Does the canceling of funds (which happens automatically by law) that are obligated on a contract place the agency in violation of the Anti-Deficiency Act?
An agency is in violation of the anti-deficiency act if funds are expended after the five year "expired account" period for an obligation. Therefore, if funds are expended within the 5 year "expired account" period, meaning in this case prior to 1 October 2011, the end of FY 11, there is not a violation of the anti-deficiency act. The contract type is immaterial. However, in your question you referred to "this" in your sentence that read "I have argued that this will place the agency...". It is unclear what "this" refers to. If "this" is expending the funds prior to the end of FY 11, then no anti-deficiency violation existed. If "this" refers to expending funds after 1 Oct, 2011, then an anti-deficiency violation will occur.
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The following are some comments from the Federal Appropriations Red Book that highlight the applicable policy and may be helpful:
Chapter 7, Paragraph D:
They [applicable obligated funds] may be retained as unobligated balances in the expired account until the account is closed, however, and are available for adjustments in accordance with 31 U.S.C. § 1553(a).
A proper and unliquidated obligation should not be deobligated unless there is some valid reason for doing so. Absent a valid reason, it is improper to deobligate funds solely to "free them up" for new obligations. To do so risks violating the Antideficiency Act.
Chapter 5, Paragraph D. 3.
Upon expiration of a fixed appropriation, the obligated and unobligated balances retain their fiscal year identity in an "expired account" for that appropriation for an additional five fiscal years.
Unobligated balances in the expired account cannot be used to satisfy an obligation properly chargeable to current appropriations (50 Comp. Gen. 863 (1971)), or to any other expired account.
During the 5-year period, the potential for an Antideficiency Act violation exists if the amount of adjustments to obligations chargeable to the expired account during a year exceeds the adjusted balance available in the expired account against which to charge such adjustments.
Chapter 5, Paragraph D.7.b. Deobligations
The amount of an obligation that is recorded against appropriations in excess of the amount necessary to pay the obligation is accounted for as follows: If the agency deobligated the appropriation before the expiration of the period of availability, the deobligated amount is available to incur new obligations. If an agency deobligates the appropriation after the expiration of the period of availability, the deobligated amount is not available to incur a new obligation, but is available to cover appropriate adjustments to obligations in the expired account.