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Chapter 4 Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement with Jeffrey Liebman 4.1 Introduction Many organizations have budgets that expire at year’s end. In the U.S., most budget authority provided to federal government agencies for discretionary spending requires the agencies to obligate funds by the end of the fiscal year or return them to the Trea- sury general fund, and state and municipal agencies typically face similar constraints (???). 1 For these organizations, unspent funding may not only represent a lost opportunity 1 At the end of the federal fiscal year, unobligated balances cease to be available for the purpose of incurring new obligations. They sit in an expired account for 5 years in case adjustments are needed in order to accurately account for the cost of obligations incurred during the fiscal year for which the funds were appropriated. At the end of the 5 years, the funds revert to the Treasury general fund. 153
CHAPTER 4. YEAR-END SPENDING 154 but can also signal a lack of need to budget-setters, decreasing funding in future budget cycles (??). When current spending is explicitly used as the baseline in setting budgets for the following year, this signaling effect is magnified. This “use it or lose it” feature of time-limited budget authority has the potential to result in low value spending—since the opportunity cost to organizations of spending about-to-expire funds is effectively zero. Exacerbating this problem is the incentive to build up a rainy day fund over the front end of the budget cycle. Most organizations are de facto liquidity constrained, facing at the very least a high cost to acquiring mid- cycle budget authority. When future spending demands are uncertain, organizations have an incentive to hoard. Thus, at the end of the budget cycle, organizations often have a buffer-stock of funding which they must rush to spend through. To illustrate the key mechanisms which create the potential for wasteful year-end spending, we build a simple model of spending with fixed budgets and expiring funds. Annual budget cycles are divided into two six-month periods. Spending exhibits decreasing returns within each period and is scaled by a productivity parameter that is unknown in advance. In the face of this uncertainty, organizations engage in pre- cautionary savings in the first period. In the second period, the prospect of expiring funds leads to a rush to spend. As a result, average spending is higher and average quality is lower at the end of the year. There is some suggestive evidence consistent with these predictions for the U.S. federal government. A Department of Defense employee interviewed by ? describes “merchants and contractors camped outside contracting offices on September 30th (the close of the fiscal year) just in case money came through to fund their contracts.” A 1980 report by the Senate Subcommittee on Oversight of Government Management on “Hurry-Up Spending” found that the rush to spend led to poorly defined contracts, limited competition and inflated prices, and the procurement of goods and services for which there was no current need (?). At a congressional hearing in 2006, agency representatives admitted to a “use-it-or-lose-it” mentality and a “rush to obligate” at year’s end (?). The 2007 Federal Acquisition Advisory Panel concluded that “the large volume of procurement execution being effected late in the year is having a negative effect on the contracting process and is a significant motivator for many of
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ESSAYS IN PUBLIC FINANCE AND INDUST
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I certify that I have read this dis
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insurance choice. Among other thing
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Acknowledgements I am deeply thankf
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Contents Preface iv Acknowledgement
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2.5.3 The Value of Plan Choice ....
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List of Tables 1.1 Asset Exemption
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4.9 First Week Contract Spending fo
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4.3 I.T. Contracting by Week ......
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CHAPTER 1. BANKRUPTCY 2 of the dead
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CHAPTER 1. BANKRUPTCY 4 relevant le
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CHAPTER 1. BANKRUPTCY 6 superficial
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CHAPTER 1. BANKRUPTCY 8 After treat
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CHAPTER 1. BANKRUPTCY 12 newly edit
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CHAPTER 1. BANKRUPTCY 15 bound of t
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CHAPTER 1. BANKRUPTCY 20 or coverag
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CHAPTER 1. BANKRUPTCY 22 homestead
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CHAPTER 1. BANKRUPTCY 24 log seizab
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CHAPTER 1. BANKRUPTCY 26 on the bas
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CHAPTER 1. BANKRUPTCY 28 to seizabl
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CHAPTER 1. BANKRUPTCY 31 CARA utili
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CHAPTER 1. BANKRUPTCY 33 Puzzle 3:
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CHAPTER 1. BANKRUPTCY 35 of income
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CHAPTER 1. BANKRUPTCY 40 TaxSim pro
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Payments CHAPTER 1. BANKRUPTCY 42 $
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OOP payments CHAPTER 1. BANKRUPTCY
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ln(seizable sssets) CHAPTER 1. BANK
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50 60 70 80 90 100 Insurance covera
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Pr(WTP > premium) CHAPTER 1. BANKRU
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CHAPTER 1. BANKRUPTCY 52 Table 1.1:
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CHAPTER 2. HEALTH PLAN CHOICE 66 pl
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Page 140 and 141: CHAPTER 3. MEDIGAP 123 have benefit
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Page 147 and 148: CHAPTER 3. MEDIGAP 130 of costs and
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