Having spent over 40 years working within government systems, I’ve always been amazed at how government finances are “inverse” in nature than that of bottom-line driven organizations. Government finances differ from private, bottom-line-driven organizations in that they prioritize public service, policy implementation, and societal well-being rather than profit generation. Unlike private businesses, which measure success through financial profitability and shareholder value, government entities focus on meeting public needs through tax-funded budgets, regulatory compliance, and long-term fiscal responsibility (Mikesell, 2017).
Governments must also balance multiple stakeholder interests, adhere to legal constraints, and maintain transparency and accountability, often resulting in rigid spending rules like "use-it-or-lose-it" policies that can create inefficiencies (Rubin, 2016). Additionally, government budgeting involves cyclical appropriations, deficit spending capabilities, and funding allocations that may not align with immediate financial returns but serve broader economic stability and public welfare (Wildavsky & Caiden, 2004).
The "use-it-or-lose-it" spending practice in government budgeting refers to the requirement that agencies or officials must spend allocated funds before a deadline, typically at the end of the fiscal year, or within a specific grant period, or risk losing those funds in future budgets or grants. While these practices are designed to prevent hoarding or inefficiency, this rule actually presents several fiduciary dangers, including encouraging wasteful spending, compromised procurement integrity, misalignment with long-term needs and reducing trust in public officials and creating ethical and legal risks.
How this Happens:
First lets consider some of the functional and dysfunctional behaviors when “use-it or lose-it” is up against a deadline. Consider the following scenario: A small government organization has received special funding of $100,000.00 to do “X.” The organization has one year (12 months) to complete “X.” At the beginning of the 11th month of the project year, the organization leaders are told that the organization has only spent $40,000.00, yet the projection is that “X” will be completed just before the deadline, and the organization will have only spent a total of $50,000.00. What are the organization’s options in both functional and dysfunction behaviors for the use of the remainder of the money?
Functional (Ethical and Effective) Behaviors:
Return the Unused Funds: If “X” can be successfully completed with only $50,000, returning the remaining funds demonstrates fiscal responsibility and transparency. This builds credibility and may support future funding requests by proving that your organization prioritizes efficiency over unnecessary spending.
Request a Reallocation or Extension: If possible, request approval to redirect the remaining funds toward related projects that enhance the original objective. An extension request could allow additional research, training, or program expansion to maximize the impact of “X.”
Enhance Project Scope or Quality: If feasible, use the funds to improve the effectiveness of “X,” such as adding extra training, better equipment, or extended outreach efforts. Ensure enhancements align with the project’s original intent and can be justified in audits or evaluations.
Invest in Data Collection and Reporting: Use funds for evaluation measures such as post-project impact assessments, lessons-learned reports, or improved tracking systems. This supports evidence-based policy decisions and strengthens future funding opportunities.
Dysfunctional (Wasteful or Unethical) Behaviors:
Frivolous Spending to Exhaust Funds: Making last-minute purchases that do not contribute meaningfully to “X” (e.g., unnecessary supplies, software, or decorations) just to use up the remaining budget. This results in waste and could damage the organization’s credibility.
Inflating Costs or Expanding Scope Without Justification: Artificially increasing contractor/vendor payments, overstaffing, or buying premium-priced services that do not improve outcomes. Overpricing small add-ons to use up the remaining funds rather than focusing on efficiency.
“Pet Projects” and Unrelated Expenses: Redirecting funds toward unrelated activities under the guise of supporting “X.” Risking audit findings or legal violations if the spending does not align with the designated purpose.
Rushed Procurement and Contracting: Hastily signing contracts without proper due diligence, leading to inflated costs, poor vendor selection, or even fraud. Risking compliance violations due to lack of transparency or competitive bidding.
The use-it or lose-it practice of many governments and grants unsuspectingly encourages officials who usually mean well and are passionate about serving the public because they don’t want to have to return the unused funds that they could possibly use in other ways to serve their organizational purpose or goals. Some of the ways this happens are:
Encouraging Wasteful Spending. Government officials may rush to spend funds on unnecessary or low-priority projects simply to exhaust their budget rather than returning unused money. This can lead to overpriced purchases, frivolous contracts, or inefficient allocations that do not serve the public interest.
