Using and Losing: Reforming Wasteful Year-End Spending

 

Public Finance

Using and Losing: Reforming Wasteful Year-End Spending

Jeffrey Liebman Faculty ResearcherJeffrey Liebman, Malcolm Wiener Professor of Public Policy, Harvard Kennedy SchoolPaper Title
Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal ProcurementCoauthor
Neale Mahoney, University of Chicago, Booth School of Business

It’s a phenomenon familiar to many organizations, public and private: as the fiscal year draws to a close and budgets remain unspent, there is a sudden rush to make sure that the money is used, lest it be lost.

Almost all federal agencies in the United States labor under this system. The funds they do not spend by the end of the year must be returned to the Treasury. Agencies with surplus funds may also give the appearance of reduced need, causing Congress to perhaps cut future budgets. Furthermore, hamstrung by a need to build up rainy-day reserve funds at the beginning of the year, agencies may tilt spending toward later months.

In the first in-depth look at federal year-end spending, Jeffrey Liebman, Wiener Professor of Public Policy at the Kennedy School, and Neale Mahoney, of the University of Chicago’s Booth School of Business, analyzed the scope and social costs of the use-it-or-lose-it approach and calculated the surprising benefits of alternative policies.

Using a “near-universe” of federal procurement spending data from 2004 to 2009, including the timing of 14.6 million purchases totaling $2.6 billion, Liebman and Mahoney found “that 8.7 percent of spending occurs in the last week of the year, or nearly five times the rest-of-year weekly averages.”

Narrowing in on a newly available dataset on the performance of 686 major federal information technology (IT) projects worth $130 billion, the authors also found projects originating in the last week of the fiscal year are 2.2 to 5.6 times more likely to have a lower quality score.

How, then, to get the most efficient use of government funds?

Reducing uncertainty, which forces agencies to slow spending at the beginning of the budget year as they squirrel money away for unexpected needs (like a flu epidemic or national security need), is unfeasible, the authors argue.

Instead, the natural solution is to allow agencies to roll over unused funds to the next year. The approach is not new. In the public sector it is already being used by state governments in Oklahoma and Washington, by the Canadian government, and even by the U.S. Department of Justice, which was given special permission by the federal government in 1992 to roll over up to 4 percent of annual revenue into a fund for IT and related projects.

To analyze the gains from permitting rollover, Liebman and Mahoney created a dynamic economic model, analyzing several scenarios. They found that “the benefit of rollover depends on the degree to which Congress can refrain from raiding the agency’s rolled over funds.” With a commitment from Congress to keep its hands off of the rolled over funds, the authors calculate welfare gains of 13 percent. “In other words, Congress could provide the agency 87 cents on the dollar, and the value of spending would be the same as in the no-rollover regime,” Liebman and Mahoney write.

Even intermediate policy changes, such as a 50 percent commitment probability by Congress of maintaining the rollover money, or a three-month grace period during which the rolled-over funds must be spent, can realize welfare gains almost three-quarters of the maximum value.

The findings appear to be borne out by the Department of Justice, where unspent funds on IT projects can be carried over into subsequent years. Consistent with their predictions, the authors found no signs of a jump in late-year spending within the Justice Department and no accompanying decline in the quality of year-end projects.

While the authors caution not to lose sight of the benefits of one-year budget periods—it allows greater Congressional oversight of executive branch operations and may provide the impetus needed to start needed projects otherwise languishing in the bureaucracy—their study makes apparent the scale of the problem, and the potential benefits of reform.

- by Steve Nadis

“The natural solution is to allow agencies to roll over unused funds to the next year.”