Use-It-or-Lose-It Budget Rules

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...IT projects that were procured in the last week of the fiscal year were between two and six times more likely to have a lower quality rating...

Federal agencies spend an average of 4.9 times more in the last week of their fiscal year than in a typical week during the rest of the year, according to Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement (NBER Working Paper No. 19481), a new study by Jeffrey Liebman and Neale Mahoney. When unspent funds expire at the end of the fiscal year, agencies rush to spend their money even when that results in funding lower quality projects.

Although there is ample anecdotal evidence of wasteful year-end government spending, systematic empirical evidence is scarce. The authors examine a new dataset of 14.6 million federal procurement contracts between 2004 and 2009, and find that on average 8.7 percent of the agencies' spending occurs in the last week of the budget year, nearly five times the normal weekly level of 1.9 percent. The procurement data underlying this study represent nearly a sixth of federal spending, and procurement is the area over which agencies have the most discretion on the timing of outlays.

One of the novel features of this study is an analysis of contracts for 686 major federal information technology (IT) projects which account for 12 percent of all procurement spending. These projects, worth $130 billion, also show a surge in spending during the last week of the fiscal year. The quality of these projects is rated by agency chief information officers. The authors find that IT projects that were procured in the last week of the fiscal year were between two and six times more likely to have a lower quality rating than projects that were funded at other times during the year.

The evidence from the one federal agency with rollover authority, that therefore does not face use-it-or-lose-it incentives, supports the importance of these rules. Since 1992, the Department of Justice has had special authority to roll over up to 4 percent of its annual appropriations for spending on IT and related projects. On non-IT projects, its last-week spending surges just like that of other federal agencies, with 9.3 percent of its annual spending occurring in the last week of the fiscal year. But on IT spending, the surge is modest: spending in the last week is 3.4 percent of annual spending. While the quality of other agencies' last-week IT projects is 1.9 percentage points lower on average than those in the rest of the year, the Justice Department's only last-week IT project received the highest rating of its 15 IT projects. The authors conclude that "the one federal agency that has the ability to roll over unused funding for IT projects does not exhibit a year-end spike in spending or drop-off in quality in this category of spending."

The study also models the consequences of changing budget rules to allow some rollover of excess funds into the next budget year. The authors suggest that this would allow agencies to raise the average quality of the projects they fund. "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," they conclude. The authors estimate that even if Congress were willing only to allow agencies to roll over funds half of the time or for a three-month period, the agencies would still receive 90 percent of the benefit.

--Laurent Belsie