Chapter 3
Time
As noted, there are three major elements in determining the availability and proper use of government funds—purpose, time, and amount. The previous chapter discussed purpose. This chapter is about the second element, time.
As we will see during the discussion in this chapter, Congress sets time limits for most appropriations that limit the amount of time the appropriation is available to incur new obligations. After that initial time, the appropriation remains available for adjustments and payments that liquidate the obligations.
109. Why does Congress put time limits on the obligation and expenditure of appropriations?
It is all part of exercising its “Power of the Purse.” Congress controls executive branch spending by limiting the purpose for which funds may be spent, the amount available, and the amount of time that is available to obligate the funds, as well as setting a time limit for liquidation of the obligations. Setting time limits for obligation helps Congress to monitor execution of the appropriations and informs its resource allocation decisions in subsequent appropriations. If funds were available without any time limitations, agencies might be tempted to build up a “slush fund” over time, thereby reducing the agency’s reliance on congressional appropriations.
110. How long are appropriations available for new obligations?
Appropriations fall into three categories, based on the duration of time in which new obligations may be created—annual, multiple-year, and no-year.1
Annual appropriations, also called fiscal year or one-year appropriations, are made for a specific fiscal year and are available for new obligations only during that fiscal year. The federal government’s fiscal year begins October 1 and ends September 30.
All appropriations are annual appropriations unless the appropriations act specifically says otherwise. This fact is implied by the title and enacting clause of all appropriations, which says they are “for the fiscal year ending September 30, (insert calendar year).” Further, most appropriations acts include a general provision that specifically states this proposition as follows:2
No part of any appropriation contained in this Act shall remain available for obligation beyond the current fiscal year unless expressly so provided herein.
Annual appropriations are available to meet only bona fide needs of the fiscal year for which they were enacted. The bona fide needs rule is discussed later in this chapter.3
111. What are multiple-year appropriations?
These are appropriations where the agency is allowed a specific amount of time—in excess of one year—to enter into obligations.4 The nature of some commodities or transactions typically requires this extended time to execute the funds. For example, funds provided for research and development activities are usually two-year funds. Appropriations for major capital investments, such as a new computer system, are normally available for three years. Some appropriations, such as those for shipbuilding and the construction of buildings, are typically available for five years. It is up to the Congress to determine the time limits of availability.
112. What is a no-year appropriation?
A no-year appropriation is available for obligation without any fiscal year limitation. The appropriation must specifically indicate that it is intended to be no-year. Usually Congress uses the phrase “to remain available until expended” to create no-year appropriations; another phrase sometimes used is “without fiscal year limitation,” which also suffices to make it no-year.5
No-year appropriations are favored by spending agencies because of the flexibility they afford. Congress is judicious in their creation because of the loss of congressional control over program levels from year to year.
113. What happens to funds the agency fails to obligate by the end of the appropriation’s available period?
Funds that have not been obligated by the deadline are said to have “expired” and are no longer available for new obligations. Such balances remain available (generally for five additional years), however, for valid adjustments to obligations made during the period of availability.
BONA FIDE NEEDS RULE
114. What is the bona fide needs rule?
First and foremost, it is important to understand that the bona fide needs rule is a “time” test, not a test of “necessity.” The bona fide needs rule helps us to determine the correct fiscal year appropriation to charge for a particular transaction.
The concept goes back over 100 years to a decision that said that an appropriation should not be used to purchase an object that is not needed in the fiscal year in which it is ordered, just to fully obligate the appropriation and keep from losing the funds to expiration.6
Simply stated, the rule says, “Use this year’s money for this year’s requirements. Use next year’s money for next year’s requirements.” Although the concept is simple, applying it to real-life situations is often complex.
Congress has enacted statutory exceptions to the bona fide needs rule, such as the authority to engage in multiyear contracts and the ability to cross fiscal years with one-year severable service contracts. Yet it remains an important consideration when an agency executes its budget,7 and violating it has been the undoing of many agency personnel when doing so causes a violation of the Antideficiency Act.
115. Does the bona fide needs rule apply only to annual appropriations?
No. It applies to multiple-year appropriations as well. Agencies may use multiple-year appropriations for needs arising at any time during the period of availability.8
116. Suppose I have a two-year appropriation, let’s say appropriated for fiscal year 2012. These funds would remain available until September 30, 2013. Do obligations that occur in FY 2013 have to satisfy needs of FY 2012, or can they be for requirements that surface in FY 2013?
