war on the rocks

Reforming the ‘Use It or Lose It’ Problem in Defense Acquisition

January 19, 2018

Last year, a congressional hearing addressed “the military hovering aircrafts at the end of runways just to burn off fuel and soldiers sent to the shooting range sometimes for an entire day just to expend ammunition.” What is the root cause of such seemingly wasteful practices? The answer is related to the feature of U.S. fiscal law commonly known as “use it or lose it.”

Each year, the Department of Defense spends hundreds of billions of dollars acquiring goods and services from the private sector. This spending does not occur uniformly across the year. In the final weeks of each fiscal year, a “spending spree” occurs during which funds are urgently spent before they expire on Oct. 1. These annual sprees have complex proximate causes, but they are ultimately rooted in the decades-long breakdown of budgetary trust between different bodies of government. In short, the Pentagon’s budget is broken because no one in government trusts anyone else to spend money in a smart way.

Understanding ‘Use It or Lose It’: Core Issues

The Section 809 Panel is a congressionally established panel that is examining ways to streamline the defense acquisition system. The panel’s research has identified several factors that contribute to end-year spending surges. These factors include process delays at the working level and policies and regulations at the higher levels. The root causes of these spending sprees, however, are the stretched-out chains of budgetary control and the provisions of appropriations law that require money to be spent by the end of specified fiscal years.

To understand the “use it or lose it” problem and its causes, it is first necessary to understand the Department of Defense’s year-end contract spending. The department is funded by several categories of appropriation, three of the main ones being Operation and Maintenance (O&M); Procurement; and Research, Development, Test and Evaluation (RDT&E). Operation and Maintenance appropriations are generally available for a single year, unlike the other appropriations, which are available for several years. It is in the O&M category that end-year surges are concentrated.

Some product and service categories experience higher surges than others. Contract spending is particularly concentrated at the end of the year for IT, construction, and facilities maintenance. IT service contracts must in many cases complete several slow-moving approval procedures, which may delay contract awards until the end of the year. Regular inventory turnover, high per-unit prices, and non-perishability in storage may also make IT hardware an attractive commodity for an acquisition professional seeking to expend funds in the short term.

At the installation level, there is generally a long waitlist for service contracts to build and maintain facilities. Funding is often held by senior commands until the end of the fiscal year, then released in large quantities once commanders are certain it will no longer be needed to meet unforeseen emergencies. With this large year-end release of funds, contracting officers set about contracting for as many competing priorities as they can afford.

The defense acquisition system has many layers of budget control stacked on top of one another. In between Congress appropriating money and a contracting officer spending that money, there may be many layers of authority, each layer having its own approval process to flow funding down to the next level. If it takes a month on average for money to move through each of 10 layers, and the law forbids the money from being rolled over into the next year, most money available for a single year will invariably be spent towards the end of the year.

Part of the reason for this state of affairs is simply that the department is enormous. As an employer of millions of people, tens of thousands of whom work in acquisition, the Department of Defense by necessity has to flow money through several tiers of control before it reaches the person who will ultimately spend it on goods and services. Above the secretary of defense are additional tiers of control over appropriated funds, going up through the Office of Management and Budget to Congress and ultimately to the congressional appropriations committees.

We acknowledge that the department’s size makes multiple layers of budgetary control unavoidable. The degree of control exercised at each tier, however, is excessive. Each tier reflects an implicit assumption that the individuals at the bottom need an added layer of oversight and cannot be trusted to make decisions unilaterally.

There are good reasons for appropriations law to require money to be spent by the end of the year. For one thing, the requirements provide an incentive against procrastination. They also create a framework in which a standardized oversight process can occur by default each year. These legal requirements also prevent the accumulation of large unspent balances, which have been characterized in the past as “slush funds.”

So Why Is It a Problem?

Surge spending, however, can produce several negative effects. The government’s negotiating leverage and pricing power may be reduced when a potential vendor knows money will be spent by a certain date. Returns on investment may be lower when acquisition professionals focus more on the timing of expenditure and less on what they are getting for their money. And of course, in worst-case scenarios, taxpayer money may fund purchases that are simply unnecessary.

The requirement that money be spent within a year also creates an incentive to withhold funds to address potential unanticipated emergencies. If a command wishes to be prepared for a sudden ship accident, hurricane, or other disaster in the fourth quarter, it is prudent for that command to retain a certain percentage of funds until the end of the year. Hypothetically, if 10 overlapping layers of authority each opted to retain 2 percent of funding as a contingency reserve until September, the lowest-level layer would receive about 20 percent of its annual funding in that month.

