In a previous post, I described the difference between Then Year dollars, or money that will be spent over a period of years, and Current Year dollars, or money spent at a specific point in time.
Congress appropriates funds in terms of Then Year dollars. Budget appropriations for one year (e.g., Fiscal Year 2019) will authorize transactions occurring over several years (e.g., through 2025). Anticipated inflation must be accounted for in budgets or else the authorized work will be underfunded.
OK, but how does this actually happen? Doesn’t most money go primarily to contractors? Are we accounting for anticipated inflation in the contractor’s expenditures?
Actually, yes. Here’s the chain of events. Appropriation. Obligation. Expenditure.
Appropriation:
As we said, Congress appropriates funds to a Government organization. Depending on the color of money, organizations then have a certain period of time to obligate the funds, which might mean putting it on contract or paying employees.
For example, RDT&E funds must be obligated within two years. Funds appropriated in FY 2019 can be obligated to a contractor on the last day of FY 2020. O&M funds must be obligated in the year of appropriation. They are one-year money, which essentially means you have to return funds that went unobligated before the end of the fiscal year. For procurement, you have three years to obligate. And MILCON, five years.
This brings up an important point: the full funding requirement.
If a future year’s appropriation is required for delivery of an end item, it isn’t fully funded. A production lot of 100 fighter aircraft must all be bought with one-year Procurement money. The only exception to the rule is for aircraft carriers. Because of their scale, a single carrier can be funded from budgets over multiple years.
RDT&E programs do not have the full funding requirement. A developmental end item can be incrementally funded. Examples include the R&D of aircraft test articles or construction of the lead-ship of a new class. Cyber acquisition is almost totally funded through RDT&E.
Obligation:
When funds are obligated to a contract, that does not mean that dollars immediately leave the US Treasury. It means that funds are set aside for the awarded contractor pending delivery (in the case of a fixed-price contract) or the next reimbursement installation (for a cost-plus contract). In the fixed-price case, the systems are inspected and accepted, and not until then will the contractor invoice the Government resulting in a cash payment. In the cost-plus case, updated accounting information in terms of direct and indirect costs actually incurred to the contract will be provided and reimbursed in regular intervals.
Note that progress payments, which used to be reviled by Admiral Rickover, allow the Government to pay contractors for partial delivery on fixed price contracts.
RDT&E appropriations, which are obligated within 2 years, are not subject to full funding. This provides some flexibility to the Government, which can more readily cancel an struggling development. It also doesn’t require massive amounts of investment by the contractor with distant reimbursement.
Expenditures:
This is reflected in the budget outlay profiles, which indicate at what rate expenditures will occur for a Then Year dollar.
Even though an end item may take longer to develop than produce, the RDT&E outlays occur at a faster rate than Procurement outlays because the end item need not be fully funded.
For example, 95% of Air Force RDT&E funds are expended within 3 years. That mark isn’t reached for Air Force aircraft procurement until after 5 years.
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| OSD Comptroller outlay profiles for Procurement and RDT&E appropriations. From the Green Book Chapter 5. |
A final note, expenditure is used in a couple ways. Outlay profiles for aircraft procurement, which is almost totally performed by contractors, represents the expenditures made by the contractor. These are the expenditures that need inflation factored in. However, money may not leave the US Treasury until after the contractor has delivered the end item and already incurred his expenses.
Excellent summary.