Opinion / Budget

Bad Idea: The “Use-It-Or-Lose-It” Law for DoD Spending

Year-end spending sprees. Increased violations of federal financial laws. Bad press for the Department of Defense (DoD). All these unfortunate events stem in part from a law requiring that DoD’s operating funds be spent in the year they are appropriated. Congress can significantly improve the effectiveness of defense spending by changing this “use it or lose it” law.

Specifically, funding for operation and maintenance (O&M) and military personnel (MILPERS) accounts must be spent in the year they are appropriated, or, with rare exceptions, they are no longer available to pay bills and instead revert to the Treasury. (To be technically correct, by “spending,” I am referring to obligating the funds by entering into a contract or by other means.) Accordingly, at the end of each year, most defense organizations take extraordinary steps to spend all funds in these appropriations, resulting in sharp year-end spending spikes. A 2010 study by researchers from Harvard and Stanford showed that, in fiscal years from 2004 to 2009, DoD spending in the final week of the fiscal year soared to more than four times the average weekly level during the rest of the year. The same result occurred in most other federal agencies.

Why the year-end rush? Program managers aren’t only worried about returning to the Treasury funds that could help their organizations. Failing to spend all of their appropriations could suggest that not all available funds are needed and so invite future budget cuts. The pithy name for these actions: “use it or lose it.” 

The year-end spending spike does not necessarily mean that funds are wasted. Towards the end of each fiscal year, DoD often buys construction-related goods and services, office equipment, and IT equipment and services: lower priority purchases that do not directly support critical Department activities but are still needed. The 2010 Harvard/Stanford study examined federal IT spending levels along with assessments of project importance made by federal IT professionals and concluded that final-week purchases are of lower priority than those made during the rest of the year.  

This rush to spend remaining funds at the end of the year can have more serious consequences than the sometimes poor contracts written by stressed federal contracting professionals. In some cases, it can lead to violations of federal law. The Anti-Deficiency Act requires that federal spending follow all laws and regulations. Managers of MILPERS accounts seek to spend all their funds in order to keep the maximum number of personnel in the military. But the costs for some military personnel spending — especially for Permanent Change of Station travel performed near the end of a fiscal year — cannot be known with precision until after the end of the year. In some cases, managers intent on keeping personnel on board do not set aside enough to pay these travel bills. The resulting violations of the Anti-Deficiency Act must be reported directly to the President and can damage the managers’ careers. While serving as DoD comptroller and chief financial officer from 2009 to 2014, I noted a number of violations resulting from the use-it-or-lose-it law.

The use-it-or-lose-it measure and the actions taken in response to it also generate bad press — some of it fair and some not so much. The press has dubbed the year-end spending spree as “Christmas in September” for DoD and other federal agencies. One article noted that DoD purchased luxury items during the final month in fiscal year 2018, including $2.3 million for crab and another $2.3 million for lobster tails. Whether these allegations of excessive and intemperate spending are fair or not, they certainly do not help DoD build a reputation as a good steward of taxpayer dollars.

Finally, year-end spending worries federal employees, who, in my experience, take their roles to manage taxpayer funds with integrity very seriously. 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 run more efficiently. As DoD comptroller, I reviewed the recommendations for DoD. Every year, I found that a large number of employees wanted to curb year-end spending. A 2007 survey of DoD financial management and contracting professionals showed the same result.

How to fix this problem? Unlike many DoD reforms, this one is easy. Congress needs to allow DoD and other federal agencies to spend a portion of the O&M and MILPERS funds in the year after they were appropriated. Congress already allows DoD to do this for funding in procurement, research and development, and military construction accounts. Carryover of just 10 percent would help a lot. No added funds would be made available to DoD. But this small change would enable fund managers to decide whether to buy that new office equipment or save the money to spend on critical training in the next year when time is available to carry out additional exercises. The 2010 Harvard/Stanford study noted that in the Department of Justice, which has some carry-over authority, final-week spending spikes were much lower.

Opponents to this carryover plan exist, especially among defense appropriators in Congress who are wary of ceding their oversight authority over the budget. A former staff director for the Senate Appropriations Committee argued that the use-it-or-lose-it law helps ensure transparency and accountability. But carryover funds would be subject to the same laws and regulations —      as well as the same accounting procedures — that guarantee transparency and accountability for funds spent during the year of appropriation. The only difference: carryover funds would be spent on more important items.

While serving as DoD comptroller, I asked the defense appropriations subcommittees to permit some carryover. The House subcommittee agreed to a tiny carryover, but the Senate did not go along. More recently, Mac Thornberry (R-TX), the ranking minority member on the House Armed Services Committee, supported 50 percent carryover. Thornberry is retiring after this session of Congress, but Adam Smith (D-WA) — who will remain as chairman of the Committee — expressed tentative support for carryover. The appropriators, however, are yet to be persuaded.

Carryover is a wonky issue, but it would significantly improve the effectiveness of defense spending. The new administration should formally request carryover authority as part of any defense reform package and deploy senior leaders to help persuade Congress to change the law. There is bipartisan support to resolve this bad idea in national security and make DoD spending more efficient.

CSIS does not take specific policy positions; accordingly, all views expressed above should be understood to be solely those of the author. They similarly do not necessarily reflect the official policy or position of the Department of Defense or the U.S. Government.

Photo Credit: DoD photo by Erin A. Kirk-Cuomo/Released

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The Honorable Robert F. Hale, "Bad Idea: The “Use-It-Or-Lose-It” Law for DoD Spending," Center for Strategic and International Studies, December 15, 2020, last modified December 15, 2020, https://defense360.csis.org/bad-idea-the-use-it-or-lose-it-law-for-dod-spending/.