FY 2012 two-year appropriations are available for requirements of either FY 2012 or FY 2013. GAO has specifically stated that “[t]here is no requirement that 2-year funds be used only for the needs of the first year of their availability.”9
117. Does the bona fide needs rule apply to no-year appropriations?
No. With no prescribed period of availability, there is no fixed period during which the bona fide need must arise.10
118. Doesn’t the bona fide needs rule make it virtually impossible to obligate expiring funds near the end of year?
Although transactions processed near the end of September are subject to additional scrutiny, and the risk of violating the bona fide needs rule is greater at that time, GAO has stated:
An appropriation is just as much available to supply the needs of the [last day] of a particular year as any other day or time in the year.11
While end-of-the-year transactions raise the specter of the agency’s “dumping” or “parking” its funds, the timing of the obligations does not, by itself, establish anything improper. Seasonal or cyclical requirements might dictate spending late in the fiscal year. Also, funds might have been reserved for contingencies or emergencies, thus delaying obligations of needed goods or services.
Bona Fide Needs Rule for Materials
119. How is the bona fide needs rule applied when buying equipment or materials?
Assume you have a new workload that will begin operation December 1. You have all the required personnel and equipment to accomplish the workload except 25 desktop computers needed for data input personnel. It is now September 1, and you have enough budget authority to cover the cost of the computers. The bona fide needs rule precludes you from using your current-year annual funds to purchase computers that are not needed until December 1. Desktop computers are commercially available, and you can wait until October to obligate and still receive the computers in time for your December 1 startup.
On the other hand, assume the new workload begins October 2 and October 1 is a Sunday. Now you have a bona fide need in the current fiscal year to order the computers so you have them when you need them. Thus, procurement lead time for commercial items and for the procurement, production, and fabrication of materials not readily available shifts the bona fide need back into the current year. Thus, one could restate the bona fide needs rule to read: “When do I need to obligate the funds to get the item when I need it?” It becomes a matter of when the need for the obligation exists rather than when the need for the item exists.
120. What if you properly obligate funds for an item, and the contractor runs into some unforeseen delays that push delivery into the next fiscal year?
So long as the bona fide need was met when the obligation was incurred, subsequent delays do not invalidate the obligation.12
121. Stock levels in our warehouse are dangerously low because we have been using up the stock without replacement due to lack of funding. If funding becomes available late in the fiscal year, may our stock levels be replenished?
Yes. Even though the replacement stock won’t be used until a subsequent fiscal year, the need exists to have sufficient stock levels in the expiring year. So you may contract in the expiring year to replenish stock levels. Such authority is not unlimited, however. GAO advises that stock levels should not exceed one year’s requirements.13
Bona Fide Needs Rule for Services
122. How is the bona fide needs rule applied to the acquisition of services?
Because of legislation passed by Congress in the 1990s, service contracts may cross fiscal years, so long as the period of performance begins in the fiscal year funding the contract. There is, however, a limitation of 12 months on severable service contracts.14
A severable service is one where after some level of work has been done by the contractor, the government has received the value of the work done to that point. The contract could thus be “severed” at any point, and the government would not have lost the value of the work performed to date. Examples of severable services are grass cutting, snow plowing, window washing, and equipment maintenance. The contract could be terminated at any point, and the government would have received the benefit of having its grass cut, snow plowed, windows washed, and equipment repaired. The important aspect of severable service contracts is that they may not exceed12 months.
Non-severable services are those where a deliverable is normally required at the end of the contract. Take, for example, a contract for a study with a final report. The government receives no value until the report is delivered. The rule for non-severable services is the same as that for severable—use the funds available when the contract is awarded for the entire effort, so long as the period of performance begins within that same fiscal year—but without the 12-month contract length restriction. If the study will take two years to complete, so be it.
123. Is training considered severable or non-severable?
Training is considered non-severable.15 It may therefore cross fiscal years, and it is not subject to the 12-month limitation on the length of the course.
GAO has also allowed annual funds to be used for training that does not begin until the next fiscal year so long as (1) the agency can clearly demonstrate a need for the training in the current fiscal year; (2) the agency does not have control over the scheduling of the training; and (3) the time between contract award and the beginning of the training is not excessive.16
Here’s an example: Let’s say it is September 1 and you need a particular training course. You need the course as soon as possible because it’s been deferred due to a lack of funding. (You’d like it to start tomorrow.) Funding becomes available, but the vendor can’t schedule the training until November 15. You have satisfied all three criteria: You can demonstrate a need in the current fiscal year; you couldn’t control the scheduling; and the delay between the contract and performance is not excessive. (Ninety days is probably a good rule of thumb for “excessive,” although the term has not been clearly defined.)
