Magic Money and Budgetary Malpractice

Everybody fiddles with their budget from time to time. How will we pay for the new car? Or that summer spike in the gas bill? What about that unanticipated bail expense, from before Colorado legalized pot? Even federal agencies do the same thing. What about that extra expense for the unplanned long stay in Iraq? Or how to help citizens deal with an unexpected tsunami when no one planned for it in the budget?

But the 2011 Budget Control Act has elevated the art of federal fiddling to new heights. Tight budget caps and the 2013 sequester have led the Defense Department and, increasingly, the State Department, to get creative with budgeting — so creative, in fact, that they are verging on malpractice.

Imagine, if you will, that your operating expenses must be covered by your income. But you want to spend more, so you create a second budget to pay for the things you do every day or month, like buying groceries or paying the gas bill. But here, instead of relying on your paycheck income, you also set up a second payer — a neighbor, perhaps — who agrees to front you the money, at no interest, fully knowing that he or she will never be repaid. Or what about just putting operating expenses on a home-equity line — one that seems to go on forever, at no interest cost to you. And the neighbor or the generous bank agrees never to look over your shoulder. Pretty sweet, right?

Unfortunately, that never happens in the real world — only in Washington, D.C.

This is essentially what Defense Department has done with the overseas contingency operations (OCO) budget request, which comes in at a whopping $58.5 billion for fiscal year 2015. According to the Budget Control Act, it’s not counted against the budget caps, so it is essentially "free" additional funding — about 10 percent of the defense budget — for a Pentagon that regularly complains about the restraints imposed by the Budget Control Act.

Of course, you may say, that’s all money for the additional costs of being at war in Afghanistan. But Todd Harrison of the Center for Strategic and Budgetary Assessments told Defense News that the costs of supporting the 9,800 troops that will remain in Afghanistan through 2015 might come to $20 billion. So what’s the other $38.5 billion for?

Turns out that’s for the operations and procurement needs of the military services, which, despite protestations to the contrary, are unrelated to the war. It will go to fund the same stuff they spend budget–capped money on: buying fuel, operating bases, purchasing and repairing equipment, procuring services, paying civil servants, and providing education and training. Many of these things are part of the Pentagon’s large "back office," which represents about 42 percent of the defense budget. As for the equipment, much of it is unrelated to the dwindling war effort, as the Stimson Center pointed out recently.

The State Department has also discovered how to tap this magic money. For several years now, it has added an overseas contingency budget request to its own base operating and program budget. These days, that extra above-the-cap funding has come to nearly 15 percent of the international affairs budget of the U.S. government. Not only did the State Department ask for nearly $6 billion in OCO for fiscal 2015, but when it learned that the president was going to ask for more money for counterterrorism programs, it jumped on that bandwagon and piled another $2 billion on top of the first ask.

And all for unexpected war costs, you say? Not in this case, though there is a lot for Afghanistan development and relief in Syria. But it’s also going to fund international broadcasting, State Department and USAID salaries, and conflict resolution and humanitarian efforts in other countries, like Somalia. These activities should just as easily have been part of the basic State/USAID budget request, but that OCO money just looks so tempting — free, flexible, and unconstrained.

For both the Pentagon and the State Department, the OCO budgets generally have not gone through the same intense internal scrub as the base budgets. Moreover, when they hit Congress, the authorizing committees — Armed Services and Foreign Relations/Affairs — generally do not hold hearings on them, and the appropriators process these contingency budgets more quickly and with less scrutiny than the base budget requests, especially for the Defense Department.

This budgetary malpractice in the national security and foreign-policy agencies continues apace. Longtime defense watchers know that the roughly $9 billion to $11 billion a year the United States has been spending for more than a decade on national missile defense is not actually part of the Navy, Army, or Air Force budget.

Way back in the mid-1980s, when Ronald Reagan proposed "Star Wars," the services got nervous because the president was asking them to shoulder costs for a mission that didn’t fit clearly with their sense of self. The Army fought on the ground with heavy equipment; the Navy ruled the seas with submarines, ships, and aircraft; the Air Force patrolled the skies, especially with fighter aircraft.

None of them really wanted to take on the budgetary requirements of the interception of Soviet missiles, not at the cost they could see coming. Missile defense would compete with the hardware they really wanted. The answer was to create a separate Pentagon agency (now the Missile Defense Agency) reporting directly to the secretary of defense, shovel the budget over there, and let the president protect it (or the secretary, on his behalf). Sure, they said, add it to the total defense budget — but for God’s sake, don’t take anything out of the services’ budgets to pay for it. And so it was done.

The missile defense precedent has stayed around for more than 30 years. Now, with the new budget caps in place, the Navy seems to have rediscovered that budgetary precedent and has encouraged Congress to act on it. The problem, of course, is the cost of the next-generation ballistic missile submarine, son of the Ohio-class submarine. This next-generation nuclear missile submarine could cost as much as $12.4 billion each, according to a report filed by the Pentagon to Congress, and the Navy wants to buy 12 of them.

The Navy, however, has decided it cannot afford that and all the regular ships it plans to buy. What’s the answer? Create a separate fund for it, outside the Navy’s budget, as a "strategic-level requirement," as one Navy official put it last year.

Congress looks willing to acquiesce; the House and Senate defense authorization bills each include a "national sea-based deterrence fund." Presumably, all the money appropriated in a given year for the new submarine would be put in this fund and the program would no longer compete with other Navy ships for funding. (But of course, the actual management of the purchase and the operation of the program would continue to be done by the Navy, keeping its back office alive.)

It is all creative accounting. And nobody has yet fessed up as to how this asset would actually be paid for. Nobody is going to trade off missile defense funds to buy subs, so that won’t work. But the Navy will argue that its current shipbuilding account should not decline by the amount of funds that go into the new submarine account — that should be the responsibility of the secretary of defense to make space for. Now, everybody seems to be betting that the White House and Congress can be convinced to raise the whole defense budget by the amount needed to buy the "boomers," as the Navy calls its nuclear missile submarines.

It doesn’t make sense. Unlike missile defense, this is a service program with a long history. The Navy has bought boomers through its own shipbuilding budget ever since Adm. Hyman Rickover shoved them down the service’s throat in the 1950s. But Rickover is dead and the Navy wants out, hoping to protect the funding for the programs that are at the core of the Navy’s mission — carriers, destroyers, and cruisers.

However you slice it, it’s budgetary malpractice. Instead of setting priorities and making hard choices — at the Pentagon, trimming the back office and fixing a broken and increasingly expensive pay and benefits system, or, at the State Department, making a better case for the base budget — they’re going after the magic money. At some point the budgetary magic wand is going to run out of power.

As budgets continue to decline, both the Pentagon and the State Department are going to have to learn how to fit real needs into real resources. And decline seems likely, as the White House and Congress remain deadlocked over a long-term budget deal. Year-by-year defense and foreign-policy budgets are slipping, and the OCO funds are starting to disappear as the Iraq/Afghanistan rationale goes away. In the long term, as the Center for Strategic and International Studies suggests, the fall in defense resources is likely to resemble the past — a decline of about one-third — until budgets settle. We are not there yet, but are clearly headed there.

But this year, like the last, the Pentagon, the State Department, the White House, and Congress are still willfully suspending disbelief, while being drawn to the magic show.