By: David Rogers
“Frankly, I am nervous,” says Robert Hale, the Pentagon’s comptroller. And with reason.
A month and half into the new fiscal year, Congress can’t seem to decide between what are three, wildly different scenarios for Hale’s world in 2014. The House endorsed most of President Barack Obama’s $527 billion request for the Defense Department in July. Last month’s stopgap CR went back to $496 billion. And DOD will drop by another $21 billion in mid-January if lawmakers do nothing to stop sequestration.
“We still don’t know what fiscal ’14 is, which is an extraordinary situation,” Hale told POLITICO. Making it worse, perhaps, is a growing acceptance—even callousness— in the Capitol toward the level of disorder sequestration brings.
The first round of cuts that began on March 1 already forced DOD to implement $37 billion in reductions in the space of six months. Why should another $21 billion –spread over more than eight months—be any harder?
Indeed, this equation is now fundamental to the politics of the House-Senate budget talks which resume Wednesday. A significant faction of Republicans have come to embrace the lower post-sequestration caps set under the Budget Control Act in 2011. And the real-life math for the military has become submerged in the tit-for-tat politics over Obama’s healthcare reforms.
The next two weeks running up to Thanksgiving are pivotal if Congress is to have any chance of restoring some order for the Pentagon and a broken appropriations process. But what’s most remarkable is how lawmakers seem to be backing into decisions without first having a full debate over what level of defense the U.S. needs going forward.
“Chaos and Uncertainty” is the title of a recent report by the Center for Strategic and Budgetary Assessments (CSBA) taking a closer look at the 2014 defense budget and impact of sequestration. And POLITICO talked with Hale to try to fill in some of the missing pieces and get his perspective on the choices ahead.
“Yes, it’s harder and bear with me on the logic,” Hale said. “In one sense it will be easier…The per-month dollar amount was more last year. But we are starting from a degraded position, particularly with regard to readiness as we begin fiscal 2014.”
“The Air Force wasn’t flying for three months. And they’re starting to recover but they haven’t. The Army is still not sending units through the Combat Training Center to culminate training—except for deploying units.”
“If we go to full sequestration, we will see some continued degradation of readiness. The Air Force won’t be able to recover. They will still have to stop flying at some units. The Army will still not be sending units through the Combat Training Center…The Navy may see some degradation in readiness.”
To get through 2013, the Pentagon’s took advantage of its ability to cut from prior-year unobligated procurement funds while pushing forward some operations costs into the future by deferring equipment reset and maintenance. Fully 42 percent of the procurement cut came from unobligated funds according to the CSBA analysis. Hale’s office said that the Army alone pushed about $716 million in equipment reset into 2014 and 2015.
If sequestration comes again, Hale said he can go back to the same well and cut unobligated prior year funds. But this pool has shrunk from about $90 billion in March to an estimated $70 billion he expects in January. And procurement cuts here are not without consequences.
“Some people think this prior year unobligated balance is some sort of slush fund. That we can do whatever we want,” Hale said. “Congress appropriated these dollars to buy ships and tanks and planes and the money is sitting there designated for particular programs. If we cut it, then those programs are either going to have to be slipped or cut. So it’s not a freebie as some people imply.”
“Under full sequestration we would see some sharp cuts in procurement particularly smaller items: large spares, mod programs,” Hale said. “I think we will see our large contractors, in these tight times, bring more work in house, perhaps less subcontracting, particularly for small businesses. Yes, I think we have industrial base concerns too.”
Obama’s $527 billion request for the base DOD budget this year would be supplemented by another $79.4 billion in Overseas Contingency Operations—chiefly war funding related to Afghanistan. And the CSBA report by analyst Todd Harrison, a senior fellow at the Washington-based nonprofit, suggests that some of the military services have pushed “peacetime” costs into OCO so as to better weather sequestration.
“The OCO request assumes a 39 percent reduction in U.S. forces in Afghanistan, but funding for Afghanistan declines only 10 percent,” Harrison writes. He examines various explanations: the fixed costs of still training Afghan forces and expense of closing bases and bringing U.S. troops and equipment home. But Harrison told POLITICO that the “circumstantial evidence” suggests that the Army and Air Force have also shifted costs from their base budgets to OCO to help avoid the budget caps.
On this point, Hale said that he didn’t believe there had been a spike in 2014 but conceded that some costs from the base defense budget have shifted to OCO. This could become a problem, he said, as future war funding drops and that hole needs to be filled.
“We have some depot maintenance and training money in OCO that may have to come back,” Hale said. “I can’t put a good number on it because how much has to come back depends on what forces we take out. Some of the forces that are over there right now may effectively leave the military if we are going to downsize.”
“Depending on how small we get, it may have to come back into the base. I think there is a potential problem there that could exacerbate the base problem.”
The immediate focus of the budget talks now is whether lawmakers can come up with alternative savings and revenues to substitute for sequestration. No one expects a deal that restores Obama’s full 2014 requests, but there is genuine bipartisan support for finding some middle ground and amending the BCA with a new set of caps for at least 2014 and 2015.
Would another $10 billion in 2014 help or has the Pentagon already “fallen off the cliff” as some suggest and better to embrace the lower caps?
“I don’t know who you are talking to,” Hale laughs. “That’s a lot of money, $10 billion. I’m not going to speculate what Congress will do, but if we saw some relief from sequestration, you would see us first try to mitigate effects on near term readiness.”
“We are in our own minds—and to some extent on paper—starting to create, if you will, buyback lists,” Hale said. “Readiness would be high… I think that is the first thing we would try to buy back with $10 billion. Try to get a lot of that direct readiness back, the flying hours, steaming hours, maintenance.”
Adding to the importance of this 2014 debate is the fact that the Pentagon is now in the midst of longer term budget exercise trying to map the next five years from fiscal 2015 through 2019. “It’s going to be a $200 billion to $250 billion total cut for those five years against the president’s budget,” Hale said. “It’s a pretty good-sized whack.”
There’s a backwash too onto 2014. In fact, the two budgets—short and long-term—inevitably influence one another.
To the extent that there will be less money in the future, new weapons programs in 2014 are more likely to be cancelled. If the caps are reset for 2014 that will have its own ripple effect going forward.
It can be a fine line to walk. Inside the defense industry, there is growing concern that the administration is not taking a stronger stand against sequestration and fighting now against the defense cuts. At the same time, the CSBA report makes the argument that the Pentagon only hurts itself by proposing “unrealistic budgets that do not account for the cuts required by law.”
“As the past year has shown, the Pentagon’s failure to plan for sequestration and its repeated warnings of the consequences did not prevent the cuts from taking place—it only served to limit the number of options available once sequestration went into effect,” Harrison writes. “The Department now has a window of opportunity, albeit a small one, to revise its budget and strategic guidance to fit within more realistic resource constraints.”