REPLACEMENT CONTRACTS
124. Suppose we award a service contract and the contractor begins work but then defaults on the contract after the new fiscal year has arrived. We still need the work finished. How do we fund the rest of the work?
When a contract is terminated for default, the original funds remain available to award a replacement contract to another contractor to complete the unfinished work.17 This is true even if the funds have expired. Although this seems counter to the rules on the use of expired funds, think of it not as a new obligation but as a replacement obligation to cover the replacement contract.
There are restrictions on the use of replacement contracts.18
1. A bona fide need must have existed at the time of the original contract and must continue to exist up to the award of the replacement contract.
2. The replacement contract must not exceed the scope of the original contract. Changes to quantity, quality, and time are all considered out of scope and would require a new obligation citing funds available at the time the new contract is awarded.
3. The replacement contract must be awarded within a reasonable time after termination of the original contract. Excessive delays in terminating the original contract or awarding the replacement contract make it difficult to argue that a bona fide need continues to exist.
125. What if the replacement contract increases the total cost of the contract? Which year’s funds are used for the cost increase?
So long as you satisfy the criteria for a replacement contract (bona fide need, no change in scope, no delay in award), increases in price are funded from the fiscal year of the original contract. This is nothing more than an upward adjustment of the replacement obligation that is recorded for the replacement contract.
126. What if there are not enough funds available in the expired account to cover the increased cost of the replacement contract?
Though it is unlikely there would be insufficient funds in the expired account, if that is the case, then don’t award a replacement contract. Award a new contract, with a new obligation citing current funds for the entire amount. Replacement contracts are not mandatory; they are used at the discretion of the agency.19
CONTRACT MODIFICATIONS
127. When a contract is modified or amended, which fiscal year is charged?
Contracts may be modified or amended for a number of reasons, and the change may be initiated by either the government or the contractor. An amendment that remains within the general scope of the contract and does not increase the price remains an obligation of the year in which the contract was executed. However, if the change causes an increase in price, then an analysis from the bona fide needs perspective must be performed to determine which fiscal year to charge with the modification.20
If the amendment is a change in scope, that is, if it exceeds the general scope of the original contract by increasing quantities, changing timelines for completion, or changing quality requirements, the modification is considered a new obligation and is charged to funds current at the time the modification is made.21
When the modification remains within the scope of the original contract but results in a price increase, additional analysis is required. Contracts normally contain a “Changes” clause, which provides for additional government liability due to changes in specifications, government-caused delays, changed conditions, etc. When a contract modification causes a price increase, one must determine whether the government’s liability is enforceable under a provision of the original contract, such as under the “Changes” clause. If so, it is considered an “antecedent liability” and the additional costs are charged to the appropriation that was current when the original contract was executed. Because the liability existed at the time the original contract was executed, the price adjustment that takes place at a later date is considered a bona fide need of the same year in which the original contract was awarded.22
128. Is congressional action required to restore the expired funds to the agency so they can be used for such upward adjustments?
No. Balances in expired accounts remain available to the agency (generally for five years) without congressional action.
129. Are there times when the price goes up through modification and there is no change in scope, that the additional costs are not charged to the original appropriation?
If the modification is not made pursuant to a provision in the original contract, it is not an antecedent liability and funds current at the time of modification must be obligated.23
In addition, under cost reimbursable contracts, discretionary cost increases that exceed the funding ceiling set by the contract are charged to funds currently available at the time the discretionary increase is granted by the contracting officer.24
GRANTS AND COOPERATIVE AGREEMENTS
130. Does the bona fide needs rule apply to grants and cooperative agreements?
It applies, but the bona fide needs analysis is very different from the analysis of contracts. The purpose of a contract is to acquire goods or services. The purpose of a grant is to provide financial assistance. Thus, the government’s “need” when making grants is to make a grant to satisfy congressional intent, and the timing of the grantee’s use of the funds has no bearing on assessing the agency’s needs.25
So the bona fide needs analysis for grants is quite straightforward: Was the grant made during the period of availability of the appropriation used, and does it further the authorized purpose of the program legislation? If the answer is “yes,” the bona fide needs test is satisfied.
