Wednesday, October 10, 2018

Alternatives to “Use It or Lose It”

Has anyone seen an intelligent and practical alternative to “use it or lose it” with budget lines?

Folks who’ve worked with department budgets in large organizations know the drill.  There’s not enough money in the budget for unexpected contingencies, so they wind up squirreling money away in lines for, say, office supplies.  (Ideally, it would go into a “contingency” line, but most of those vanished several cuts ago.) The excess gets tapped as emergencies arise, which they do.

Towards the end of the fiscal year, usually in the Spring, a memo goes out reminding everybody of the purchasing deadline for the fiscal year.  Savvy managers immediately rush to spend down the excess, because they know that any money left over at the end of the year will be cut from next year’s budget, never to be seen again.  The organization winds up with an odd mix of austerity and hoarding, as a central office practice that seems rational in a vacuum -- “if they didn’t spend it, they obviously didn’t need it” -- crashes into local office practices that are rational in a different way: “if they take it back and something bad happens next year, I’m toast.”  

In isolation, each perspective makes sense.  If the central budget folks need to cut somewhere, and they notice some money unspent in certain lines, it’s a much more tempting target than cuts that would involve firing people.  Similarly from a department perspective, if frugality is punished, why be frugal? That becomes especially clear when years of voluntary cuts are followed by years of across-the-board cuts, when the folks who were frugal before are really suffering, and their sneakier colleagues are okay.  They notice. They talk. Secrecy is not an option.

If overall budgets were more flush, use-it-or-lose-it wouldn’t matter so much.  If too much got cut from a given area, that area could just appeal to the central office to have some restored.  But when budgets are tight and declining, there may not be that kind of slack in the system.

The incentives of the overall organization are to avoid wasteful spending, but the incentives of the various subunits are to avoid giving signals that they’re cuttable.  The incentives are contradictory. And as my economist friends never tire of saying, incentives matter.

So we’re looking for practical alternatives to “use it or lose it.”  By “practical,” I mean alternatives that don’t assume an airdrop from the money fairy, and that assume at least some level of self-interest all around.  In the local context, we also have to assume continued enrollment decline, so the overall pot of money gets smaller every year.

I’m kind of struggling with it, but I hope that some of my wise and worldly readers have seen or thought of a better way.

If overall budgets were relatively stable, I could see simply reverting to the original starting point at the beginning of the following year.  If you gave back a few thousand dollars last year, that’s great, but you don’t lose it. But we can’t assume that, because the enrollment decline is large and long enough to make promises like that hard to keep.

We could possibly do some sort of fractional restoration -- you get back half, say -- but that might not be a powerful enough incentive.

Wise and worldly readers, is there a better way?