Why DoD’s Year-End Spending Needs to Change

As the end of the fiscal year approaches at the Department of Defense (DoD), teams at most defense organizations are working hard to spend all the funds in the Pentagon’s day-to-day operating budgets, which are available for use only during the ourrent fiscal year. To do otherwise, they fear, would suggest that not all available funds are needed and so invite future budget cuts. The pithy rationale for these actions: “Use it or lose it.”

My own experience as the DoD comptroller, along with university research, suggest that year-end spending pays for lower-quality and lower-priority projects.  We need to find practical ways to apply the brakes to year-end spending so that DoD funds only its highest-priority needs.

DoD spending spikes sharply during the final week of the fiscal year.  (To be technically correct, by “spending” I am referring to entering into contracts or otherwise obligating funds.) In a 2010 report researchers from Harvard and Stanford Universities showed that, based on data for the years 2004 to 2009, final-week spending at DoD was more than four times higher than the average weekly spending during the rest of the year.  Similar trends occurred at other federal agencies.

The spike doesn’t necessarily mean that year-end funds are wasted.  Many year-end funds buy construction-related goods and services, office equipment, and IT equipment and services. These items are needed, but they do not directly support the most critical DoD mission needs, such as training and military readiness.  Moreover, research on federal IT spending suggests that final-week purchases are of lower quality than those made during the rest of the year, and I suspect the same finding applies to other categories of spending.  The surge in spending may also lead overworked contracting officers to push out lower-quality contracts.

Making operating funds available only for one year works against good resource allocation in another way. Resource managers must estimate forthcoming bills for services in the final month of the fiscal year (for example, final bills for electricity and water) and obligate the funds before year’s end. They have to estimate on the high side because, if their estimate is low, they risk violating the federal anti-deficiency laws. High estimates for routine services leave fewer funds available for mission-critical activities such as training and readiness.

Year-end spending worries federal employees, and it should worry taxpayers too.  For several years the Obama Administration conducted a SAVE campaign (Securing Americans’ Value and Efficiency), which asked federal employees to suggest ways to make government more efficient. In my role as DoD comptroller, I reviewed suggestions related to DoD. I was struck by how many employees urged that year-end spending be reduced. A 2007 survey of DoD financial management and contracting professionals showed the same result. Almost all respondents expressed concerns about year-end spending.

The law already has some provisions designed to avoid year-end spending spikes.  For example, only 20 percent of major operating budgets are supposed to be spent during the final two months of the fiscal year. But this provision still leaves room for final-week spikes.

Congress could help by passing DoD appropriations on time – that is, by October 1.  Late appropriations push even more spending toward the end of the year and may exacerbate year-end spending. Unfortunately, Congress has not provided DoD with an on-time appropriation during any of the Obama years, and it will apparently not do so again this year.

But Congress can help by permitting DoD to carry over a small percentage of its operating budgets (perhaps 5 percent) into the next fiscal year. This flexibility would not increase the total funds available to DoD. However, for funds eligible for carry over, managers could decide whether to buy that office furniture for the headquarters at the end of the year or wait and let other needs compete for the funds next year. There is some evidence that carry-over authority helps. Our Harvard and Stanford researchers found that, at one federal agency that had such authority (the Department of Justice), final-week spending spikes were much smaller.

While serving as DoD’s comptroller, I tried to persuade Congress to permit the Department to carry over small amounts of its operating funding into the next fiscal year.  I made a few converts, but not enough to make it happen.

The next administration should try again to secure carry-over authority.

Robert F. Hale is a fellow at Booz Allen Hamilton. He was comptroller and chief financial officer at the Defense Department from 2009 until 2014.