ADVANCE PAYMENTS
131. Are advance payments authorized?
Advance payments are prohibited by statute, but there are number of notable exceptions. Advance payment means making a payment before the work is done or goods are delivered. The purpose of the advance payment prohibition is to protect the government against nonperformance by the contractor or other supplier. Advance payments are permissible in many situations. So we have a statutory prohibition with a series of statutory and non-statutory exceptions.26
It is important to distinguish between the advance payment prohibition (31 U.S.C. 3324), which prohibits paying before goods and services are provided, and the Antideficiency Act (31 U.S.C. 1341), which prohibits payment in advance of an appropriation. It is a common mistake to confuse the two. A violation of the advance payment law might earn you an audit finding. As we will see in the next chapter, a violation of the Antideficiency Act can earn you the loss of employment or even some jail time.
132. What are some of the exceptions to the advance payment prohibition?
Major exceptions have included the following:27
Salary advances to employees
Travel and transportation advances to employees
Tuition payments under the Government Employees Training Act
Advance funding to grantees
Gift certificates to be redeemed later at full value
Contract financing payments authorized under the Federal Acquisition Regulation
Agency head determination to be in the “public interest,” with adequate security provided by the contractor
Presidential determination to facilitate national defense
“Fast Pay” contracts under the Federal Acquisition Regulation
Publications—defined as “any publication printed, microfilmed, photocopied, or magnetically or otherwise recorded for auditory or visual usage”
Other federal agencies
State and local governments furnishing noncommercial services available only from the state or local government (e.g., sewer service charges, lease of state lands).
ACCOUNT CLOSING AND CANCELLATION OF FUNDS
133. The period of availability (established by the appropriations act) and the expired period when new obligations are not allowed were mentioned previously. What comes after the expired period?
The so-called Accounts Closing Law was passed in 1990. It defines what actions are allowable during the expired period, the length of the expired period, and what happens after the expired period.
31 U.S.C. 1553(a) states:
After the end of the period of availability for obligation of a fixed appropriation account and before the closing of that account under section 1552(a) of this title, the account shall retain its fiscal-year identity and remain available for recording, adjusting, and liquidating obligations properly chargeable to that account.28
31 U.S.C. 1552(a) states:
On September 30th of the 5th year after the period of availability for obligation of a fixed appropriation account ends, the account shall be closed and any remaining balance (whether obligated or unobligated) in the account shall be canceled and thereafter shall not be available for obligation or expenditure for any purpose.29
Let’s sort through what this means. First, the term fixed appropriation account means an annual or multiple-year appropriation. We’ll address no-year appropriations later.
Using an FY 2012 Salaries and Expenses annual appropriation as an example, we know that the funds are available for new obligations from October 1, 2011, until September 30, 2012. During this period the agency may make new obligations, liquidate those obligations, and make upward or downward adjustments to the obligations.
The funds expire September 30, 2012, and remain expired for five years. (This is the norm. Some agencies have other periods specified by statute; for example, the Environmental Protection Agency has seven years). During this expired period the agency may liquidate valid FY 2012 obligations that were properly incurred during FY 2012 and make upward and downward adjustments to the obligations. But it may make no new obligations.
Five years later, on September 30, 2017, the account is closed and remaining funds are canceled. They are no longer available for any purpose, including obligation, adjustment, or liquidation.
134. What if there are still valid invoices to be paid against the closed appropriation?
The agency would make payment from any current appropriation account that is available for the same purpose. However, the cumulative total of old obligations payable from current appropriations is limited to the lesser of 1 percent of the current appropriations or the remaining balance (whether obligated or unobligated) canceled when the appropriation account is closed.30 Thus, agencies must maintain the visibility of the appropriation balances even after they have canceled, to ensure payments do not exceed the original appropriation.
135. Let me see if I understand this correctly. Assume today is April 1, 2012. I have a valid unpaid invoice citing an FY 2004 appropriation that was available for three years. Those funds would have expired on September 30, 2006, and canceled on September 30, 2011, some six months ago. To pay the bill, I would have to use FY 2012 funds of the same type. Is that correct?
Almost. The original funds have canceled. However, you are allowed to use any currently available funds of the same type. They need not be current year funds. Thus, you could use any available balances from FY 2010, FY 2011, or FY 2012 because they are all still available.
136. Isn’t the agency being hit twice for the same obligation? It had to reserve the funds in the original year, which are now lost, and then pay for it out of current funds.
That is exactly right. From a program standpoint the agency has paid twice, though only one actual payment went out the door. Agencies need to carefully review any unpaid invoices they hold to ensure such invoices are paid before the funds cancel. Paying offices should routinely make such reviews each summer and take all possible actions to pay the invoices that cite canceling funds before September 30.
