Wednesday, July 14, 2021

Getting more out of defense dollars

  Imagine you have credit card points expiring at the end of the month but not enough to get the item at the top of your wish list. You’d probably be willing to use them to get something less desirable.

  Why watch, empty-handed, as those points vanish? If you don’t have enough for the cast-iron skillet you wanted, better to settle for a waffle iron than wind up with nothing.

  Defense budgeteers face a similar “use it or lose it” situation every Sept. 30.

  The Pentagon’s operations and maintenance funds—40% of the latest defense budget—expire after 12 months. And the military only gets those full 12 months of spending time if it gets the money on time, at the start of each new fiscal year. Due to congressional dysfunction, that has happened only once in the last 10 years. But no matter how late Congress appropriates the money, any unobligated operations funds turn to dust on the stroke of midnight, Sept. 30.

  Compounding the predicament, your boss expects you to spend every single one of those dollars before they expire. Otherwise, your boss in turn looks bad to their boss.

  The percentage of budget you managed to spend is a flawed metric for measuring performance, yet it’s used by both Congress and the Pentagon. In their eyes, the higher the percentage used, the better.

  Moreover, they apply this measure, not just at the end of the year, but at the end of every quarter. Further, the law requires that no more than 20% of your yearly budget can be spent in the last two months of the fiscal year—the 80/20 rule. Contrast all of this with the private sector, where you are rewarded for coming in under budget.

  In short, the Pentagon is playing with a deck stacked to settle for that waffle iron.

  This incentive structure drives all kinds of bizarre and inefficient behaviors. Studies have shown that procurement decisions have poorer quality nearer the end of the year. Contracting offices are jammed in August and September, leading to waste. Unneeded supplies are bought.

  There are, however, ways Congress can help alleviate this situation: Relax the 80/20 rule; provide some authority to carry over funds; and accelerate processes allowing the Pentagon to repurpose funds.

  In 2018, Congress relaxed the 80/20 rule (to 75/25) to accommodate for a lengthy continuing resolution and an increased budget. Since then, it has reverted to its old ways. Congress should try it again and assess how it changes the execution of funds and the crunch to spend at the end of the fiscal year.

  As for letting the Pentagon carry over some resources into the next fiscal year, that was proposed last year. Other federal agencies have similar authority, why not the Department of Defense? A 5% carryover authority would be a good start, reducing the incentive to allocate all the resources without taking much away from the yearly planning.

  Last but not least, Congress should speed up the process to reprogram funds within the Pentagon. If a financial manager realizes that his program will have some extra resources that would be better used in another part of the Pentagon, there is a process to move that money. However, by the latest calculations, it takes the Navy an average of 96 days—or close to one-fourth of the fiscal year. That’s simply not agile enough for funds available for only 12 months on a good year.

  All in all, these changes would not guarantee that the Pentagon would no longer rush to obligate every dollar at the end of the fiscal year. However, by injecting a dose of flexibility that would empower financial managers to make better trade-offs with defense dollars, they would lead to wiser spending.

  After all, when it comes to national defense, we should not have to settle for a waffle iron when we need a cast-iron skillet.

  About the author: Frederico Bartels is a senior policy analyst for defense budgeting at The Heritage Foundation's Davis Institute.

  This article was published by The Heritage Foundation.

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