Flexible Spending Account

It is by now virtually certain that the sequester is with us at least through this year and, some speculate, maybe even next year as well. It is becoming equally clear that the Pentagon will survive the sequester, for all the management challenges it poses.

People have been writing about the flexibility given for air traffic controllers and the Agriculture Department as Congress tries to work its way around some of the tough issues sequestration imposes.

It might seem like it is time to pity the Defense Department, because Congress does not seem to be preparing a new set of flexible cards for the Pentagon. But there is no new deal for DOD because there doesn’t have to be one. "Flexibility-R-Us" is the way the Pentagon is managing, and they are doing a mighty fine job.

As I have been writing for some time, the Pentagon already has a number of ways to play its budgetary cards under the sequester, and it is using all of them. And the flexibility cards just keep coming.

First, the definition of what was to be sequestered waived the pay and benefits funds, so no harm to the troops. Then, any funds already tied to existing contracts were off the table under the Budget Control Act, meaning the impact on defense contractors was delayed (watch for declining procurement budgets in the future, though).

Then, the Office of Management and Budget agreed that the funds that remained vulnerable to the sequester — DOD’s operating funds (civilian pay, operating the force, maintaining equipment, training, base maintenance, and operations) — could be moved around. Not every account needed to be sequestered equally.

And Congress increased this flexibility when it passed a final appropriations bill for DOD in March, adding $10.5 billion to operating accounts for this year above the level provided in the continuing resolution that expired that month. (Not every department got a final appropriation; most just have to suck up the continuing resolution level, which was the FY 2012 amount.)

The next set of Pentagon flex-cards were dealt last week, when DOD transmitted its reprogramming request and its war budget for this year to Congress.

DOD has significant flexibility when it comes to reprogramming. Internally, without telling anyone, they can and have moved money within accounts totaling more than $10 billion a year every year since FY 2000. There is no formal report on how much they have already moved around to deal with the sequester, but they have surely used this authority up to the limits provided in law.

In addition, current law allows the department to transfer another $7.5 billion across accounts, as long as it notifies the key congressional panels (the armed services committees and the defense appropriations subcommittees).

When the department sent its reprogramming up to the Hill last week, it actually proposed moving more than $9.6 billion around, using additional transfer authorities. DOD proposed to move this money exactly in the way you might expect — to relieve its operational account problem.

It took more than $3.6 billion out of procurement accounts (buying stuff) and put it (along with funds from other areas, including personnel, since the force is getting smaller) into the operational accounts, solving more than $6.5 billion of its operations money woes (especially for the Army, which saw its operations accounts go up $4.8 billion).

Not much for Congress to worry about here, unless some of those procurement dollars were headed to companies in members’ districts, and some surely were.

The war budget request of $79.6 billion, on the other hand, should raise some questions. I have already suggested that the Pentagon might use the politically popular war funds (Overseas Contingency Operations, or OCO, funds) to cover some of its operational problem.

The reason DOD could be tempted is because in reality there is no separate war budget, in accounting terms, when it comes to operational funding. This is by far the most flexible part of the defense budget.

Operations are operations; all the money looks the same, whether it is being spent here or there. It’s still training, flying, sailing, and base operations. And Congress does not do much to track exactly where these operational dollars are being spent.

So, over the years of Iraq and Afghanistan, operational funding could kind of slop back and forth, depending upon need. We tried pretty hard in the Obama transition to tighten down what DOD could ask for in a war budget. It was easier when it came to hardware — if it wasn’t lost or damaged in the war, it couldn’t be in the war budget. If it was training and troop planning that would be part of what the Army would do in the absence of the war, DOD couldn’t use the war budget to pay for it.

It looks like those days of discipline are over and done with. The OCO budget request already looked like it was going to be a problem when the administration delayed sending it to Congress. Then, when it was only $9 billion less than what the Pentagon asked for last year, even though the number of troops in Afghanistan has gone down by 39 percent, my suspicions rose even higher.

It’s deucedly difficult to read the OCO cards, precisely because operations are operations and the OCO budget request does not specify where they are taking place. But there are some questions Congress needs to ask, unless it is willing to let DOD slide in order to deal with sequestration.

The Pentagon has once again put funds for wages and benefits of all the soldiers and Marines in excess of FY 2016 troop targets (182,000 for the Marines and 490,000 for the Army) into the OCO budget — $5.1 billion worth — under the dubious assumption that those folks are only there because of the war. Of course, if they could keep them, even without the war, they would — but, ya know, budgets are coming down.

Then there are other pieces of terminology that suggest operations budget issues have crept into the OCO budget: the department estimates shortfalls in its Operations and Maintenance accounts, for example. And undisclosed amounts for undefined "personnel pay for mobilized forces." (That’s not in the field — would they be mobilized anyway?) And "pre-deployment training," training they might be doing anyway? And "various classes of supplies" not otherwise described. These categories add up to $25.7 billion of the total.

There is funding to support forces that are not in Afghanistan that "also support activities other than those in Afghanistan." You’re telling me all of that is ongoing activity that has nothing to do with the war and ought to be in the base budget?

And there’s a hardy perennial at least partly outside the operations accounts: $8.9 billion to "repair and replace equipment as DOD resets the force," despite the reality that the Army already substantially repaired and reset its equipment using billions of dollars of OCO and supplemental funding over the past decade, as my colleague Russ Rumbaugh has pointed out.

The OCO request provides a tempting option for repairing some of the impact the sequester has had on basic DOD operations funds. And the Hill might be lenient, providing yet more flexibility to the Pentagon.

Bottom line: DOD is the dealer when it comes to surviving the sequester, and the house usually wins. As I have said before, the sequester is not fun, but it is manageable.