137. Suppose an error is detected in the records of a closed account. Are we required to leave the error as is?
Agencies are required to keep accurate records. If it is determined that account balances in a closed account are wrong due to reporting or clerical errors, the agency may make corrections to its books. Such adjustments affect only the agency’s records and have no effect on the availability or use of obligated or unobligated balances formerly contained in those appropriation accounts.31
138. Are there any exceptions to the accounts closing law?
One major exception to the accounts closing law, involving contractor protests, is found at 31 U.S.C. 1558(a). Such protests may be against the solicitation, proposed award, or award of a contract. The appropriation that would have funded the contract remains available for obligation for 100 days after a final ruling is made on the protest. This provision applies to protests filed with GAO, the contracting agency, a court, or the General Services Board of Contract Appeals.32
Another exception applies to litigation in the courts that is not part of a protest. The equity powers of the federal courts may result in decisions that delay the expiration or canceling of budget authority that had not yet terminated at the time the suit was filed. This is based on the principle that the courts are allowed to take actions to preserve the status quo of a dispute and to protect their ability to decide a case properly before them. The courts simply suspend the expiration or closing of the account by extending the term of the existing budget authority.33
139. Does sending my annual funds on an interagency order to another agency’s working capital fund (which is no-year) extend the life of my appropriation?
No. The customer’s funds retain their fiscal year identity until the performing agency actually does the work and earns the revenue. Agencies have even tried sending advance payments to other agencies in an attempt to keep their funds from expiring. It just doesn’t work. These attempts to “park” money with another agency will be discussed in more detail in Chapter 6, Intragovernmental Transactions.
140. The accounts closing law addresses fixed-term (annual and multiple-year) appropriations. Does it also mention no-year appropriations?
Yes. 31 USC 1555 states that a no-year account is to be closed if (1) the agency head or the President determines that the purposes for which the appropriation was made have been fulfilled and (2) no disbursement has been made against the appropriation for two consecutive years. Both conditions must be fulfilled to close such an account. The purpose of this United States Code section is to allow inactive appropriations to be closed and get them off the agency’s books.34 Thus, no-year appropriations do not expire. They go directly from available to canceled.
BARRING ACT
141. Contractors are sometimes slow to invoice for the work they do. If they wait too long to invoice, couldn’t that put the agency into a position where the funds have already canceled and current funds would be required to make the payment?
That is certainly possible. Although why a contractor would want to delay submitting an invoice is unclear, it does happen from time to time, probably due to administrative error. If a valid invoice is submitted for work properly obligated, the government is required to make the payment, even if that means using current funds.
There is one exception, however: 31 U.S.C. 3702(b)(1), usually referred to as the Barring Act, prohibits the payment of such a claim if it has not been received within six years of the time the claim accrues. The claim would accrue when the contractor has done the work or delivered the item contracted for. The purpose of the Barring Act is to limit the time exposure of claims against the government, and it allows the government to dispose of its records after a reasonable amount of time. Without a time limit for the submission of claims, the government would have to keep all of its records forever.
RATIFICATIONS
142. On occasion someone who is not authorized to obligate the government does it anyway. Such an unauthorized commitment may be “ratified” by a contracting officer at a later date. If the ratification occurs in a fiscal year subsequent to the original unauthorized transaction and contractor performance, which fiscal year is charged with the obligation?
When an agency examines the facts of a situation and determines that ratification is appropriate, the act of ratification turns what was an unauthorized transaction into an authorized, legal obligation. Such ratified amounts are chargeable to the fiscal year in which the need arose and the services were performed.
NOTES
1. U.S. Government Accountability Office, Principles of Federal Appropriations Law, Volume I (GAO-04-261SP), Chap. 5, 5-4.
2. Ibid., 5-5.
3. Ibid., 5-6.
4. Ibid., 5-7.
5. Ibid.
6. Ibid., 5-11.
7. Ibid., 5-12.
8. Ibid., 5-14.
9. Ibid., 5-15.
10. Ibid.
11. Ibid., 5-17.
12. Ibid., 5-23.
13. Ibid.
14. Ibid., 5-25.
15. Ibid., 5-27.
16. Ibid.
17. Ibid., 5-29.
18. Ibid.
19. Ibid., 5-33.
20. Ibid.
21. Ibid.
22. Ibid., 5-35.
23. Ibid., 5-36.
24. Ibid.
25. Ibid., 5-48.
26. Ibid., 5-50.
27. Ibid., 5-51–5-66.
28. Ibid., 5-71.
29. Ibid.
30. Ibid., 5-74.
31. Ibid., 5-75.
32. Ibid., 5-89.
33. Ibid., 5-83.
34. Ibid., 5-77.