Funding Sources and Uses - US Government

The federal budget. What comes to mind when you hear those words? Maybe that it's massive, over $6 trillion annually, and increasingly in the red. Government spending, a.k.a. funding uses, is exceeding government income, a.k.a. funding sources, by nearly $1.5 trillion each year. That's the view from the top down. But let's flip the script. What's the view from an agency's perspective? Where do they get their money, and how do they spend it? First, let's talk about the funding sources. Most of the funding indeed comes from the federal budget, and Congress holds the purse strings. Congressional funding is commonly grouped into three buckets. For one, the mandatory spending funds, which are locked in by existing, longer-standing laws. This is how Medicare and Social Security are funded, for example. Mandatory spending accounts for roughly 65% of the federal budget. The next bucket is also locked in spending. Interest payments on the national debt, which accounts for another 10%. While this is indeed a pre-existing commitment, paying this interest isn't written into longer-standing law, and it isn't classically understood as mandatory spending. The remaining 25% is discretionary spending, which Congress budgets for each year through the annual appropriations process, which we'll cover in the next chapter. This is the process by which most departments and agencies get their funding. The result of the appropriations cycle is effectively a packet of different appropriations. Appropriations are budget-setting laws, each dictating how receiving departments and agencies can use funds, and critically, for how long. The clock, or funding window, on the money matters. Some money has a one-year expiration. Use it within the budget year, or lose it. This is often called one-year funding. Multi-year funding has a longer shelf life. Say, two-year money, or seven-year money. You can spend it any time within that window. All at once, all at the end, or spread evenly throughout. There is also no-year money, which has no expiration. In addition to the funds sent by Congress, some agencies generate their own income, known as Own Source Revenue, OSR. This includes fees for services or activities, such as national park entrance fees, FDA drug approval fees, or revenue from postage stamps sold by the U.S. Postal Service. Let's turn to the uses of funds, which we can view through two lenses. The first lens is what the funds are used for. For one, there is operational spending. These go to covering overheads, rents, IT costs, and so on, and most employee salaries. For two, there is programmatic spending, funds directly tied to delivering the agency's mission. Think FEMA disaster response dollars, housing subsidies, and so on. On budget documents, you may find additional categories, like capital projects, or different terminology. The second lens is how the funds are spent, directly or indirectly. Direct spending is when agencies handle operations themselves, such as running enforcement programs or paying employee salaries. Indirect spending is when agencies outsource the work to other actors. These could be private sector vendors, non-profits, or even state and local governments. The two main vehicles for indirect spending are grants and contracts. Grants are disbursements for specific activities, and controls are placed tightly around the budget line items, what money gets spent on. Grant recipients must show their budgets, and often prove what they've spent, and overheads must be kept within pre-set allowances. Recipients are not able to make a profit from a grant. A common type of grant is what's called a cooperative agreement. This is used when the agency stays involved in the execution of the grant, and it involves closer oversight. Say the EPA issues a grant for research on water quality in agricultural regions. The EPA may want to be highly involved in the study, and contribute its own in-house technical expertise. This type of work might be outsourced via cooperative agreement. Contracts work a bit differently. They place the control on the deliverables of the work, which could be physical products or services, not on budget line items. Less proof of spending is required, and overheads are not managed in the same way. Critically, unlike grantees, contractors can earn a profit. Most operational spending, say for IT expenses, happens via contracts, as does procurement for other goods or services. Contracts go through onerous and often slow procurement processes with many rules and requirements. It's not easy to become a government vendor. However, smaller contracts, typically under $250,000, can often move through so-called simplified acquisition procedures, or SAPs, which allow for streamlined procurement and usually fewer competitive bidding requirements. Another way to accelerate and streamline future procurement efforts is to use more open-ended contracts, called Indefinite Delivery Vehicles, IDVs. These allow for the purchasing needs to shift over time. For example, IDIQ, Indefinite Delivery, Indefinite Quantity contracts, work as the name suggests. They leave open the total quantity of goods or services to be delivered within a set time period. For bigger vendors serving multiple agencies, a single contract might be used, called a GWAC, Government-Wide Acquisition Contract.