What Is “Spend It Or Lose It”?

July 17, 2013

WHAT IS “SPEND IT OR LOSE IT”?

“Spend it or lose it” is the mentality fostered by the federal government’s current budgeting process, which creates harmful incentives for agencies to spend all the money in their budgets in order to receive even bigger budgets down the road.

The Wall Street Journal summarized the problem perfectly in 2010: “Under current law, agencies are typically forced to return any unspent part of their budgets, giving them an incentive to use every last dollar even if the money isn’t needed.”  This results in a flurry of wasteful spending towards the end of the fiscal year as agencies worry they will “spend too little.”

In 2012 Federal Times reported that many federal contracting offices answered phones and emails until midnight on September 30, the last day of the fiscal year, in an effort to use up their funds.

Spending by Week | Spend It or Lose It

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Key Points:

  • Empirical Analysis Shows A Spike In Federal Spending During The Last Month And Week Of Each Fiscal Year.
    • The Flurry Of Year-End Spending Is Associated With A Drop-Off In The Quality Of Investment.
  • The Problem Of Spend It Or Lose It Has Been Around For More Than 30 Years
  • Many Private Companies Strategize For Or Help Their Clients Capitalize On The End-Of-Fiscal Year Spending “Flush”
  • President Obama Has Acknowledged The Problem And Advocated For Solutions With Republicans, But The Problem Remains

 

The Current Approach To Budgeting And The Consequences:

“For Annual Accounts, Appropriations Are Made Available For Obligation For Only One Year And Any Unobligated Amounts Expire At The End Of That Fiscal Year.” “However, unexpended balances of the expired annual appropriations are normally carried forward for five years during which time the balances are not available for new obligations but are available to pay old bills. After the five expired years, the balances are permanently canceled.” (“Balances Of Budget Authority,” OMB, 4/10/13)

Empirical Analysis Shows A Spike In Federal Spending During The Last Month And Week Of Each Fiscal Year. “Figure 1 shows contract spending by week, pooling data from 2004 through 2009. There is a clear spike in spending at the end of the year with 16.5 percent of all spending occurring in the last month of the year and 8.7 percent occurring in the last week. The bottom panel shows that when measured by the number of contracts rather than the dollar value, there is also clear evidence of an end-of-the-year spike, with 12.0 percent occurring in the last month and 5.6 percent occurring in the last week.” (Jeffrey B. Liebman And Neale Mahoney, “Do Expiring Budgets Lead To Wasteful Year-End Spending? Evidence From Federal Procurement,” Harvard Kennedy School Of Government And Stanford Department Of Economics, 11/19/10)

  • In Particular, Categories Of Spending In Which There Is Flexibility As To Timing Experience Significant Year-End Spending Surges. “Construction-related goods and services, furnishings and office equipment, and I.T. services and equipment all have end-of-year spending rates that are significantly higher than the average. These categories of spending often represent areas where there is significant flexibility about timing for performing maintenance or upgrading facilities and equipment, and which, because they represent on-going needs, have a reasonable chance of satisfying the bona fide needs requirement even if spending happens at the end of the year.” (Jeffrey B. Liebman And Neale Mahoney, “Do Expiring Budgets Lead To Wasteful Year-End Spending? Evidence From Federal Procurement,” Harvard Kennedy School Of Government And Stanford Department Of Economics, 11/19/10)
  • The Flurry Of Year-End Spending Is Associated With A Drop-Off In The Quality Of Investment. “We then analyze the impact of the end-of-year spending surge on spending quality using a newly available dataset on the status of the federal government’s 686 major information technology projects—a total of $130 billion in spending. Consistent with the model, spending on these I.T. projects spikes in the last week of the fiscal year, increasing to 7.2 times the rest-of-year weekly average. Moreover, the spike is not isolated to a small set of agencies or a subset of years, but rather a persistent feature both across agencies and over time. In tandem with the spending increase, there is a sharp drop-off in investment quality. Based on a categorical index of overall investment performance, which combines assessments from agency information officers with data on cost and timeliness, we find that projects that originate in the last week of the fiscal year have 2.2 to 5.6 times higher odds of having a lower quality score.” (Jeffrey B. Liebman And Neale Mahoney, “Do Expiring Budgets Lead To Wasteful Year-End Spending? Evidence From Federal Procurement,” Harvard Kennedy School Of Government And Stanford Department Of Economics, 11/19/10)

 

A HISTORY OF “SPEND IT OR LOSE IT”

“Spend it or lose it” isn’t a new problem. In 1980 a Senate subcommittee held hearings and issued a report, “Hurry-Up Spending,” finding that the scramble to spend funds at the end of the year resulted in less-than-responsible spending.

