Digital reform of public sector organizations rests on their ability to innovate with digital technology. Since the public sector innovation literature pays limited attention to digital, and as digital innovation is rarely investigated in public sector contexts, current knowledge on digital innovation capabilities in such organizations is limited. Through a case study of digital reform in a local government organization, we identify how public sector conditions organizations' capability for digital innovation. This includes legal structures that propagate infrastructural fragmentation, resource allocation systems that restrict innovation scopes, how political pressure leads to conflicting frames of the strategic role of digital, and how public and legal liability may lead to innovation paralysis. The paper contributes to the literature by illustrating the unique conditions for digital innovation in the public sector, and to practice by highlighting key shifts that increase organizations' digital innovation capability.