Budget Rules May ‘Encourage’ Agencies’ Year-End Shopping Sprees

Published November 17, 2014

Scholars from the Mercatus Center at George Mason University searched through numerous public spending databases for evidence of wasteful “use it or lose” spending by government agencies.

As described in Missouri State Auditor Thomas Schweich’s 2012 examination of state spending practices, government officials often have “a concern that lapsing funds would result in future agency budget cuts,” as budget rules—at both the state and federal level—often prevent most agencies’ unused balances from being carried over into the next fiscal year.

In late September, Mercatus Center at George Mason University Senior Research Fellow Jason Fichtner and Frédéric Bastiat Fellow Robert Greene examined the scholarly research on year-end spending surges, as well as public data on state and federal government spending.

Greene and Fichtner could not establish solid evidence of causality between the budget rule and spending patterns, but Fitchner says that he believes he did help provide a better understanding of the correlation between the rule and agencies’ spending habits.

“The aggregate spending patterns tell an interesting story that we feel requires further research and congressional oversight,” Fitchner said.

‘Not Optimal’
The study, he says, suggests “the current budget rule of use-it-or-lose-it is not optimal and may be encouraging wasteful spending of taxpayer dollars.”

Last year, Harvard University professor Jeffrey B. Liebman and University of Chicago professor Neale Mahoney submitted a study on this topic to the National Bureau of Economic Research (NBER). Using data from the Federal Procurement Data System and the White House’s IT Dashboard, Liebman and Mahoney created mathematical simulations of congressional appropriations and agency spending, modifying the simulations to predict the effects of reform ideas.

According to the researchers, “the prospect of expiring funds” scares agencies into spending the rest of their allotted money, “even if the marginal value is below the social costs of funds.”

Explaining the results, Liebman and Mahoney said their study provided “some evidence on the causes of lower performance at the end of the year,” as “contracting officers face substantial time pressure at the end of the year, obtaining fewer bids for each contract and choosing to use less time-intensive contract vehicles when they have sufficient discretion.

“We assume that agencies—and their employees—do not have self-control problems,” Liebman and Mahoney added, noting alternative hypotheses exist, such as “agencies [saving] lower priority projects for the end of the year,” and undertaking those low-priority projects when funds permit.

Fichtner’s work is based on a broader review of government spending than the NBER study. The Mercatus Center study examined records from numerous different sources, including the Federal Procurement Data System, the Federal Assistance Award Data System PLUS, SmartPay, the Federal Assistance Award Data System, the Catalog of Federal Domestic Assistance, the Federal Funding Accountability and Transparency Act Subaward Reporting System, and the Catalog of Federal Domestic Assistance.

By summing monthly expenditures for each executive department and creating weighted averages for agencies’ monthly spending, Fichtner was able to determine how the calendar month may be affecting an agency’s spending. All but two federal departments—the Department of Energy and the Department of Veterans Affairs—spent more money during the last month of the fiscal year, September, than in the first month of the year, October.

More Oversight Needed, More Often
“Our findings were shocking,” he said. “If an agency were to spread its contract spending evenly over a 12-month period, roughly 8.33 percent of spending would occur in each month. However, in September 2013 the Department of State spent 38.8 percent of its contracting expenditures, and the Department of Health and Human Services spent 28.7 percent.”

Fichtner does not characterize his study as definitive, instead saying these budget rule effects merit further study.

“Anecdotal stories about the State Department spending $1 million on a sculpture for the embassy in London or $400,000 for a statue of a camel for the embassy in Pakistan are numerous, and have been widely covered in the news,” he said. He suggests more frequent congressional oversight reviews and budget rule reforms as possible solutions.

“The question remains,” he concluded. “If such spending is indeed wasteful, what can be done to reduce it?”

One suggestion Fichtner’s study proposes is allowing “agencies limited rollover—also known as carry-over—authority for funds not spent by the end of the fiscal year. In order to improve accountability, we’d also suggest that Congress conduct more oversight, throughout the year, of where agencies spend their money and when.”

Fichtner’s proposals echo suggestions made in Liebman and Neale’s narrower study.

“A natural way to increase efficiency would be to allow organizations to roll over budget authority across years,” their paper suggests. “Under such a system, budgeting would still occur on an annual basis, but rather than expiring at year’s end, unused funds would be added to the newly granted budget authority in the next year.”

Alexander Anton ([email protected]) writes from Palatine, Illinois.

Internet Info:

“Curbing the Surge in Year-End Federal Government Spending: Reforming ‘Use It or Lose It’ Rules,” Jason J. Fichtner, Mercatus Center: http://heartland.org/policy-documents/curbing-surge-year-end-federal-government-spending-reforming-use-it-or-lose-it-rule/