The Fiscal Slide
Five reasons the Pentagon will avoid the pain of sequestration.
We are in the middle of a political and rhetorical donnybrook about the threat that falling off the fiscal cliff poses for our national security (to say nothing of what it would do to domestic discretionary spending). There will be some attention to this "crisis" in the last two presidential debates.
It is a crisis carefully engineered by the Budget Control Act, passed in August 2011: If the Super Committee failed, which it did, automatic cuts, which legislative language dubbed a "sequester," would be imposed January 2, 2012.
In September of this year, the Office of Management and Budget solemnly certified that these cuts would take 8.2 percent of FY2013 appropriated funds away from every "program, project, and activity" (PPA) in domestic discretionary spending and a whopping 9.4 percent from the "non-exempt" parts of the defense budget.
But does this mean the end of our national security (and domestic well-being), as the political debate suggests? A little careful noodling about the impact of a sequester on the Defense Department suggests it might not be the end of the world. In fact, it might be exactly the fiscal discipline DOD needs.
Let me get technical for a moment, so we can actually see what might go on. First, the law made it clear that the administration could exempt funding for troops and their benefits (including retiree benefits) from the fiscal cliff. The administration has done that, so the troops will be okay. (Their number is coming down anyway as a result of the end of the wars in Iraq and Afghanistan.)
Then, there is the matter of procurement and what some see as the almost cataclysmic level of devastation that such harsh cuts would impose on the defense industry. Except they won’t. It turns out the industry is pretty healthy, it has been for a decade, and it is working on contracts that have been funded in prior budget years, which are exempt from sequestration.
As the director of defense procurement put it: "The vast majority of our contracts are fully funded, so there’s no need to terminate existing contracts unless the product is no longer needed." Lockheed treasurer Ken Possenriede agreed that sequestration was not a near-term problem: "If sequestration happens, just based on our normal business rhythm, we’re comfortable from a cash-on-hand standpoint that we’ll endure that."
How about military operations, including the war? Well, the war budget, which has never really been separate from the non-war budget — that’s a political fiction the executive branch and Congress set up, but the funds are, in reality, mixed — is included in a sequester, which might sound terrible for the troops in Afghanistan.
But, the reality is that the funds for DOD operations (war and much else) are very "fungible," as we budget wonks like to put it, meaning the funds can be moved around among programs pretty flexibly — from training to education to base operations to the costs of operating troops in the field. And OMB and the Pentagon agree that "PPAs," in operations land, means "accounts." And accounts are things like Army Operations and Maintenance, which can cover all of the above activities. So, the service managers would have 9.4 percent fewer funds than the Congress gave them, but significant flexibility to move them around, setting priorities and making choices. Let’s say they have a scalpel to work with, not a bludgeon.
So what about research — the investments in the future of defense technology? Well, here, too, there would be 9.4 percent fewer dollars than appropriated. But R&D is what they call a "level of effort" area of funding — you buy as much R&D as the money allows, but you don’t have to cut items out of a production contract. And the Pentagon would have some flexibility as well, since most R&D "program elements" cover a variety of R&D projects, so fewer resources means setting priorities and making choices.
Beyond these technical flexibilities, DOD, like other departments, would also have recourse to reprogramming funds and using its general transfer authority. The flexibility here is pretty great; over the past decades some reprogram and transfer totals have been in the tens of billions of dollars. What it takes is making the same tough choices, many of them internal. A few, the transfers, would have to be communicated to Congress, where the senior leadership of the key authorizing and appropriating committees (who don’t want to devastate defense) would be likely to agree, especially as they were the most anxious to protect defense.
And OMB could alleviate the short-term urgency by agreeing to hold off on taking the cuts until later in the year, by approving overall funding ("apportionment") at a higher level early in the year, and delaying the cuts until later, when planning in DOD was complete.
It is not a pretty picture; no management expert would say this is the way to do defense (or any other) budgeting. But it is not doomsday. In fact, it might be discipline — exactly the kind of budgetary discipline the Pentagon has not had for the past decade. Good management, priority-setting, and greater efficiency might be the result.
And since the sequester would be a one-off, setting a lower baseline for future defense growth, our national security might just be as safe as it ever was.