Certain provisions in appropriations law may exacerbate these issues. Legal categorization of software modifications as “investments” or non-“investments” has indirectly prevented the upgrade of several IT systems. For military construction, inflexibility across appropriation accounts contributes to high demand for improvements to military facilities each year. This high demand leads to cautious allocation of limited resources — in other words, delays in spending until the end of the year. The Section 809 Panel’s forthcoming report to the House and Senate Armed Services Committees, will include specific case studies on IT programs in which funding rules have contributed to development problems.

Within the acquisition workforce, the high year-end workload contributes to low morale and poor retention. In the last few weeks of September, as the end of the fiscal year approaches, employees may be expected to work overtime including weekends. Military contracting offices can become temporary child care centers over the weekend, as employees bring in young children due to on-base daycares being closed.

The biggest problem with year-end spending, however, is what it indicates rather than what it causes. The surges point to the troubling possibility that for some parts of the Defense Department’s acquisition system, the timing of a purchase matters more than its utility to the warfighter or its return on taxpayer investment.

Short-Term Fixes

Congress has historically addressed year-end spending surges via measures such as the “80/20 rule,” which has been incorporated into defense appropriations bills for several decades. Under the 80/20 rule, the Department of Defense must spend at least 80 percent of single-year funding in the first 10 months of the fiscal year. However, at least one former Comptroller General of the United States stated that the 80/20 rule and similar measures are “difficult to administer and do not address the real problem.” Top-down budget controls, imposed on a monthly basis, lock the department even more rigidly into a pattern of emphasizing timing over return on investment.

In the short term, Congress could adopt several approaches to mitigate the perverse budget incentives that affect defense acquisition. Carryover (or “rollover”) authorities could permit portions of annual appropriations to be used in the following year or years. Economists from the International Monetary Fund, the Mercatus Institute at George Mason University, and Harvard University and the University of Chicago have written studies lending support to the idea of carryover authority.

Biennial appropriations bills, enacted during non-election years, could help reduce dependence on continuing resolutions and depoliticize the appropriations process. In recent decades, biennial appropriations proposals have periodically gained support from members of Congress of both parties.

Increased use of working capital funds could increase the adaptability of the acquisition system, helping buy what is needed now rather than exactly what was budgeted for previous years. A recent example of such an approach is the Modernizing Government Technology Act, enacted as part of the FY2018 National Defense Authorization Act. New appropriation categories, such as the House Appropriations Committee’s FY2018 “National Defense Restoration Fund” accounts, may also reduce pressure in the short term by providing increased flexibility.

Longer-Term Solutions

In the view of the Section 809 Panel, however, increased trust between the legislature and the defense acquisition community is the best long-term solution to the “use it or lose it” incentive. Instead of mandating that the department spend specific sums of money within specific timeframes, Congress should use its oversight powers to ensure that acquisition authority — including access to money — is devolved to the working levels of the department and the military. As a society, we trust an Army colonel in the field to make split-second decisions on matters of life and death. When we assign that same colonel to manage an acquisition program, however, we give him or her very little control over how program money may be spent.

On the executive branch side of the equation, the Department of Defense must show a willingness to engage in honest, timely communication with legislators and the public about the costs and benefits of military investments. Without such honesty, legislators will feel compelled to correct problems through micromanagement.

If the United States wishes to unlock the innovative potential of its military professionals, it must trust and empower them to deliver solutions to the warfighter using their own judgment of how best to spend money, rather than a complicated set of fiscal law requirements and financial regulations.

Over the next year, the 809 Panel will issue recommendations for creating an acquisition and budgetary process that reinforces trust and accountability — a way to streamline a bureaucracy whose complexity can often be traced back to a fundamental lack of trust. These recommendations will be issued in three phases over the next year.

The “use it or lose it” problem is complicated and there may be no perfect solution. But these ideas can serve as a starting point for lawmakers to determine the best approach. Addressing the root causes of perverse budgetary incentives will require strong action from Congress. Such action must be thought out strategically, it must accept the inevitability of risks, and it must think boldly.

 

Dr. Allan Burman is a Commissioner at the Section 809 Panel and the former Administrator for Federal Procurement Policy for Presidents Reagan, Bush, and Clinton and currently the president at Jefferson Solutions and Chairman of the Procurement Round Table. He holds a PhD in Education and Economics from George Washington University and was a Fulbright Scholar at the Institute of Political Studies. Gabriel Nelson is a staff researcher for the Section 809 Panel and previously worked for the Congressional Research Service.

Image: U.S. Air Force/Paul Holcomb