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Why do institutions sometimes prohibit carrying forward the unused funds from one fiscal year onto the next? Are there reasons for it or is it just an arbitrary rule? Universities in Canada, it seems, are particularly guilty of this.

The cons of this approach are obvious: one sees a lot of frivolous expenses near the end of the fiscal year, meanwhile there are not enough funds available to either other units and/or for the future. That is, some people/units are not allowed to save over multiple years to invest in something that might improve the infrastructure and/or efficiencies.

Is there a financial reason for this?

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Based on my college accounting classes (which I didn't score well in) the thought is that in the case of government, that money really belongs to the tax payers. What the intent of the rules are is that an entity makes a budget and sticks to it. Should they be under budget then it can be assumed they don't need to budget as highly as they did, because they should be taking a little of the tax money as possible.

In practice though, entities have to already work pretty hard to justify their budgets, and would have to work much harder to justify keeping the same budget if they spent less in the prior fiscal year. The result is (seemingly) wasteful spending at the end of a fiscal year to so the budget was all used up and the next fiscal year is easier to justify to the board that approves it.

There shouldn't be a need for a tax taking entity to invest or save since it is tax payer money. Instead should they need capital improvements or other large expenses, they need to be planned and discussed like any other budget item. A entity shouldn't invest the money, it should be returned to the tax payer so they can do their own investing.

It isn't a financial reason per se as much as it is a "keep a government in check" rule.

My information was from a US college class, but I would bet it applies to most system in the world.

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