Another report that year by the comptroller general found year-end spending contained clear examples of purchases “that reflect[ed] little more than a desire to use up funds that would otherwise lapse.”

Empirical analysis shows a spike in federal spending during the last month and week of each fiscal year. (The results are summarized in the chart below.)

The study also showed “a sharp drop-off in investment quality” in the hurried year-end spending.
The Problem Of Spend It Or Lose It Has Been Around For More Than 30 Years:

“In Fiscal Year 1980, The Senate Subcommittee On Oversight Of Government Management Held Hearings And Issued A Report, Hurry-Up Spending, To Address Problems With Federal Spending Practices And The Award Of Government Contracts.” “The Subcommittee found that the rush to obligate expiring funds before the end of the fiscal year frequently resulted in a lack of competition, poorly defined statements of work, inadequately negotiated contracts, and the procurement of low-priority items or services.” (“Year-End Spending: Reforms Underway But Better Reporting And Oversight Needed,” GAO, 7/31/98)

SIOLI Backgrounder Graph

In 1980, The Comptroller General Prepared And Released A Report That Found That While There Were Legitimate Reasons For Some Year-End Spending Surges, There Were Also Clear Examples Of Spending That “Reflect[ed] Little More Than A Desire To Use Up Funds That Would Otherwise Lapse.” “Year-end surges may or may not be inappropriate. Some surges reflect a program’s cycle. Others result from the delayed availability of appropriations: still others are the result of a carefully developed financial plan intended to permit management to make the best possible use of limited funds. But some, clearly, are unnecessary and unplanned and reflect little more than a desire to use up funds that would otherwise lapse or would be shown as unobligated carryover. The occurrence of unplanned surges reflects on the quality of the estimates and makes future budget requests suspect. Year-end surges can also contribute to increased overtime costs, reduced staff morale, and poorer quality contracts and grants.” (“Federal Year-End Spending: Symptom Of A Larger Problem,” GAO, 10/23/80)

A Follow-Up Report By The Then-Government Accounting Office In 1998 Concluded That While There Were More Safeguards And Fewer Budgetary Resources For “Low-Priority Purchases Than In 1980,” It Was Difficult To Produce An Accurate Assessment Due To Limitations In Available Data. “Our work and that of others indicates that today there are more safeguards against unplanned year-end spending and, in most discretionary programs, fewer resources available for low-priority purchases than in 1980. Despite these changes, it is difficult to assess the patterns of spending during the year because reported quarterly budget execution data are not reliable. Without complete and timely information for oversight, the Office of Management and Budget (OMB) and other decisionmakers do not have an accurate assessment of the financial status of federal programs during the year. Even at year-end, there are significant differences in three comparable sets of data that agencies report to OMB and the Department of the Treasury.” (“Year-End Spending: Reforms Underway But Better Reporting And Oversight Needed,” GAO, 7/31/98)

 

LUCRATIVE BUSINESS FOR FEDERAL CONTRACTORS

Many Private Companies Even Strategize For Or Help Their Clients Capitalize On The End-Of-Fiscal Year Spending “Flush”:

BOSCOBEL MARKETING COMMUNICATIONS:

“The End Of The Federal Fiscal Year Can Be A Busy Time But Very Profitable For A Business Development Professional Who Is Up To The Challenge.” “Joyce L. Bosc, president of Boscobel Marketing Communications, sums up the federal buying season: ‘This time of year, government agencies are racing to spend the remainder of their annual budgets by the end of their fiscal year on Sept. 30. This can create a use-it-or-lose-it situation for your government customers and prospects, who have to spend their money by the end of September or lose it forever. The end of the federal fiscal year can be a busy time but very profitable for a business development professional who is up to the challenge.’” (Micheal Keating, “End Of Federal Fiscal Year Can Be Hectic,” Government Product News, 8/3/09)

