Online Exclusive: Beware the Election Windfall

Such uncertainty can have myriad effects on public sector agencies — and other organizations dependent on government funding — which typically have greater difficulty reacting to economic shifts than the private sector.

But the economy isn’t the only source of uncertainty in 2024. It’s also an election year in the U.S. For public sector organizations, this brings its own share of anxieties that internal auditors should consider in their risk analysis.

Rhetoric Vs. Policy

Before highlighting what an election means for the public sector, it is equally important to highlight what it does not mean. Media coverage of polls and campaign rhetoric may illustrate that Democrats and Republicans have radically different political and economic philosophies. However, in practical terms, changes to individual organizations and agencies based on what party gains power likely will be minor in the short term, as major policy pivots take time to implement.

“Both parties like to spend money,” says Steve Wyett, senior vice president and chief investment strategist at BOK Financial in Tulsa, Okla. “They might spend it on some different things on the margins, but they’re both going to spend.” Also, he notes that in sectors such as education, state governments largely drive spending policy.

While the outcome of the election might not result in much change, often the time leading up to the election can. For example, the administration in power — if its party controls both the executive and legislative branches — may seek to create positive headlines or, if re-election is in doubt, carry out as much of its agenda as possible before leaving office. These ambitions can lead to a significant and unexpected influx of funding. This may appear to be positive on the surface, but it can lead to substantial risk.

When an agency receives a significant budgetary increase, it typically comes with a catch: That money has to be spent. Otherwise, the funding is lost entirely. 

“Especially in times of recession, government agencies are often in a spend, spend, spend mentality,” says Mark Maraccini, public sector internal audit lead partner at Crowe in Austin, Texas. “This creates risks across the spectrum. When you get a big influx of money, you’re going to have to deal with fraud and potentially waste abuse, but you’re also going to have to deal with general mismanagement or inability to keep the same controls and processes you had in place.”

The question of where such funding can be spent is not easy to answer. What looks wise in the short term can prove unwise in just a couple of fiscal years. “Agencies have to remember that this is only a short-term influx,” Maraccini says. “They can’t just ramp up and hire a bunch of people, for example, because in two years that money is going to be gone. They have to think about not just spending, but sustainability.”

As a board member of Tulsa-based nonprofit Family and Children’s Services, the largest provider of mental health services in northeast Oklahoma, Wyett has seen this issue firsthand. “With the passing of the recent Medicare and Medicaid expansion in Oklahoma, we have additional monies coming in now from a government standpoint, and it’s stressing infrastructure to make sure we effectively account for it,” he explains. “We’re having to spend a lot on hiring and building out departments that we haven’t had to have in the past. It’s been a positive development, but it’s hard to keep up with everything you need to do.”

Internal Audit Can Raise Awareness

Facing such scenarios, internal audit can help keep organizations in a place that is sustainable in the short and long term. “When money comes in, internal audit needs to understand how the organization is looking at new programs and initiatives,” Maraccini says. For example, does the organization have a plan for when the funding goes away?

“It’s internal audit’s responsibility to at least raise these areas to those charged with governance,” he says. “Whatever they decide at the end of the day is their decision, but it’s your responsibility to bring it up.”

Wyett agrees. “The organization wants to take advantage of it while the funding is here, but it has to consider it may be more of a variable revenue model,” he says.

Thinking Beyond Long Term

Long-term organizational sustainability is not just important regarding election year funding. It becomes even more paramount as the U.S. government budget deficit widens. The U.S. Congressional Budget Office forecasts a deficit of $1.6 trillion this year, which amounts to 5.6% of U.S. gross domestic product.

“To get our government deficit under control, eventually some bipartisan agreement is going to be needed on how to move forward,” Wyett says. “You can’t do it with just a spending cut, and you can’t do it by taxing the rich.”

According to Wyett, internal audit must ensure the organization has the long-term awareness to know that something in the government has to give eventually. “It may not be tomorrow or the next day, but one day we’re going to have to operate in a little bit different of an economic environment,” he says. “The government is going to need money, and it’s going to come after all of us. We need to be aware that this reality is coming and have at least some idea on how to move forward.”

Even when current economic news is positive, the specter of government deficit spending will continue to loom large for the foreseeable future. Public sector internal auditors must continue to be diligent.