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Aerospace and Defense Channel

The Realities of the Big Budget Showdown and the Uncertain Future for DOD

February 19, 2013
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The Big February Budget Showdown

How can Microwave Companies be “prepared for the un-preparable” scenario--- what level of Defense Spending will be finalized in the upcoming budget debate in the next few weeks?  What happens in FY2013 and over the next ten years?  Given the fiscal situation we face as a nation, what will be the outcome of the next round of Budget fights over DOD spending? Will there be more clarity on what will happen or will the “Fog of War” overcome and ensnare the political wrangling on both sides of the political aisle?  Will the congress literally “kick the can down the road” once again and postpone reality for a few months?  What Defense Programs will survive and which will not?  Can programs that are over budget and late, even those deemed critical to our National Defense, escape without being put on the chopping block?  Is DOD Procurement and R&D spending going to be sacrificed on the political alter of  fiscal austerity, or will manpower cuts and readiness reductions become “revenue sources” (AKA bill payers) for favored programs of record?  Will Defense companies continue to be stuck in a quagmire of uncertainty as it relates to future investment, hiring and strategic planning for their businesses?  Or is there “a pony” to be found in all the muck?  Let’s look at the issues “post fiscal cliff”, prior to the “swift sword of Sequestration” and as we approach the deadline of the Continuing Resolution-- and try to understand what is really happening here.

Analyze the Problem

As well trained engineers our first thought when we confront something like this difficult and complex situation is to try to establish a model, a frame of reference to start our analysis.  We are driven to go back to first principles so we can put together our approach to dissecting the complex problem.  We will look at the underlying issues, define the root causes, put together some trade studies, and then put in place a process to understand what's happening.  And through this analysis, we will go forward and define how we should react to the circumstances we face.   In addition, we will see if we can find truth within the political back and forth.  And see if the rhetoric “violates the laws of (Political) Physics”.  

Well, nice thoughts fellow engineers! But I have some bad news here, a reality check of sorts.  Don't waste your time looking for rational behavior in this a truly irrational scenario.  What is going on has no precedent, makes absolutely no sense, and is quite frankly, a huge self inflicted wound on our economy and our country.  I submit that what we are going through now in this Defense Budget debate as part of our Fiscal crisis, is not scientific or logical.  Indeed it is nonsense.  It cannot be analyzed in a methodical, truly reflective and thoughtful way.  It is basically “nuts”.  This DOD budget battle is just pure partisan rhetoric masquerading as policy.  This is political theater, showcasing the worst side of American Politics.  It is brass knuckle time, a true blood sport-- take no political prisoners.  It’s all about winning.   Ladies and Gentlemen:  It’s time to “Fasten your seat belts and put your tray tables in their upright and locked position”. We are all going to take off on a very wild and uncertain fiscal ride over the next two weeks---and need to be strapped tightly into our seats 

The Mess We Are in Today

There are a lot of reason “why we are....where we are” in this budget debate. The politicians have really messed this up badly. The lack of appropriate legislative authority for a DOD Budget, the draconian cuts of sequestration and bitter fights over Defense Policy and Programs have crippled the Congress, Industry, and the Military Services.  When we, as members of the Supply Base, look at what is happening, we are shocked and in total disbelief.  We are befuddled with the lack of clarity in the whole process, the effects on our customers, the divisiveness it spawns, and the air of uncertainty that seems to overwhelm everyone.  This is not really a good way to run a business, never mind it is the process by which we defend our country, run our Defense Department and fund National Security Strategy.  Whatever happened to responsible behavior?

If Congress and the White House are unable to agree on debt reduction measures by March, America will face a triple threat: a congressional vote to raise the debt ceiling, across-the-board spending cuts required by the Sequester and the expiration of the law that keeps the government funded.

What is driving this Uncertainty?

There are some major forces at play here, shaping the DOD budget debate. Most factors driving the debate are the result of the political compromise of the Budget Control Act of FY2011 and the Fiscal Cliff deal stuck earlier this year.  It puts matters on a whole new frame of reference which we now view as some revenue/tax increases were approved.   Indeed, Defense cuts will now be weighed against other discretionary spending cuts, pitting different constituents against one another.  We hear the voices from all sides preach the impending “Doom and Gloom” in the DOD if these cuts are enacted.  The main culprit here is the DOD Defense Budget Sequestration battle and the impacts over the ten year spending projections.  The legislatively mandated levels of cuts approach over $1 Trillion or about a 9.3% to every program regardless of importance, priority, or contractual position.             