 

TARGETGOV:

“Savvy Government Vendors Are Actually Going Full Speed Ahead Right Now With Targeted, Aggressive Marketing And Sales Campaigns To Position Themselves For The Federal End Of Year Spending Rush.” “The federal government agencies follow a fiscal year beginning October 1 and ending September 30. … While many private sector companies are struggling to ramp up after enduring a long, non-productive summer, savvy government vendors are actually going full speed ahead right now with targeted, aggressive marketing and sales campaigns to position themselves for the federal end of year spending rush. The concept behind this process is that any federal agency that has not spent their budget must find appropriate purchases to spend all the monies allotted to them before September 30 or risk having the next year’s budget reduced. If they do not know who you are and what you have to offer you will never get any of this business.” (Gloria Berthold Larkin, “Federal Fiscal Year End Starting – Strategize Now To Win,” Ezine Articles, 7/1/08)

 

DELTEK:

“Brace Yourselves For Another Exciting Ride: You Can Prepare For A Government EOY Spending ‘Flush.’” (Ray Bjorklund, “The Heat Is On: Prospects For Federal Spending In Q4,” Deltek, 8/12)

 

LATEST EXAMPLES OF SPEND IT OR LOSE IT AT WORK

The Internal Revenue Service:

IRS Division Managers Defend Spending Because Unused Funds Would Have Lapsed: “The [IG] report found IRS officials paid thousands of dollars to pay motivational speakers, who were flown to the conference on the taxpayer dime, sometimes in first class. … The funds came from a $132.7 million pool that division received to hire about 1,300 employees. Division managers told TIGTA that they actually made over 1,500 hires during that fiscal year, the majority of which were front-line employee.  But since the hires had not been on board for the full year, the division had unused funds that would have lapsed at the close of fiscal 2010.” (Peter Schroeder And Bernie Becker, “IG Report Finds Broad, Wasteful Spending On IRS Conferences,” The Hill, 6/5/13)

Rep. Jackie Speier (D-Calif.): How Do We Fix “Spend It Or Lose It? “I think the IRS is just one example of what’s going on in every agency in the country in the federal government when they’ve got money at the end of a fiscal year and they don’t want to lose it, so you use it.  And you find some way to use it.  And in this case it was an Anaheim conference, and somewhere else it’s some other form of training or it’s SWAG or whatever.  So, how do we fix that?  ….” (House Committee On Oversight And Government Reform, “IRS Spending And Culture” C-SPAN3, 6/6/13)

Rep. Jackie Speier (D-Calif.): “You’ve worked at OMB before, so you’ve seen this phenomenon before. It’s something I’m very concerned about; which is, as various federal agencies come to the end of the fiscal year, and they have money left in accounts, they want to spend it down because there’s fear that if they don’t spend it down, they will not be fully funded in the subsequent year. Is that correct?”

Acting IRS Commissioner Danny Werfel: That is a major problem.” (House Committee On Oversight And Government Reform, “IRS Spending And Culture” C-SPAN3, 6/6/13)

 

The Department of Defense:

The Washington Post: “Spend The Money! Spend It All! Spend It Now!” (Al Kamen, “Defense Agency Looking For Ways To Spend,” The Washington Post’s In The Loop Blog, 7/10/13) 

DISA Races To Achieve Their Goal Of Spending 100% Of Available Resources This Fiscal Year. “’Our available funding balances remain large in all appropriations — too large to spend’ just on small supplemental funds often required by existing contracts, the June 27 e-mail said. DISA’s budget is $2 billion. ‘It is critical in our efforts to [spend] 100% of our available resources this fiscal year,’ said the e-mail from budget officer Sannadean Sims and procurement officer Kathleen Miller. ‘It is also imperative that your organization meets its projected spending goal for June. . .’” (Al Kamen, “Defense Agency Looking For Ways To Spend,” The Washington Post’s In The Loop Blog, 7/10/13)

