Flexible Spending Accounts

The fiscal cliff looms, at least to some. The defense industry has known for some time that defense budgets are going down; sequester just spurs the contingency actions already underway. But the government has been more reluctant to anticipate the future, near-term or long-term. An almost unreal aura of "hear no evil, see no evil, speak no evil" had overtaken the Obama administration ever since the Super Committee failed a year ago to produce a grand bargain on federal spending and revenues.

Whenever Pentagon officials were asked, they said that no planning was underway. Secretary Panetta repeatedly said that the defense budget the president sent to Congress in February, which provided for a flat budget in real dollars for the next decade, was the minimum DOD needed. Anything else might require revisiting the interim strategy the department issued last year. Sequester would be "doomsday," a "meat cleaver" that would undermine the strategy and our security. Panetta, Deputy Secretary Ash Carter, and Undersecretary Bob Hale repeatedly said they were doing no planning for the fiscal cliff. They, and other agencies, were waiting for the White House Office of Management and Budget to provide guidance.

But until this week, they did not get it. OMB had not defined what constituted "programs, projects, and activities" (PPA) — the funding for which will be sequestered under the Budget Control Act. It sounds really technical, but it matters. The more granular the definition of what PPA are, the less flexibility DOD (or any other agency) would have to deal with the automatic cuts. For example, if OMB defined PPA as a budget account, like "Air Force Aircraft Procurement," that would give DOD a lot of flexibility to move funds around to protect specific aircraft, like the new tanker aircraft and the F-35 fighter, and maybe take the hit on trainers or modernization of the B-1 bomber. But if PPA were what the Pentagon calls a "program element," then each aircraft in that account would have its resources cut 9.4 percent, a lot less flexible option.

So DOD has been lobbying for OMB to define PPA at as high an aggregate level as possible. On December 5, DOD (and the rest of the government) apparently got the answer. No document has been released, as yet. But conversations I have had suggest that what OMB said to DOD will make some people happy and some not so happy. For weapons programs, it seems PPA are likely to be defined as program elements — so there can be no felicitous tradeoffs between tankers and fighters, or ammunition and tanks, or aircraft and ships. Planning has to take the same cut across each program element.

It’s not the end of the world. Within each program there are sub-categories like "spares" and contract terms that include contingency funding, giving program managers some flexibility. A 10 percent cut in funding does not end a program. And, in any case, we’re talking about funding the next set of contracts — sequester does not apply to funds already locked (obligated) into existing contracts. So there will be no immediate "cliff diving" on the contract side, but there will be fewer resources for the next round.

The happier folks may be those responsible for operating the Pentagon — buying the fuel, managing the contracts, doing the planning, maintaining the bases, supplying the forces in Afghanistan, contracting with the guards and cooks at Bagram airfield, delivering training, conducting exercises, or just sailing, driving, or flying around. There, the definition of PPA may provide substantial flexibility, by being set at the account level. In other words, the roughly 10 percent reduction would apply to "Army Operations and Maintenance," which is an $82 billion account in the FY 2013 Army budget request. While nobody likes losing $8 billion, the Army would at least have the flexibility to move the remaining funds around and, as it were, cut the grass less often at Ft. Belvoir in exchange for supporting the Bagram services contracts.

Sequester is not about closing the government; it’s about cutting back on spending. If I were betting, the impact will most likely be felt by services contractors (the lawn service company) and by folks almost nobody is talking about — the civilian workforce at the Pentagon, some of whom could be taking an involuntary day or two off, without pay.

None of this will happen right away. In fact, although OMB has not said what it will do if there is no budget deal by January 3, one possibility is that it will use its existing authority to tell agencies how fast they can spend their money (apportionment) conveying to them the message: "Keep spending like you were before. We’ll get back to you on sequester when we know what Congress is going to do." In other words, if OMB anticipates that Congress might reach a deal sooner rather than later, sequestration might be short-lived, even if there’s no agreement by the January 3 deadline.

So this is all contingency planning. The ball is still in President Obama and Speaker Boehner’s court. At least DOD may now have a clearer view of the track ahead, just in case.