There is also the DOD Budget funding issue with the Department of Defense operating under a Continuing Resolution (CR) in FY 2013.  And there is talk that it should it be extended through the entire fiscal year.  That presents a whole new set of serious problems.  We don’t even want to think about going there.   And the debate and final decisions that will be the outcome here, will have direct and immediate impact on plans and programs the DOD has already prioritized, funded and put in place.  Does the Pentagon have to renegotiate every DOD contact with each contractor or subcontractor?  What and who will pay the cost to do this?  This could be very serious.   And don't forget our continuing National Security commitments around the world. They don't stop because we are in a political conundrum. This budget situation places undue constraints on all US Military Forces as they carry out our National Security Strategy around the world.   America needs to be vigilant and prepared to defend ourselves and our friends in spite of our own internal political squabbling over these matters.

Viewing the Future through the Looking Glass of a Continuing Resolution 

With all the uproar going on over the fiscal mess we are in and its dire impact on Defense Spending and program cuts, you would possibly surmise that all is lost, the sky is falling, and the end of the world as we know it is upon us.  Well, not exactly.  The Congressional Leadership and Members of both Houses of Congress have actually voted in favor of, and have passed the FY 2013 Defense Authorization Spending Bill.  Yes, that is correct.  It’s done.  It was passed, and the President has actually signed the FY 2013 Defense Appropriations Spending Bill into Law.   The National Defense Authorization Act for Fiscal Year 2013 was signed by the President on 2 January 2013. The final bill passed the House by a vote of 315-107 on 20 December 2012 and the Senate by 81-14 the following day. It authorized an overall defense base budget of $552.2 billion and $88.5 billion for Overseas Contingency Operations (OCO) funding.  The President signed the bill despite his concerns that the bill overly restricts the Department of Defense at a time when flexible cuts are necessary and funds must be directed to the most important programs. 

So all is good, right?  Well, not quite so fast.  This is Washington, remember, and everything comes along with “a catch”, a “but”, or a whole host of completely “devilish details”.  And that is the case here to.   The funding level for the DOD Budget in FY 2013 is now legally constrained.   The legal wrinkle is that because Congress failed to enact a proper appropriations bill setting federal spending, it instead passed a CR that orders all agencies to keep spending exactly what they did last year on exactly the same things this year. The law leaves very little room to adjust for any changes in actual needs. So, even before you take into account the impending cuts from sequestration, you are stuck with another set of constraints.  

The Details of the CR

Basically this approach of a Continuing Resolution is a cap on spending to levels equal to/less than last year’s appropriations level.  With the CR you can only spend your allocated funds in accounts that existed in prior years as authorized/appropriated accounts, no new starts are allowed, and funds are capped at 90% of the prior year. It literally gets down to what the DOD is “authorized to spend funds on”, versus “what has be appropriated to spend funds on”.    The law leaves very little room to adjust for any changes in actual needs.

So, even before you take into account the impending cuts from sequestration, there are problems.  For example the Marines are not only short of the total amount of operations and maintenance (O&M) money they need to operate day to day, they also aren't allowed to reshuffle the money they do have from over-funded or low-priority accounts to meet their most urgent needs.  Unless they get explicit permission from Congress, they are stuck.  Their money can possible be in the wrong places in some instances, but they can't move it without explicit permission from Congress.  Confusing, yes but that is the way it works in Washington.  And just for the record, the Continuing Resolution (CR) was enacted for six months, until March 27, 2013.  So it about to expire soon and we are back in the soup of Budget Basics all over again.  And our military leadership is not happy, as they warn that extending the CR spending bill for a full-year — which keeps funding levels the same from the prior year — would cause nearly as many problems as sequestration itself.

Sequestration Implementation Detail: FY 2013 through FY 2023

The sequester was intentionally designed to be an unacceptable financial tool - an option no reasonable policymaker would ever willingly choose to use. But by continually pushing off the day of reckoning, we find ourselves in a situation where we essentially have further amplified its potentially destructive impact.  Even deeper cuts may be required over an even shorter budget period.  The Sequester’s impact on military readiness could be disastrous. We will have fewer resources to keep pilots trained or our warship crews capable of full combat operations. It will rob Army units of important training resources as they to prepare to deploy for combat. Another area of deep concern is the potential layoffs of federal employees and private-sector contractors. The civilian workforce is composed of professional individuals.  And Defense contractors cannot be expected to make smart decisions about their businesses if they lack clear guidance on the short- and mid-range budget outlook. 

