Tuesday, March 05, 2013

The Devastating Mathematics Of Budget Cuts In The US

The failure of the US politicians to come up with a budget to prevent the current sequestration is devastating to science research and funding. There is an almost universal agreement on this. However, the way it is done is even more devastating that many people realize, and I often wonder if the politicians that are doing this realize this as well. I'm tempted to think that some of them do not realize this, because this is done often enough, year-after-year, that they don't seem to understand the severity of what they are doing.

Here are some simple mathematics that anyone can understand, and it illustrates the utter stupidity of what they are doing.

Let's say that Govt. Agency X has a budget of x. This is the amount of money that they are given for the fiscal year (12 months). So on average, this agency has x/12 amount of money to spend per month, which is 0.083x per month.

Budget = x
Spending per month = x/12 = 0.083x

OK so far?

Now, since Congress can't get their act together and come up with a budget when they are supposed to by the end of September, they pass this thing called "Continuing Resolution". This is where, devoid of a budget for the new fiscal year, they continue working using the budget of the previous year until a new budget is agreed upon. So this agency will continue to work under the assumption that it has x amount of money in a fiscal year! In other words, the agency will continue to spend, on average, 0.083x per month.

Average spending per month for new fiscal year = 0.083x

Now, let's say, at the end of February of the following year (i.e. 5 months into the new fiscal year), a new budget is agreed upon and takes effect. This means that Agency X has spent:

Amount of money spent = 0.083x * 5 months =  0.417x. ----- (1)

So this agency has spend 0.417x amount of money already by the end of February.

Unfortunately for Agency X, its budget was cut by 12% (the same devastating amount being cut during this sequestration). What this means is that instead of getting x for the new fiscal year, the agency is supposed to get 0.88x.

Budget for new fiscal year = 0.88x
Average spending per month = 0.88x/12 = 0.073x

By the beginning of March (after 5 months into the new fiscal year), this agency should have 0.513x amount of money left, i.e.

0.88x - (5 * 0.073x) = 0.515x

But that is not what is going on. Because of the continuing resolution, the agency was spending, on average, 0.083x per month, for 5 months, for a total of 0.417x (see (1)). The amount of money left for this agency is:

Amount of money left = 0.88x - 0.417x = 0.463x. !!!!!!!!!!!!!!!!!

This is significantly different and LOWER than 0.515x amount of money had the budget cut been applied AT THE START OF THE FISCAL YEAR. This agency is in a deeper financial trouble by this time because it has even less money than expected.

There are two devastating impact here:

1. The budget for this agency was cut from x to 0.88x. That in itself creates major problem

2. However, it was made WORST when congress could not come up with a budget when it should and instead, applied a continuing resolution for several month before indicating that this agency will get a budget cut.

The agency would have been better off to receive a budget of 0.88x at the start of the fiscal year. It knows what it has to spend. Instead, not knowing and having to spend using the old budget only causes it to spend on money that it won't have. The longer the continuing resolution goes on, the more devastating the cut will be.

This is what is going on right now in the US budget. We were under a continuing resolution since the start of Oct. of 2012. The 12% budget cut due to the sequestration is devastating because the money that's left is significantly smaller than had the 12% cut been applied at the beginning of the fiscal year. The budget cut is bad enough. The inability of Congress to come up with a budget ON TIME, WHEN IT SHOULD, creates a double-whammy.

In case you think what is happening this year is unique, think again. I do not remember the last time the US Congress managed to come up with a budget on time, when it should. The continuing resolution legislation has been invoked almost every single year lately, it seems. When this happens, any branch of the Govt. that ends up receiving a budget cut often has to deal with massive problems in trying to balance out what needs to be done and what has to go.

We ask our elected officials in Washington to do two major tasks: (i) come up with sensible legislation and (ii) come up with a federal budget. One can argue about how successful they are with (i), but for (ii) they have done an extremely poor job as far as the timeliness of what they should accomplish. For most of us, we get penalized for not completing something on time, when we're supposed to. Obviously, this doesn't apply to those who come up with our Federal budget.


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