BY GORDON ADAMS
Secretary Hagel has finally answered the mail, addressing the impact that a $52 billion sequester cut would have on the defense budget the president requested for Fiscal Year 2014. His July 10 letter — which responds to a request from Senators Carl Levin and James Inhofe, the chair and ranking member of the Armed Services Committee — is full of bad news and seriously misses an opportunity to start some real planning for a defense drawdown that is underway, with or without sequestration.
Hagel’s letter is refreshing in one respect. It does not hyperventilate, unlike the rhetoric used by Secretary Panetta, for whom even one year of sequestration (currently playing in a budget theater near you) was a “doomsday” event that would reduce the United States to a “second rate power.” That has not happened, so Hagel is more careful. He says that, if further cuts are implemented, “the size, readiness and technological superiority of our military will be reduced, placing at much greater risk the country’s ability to meet our national security commitments.” And he is cautious about its impact on strategy.
He does not say that the Defense Department would have to abandon Panetta’s Defense Strategic Guidance, which laid out the so-called pivot to Asia 18 months ago, but he does argue that the sequester would, “even with flexibility, substantially limit our ability to implement [budget] cuts in a way that fully protects the tenants [sic] of the DSG.”
But, in a way, Hagel’s approach is even more dramatic than Panetta’s. Panetta asked for flexibility to manage the cuts; Hagel doesn’t bother. He doesn’t warn of using a “meat axe” to do the job of a scalpel; he just says that sequester-level cuts would be damaging, flexibility or not. Specifically, he says even if Congress went so far as to set aside any current limits on internal Pentagon funding transfers, “DoD would not be able to mitigate the significant and detrimental impacts associated with sequester levels.”
When he gets to the specifics of those impacts, however, the letter is curiously empty of analysis and misses the big opportunities he has to truly change how the Pentagon does business, and, in doing so, focus its funding on the forces and equipment he says he needs.
There are three big problems here — problems he has focused on before — but he does not offer options to actually manage them.
First of all, there are the “military people” questions. He warns that even if DOD had the flexibility to save money on people (military pay and benefits are exempt from the sequester), reducing the size of the force beyond current plans would not produce big savings in 2014, largely because people would have to be paid to leave. Moreover, he says, Congress would have to lift restrictions it put on lowering the size of the Army and the Marine Corps — so, over to you, Congress. Force reductions will happen in a drawdown, and they will go deeper than currently projected, so it is high time to think about how to do that and start now, however minimal the first year savings. Hagel’s letter does not do that.
Instead, the secretary writes that a 10 percent cut in military personnel spending would force DOD to stop adding new people, stop moving people around, stop bonuses, and freeze promotions. That all sounds pretty draconian, but Hagel does have choices — they’re just tough ones. How about no pay increases for the force, or a change in the compensation formula so that performance is rewarded, rather than time in rank? Hagel doesn’t discuss it. What he does say is that, if Congress insists on raising military pay 1.8 percent, instead of the 1 percent increase the administration asked for, it will make FY 2014’s budget problem harder, should the sequester hit. This is true.
Hagel also skips over the big, underlying personnel challenges: fixing the retirement system and lowering health care costs. Again, we have “over to you, Congress” — just give us the health insurance (TriCare) fees we asked for (something Congress has already made clear it is not going to do), or the FY 2014 problem will be worse. Again, true, but how about putting forward a more serious health care reform proposal that could save real money, like consolidating the services’ health care infrastructures?
That brings us to the second big basket of budgetary concerns: the Defense Department’s “back office.” Only Hagel calls it something different: “operations and readiness.” This is really an important language issue. The politics of sequestration are now totally wrapped around the two hot-button issues of military readiness and civilian furloughs. But if you focus there, you are not managing the back office problem; you risk waving the Washington Monument at the Congress.
Secretary Hagel goes for the Monument: Operations and Maintenance (O&M) funding, he says, “finances much of the cost of training and readiness, both of which have already been severely affected by the FY 2013 sequester.” DOD needs more funds for readiness next year to make up for declining readiness this year.
This assessment is well into anecdotal territory. The Air Force has stopped flying “about one third of its combat-coded squadrons” and, with the sequester, would have to “significantly reduce training at more than half of its active flying units.” But there are no data here, no clear definitions of what the measurements of Air Force “readiness” really are. Just the suggestion that moves of this kind will “reduce deployable combat power” (by how much and in what way?), “contribute to accidents” (how much and in what way?), and “hinder morale” and retention (data on past correlations here?). You see what I mean — foreboding language, anecdote, and we’re outta here.
