Defense Financial Highlights

House defense committee chair proposes acquisition system reforms

Friday, March 27th, 2015

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House Armed Services Committee (HASC) chair Rep. Mac Thornberry (R-TX) introduced a bill containing the first in a series of broad ranging defense acquisition reforms.

During a year-long effort, the committee engaged stakeholders from the Department of Defense (DoD), industry, and Congress to develop proposals for long-term reform of the defense acquisition system. Thornberry called his proposal “the first step on what I expect to be many years of focused work to improve our flawed defense acquisition system.”

The broken acquisition system is contributing to the loss of our military’s technological edge,” Thornberry charged. He said the current system is slow, cumbersome, and often many years late in delivering equipment that frequently under performs and is costly to maintain.

The proposed “Agile Acquisition to Retain Technological Edge Act” would streamline the process, improve accountability, and eliminate outdated regulations, thereby begin “to get some of that edge back,” Thornberry stressed. The bill’s provisions promote a system that is “proactive, agile, transparent, and innovative.”

To be proactive, the bill proposes to empower acquisition officials by removing barriers so that officers can pursue acquisition as a profession. It would provide a “Defense Acquisition Workforce Development Fund” and expedited hiring authority for hiring and training the acquisition workforce. The bill also would give acquisition program managers greater flexibility to address programmatic risk and enable the selection of contract types that best meet program objectives with an appropriate level of risk.

The bill promotes quick program adjustments by allowing program managers to focus on oversight, engineering, and risk management. The proposal would consolidate reporting requirements, streamline the approval process, and identify key considerations that are addressed during the life of the program. The bill also would eliminate “non-productive Departmental legal review” in some cases.

The bill promotes transparency by supporting government and industry communication that is clear and open and the production of auditable financial management statements.

The proposed reform bill would remove barriers that inhibit companies from seeking defense business or proposing new ideas. The bill would promote the use of value engineering to encourage contractors to reduce costs and share savings. The Mentor-protégé Program would be made permanent to improve the linkage small and large defense contractors. Also, the bill would make the Small Business Innovative Research Program permanent to be used “more broadly by the military services and defense agencies.”

Thornberry said the reforms will be considered for inclusion in the FY2016 Defense Authorization bill, which the HASC will take up next month. Ranking Member Rep. Adam Smith (D-WA) co-sponsored Thornberry’s proposals.

Thornberry said he released his recommendations of what he called a “discussion draft” of the bill now because he wanted feedback from the stakeholders. “We listened to a lot of folks as we drafted this bill, and we want to hear from them again before we work to make it law,” he said.

OMB issues strategy to reduce federal real estate footprint

Thursday, March 26th, 2015

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The Office of Management and Budget (OMB) has issued a National Strategy for Real Property that directs agencies to lower the real estate footprint beginning next year.

In a memo to federal agencies, OMB Controller Dave Maulder said the National Strategy for Real Property “establishes a new strategic framework through which the government can manage its real property.” This framework will “guide agencies’ real property management, increase efficient real property use, control costs, and real property holdings,” he stressed.

In 2013, OMB ordered agencies to freeze their domestic real estate footprint and better utilize existing space through consolidation and higher occupancy rates. Under the “Freeze the Footprint Policy,” agencies were prohibited agencies from increasing “the total square footage of their domestic office and warehouse inventory compared to the 2012 baseline.”

OMB is calling the policy a success. Between 2012 and 2014, agencies cut 21.4 million square feet of space, according to OMB. In 2014 the government “disposed of 7,350 buildings, 44 million square feet of space, and eliminated $17 million of annual operation and maintenance cost,” OMB said.

The new Strategy will build on this success, Mr. Maulder stressed. The Strategy has three key steps: 1) freeze inventory growth; 2) measure performance; and 3) reduce real estate inventory.

The inventory freeze will continue through 2020. Measuring the performance of office and warehouse assets will “identify opportunities for efficiency improvements through data driven decision-making.” Inventory will be reduced by consolidating, co-locating, and disposing properties. The disposal of excess and underutilized properties will also be accelerated.

The “Reduce the Footprint” (FTF) policy issued to implement the Strategy directs agencies to establish targets for annual cuts in domestic buildings square footage and implement space design standards in using domestic office space.

The FTF requires agencies to develop a five-year Real Property Efficiency Plan by July 10, 2015. Each plan will contain a description of internal controls that: describe the processes used by agencies to identify offsets when adding space; describe internal reviews and certification processes required for new leases, acquisitions, and expansions; and justification documentation when not applying standard designs.

