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Class Notes

Understanding Obligation and Deobligation in Resou

Obligation: legally reserving funds for expenses e.g: travel orders. Deobligation: adjusting obligations downward when actual costs are less, freeing funds for other needs. Ensures efficient effective use of finite resources in government operations.

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    Obligation vs Deobligation It is important to remember that resources are finite, and because of this we must distinguish between "wants" and "needs". Obligation refers to the legally binding setting aside of funds towards a requirement, such as goods or services. For example, an obligation is created when travel orders are approved for a Soldier heading to a school. This obligation reserves their plane ticket, lodging, rental car, and other anticipated expenses. Deobligations are downward adjustments of previously incurred obligations. Using the previous example, when the Soldier returns from the school, he or she files a voucher for the actual expenses occurred. If the actual expenses are less than the original estimate from the travel orders, then a deobligation needs to occur to ensure the excess funding is returned and is made available for the unit to spend towards another requirement. The Army operates under the mandate to use all available resources in the most effective and efficient means possible to support the combatant commander. Although not mutually exclusive, these two goals—effectiveness and efficiency, do not have the same meaning. * Effectiveness describes how well consumed resources achieve the desired outcome or endstate or simply stated, "doing the right thing." * Efficiency speaks to the manner in which those resources are consumed in order to produce the maximum amount of output regardless of whether the output achieves the desired outcome—"doing things the right way." Obligation • A legal liability of the government for the payment of goods and services ordered or received, or a legal duty on the part of the United States that could mature into a legal liability by virtue of actions on the part of the other party beyond the control of the United States. Payment may be made immediately or in the future. An agency incurs an obligation, for example, when it places an order, signs a contract, awards a grant, purchases a service, or takes other actions that require the government to make payments to the public or from one government account to another. Deobligation * An agency's cancellation or downward adjustment of previously incurred obligations. Deobligated funds may be reobligated within the period of availability of the appropriation. For example, annual appropriated funds may be reobligated in the fiscal year in which the funds were appropriated, while multiyear or no-year appropriated funds may be reobligated in the same or subsequent fiscal years.

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    Contracting Example Yjar 1 Ystr urn; EEfWBils I'cr maifteraiet: support ertd j * a t ; a ccnttaet fa* S‘ nrjlkzn. Tfas 11 :Fe test isllmaic af cns-.s- L*f gzods arid i c -.iLzs 41r ng th,- Im.jth -t ■ -c <n nFnirt Ytoira ?- 5 Y-i r nninhcr.-n-.r mitmnt rrntir Kis ir (Kimrrtqnrsi w n ■ r , fljr cwftKl s ' ( i f * > m M f m f • *jrtretir«wnd» tfkcalwi i y m r Y M r 1 jficr3F‘l*fl f ’*'i Contract Ends At the end of the contract, everything is complete, but the contractor only billed $900,000, not the full SI million. The remaining $100,000 is deobligated. If the obligation occurs within the five-year expired state, the funds can only be used towards adjustment of other requirements that occurred in the same year of the contract. If the deobligation occurs after the fifth expired year, the amount is cancelled and returned to the Treasury □ n the class Resource Management you discussed the Operations and Maintenance, or O&M, category of funding and may recall that this is generally where battalions and brigades spend the majority of their budget. Appropriations can generally be spent or obligated in the first year and then enter an "expired status" for five more years, before finally being cancelled. During the "expired status" no additional obligations can occur, but funds can still be disbursed against existing obligations. □ Remember, deobligated funds may be reobligated only within the period of availability of the appropriation, or the first year, which means funds deobligated in the "expired status" years cannot be applied toward other unit priorities. At the end of this five years any money that has not been disbursed is returned to the treasury. The Army is averaging a 3 - 5% deobligation rate after five expired years in its Operations and Maintenance account. This represents a noticeable loss of purchasing power and impacts readiness. E Here are some of the top sources of O&M dollars lost to units and the Army through deobligation. Contract Ends o At the end of the contract, everything is complete, but the contractor only billed $900,000, not the full $1 million. The remaining $100,000 is deobligated. If the obligation occurs within the five-year expired state, the funds can only be used towards adjustment of other requirements that occurred in the same year of the contract. If the deobligation occurs after the fifth expired year, the amount is cancelled and returned to the Treasury.

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    Contractmg Example Top D*ot)li(;*tkor»s Seine** Conlr Acrml S e r v i c e * 43% Maximizing Buying Power Tips to Help Maximize your Unit's Purchasing Power z Integrate other staff sections in budget development. Z Align expenditure with commanders' priorities and desired outcomes. □ Perform historical cost analysis and apply to future spend plans. z Prioritize expenditure. z Seek other funding sources. □ Minimize deobligating funds in the expired, or cancelling, years. Remember, currently the Army is averaging a 3 - 5% deobligation rate after 5 expired years in its Operations and Maintenance account. This may seem small, but if you look at the Department of the Army budget as a whole, it represents S4.5 billion in buying power. Cost Driver

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