Budget Issues:

Budgeting for Inflation in Civilian Agencies

AIMD-00-14: Published: Oct 1, 1999. Publicly Released: Oct 1, 1999.

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Paul L. Posner
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GAO reviewed the Department of Defense's (DOD) experiences with budgeting for inflation, focusing on whether it is feasible for civilian agencies to also budget for inflation.

GAO noted that: (1) for a number of reasons, DOD has experienced greater changes in purchasing power due to inflation and has a better ability to track these changes than civilian agencies; (2) more specifically, DOD is able to identify changes in inflation because of three factors not found in most civilian agencies: (a) large dollar amounts structured by function that can be aggregated to a relatively few account titles; (b) a budget planning process that spans multiple years and serves as a baseline for measuring change; and (c) full funding for major weapons systems and other large procurements, which provides appropriations up front for the total estimated cost of a program or project at the time it is undertaken regardless of when the funds will actually be obligated; (3) in contrast, civilian agencies, for a number of reasons, have less potential to experience large changes in purchasing power due to a change in estimated inflation rates, and have a difficult time tracking fluctuations in inflation; (4) one reason is that funding for capital assets in civilian agencies, with few exceptions, is fundamentally different than in DOD; (5) for the most part, civilian procurement is funded on an incremental basis, that is, only for the amount that is expected to be obligated during the first year; (6) thus, no matter the size and length of the procurement, the annual budget process provides a regular opportunity to reassess (and reestimate for such factors as changes in inflation) an agency's funding requirements; (7) in addition, while 40 percent of federal procurement activities are carried out by civilian agencies, they are spread over approximately 700 disparately structured accounts across many agencies and individual contracts; and (8) taking these factors into consideration, requiring civilian agencies to track changes in inflation would not be cost-effective.

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