March 17, 2021

Ditch Use-or-Lose Budgets in the Department of Defense

Insight from the Pitch 2020: A Competition of New Ideas

By Luke Chen

As near-peer adversaries of the United States invest in disruptive military technology ranging from hypersonic missiles to cyberweapons, the Department of Defense (DoD) must respond accordingly with its own investment in research and development. While the 2018 National Defense Strategy is a welcome sign that strategic priorities and the spending that comes along with them are moving in the right direction, problems remain with the execution of this spending.

The “use-it-or-lose-it” budget phenomenon, in which organizations scramble to spend their unused budget at the end of the year to maintain their budget size for the next year, remains problematic for the department. The numbers are staggering—in the last week of fiscal year 2017, the DoD spent $23 billion on contracts, a number four times the average amount of every other week in that year.

Although some of this disproportionate spending is due to contract negotiations naturally falling on the last week of the year, this explanation cannot account for a spike in spending on items unrelated to key priorities. Research by the nonprofit OpenTheBooks revealed that various DoD branches spent tens of thousands of dollars on fidget spinners, arcade machines, and snowboards in the last week of the fiscal year. In addition to being embarrassing for the DoD, such spending demonstrates that portions of the budget are not being used wisely. While these purchases are small compared to the DoD’s total budget, this spending pattern is indicative of a culture that wastes end-of-the-year budgets on non-mission essential items instead of wisely reinvesting in top priorities.

The “use-it-or-lose-it” budget phenomenon, in which organizations scramble to spend their unused budget at the end of the year to maintain their budget size for the next year, remains problematic for the department.

The use-or-lose spending phenomenon is no secret, and Congress has attempted to curb this spending. One proposed measure to discourage use-or-lose spending sprees dictates that 80 percent of the budget must be spent in the first three quarters of the year. Another measure allows an organization’s unused funds to roll over to the next year.

While these measures are appropriate and likely beneficial, they may still not address the root of the problem. To dodge the 80-20 percent rule, an organization could simply boost spending in the last week of the third quarter. As for budget rollovers, the main incentive to spend the entire budget remains. Organizations will still fear receiving a smaller future baseline budget, regardless of the size of their rollover funds. An alternative way to attack the use-or-lose spending phenomenon is to alter the relationship between spending and budgetary decisions. Starting from the level of organizations that are a few thousand people in size, the Department of Defense should use a new accounting metric that provides insight into how prudent its spending is. This metric should take into consideration not simply the total amount spent, but two additional factors: the timing of spending and the category of spending. Some notional categories might include weapons systems, armaments, building construction and maintenance, IT infrastructure, travel funds, office furniture, etc.

In essence, the “meaningful expenditures” metric would be a weighted sum of all spending rolled into a single number. Because spending at certain times and on certain purchases is clearly less relevant to the mission, it should be given less weight in budgetary calculations. The overall calculated metric would then be used to evaluate and compare how efficiently an organization is spending money across its sub-organizations and over time. Most importantly, this number would be used as a factor in considering the next year’s budget.

For example, a unit or organization’s purchase of fidget spinners would count less toward meaningful expenditures—maybe only 80 percent of a $100 purchase would be considered “meaningful.” On the other hand, when spending on categories more critical to national security, like spare aircraft parts, 95 or even 100 percent of that $100 would be considered “meaningful” and credited toward next year’s budget decisions. The timing of the purchase would be weighted in the same way. Spending large sums later in the year, especially in the last few weeks, is a sign of an organization suffering from the use-or-lose spending phenomenon. This spending should be considered less meaningful and thus weighted less.

If this metric were adopted, organizational pushback should be expected, especially for organizations in a highly inertial bureaucracy like the DoD. To mitigate this, budget-makers must emphasize that the policy is not a ban on categories of spending or a cut in budgets, but another tool to measure how responsible an organization’s spending is. Sub-organizations that spend well could even be rewarded with more money in the future.

An alternative way to attack the use-or-lose spending phenomenon is to alter the relationship between spending and budgetary decisions.

The way this metric is weighted also is expected to be hotly contested because sub-organizations may try to fight for a weighting scheme that allows them to spend as freely as possible. To counter this, organizations must begin by reaching a common understanding on which purchases are inconsequential to national security. Purchases like fidget spinners can be used as the baseline and starting point for weighting. Further decisions on weighting can be iteratively rolled out after common agreement.

The implementation of the metric should be incremental and start small. To begin, only a few small organizations should adopt the measure to figure out what works best. Successful adoption would encourage others to follow.

While changing the whole department is a long way off, pushing for a wiser spending culture at the unit level is a good first step toward eventually affecting larger multi-billion dollar expenditures related to DoD contract spending. Ideally, a culture of thrift would heavily scrutinize and document instances of waste in contract spending and reallocate the newfound savings.

With a new culture that encourages prudent spending, it would soon become frowned upon to splurge on non-mission essential items, like Dyson vacuum cleaners, to finish off the budget. Though Dyson vacuums are futuristic and sleek, and they kind of look like weapons, they won’t win tomorrow’s battles.

About the Author

Luke Chen is a second lieutenant in the U.S. Air Force who is currently stationed at Wright Patterson Air Force Base.

Acknowledgments

Thank you to former Senior Fellow and Program Director Susanna Blume who provided useful insight. The views expressed are those of the author and do not reflect the official policy or position of the U.S. Air Force, Department of Defense, or the U.S. government.

About The Pitch

In 2020, the Center for a New American Security (CNAS) launched a premier event to elevate emerging and diverse voices in national security. Selected applicants made their pitch for innovative policy ideas to renew American competitiveness in front of a distinguished panel of judges and live virtual audience at the CNAS National Security Conference on June 24, 2020. Winners included Grace Kim (Best in Show and Military and Defense Heat Winner), Tina Huang (People's Choice Award), Luke Chen (National Security Institutions Heat Winner), Khyle Eastin (Alliances and Multilateralism Heat Winner), and Alan McQuinn (Economics and Technology Heat Winner).

Defense

The Pitch 2020: A Competition of New Ideas

In 2020, the Center for a New American Security (CNAS) launched a new premier event to elevate emerging and diverse voices in national security. Selected applicants made their...

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