Army looks to end ‘use it or lose it’ budgeting

The Army is a few weeks away from an experiment that aims to tackle one of the most persistent bugs in the federal government’s budgeting process: the “use it or lose it” phenomenon that manifests itself at the end of each fiscal year in almost every government office.

As part of a directive set to take effect on July 1, the Army is telling the leaders of all of its major commands that they cannot cut a program’s funding just because it didn’t spend all of its money the year before. In theory, the policy would at least reduce managers’ incentives to binge on questionable purchases in the last few weeks of September.

The Army’s comptroller and its director of business transformation are in charge of drafting specific regulations to put more meat on how the policy will work in practice. Until the rules are written, an April memo signed by then-acting Army Secretary Patrick Murphy describes the basic thrust:

“Commanders and staffs will not automatically decrement commands or programs in future allotments when they do not spend all funds without further investigation.” Unit comptrollers and other higher-ups will have to “evaluate the reason for the under-execution and determine if it was a onetime event or funding adjustments are needed.”

Another provision of the broader directive, titled “Changing Management Behavior,” says top commanders must find ways to encourage the organizations under their charge to save money instead of spending everything they have. This includes letting them repurpose any savings they find to pay for their own unfunded priorities in the next budget year.

Assuming the Army achieves the culture change it’s attempting with this directive, it’s worth noting that it can’t overcome the use-it-or-lose it phenomenon on its own. Every year, congressional committees pare back funding for programs that they deem to be “in excess of need” or “ahead of need” because they underspent what they were allocated the year before. But the congressional role in use-or-lose it is at the macro scale of the federal budget. As a general rule, the Hill only sweeps money from one program to another when many millions of dollars are at stake in a particular line item.

And the handful of studies that have been done on the subject seem to show that most of the problem arises from the cumulative effect of hundreds of small contracting activities behaving in a perfectly rational manner, each of which is responding to their commanders’ wants to preserve their funding in the next budget year.

One exhaustive study of procurement data published by the National Bureau of Economic Research in 2013 found federal agencies spent, on average, five times as much in the last week of September compared to any other week each year between 2005 to 2009. Put another way, as an average across the entire government, 8.7 percent of procurement spending happens in the last seven days of the fiscal year.

Agencies do not always get the biggest bang for their buck when they feel they’re forced to purge all of one year’s dollars lest their budgets be cut in the succeeding year. Anecdotes abound regarding unused piles of toner cartridges and flower pots purchased with end-of-year funds, but the same NBER study found that serious procurements, particularly those involving IT systems are ripe for problems when they’re bought during the September rush: they were between two and six times more likely to get “low quality” ratings based on agency CIOs’ own assessments and cost and schedule goals.

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