The $54.7 billion in 2013 defense cuts will be imposed in an across-the-board, proportional cut in the funding provided for Defense accounts for the Pentagon in the appropriations bills.  War costs within the National Defense function are also subject to sequestration, as are defense un-obligated balances carried over from prior years. So if your money hasn't yet been obligated or spent, it will be cut.  Although war costs, like other emergency costs, are effectively outside the discretionary caps that the Budget Control Act created, the sequestration resulting from the failure of the Super committee is a separate process, and war and other emergency costs are subject to sequestration.  The process for years after 2013 is quite different. The required defense funding cut of $54.7 billion in each year from 2014 through 2021 will occur through reductions in the annual statutory caps on defense funding that the Budget Control Act sets for each of those years if sequestration is triggered.  Unlike in 2013, there will be no automatic cut of all affected defense programs by the same percentage; instead, the Appropriations Committees will decide how to live within the newly reduced defense funding caps.           

Here is a top line projection of the effect of Sequestration on the DOD Future Years Defense Plan (FYDP) using some budget figures and some back of the envelop calculations:

Comparison of DOD Base Discretionary Budget Authority for FY 2013 to FY 2021

(in billions of then-year dollars) and Sequestration Effects Not including OCO (Overseas Contingency Operations)

                                            FY13    FY14    FY15    FY16   FY17   FY18   FY19   FY20   FY21

President’s FY13
DOD Budget Request  $525.4  $533.6  $545.9  $555.9  $567.3  $579.3  $592.4  $605.4  $617.9

DOD Budget Under
Sequester                     $485.7  $475.2  $488.7  $499.2  $511.6  $524.0  $536.5  $549.8  $563.2
 

DOD Guidance and Real Consequences

There's an ugly series of ripple effects at play. Facing funding shortfalls from both the Continuing Resolution and the Sequester, Deputy Secretary of Defense Ashton Carter has set out to put in place a framework for the DOD to follow if all this happens.  Deputy Secretary Carter directed the Services, in a January 10 memo, to prepare for the possibility both of sequestration -- the automatic cuts -- and of a year-long extension of the current continuing resolution -- which sets spending at fiscal 2012 levels for ongoing projects and forbids starting all new ones in the absence of a proper authorization bill for 2013.  This is like the “Perfect Storm” of all Budget Nightmares for DOD. 

Carter also ordered the armed services to cancel major maintenance in the third and fourth quarters of fiscal year 2013 (April through September of the calendar year). In the Navy Department's case, that included canceling planned overhauls of ships and maintenance depot work on both Navy and Marine Corps aircraft. That means squadrons will be taking broken and in need of repair assets such as airplanes out of service.  But not getting any repaired ones back in the foreseeable future.  This means shutting down repair depots.  It has been estimated that instead of having roughly eight of 12 airplanes on the ramp in our non-deployed squadrons around the Marine Corps, they will have five.

Marine Squadrons actually deployed on operations will be kept at full strength, albeit at the expense of funding other forces. Fewer planes means fewer opportunities to train, which means pilots won't be flying enough hours to retain their qualifications. Crews are scheduled to drop their training to ten flying hours per crew per type-model series.  Marine aviation statistics show that if you fly less than 15 hours a month, you're a safety hazard.  So the tradeoff is real—Marine Aviators run the very real risk of killing pilots and destroying airplanes.  The Marines are planning to fund some squadrons adequately at the price of grounding others altogether  

The Navy Department is planning cost-cutting moves including a hiring freeze and the cancellation of Navy carrier deployments if sequestration occurs. The Navy has already announced it is dropping plans to send a second aircraft carrier group to the Persian Gulf at a time when many observers believe this sends the wrong signal to Iran. The most dramatic impact will be on Marine Corps squadrons flying the F-18 Hornet fighter jet some of which will probably be grounded starting late this year.

The Army will also have constraints on military training and readiness, and activities will face budget cuts for the current fiscal year and beyond. Even though current military personnel are spared, civilian employees will be affected through layoffs and furloughs. An Army-wide hiring freeze has already begun, and about 3,100 temporary and term employees have been terminated.  This sequestration means curtailing training of 80 percent of ground forces, affecting basic war-fighting skills. It could also introduce a critical shortfall in areas such as aviation, intelligence and engineering. Personnel, training, and equipment will not be the only things discussed regarding sequestration for the Army; local business will be affected as well.  The Army will have to reduce purchase orders from 3,000 small companies, hitting the small companies hard, which will be devastating for them.

Sequestration Has Real Consequences

 “We need budget certainty — that is, we need the antithesis of sequestration: a steady, predictable funding stream,”
Joint Chiefs Chairman Gen. Martin Dempsey in testimony to a Congressional Committee.