Each agency plan will also: describe its use of the President’s Management Agenda performance benchmarks; report on its reduction targets for office and warehouse space; report on its disposal targets for owned spaces; and a plan to identify opportunities for reducing office space and warehouse. Agencies will also document investment costs and total cost reductions through disposal of leased space and owned buildings and provide an explanation of actions taken to maximize and increase office space efficiency.

The agency plans will identify offsets for any growth in total office space “to ensure that there is no net increase in the size of owned and leased office inventory. The Department of Defense (DoD) will be able to count as offsets any office of warehouse space at military installations that are closed or realigned under the Defense Base Realignment and Closure (BRAC) process. However, properties “mothballed,” enhanced use leases or outleases, and properties for which the Federal Real Property Profile (FRPP) use code is changed to other than office or warehouse after the baseline is finalized cannot be counted as offsets.

The final Real Property Efficiency Plan is due September 10, 2015. Each year after that, agencies will submit a plan for the next five-year period until 2020.

Total cost of DoD major acquisition programs declines

Tuesday, March 24th, 2015

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The total cost of 77 selected Department of Defense (DoD) major acquisition programs decreased by $9.1 billion (-.06 percent) in 2014, according to a report issued by DoD last week. 

This small increase reflects increased planned quantities (+$2.5 billion), program schedule changes (+$2.4 billion), higher costs due to engineering changes (+$5.4 billion), increased program cost estimates (+$0.2 billion), and other changes ($0.2 billion). Extending Offsetting these increases were cost decreases due to lower escalation rates (-$10.8 billion) and a drop in support costs (-$9.0 billion).

When $6.964.4 billion is added to extend the funding for Ballistic Missile Defense through FY2020 (previous reports limited BMD funding through FY2019) and adjustments are made for final and initial reports, the total cost of DOD major acquisition programs as of December 31, 2014 is $1.622 trillion.

The DoD report also identified one program that experienced critical Nunn-McCurdy unit cost breaches—unit cost increases of 25 percent or more to the current Acquisition Program Baseline (APB) or 50 percent or more to the original APB. The Joint Standoff Weapon—Baseline Variant and Unitary Warhead Variant (JSOW). The breach occurred because JSOW production was terminated after FY2015 in the president’s FY2016 budget resulting in a significant reduction in quantities.

The Warfighter Information Network—Tactical Increment 2 (WIN-T Inc2) experienced a significant McCurdy breach—unit cost increases of 15 percent, but less than 25 percent of the current APB or 30 percent, but less than 50 percent of the original APB. The WIN-T Inc 2 breach was due to a 32 percent quantity decrease (5,267 to 3,583) and a procurement schedule extension.

Programs submitting their initial SAR reports are not represented in the total cost growth estimates for a particular year. For this reporting period, the initial report was submitted for the Air Force Intercontinental Ballistic Missile Fuze Modernization (ICBM Fuze Mod) program at a cost estimate of $2.076 billion.

The cost estimates for selected programs are reported in the congressionally-required Selected Acquisition Reports (SAR).  SAR estimates of total program costs include actual costs to date and estimated future costs.  Program costs include research and development, procurement, military construction, and operations and maintenance costs that are acquisition-related. 

DoD prepares these congressionally-required reports annually (with submission of the budget).  Quarterly reports are prepared for programs that experience cost increases of 15 percent or more, and schedule delays of at least six months.  DoD also submits quarterly reports for a program’s initial and final report, or for programs that are rebaselined during major milestone reviews.

Proposed House Budget Resolution would cut spending by $5.5 trillion, increase defense, but not end sequestration

Friday, March 20th, 2015

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A budget resolution approved by the House Budget Committee (HBC) yesterday would cut $5.5 trillion from federal budgets over the next 10 years and balance the budget by 2024.

HBC Chairman Rep. Tom Price (R-GA) called the resolution “a strong step forward in addressing the nation’s fiscal and economic challenges.”

The annual budget resolution, often referred to as a “congressional budget blueprint,” sets revenue and appropriations targets for the tax writing and appropriations committees, so they can begin work on the president’s budget request.  This is an internal congressional procedure, so the passed budget resolution is not sent to the president for approval.

The HBC plan, “A Balanced Budget for a Stronger America,” would set the FY2016 total federal spending level at $3.8 trillion, about $140 billion less than current policy. Of the $5.5 trillion reduction from 2016 to 2025, $2.2 trillion would come from changes to the health care law and $2.1 trillion from Medicare, Medicaid, and other mandatory programs. The remaining reduction would result from cuts to discretionary programs (-$539 billion) and lower interest payments on the debt ($-798 billion).

The HBC proposal would not end sequestration.

The budget discretionary budget authority for national defense (DoD plus other defense-related spending such as the Department of Energy’s nuclear program) would increase by $387 billion from FY2017 to FY2025, while cutting non-defense budgets by $759 billion over the same period.

