Budget battle at start of year triggers wasteful spending later

Stalling budgets is nothing new for Congress.

In fact, avoiding a budget battle and passing an appropriation bill on time is the exception rather than the rule.

A new study carried out at the University of Chicago Booth School of Business and the National Bureau of Economic Research demonstrated that delaying bills at the beginning of the fiscal year results in even greater wasteful spending at the year’s end.

Put simply, a budget battle leads to high spending later on, and on lower quality projects.

The authors, Neale Mahoney and Jeffrey B. Liebman examined evidence that long-storied “use-it-or-lose it” spending sprees are very real – with spending spiraling up to nearly five times higher than other weeks of the year. The researchers explained how budget delays can make matters worse.

Mahoney said “Faced with uncertainty over future spending demands, there’s an incentive to build up a rainy-day fund over the first part of the year, followed by a rush to spend it on lower-quality projects at the end of the year.”

The researchers looked at federal procurement data to determine whether such year-end spending sprees existed, and if so, the waste that resulted from them.

The authors wrote “There’s a clear pattern in the data showing later appropriation dates result in a greater fraction of government spending occurring at the end of the year.”

Mahoney and Liebman believe that theirs is the first economic analysis of wasteful year-end spending in the private or public sector.

They say their study not only demonstrated that the problem really exists, it also offers a potential solution.

Mahoney said “Our model confirmed three things. First, an organization with a fixed period in which it must spend its budget resources¬ – like the federal government – sees a surge of spending at the end of the year. Secondly, such spending is of lower quality, and third, permitting the rollover of spending into subsequent periods leads to higher quality.”

If money is left over at the end of the year it may be lost, because Congress is generally tempted to reduce future funding based on such leftovers.

If there weren’t that pressure to use it or lose it “Most of the inefficiency could be eliminated with relatively modest changes to budget procedures – for example, allowing agencies to roll over unused funds into the next fiscal year for use during a four-month grace period,” Mahoney explained.

Most federal spending is not susceptible to end-of-year spikes. Seventy-eight percent of federal spending is spent on interest on the debt, employee compensation and mandatory programs.

So, the researchers concentrated on goods procurement, which represents 15% of federal spending. They focused on IT (information technology) projects, which along with other office needs tend to have higher-than-average end of fiscal year spikes, and also have flexibility in timing for upgrades and maintenance.

The authors were able to test the hypotheses across a wide range of agencies, since virtually all of them carry out IT projects. With data from www.itdashboard.gov, which tracks 27 of the largest federal departments, they were able to analyze $130 billions’ worth of IT projects.

The investigators determined that during the final week of the fiscal year, expenditures were generally of a “lesser quality”, which they deemed more wasteful.

However, there is an agency – only one – that has the authority to roll over unused money, the Department of Justice. Mahoney and Liebman found that year-end IT spending there declined while project quality increased.