That was some recent sober guidance from the Chairman of the Joint Chiefs of Staff.    Most of the Joint Chiefs of Staff, attempting to end the Budget impasse, recently made a rare joint appearance on Capitol Hill before the Senate Armed Services Committee, calling on Congress to avert sequestration and stop funding the government with continuing resolutions.   Each military leader laid out the dangers of the automatic cuts: reductions of 100,000 soldiers, the loss of planes and ships, cuts in essential training and an inability to carry out the new U.S. military strategy, the so called look pivot towards the Pacific. Sequestration was described as a true crisis in military readiness.  The cloud of uncertainty hanging over our nation’s defense affairs was described by the Generals as already having lasting and irreversible effects.  The sequester cut would wipe away approximately 9.4 percent of the Pentagon’s $600 billion-plus budget, with areas like military personnel exempted.  

The Defense Department is planning cost-cutting moves including a hiring freeze and the cancellation of Navy carrier deployments if sequestration occurs. The Pentagon has warned that sequestration will result in up to 22 furlough days for the nearly 800,000 members of its civilian workforce through the end of the fiscal year, at the end of September.  Given how far apart Republicans and Democrats are on how to avoid the Sequester, both sides may well look at the automatic cuts and decide that it's probably better than any deal we could negotiate with the other side.  Score one for the abject failure of our democratic process on that point! 

The latest news shows that the new Fiscal Cliff Deal from early January reduces the blow to the Defense Department from the original $62.8 billion cut -- about 11.5 percent from every non-exempt account -- to a more modest $48.1 billion -- about 8.8 percent. Some of the difference is made up by increased tax revenue, some is simply pushed off to fiscal 2014, when the Defense budget will be about $4 billion lower than planned under the original sequester deal.  Additionally, procurement in major combat systems could be canceled - along with the significant per-unit cost savings negotiated as part of these multi-year contracts. For instance, the Pentagon negotiated nearly $4.5 billion in savings through a multi-year contract to build Virginia-class submarines - and those savings could be lost if the Navy disrupts the terms of the agreement. 

The Sequester’s impact on military readiness could be disastrous. We will have fewer resources to keep pilots trained or our warship crews capable of full combat operations. It will rob Army units of important training resources as they to prepare to deploy for combat. Another area of deep concern is the potential layoffs of federal employees and private-sector contractors. The civilian workforce is composed of professional individuals.  And Defense contractors cannot be expected to make smart decisions about their businesses if they lack clear guidance on the short- and mid-range budget outlook. 

Future War Fighting Capability-The Next End Game

As you look at US Military capability today, there is no doubt that future conflicts will be different from the ones that you just fought.  And that means we will adapt our forces and shape their structure, training and equipping far more differently than we do today. This transformation will happen in parallel with the battles over DOD Budget Levels, Sequester, and the Continuing Resolution ---as we undertake this difficult budget and fiscal deliberations on our Defense Budgets and Future plans.

To look at this matter, let’s see how the US Army sees its future.  The Chief of Staff of the US Army, Ray Oderino has recently said this recently, put an Army perspective on the role he sees for the soldiers of tomorrow.  He has a bold vision for the capabilities required for future Army War fighters.   He believes conflict by its very nature involves people, and that the best way to prevail in war,  or better yet prevent it altogether,  is to understand and influence the human beings on the other side.  He went on to comment that new hybrid threats are emerging that hide amongst civilians like guerrillas but will wield technology and weapons once reserved to states.    

He said the US Army must preserve its hard-won counterinsurgency capabilities while restoring those fundamental war fighting skills it has developed since 2003 to project power abroad and wage fast paced/special operations style warfare.--anytime, anywhere, against any foe.  He also warned about the potential of a new Cold War style stand-off with a nuclear-armed "peer competitor".  That is something we should avoid, and not seek.  He said the Army needs to move away from deploying brigade-sized packages on a set schedule to Afghanistan and provide regional commanders with "forces scalable from squad to corps tailored to their needs. The Army supports other services operations in a host of unglamorous, "often overlooked," but essential ways, from hauling ammunition supplies to operating communications networks. These are some very insightful comments from one of our top generals.

Where are we going from here?

With all the partisan rhetoric that is flying about these days, we sometimes lose sight of the basics and what this is all about -- what we really need to adequately fund for our National Defense.  We need to focus on what programs and policies will best secure our nation from “all enemies foreign and domestic”.  I think we would be well served to heed the sage comments from the Chief of Staff of the Army on what type of Defense Department we will we need to defeat tomorrows adversaries.  Whether it's on Land, Sea, Air, Space or Cyberspace, we must be ready to prevail on that battlefield.  As we watch the “Washington Wrestling Match” for the next few weeks, let’s hope cooler heads will prevail in the contentious debates.  Our nation must come together on all issues surrounding the Fiscal Cliff, Debt Ceiling, Sequestration, and Continuing Resolutions, and we must do the right thing for America. 

Recent Articles by Jim Fallon, President and CEO, Fallon and Associates LLC

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