But, O&M not only pays for training and that elusive “readiness” thing, it also buys a large DOD back office — the administrative overhead that eats something like 42 percent of the Pentagon budget, according to the Defense Business Board. Hagel focuses on readiness and training, but he, as with many past secretaries (Gates is an exception), finds it hard to tackle this core expense, and it is a big one. Health is part of it, but only part.
There are all those uniformed personnel performing jobs that could be done more cheaply by civilians, or not at all. They are squirreled away doing things like financial management, personnel management, supply management, retail sales, even redundant education activities. Thousands of them, performed by uniformed personnel who are not combat troops. According to McKinsey, these folks make up one of the worst “tooth-to-tail ratios” in world militaries. Removing the military from such functions and tasks, and rooting out some of the tasks themselves is a tough job. Arnold Punaro, the DBB’s chair, has said, “You have to go to war every day to make progress in reducing overhead.”
Looking at O&M as “back office” and not “readiness” is an important change in perspective. There are two kinds of non-uniformed people, and in his letter Hagel only mentions one of them: civil servants. Hagel says he wants to avoid furloughs next year, but says that will mean going to reductions in force, or RIFs, which eliminate civil servants. OK, if the civil service has to shrink — and it does — which people get RIFed? There is not a hint of a plan for the back office in his letter, and civil servants are half of his back-office civilian workforce.
Wait, there’s more back office than the uniforms doing civilian jobs and the civil servants. I’ll let you in on a little-discussed secret. There is another bunch of back office folks: contractor personnel. Prepare to be staggered: There are about as many contractors working for DOD and the services as there are civil servants — about 700,000. That estimate comes from Pentagon Comptroller Bob Helm, testifying before the Senate’s defense appropriations subcommittee on June 11 this year. Hagel passes over this shadow civil service in silence. What are they doing and where? Why is the taxpayer paying them to do it? And how about skinnying down this group before we go to RIFs and forced departures for the uniforms?
Fixing the back office could produce real savings — funds Hagel could start scooping up, if he asked for flexibility on the sequester, to commit to the troops and equipment he thinks he needs. Seize the time now, while the drawdown and sequester give you the leverage, Mr. Secretary, or this back office problem will haunt you (as it has other secretaries and will future ones) the way the man on the stair did in William Hughes Means’ poem of 100 years ago:
Yesterday upon the stair
I met a man who wasn’t there
He wasn’t there again today
Oh, how I wish he’d go away
Hagel’s letter deals with the third basket, too: buying equipment or “defense investment.” Here, Hagel seems to be making a pitch to the contracting community and the members of Congress who live in the world of contracting. And it sounds pretty scary. He says DOD will have to cut investment funding (procurement and research and development) perhaps 15-20 percent in FY 2014 if the sequester happens, affecting “funding for hundreds of program line items, large and small.” The message is clear: “we would be forced to buy fewer ships, planes, ground vehicles, satellites, and other weapons.”
Man the ramparts, mobilize the stakeholders; this must not stand. And he could be right, procurement (and even research) dollars will fall. They have already declined more than 20 percent from the FY 2010 peak, as they always do in a defense drawdown, sequester or not.
In fact, some context may help here. In the four years after peak investment spending at the end of the Korean War (1952), DOD procurement budgets, in current dollars (the right comparison, because he is talking about real, annual dollars here) fell 77 percent over three years, an average of nearly 26 percent a year. After the Vietnam War, it fell 33 percent, or an average of 11 percent per year. After the end of the Cold War, going out four years, to capture most of the decline, it fell nearly 46 percent, an annual average of 11 percent.
So a 15-20 percent decline in one year in the procurement budget would be higher than the last two drawdowns, but lower than Korea. This is, after all, a drawdown, at the end of combat. Procurement dollars can and should be going down. There are always lots of reasons, some good, for saying these dollars should not decline, but they do, and they will. And there will, as there always are, be consequences for the industry and its labor force.
That’s the job of planners at DOD: to think about the ways to manage a decline in resources in ways that preserve capability that is needed, and focus on the missions, forces, and equipment that provide adequate security. And do so in an era of declining budgets.
While Secretary Hagel seems to appreciate this reality — hence some of the less hyperbolic language — the letter does not yet tackle the tasks that need to be done to manage defense in this fiscally-constrained world. And, defending his budget, he willingly gives away the one tool he could most use: flexibility.