A Wink and Nod Toward Sequestration

While the nation swirls in the Sufi-dance around surveillance, the congressional defense committees have had their heads down, marking up the DOD money bills for the coming fiscal year (FY 2014).

When it comes to the overall totals in the defense money bills, the House committees are following the theme of sequestration-avoidance, which has characterized the congressional approach to defense all this year. This means providing funds more or less around the levels requested by the administration.

But the committees, especially the appropriators (who provide the real money), are also winking and nodding toward the reality that the sequester will probably continue this year and may well come around again next January if there is no broader agreement on the federal budget this year. Using every flexible tool they can find, the committees are looking for ways to make DOD whole, as far as possible.

The House Armed Services Committee bill started the wink and the nod. Overall, it ignored the sequester that could come in January, providing $526.6 billion for the base defense budget, the level for which the administration asked. That is more than $50 billion above the level defense will get if there is no broader budget agreement this year and sequester kicks in.

The real money, though, comes from the appropriators. Their overall funding level was a tad more realistic — $4 billion, or nearly 1 percent below the level requested by the administration (which would continue the slow decline in defense budgets that started in FY 2011). Still well above the sequestration level, though.

But both committees moved their fiscal eyelids and heads in ways that try mitigate that sequester. The heaviest hit from sequestration is on the Operations & Management accounts at DOD — the accounts that cover military operations like flying, sailing, driving tanks, training, maintaining equipment in the depots, operating bases, and the like. This happens because pay and benefits are largely exempt from the sequester, and the impact on contracts is delayed — dollars already tied to contracts are also exempt.

But those operating accounts are the life-blood of keeping things going in the military and the most flexible accounts the Pentagon has, which helps mitigate sequestration. So the House appropriators winked and nodded, taking advantage of that flexibility.

The congressional "wink" was to tweak the base budget, decreasing the funds for research and development, and increasing them for "Operations and Maintenance." This helps make up, next year, for some of the impacts of sequestration on operations this year; it refills the pots a bit.

Well, but, you say, what if the sequester hits in January? Isn’t Congress just putting money in another pocket only to have it taken away? Well, yes, but the "nod" both the House Armed Services Committee and the House appropriators made is over in the war budget — the Overseas Contingency Operations (OCO) budget.

Three-quarters of the war budget is spent on "Operations and Maintenance." And, truthfully, these O&M dollars are in exactly the same accounts as the base budget O&M, and totally fungible with non-war operating costs.

The administration’s budget request of $79.5 billion for OCO is already unpredictedly high, in part, as I wrote a while back, to fill the O&M bucket sequestration has already cut, and may cut again. OCO provides a back-door fix, so the HASC and the House appropriators did the administration one better — they added another $6 billion to the OCO budget request, raising the total to over $85 billion.

So those O&M dollars might be sequestered in January (if there is not a broader budget agreement), but, if the bills became law, the sequestration would be cut from a higher level, leaving more in the pot.

Of course the committees also made it harder on the administration, at the same time, by rejecting soundly the request for a new round of base closures (which would save money downstream), and waving aside most of the effort to get healthcare costs under control by increasing enrollment and other fees for the military’s Tricare system. The third rail of defense budgeting is still alive and well.

This is not the last move in the budget game. Sen. Mikulski and the Senate appropriators are up next. It will be interesting to see what moves they make that both allow sequestration to continue (cutting the defense budget for everyone — a BRAC for defense dollars), while mitigating the effect on operations.