Great Expectations

For the past three years, we have been bathed in pathos, hand-wringing, and garment-rending as the Pentagon faced declining budgets and the sequester cliff. But with the Ryan-Murray budget agreement for the next two years finalized last December and ratified in detail by the appropriators in January, it would seem the long nightmare is over.

Washington may be struggling in the snow, but the air is full of springtime and summer joy for the Pentagon, its contractors, and its congressional supporters — or so it would seem. "White House Pushes Budget Hike," hollers the Defense News headline. There is talk, reported there, that the Obama administration may send up a budget on March 4 that will include a $26 billion list of "wants" that the military services would love to have next year, if they just had a little bit more funding than the Ryan-Murray agreement provides. That same FY 2015 budget is likely, moreover, to include projected DOD funding for 2016 and beyond that is higher than the caps currently in place under the Budget Control Act (BCA).

But are "Happy Days Here Again" for the Pentagon? Well, if you have been reading this column for the past 18 months, you know that happy days actually never left the Pentagon behind. Defense spending, even after the sequester last year, is at a level unmatched in any year from 1945 to 2006, in constant dollars. Even the 2013 sequester was manageable, without doing long-term damage to military capabilities or, for that matter, military readiness.

Congress made sure of that last month when it not only increased the DOD’s budget above the sequester amount, but approved more than $85 billion in so-called war funding (the Overseas Contingency Operations funds). This represented $5 billion more than the administration had asked for and included $10 billion in operational funding (some of which is readiness-related) that the appropriators slid over from the base budget so they could make room for things the Pentagon did not want and did not ask for — but were definitely congressional pet rocks. These included the Global Hawk Block 30 UAV (which the Air Force wanted to ditch), and money for armored vehicle plants in Ohio and Pennsylvania (which the Army wanted to mothball). And the whole $85 billion in "war funding" is not counted toward the budget caps. From a budgetary point of view, the Pentagon has solved its readiness problem and done it "for free."

The way I see it, the Pentagon was already happy, and deliriously so, well before the Obama White House decided it would load it up with more money — and not just on top of this year’s budget caps, but well beyond 2015. It is sad that they have decided to play this game. Letting the services put out a wish list just postpones the day of reckoning and encourages bad budgetary behavior.

Is it really true that the days of wine and roses are here? Not really. There are still hard choices ahead. To understand this reality, we need to understand "baselines" in budgeting — just what, exactly, was the Pentagon’s budget plan for the future prior to the Budget Control Act and the sequester of last year? Was it more, even much more, than what these proposed increases from the Budget Control Act would provide? Definitely, about a trillion dollars more. The Pentagon’s problem now is that the planning appetite for money and things was way beyond what the forthcoming budget is likely to offer. When first Bob Gates and then Leon Panetta complained that the defense budget was being "cut," they were playing this baseline game. The cuts they were complaining about were from the appetite baseline — from a budget play that they thought would grow more than 2 percent every year above inflation.

When actual defense funding began to come down in FY 2011 — instead of growing as hoped — the services were watching those delusions of endless growth disappear. Future budgets began to look flat. First the services would only see their budgets grow by the rate of inflation, meaning that they could buy the same things, but no more. Then, as more budget realism reached Congress, the Pentagon would not even get growth with inflation. And then the BCA hit, followed by sequestration, which took the expected funds for FY 2013 down more than $30 billion below what the Pentagon thought it had for last year. It was time to forget about illusions of growing resources.

The funny thing about budgets is that this baseline — the point from which we start counting what is going to happen in the future — keeps changing every year, as new budgets are passed and new forecasts are provided. So, between last year’s sequester, which set a new, lower starting point for 2013, and the Ryan-Murray bill, which only slightly improved on the baseline after sequester, all those future budget projections keep starting from a lower level than they did in the previous year.

The Pentagon has played this baseline game for decades; optimism and hope about future budgets have always prevailed over common sense and history, especially after a war. The bottom line is that we remain in a defense drawdown, with a defense budget that has actually gone down every year since FY 2010, and today we have a projected defense budget that is now well below the appetite the services counted on just two years ago. If you look at the space between the healthy appetite of two years ago and the likely budgets today, more than $1 trillion in total has disappeared from the 10-year wish list the service chiefs once had. And the safety blanket that by now much-abused war funding has provided is slowly going away (a lot of it stopped funding the war and supported basic operations several years ago).

I’m not worried. Politicians and policymakers have put plenty of cushioning in this budget, even at levels lower than those previously wished by the services. The defense industry, too, has clearly adjusted to the new environment, saving its dollars and adjusting its business. It now feels that the worst is over. Or, as Raytheon CEO Bill Swanson put it: "[I]f you look at ’16 and look at the numbers, it [the defense budget] ticks up even under sequestration." Of course, he has to say that. He’s hoping for some of those funds (although he’s making a dangerous error — what looks like growing budgets is really only just adding inflation to the budget from the previous year’s budget, not new, additional funding). And, as long as the war budget is available, the politicians on the Hill will be able to put things back into the budget that the Pentagon wants to take out — like funding for the Ohio and Pennsylvania armored-vehicle production plants, keeping a carrier from being retired early, and preventing the Air Force from retiring its whole fleet of A-10 close air support aircraft.

But a lot of tough choices remain for the DOD, because even though the defense budget looks like it’s going up, those budgets won’t buy what the services wished for even two years ago, much of which is still in the plan. The budgetary rock has rolled down the hill, so the pushing gets harder. It means the Army is still likely to shrink to 420,000 service members, down from the 490,000 Gen. Ray Odierno wanted. The Air Force will still lose some squadrons; the Navy will still shrink. The rising costs for military compensation and benefits will still squeeze the rest of the defense budget. The huge costs of the DOD’s back office will still weigh like an anvil on planners looking for savings — and the civil service at the DOD will still shrink.

These are the tough choices the new Pentagon leadership needs to focus on. Shame on the leadership for promising a wish and a prayer — $26 billion in FY 2015 the services will never see, or another $36 billion in FY 2016 that is equally unreal. Those are counterfeit promises that let the services keep the unaffordable in their future plans until the day comes that the money is not there and the decision-making they should do now has become even harder.