the machinery.

As the cumulative cost of these three applications exceeded the loan funds available, the finance advisory committee was forced to select only the most worthy proposal. Although committee members felt all the applications had merit, the substantial financial payoff of the street maintenance proposal made it a clear choice for funding. The committee forwarded a recommendation to fund the street debris separator to the city council, the loan funds were transferred, and the department agreed to a repayment schedule of $10,000 per year for a period of three years.

Following the first year of operation, the public utility worker compiled a performance report that outlined the benefits ultimately realized through this loan award. The equipment had been used to screen more than 400 tons of street debris and drastically reduced waste disposal costs. Although his original estimate had predicated an excellent return rate on the Innovation Loan Program funds, the actual savings of approximately $45,000 in this first year far exceeded expectations. As a bonus, about half the street debris was salvageable as soil, sand, and rock, helping the city council reach its goal to protect natural resources through waste reduction as well.

In subsequent years, employees have submitted applications for a variety of other initiatives:

• A proposal to build a picnic structure in a public park using the Innovation Loan funds to leverage private donations. Although this application was approved in concept, the project was discontinued when the total construction cost could not be met. The allocated loan funds were returned to the program.
• Purchase of a computer modem bank to replace the monthly charges and installation cost of individual telephone lines. This project was funded and has ultimately saved approximately $20,000 each year for a total loan cost of $9,900.
• A plan to offer specialized confined space rescue training to emergency services personnel of other government agencies. Approved during the most recent year’s loan award process, the results of this program are not yet available.

In the second year of the Innovation Loan Program, the city’s budget committee and city council approved an additional $30,000 to be made available in the loan fund for an ongoing total of $60,000. Although staff originally envisioned that the program would be fully funded at $90,000, increasing demands on the city’s general fund eliminated the third year of new funding. Over time, the loan program has become self-supporting, however, as cost savings or revenue enhancements are achieved and the loans are repaid.

Following initial implementation of the program, finance committee members requested an adjustment to the schedule to complement the city’s budget process. As a result, the loan application deadline was moved forward in the second year of the program to September. This allowed the loan funds to be awarded by the end of the year, prior to the city’s formal budget review process.

Over time, the Innovation Loan Program has been modified and improved in other ways as well. In the second year of the program, criteria for awarding loans were streamlined and clarified. Better systems for evaluating the potential benefits of the proposals have been developed and implemented. In addition, new reporting mechanisms have been put in place to ensure that the program’s goals continue to be met and that the loan proceeds are being used to the greatest benefit.

Costs and Benefits

The Innovation Loan Program was initially conceived to involve employees in improving government services, to stimulate innovative thinking, and to recognize and reward creativity. In addition, the program is intended to result in cost savings or increased revenues to the city and its taxpayers. In its first year, the Innovation Loan Program exceeded these objectives.

The program’s greatest financial success occurred in its first year. The $30,000 in awarded loan funds resulted in a $45,000 savings, surpassing all projections. Table 1 illustrates the cycle of capitalization, expenditures, and repayments anticipated over the first five years of the Innovation Loan Program. Interest accumulated from the loan fund is deposited to the general fund as undesignated revenue and does not affect the dedicated revenue fund in which the Innovation Loan Program resides. As a result, interest revenue and expense is not shown.

Table 1. Loan Program Balance Sheet, 1994–1998

* Estimated

Table 2. Cumulative Savings, 1994–1998

* Estimated.

Note: All amounts have been rounded to the nearest 1,000.