Emails Encouraging Spending Are “Common Practice Among Government Agencies.” “A DISA spokesperson e-mailed to say that these e-mails are ‘common practice among government agencies’ and that many congressional “financial and procurement timelines . . .are designed to ensure that agencies” spend 80 percent of their funds before the last two months of the fiscal year, or by August 1.” (Al Kamen, “Defense Agency Looking For Ways To Spend,” The Washington Post’s In The Loop Blog, 7/10/13)

Former Assistant Secretary Of Defense Lawrence Korb: “’In the Pentagon, you have to use it or lose it by the end of the fiscal year in September,’ says Lawrence Korb, a former assistant secretary of defense now at the Center for American Progress. ‘You see this a lot. ‘We’ve got to fly a lot this month for training, otherwise Congress will take back the money they gave us.’’” (Brad Plumer, “Why Defense Spending Mysteriously Surged 13% Last Quarter — And Boosted GDP,” The Washington Post’s Wonkblog, 10/26/12)

“Today’s Acquisition System Often Penalizes Program Managers Who Don’t Spend Every Last Dime Of Their Budget Before The End Of The Fiscal Year.” ”Today’s acquisition system often penalizes program managers who don’t spend every last dime of their budget before the end of the fiscal year. If you don’t spend all of the money allocated, Congress will likely appropriate less for your program next year. And presiding over a shrinking program is not a recipe for career advancement.” (Michele A. Flournoy, “The Smart-Shopping Way To Cut Defense Spending,” The Wall Street Journal, 7/7/13)

Imagine A World In Which Program Managers Were Evaluated On Whether Or Not They Could Meet Program Milestones While Saving Taxpayer Dollars.” “Imagine a world in which program managers were evaluated on whether or not they could meet program milestones while saving taxpayer dollars. Those who found more cost-effective ways to manage their programs would receive awards and accelerated promotions. This would be one important step toward creating a more cost-conscious Pentagon culture.” (Michèle A. Flournoy, “The Smart-Shopping Way To Cut Defense Spending,” The Wall Street Journal, 7/7/13)

Under Current Budgeting Rules Departments And Agencies Worry That They’ll “Spend Too Little.” “Michael O’Hanlon, a defense analyst at the Brookings Institution, concurs that defense expenditures often rise just before the end of the fiscal year in September. Every year, Congress provides the Pentagon with a certain amount of budget authority. If the military doesn’t spend the full amount, there’s the risk that lawmakers could come back the following year and reduce the defense budget. ‘The Pentagon wants to show that the money’s well spent,’ says O’Hanlon. ‘But they can also fall out of favor with Congress if they spend too little.’” (Brad Plumer, “Why Defense Spending Mysteriously Surged 13% Last Quarter — And Boosted GDP,” The Washington Post’s Wonkblog, 10/26/12)

 

THE WORST KEPT SECRET IN WASHINGTON 

The White House Is Aware Of The Problem Of Spend It Or Lose It And Has Offered Solutions To Limit Abuse:

In 2010 The Obama Administration Proposed “Let[ting] Agencies That Save[d] Money Redirect Half The Savings To Other Initiatives, With The Rest Going Toward Deficit Reduction.” “The White House plans to ask Congress for new authority that could help to discourage unnecessary spending by federal agencies, a move that comes amid rising public concern about the federal deficit. The proposed change would let agencies that save money redirect half the savings to other initiatives, with the rest going toward deficit reduction, an administration official said on Sunday. Under current law, agencies are typically forced to return any unspent part of their budgets, giving them an incentive to use every last dollar even if the money isn’t needed. The new policy would alter those incentives. The dollars aren’t huge; at most, about $25 billion would be subject to redirection. But officials said the goal was partly to change the mentality at the agencies. The proposal is modeled after Pentagon rules that allow the military to move money among programs.” (Laura Meckler, “Giving Government Incentives To Save,” The Wall Street Journal, 6/7/10)

As Senator, President Obama Backed USAspending.gov To Track Government Spending: “When he was a senator, Barack Obama pushed through a law setting up a kind of ‘Google-for-government’ website [USAspending.gov] — a one-stop-shop for tracking the $1 trillion handed out in federal contracts. Obama said the new site would help create a more transparent government. … When the website was launched, Obama made a Senate statement casting it as a victory for open government.” (Peter Nicholas, “Obama-Backed Website On Government Spending Is Found Lacking,” Los Angeles Times, 3/13/10)

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