In FY2016, the proposed budget would keep defense at the sequester level of $523 billion, but would set funding for Overseas Contingency Operations (OCO) at $90 billion, about $40 billion above the request. The president’s national defense base budget request was $561 billion, $38 billion above the cap.

The committee’s budget resolution would also set up a “Defense Readiness and Modernization Fund” that could be used to increase defense funding is a way that would be considered “deficit-neutral,” just like funding for the OCO account.

House pro-defense supporters urged the committee to approve an amendment adding more defense funds. This concerned so-called “deficit hawks” who are troubled about resulting increases to the deficit, unless they were offset by cuts elsewhere. The House leadership, worried that this standoff could imperil passage of the budget resolution on the house floor, brokered a deal that the Rules Committee would accept an amendment to increase OCO funding to $96 billion, without requiring any offsets, and would not require offsets for the $20 billion “Defense Readiness and Modernization Fund.”

The full House is expected to consider the budget resolution next week

Senate passes and sends FY2015 Appropriations and Defense Authorization bills to president

Monday, December 15th, 2014

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The Senate has passed and sent to the president the FY2015 Appropriations bill that funds the Department of Defense Appropriations bill and 10 other bills (including Military Construction /VA) through the end of FY2015. The bill also funds the Homeland Security Appropriations bill under a continuing resolution (CR) through February 27, 20015.

The Senate passed the $1.013 trillion government funding bill 56-40 Saturday after defeating moves by Sen. Ted Cruz (R-TX) designed to stop the bill from proceeding to a final vote. The House had passed the bill 219-206 on Thursday. The president indicated he will sign the bill, thus averting a government shutdown.

Senate Majority Leader Sen. Harry Reid (D-NV) acknowledging the compromise cooperation between Democrats and Republicans needed to finish the bill said “this bill is not perfect, but we can all be proud that we voted tonight to make America more secure, put our government on more sound footing than when this Congress began.”

Funding in the bill for DoD base appropriations, less Military Construction, totals almost $490.2 billion, about $1 billion less than the request. Military Construction appropriations funding (in the MilCon/VA bill) is $6.6 billion, essentially the same as the request.The bill also provides $64 billion for Overseas Contingency Operations (OCO).

The bill provides funding for a 1% percent military pay raise. But, it freezes freeze pay for general and flag officers and makes a 1 percent reduction in the Basic Housing Allowance (BAH). The conference agreement adds about $200 million to the Defense Commissary Agency funding request to maintain operations.

The legislation includes about $850 million to refuel the USS George Washington, denying the administration’s plan to defer a decision on refueling until the FY2016 budget. The bill also funds continued operations of A-10 aircraft and continues operations of the full Airborne Warning and Control System (AWACS). The administration had proposed retiring both of these aircraft.

The Senate also approved (89-11) the FY2015 Defense Authorization bill, which the House passed earlier this month. The president is expected to sign the bill.

The Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015,” named after the Senate and House Armed Services Committee chairmen, authorizes $495.9 billion for the Department of Defense (DoD) and $17.5 billion for the Department of Energy (DoE) nuclear weapons program.  The bill authorizes an additional $63.7 billion for Overseas Contingency Operations (OCO).

The legislation authorizes a 1 percent military pay raise, requested by the president. However, the bill rejects proposed changes to TRICARE fees, deductibles, and pharmacy co-pays, but does authorize a $3 increase in pharmacy co-pays for prescriptions filled in non-military treatment facilities by non-Active Duty TRICARE beneficiaries.

The authorization bill rejects the administration-proposed 5 percent cut to Basic Allowance for Housing (BAH), opting instead for a 1 percent reduction in BAH. The bill also rejects another Base Realignment and Closure (BRAC) round in 2017 that was urged by the administration. In recent years Congress has repeatedly rejected administration requests for another BRAC round.

The bill also denies the administration proposal to defer a decision on refueling the USS George Washington, providing almost $800 million for support and advance planning for refueling the aircraft carrier, prohibits the Air Force from retiring or preparing to retire the A-10 aircraft fleet in FY2015, and stops the Air Force from retiring any Airborne Warning and Control System (AWACS) in FY2015.

In a major organizational move, the conference agreement creates an Under Secretary of Defense for Business Management and Information that combines the positions of Deputy Chief Management Officer (DCMO) and Chief Information Officer (CIO).

Before adjourning this week, the Senate will move to complete action on a number of pending nominations proposed by the president and legislation extending for one year tax provisions set to expire at the end of the year. These so-called “tax extenders” include research and development tax credits (highly popular with business), state and local sales tax deductions, tax credits for energy efficient homes, and bonus depreciation tax credits. 

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