As details emerge on the Obama administration’s budget proposal for fiscal year 2014, it is safe to predict that the Defense Department and its contractors will continue to live in crisis mode for the foreseeable future.
The president Wednesday will unveil his proposed budget for fiscal year 2014, which according to news reports, will include $526 billion for the Defense Department. That request, however, reflects wishful thinking on the part of the administration, as it exceeds by $51 billion the amount that Congress allowed the Pentagon to spend in 2014 under the Budget Control Act that was passed in 2011.
Anyone who was hoping for a more predictable budget outlook and for some relief from the turbulence of the past two years is in for a huge disappointment, warned senior analyst Todd Harrison, of the Center for Strategic and Budgetary Assessments.
The budget process over the coming months will likely be a continuation of the gridlock and dysfunction that followed the 2011 debt-ceiling fight, Harrison and other analysts predict. The stalemate over how to reduce the nation’s fiscal deficit led Congress to pass the Budget Control Act that set spending caps for the next 10 years and requires automatic cuts when federal agencies exceed those limits.
Although the BCA spending caps are the law of the land, the administration intends to propose a budget that ignores them. This will set the stage for another showdown over government spending for the fiscal year that begins Oct. 1. Whether the president’s gamble — that a deal can be worked out to change or remove those budget caps — pays off remains to be seen, Harrison said last week at a CSBA news conference.
“The budget process in Washington has really broken down,” he said.
The Pentagon is bracing for more disruption. It is still coping with the 2013 sequester, which requires the Defense Department to cut $41 billion in spending by Sept. 30. No one is harboring any hope that Congress will reverse those cuts, said Harrison. “People seem to be resigned that this is happening.”
The 2014 budget will remain under a cloud of uncertainty, he said, because the underlying issues that have kept Washington in permanent crisis mode have not been resolved. Both sides want to reduce the deficit. Both sides say they want to avoid abrupt defense cuts. But they cannot agree on alternative means for reducing the deficit. Obama’s 2014 budget will propose both cuts to entitlement programs and tax increases. Democrats want to offset cuts with new revenues, and Republicans want to cut domestic social programs to pay for defense and to reduce taxes.
“Doesn’t that sound like the past two years?” Harrison asked. “This is the exact same debate we’ve been having." A grand bargain where both sides would compromise on a mix of spending cuts and tax increases appears elusive, he said. “I’m not confident that they will reach a deal between now and Oct. 1.”
A safe bet is that, in the absence of a budget agreement, Congress will pass a temporary measure by Oct. 1 to keep the government funded at the 2013 levels. Because 2013 funding is higher than the 2014 budget caps, that will trigger a sequester, again, said Harrison. Another wrench in the negotiations will be a new debt-ceiling deadline this summer. The outcome should be of concern to the Defense Department, as it could result in further spending restrictions, beyond those set in the Budget Control Act. “We’ll be going from one crisis to the next.”
Harrison suggested that the Pentagon should take preemptive cost-cutting measures that could soften the blow of sequesters and seat-of-the-pants decisions. The priorities should be to slow down cost growth in military and civilian personnel accounts, curb bloated overhead expenses, and come up with a viable strategy to work with Congress to close unneeded bases nationwide.
Defense Secretary Chuck Hagel called for such actions last week in a speech at the National Defense University. Harrison said it is clear that Hagel would like to “get ahead of this problem” instead of having to respond to one budget crisis after another.
What the Pentagon has always done when budgets fall is reduce the size of the force and cancel weapon programs. But cost growth has accelerated so much more rapidly over the past decade that there is a danger now that, without significant rebalancing within the budget, the military would have to shrink far more drastically than it did in previous downturns.
One example of needed reform is in the civilian workforce, said Harrison. The 2013 sequester is forcing the Pentagon to furlough most of its 800,000 civilian employees for 14 days in order to cut payroll expenses. That works as a stopgap measure, but when the new fiscal year begins Oct. 1, the department will still face the problem of having to meet payroll. The Pentagon needs a plan to cut people, but in a way that preserves relevant skills, he said. Downsizing by attrition or voluntary buyouts, he said, are about the worst possible options because they result in the departure of the most skilled employees who can easily find work elsewhere. “Those tend to be the people who are more valuable and you want to keep.”
Harrison also recommended the Pentagon engage in a serious effort to reform military compensation, which is eating up 34 percent of the defense budget, compared to 30 percent a decade ago. If the BCA budget caps stay in place, by 2021, military personnel will consume 46 percent of the defense budget. Operations and maintenance accounts — which cover civilian payroll, war operations, facilities and many overhead functions — by 2021 would consume 40 percent of the defense budget, compared to about 30 percent today.
At this rate, personnel and O&M alone would gobble up 86 percent of the budget, crowding out spending on weapons procurement, research, development and military construction, which currently make up 36 percent of the budget.
“We are not on a good path here,” said Harrison.
While many analysts have called for the termination of expensive weapon programs as a way to offset rising personnel costs, Harrison cautioned that the cost savings from killing weapon systems are negligible. “Acquisition reform is something we should always be trying,” although he does not believe the system can be changed much. Terminating programs doesn’t achieve anywhere close to the savings that are needed to comply with BCA budget caps, he said. “You could completely eliminate all these major weapons and it still does not get you the reductions to meet the budget caps,” he said. “If you kill a program, you still need something in its place.” Former Defense Secretary Robert Gates killed the Air Force’s bomber program and the presidential helicopter, among others. The Air Force will eventually buy a new bomber, and the president will acquire a new helicopter. “When you add up the net savings [from terminations], it’s not that much.”
Harrison would advise the Pentagon to put forth a plan on how it would bring spending down by $51 billion in fiscal year 2014, in order to meet the $475 billion cap set in the BCA. That spending limit would be $9 billion less than what the Defense Department was appropriated in 2013.