Compromised Procurement Integrity. Rushed spending increases the risk of poor contract oversight and fraud, as vendors may exploit urgency by inflating prices or delivering subpar goods and services. Due diligence in vendor selection and competitive bidding may be bypassed, leading to potential conflicts of interest or ethical breaches.
Misalignment with Long-Term Needs. Short-term spending goals may take precedence over long-term strategic planning, leading to investments in temporary fixes rather than sustainable improvements. Agencies may prioritize capital expenditures (such as equipment purchases) over human capital investments (such as training or hiring) to spend money faster.
Budgetary Inflation and Future Waste. If agencies habitually exhaust funds to justify their budget requests, it creates an artificial demand for increased funding in subsequent years. This can lead to systematic budgetary inflation, where departments receive more funds than necessary, further straining public resources.
These behaviors in spending can ultimately create a perception of reduced trust and accountability. This reduced trust and accountability may lead to legal and ethical issues for public officials. The perception that government funds are being spent irresponsibly erodes public confidence in fiscal stewardship. This can trigger political scrutiny, audits, and investigations, potentially leading to legal and reputational consequences for agencies and officials involved. If spending decisions violate fiduciary responsibilities or procurement laws, officials may face mismanagement charges, ethics violations, or even legal action. Failure to ensure fair and transparent spending practices can result in waste, fraud, and abuse investigations.
How do we avoid the “use-it or lose-it” way of thinking...and dysfunctional behavior?
To mitigate the fiduciary risks associated with "use-it-or-lose-it" budgeting, government agencies should advocate for budget carryover flexibility, which allows unspent funds to be allocated for future use rather than forcing last-minute, inefficient expenditures. By permitting agencies to roll over unused funds into the next fiscal year, organizations can focus on long-term financial planning rather than short-term spending to avoid budget reductions (Mikesell, 2017). This approach ensures that funds are utilized based on actual needs rather than arbitrary deadlines, leading to more sustainable and responsible fiscal management. Additionally, agencies can establish reserve funds for high-priority future projects, which supports strategic planning and fiscal discipline (Rubin, 2016). However, such policies require clear guidelines and accountability measures to prevent misuse or excessive accumulation of funds.
Another critical mitigation strategy is the implementation of stricter oversight and accountability measures, such as mandatory cost-benefit analyses and performance evaluations before approving expenditures. By enforcing thorough financial reviews and requiring documented justifications for large purchases, agencies can deter wasteful or unethical spending (Wildavsky & Caiden, 2004). Moreover, strengthening procurement regulations and ensuring competitive bidding can prevent last-minute contracts that are overpriced or misaligned with program goals. Regular audits, performance assessments, and transparent reporting mechanisms help maintain public trust and ensure that government spending aligns with the intended purpose of appropriated funds (Newcomer et al., 2015). Strong oversight also reduces the risk of corruption, favoritism, and inefficiency by ensuring that all expenditures withstand scrutiny and contribute to measurable outcomes.
Lastly, government agencies and grant awardees should shift toward efficiency-based budgeting, where departments are rewarded for fiscal prudence rather than being penalized for underspending. Traditional budgeting models often encourage wasteful end-of-year spending to maintain funding levels in future cycles (Rubin, 2016). Instead, agencies should adopt performance-based budgeting, where funding decisions are made based on demonstrated efficiency, effectiveness, and impact. Incentives such as performance-based bonuses, public recognition, or increased discretionary authority can encourage responsible financial behavior (Mikesell, 2017). Additionally, agencies can implement zero-based budgeting (ZBB), requiring departments to justify their budget from scratch each year rather than relying on past spending levels (Newcomer et al., 2015). These approaches shift the focus from spending targets to outcome-driven financial planning, ensuring that public funds are used in the most effective and accountable manner.
References:
Mikesell, J. L. (2017). Fiscal administration: Analysis and applications for the public sector (10th ed.). Cengage Learning.
Newcomer, K. E., Hatry, H. P., & Wholey, J. S. (2015). Handbook of practical program evaluation (4th ed.). Wiley.
Rubin, I. S. (2016). The politics of public budgeting: Getting and spending, borrowing and balancing (8th ed.). CQ Press.
Wildavsky, A., & Caiden, N. (2004). The new politics of the budgetary process (5th ed.). Pearson.
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