Defense Financial Highlights

Senate committee approves FY2016 Defense Authorization bill

Friday, May 22nd, 2015

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Last week the Senate Armed Services Committee (SASC) approved the FY2016 Defense Authorization bill by a vote of 22-4. Four Democrats, including Ranking Member Sen. Jack Reed (D-RI), voted against the bill. The House passed its version of the bill this week.

The bill authorizes force levels, programs, and policies (including military pay raises) for DoD budgets and the programs and policies for the Department of Energy (DoE) nuclear weapons program.  Appropriations bills provide actual funding.

The SASC bill authorizes a total of $612 billion, including about $485 billion for the Department of Defense (DoD) base budget and $89 billion for Overseas Contingency Operations (OCO). A provision in the bill would allow DoD to transfer $38 billion from OCO to the base budget if defense and nondefense funding caps are revised in legislation.

Sen. Reed, and other Senate Democrats are concerned that including the additional base budget funding in OCO to get around defense funding caps (set in the Budget Control Act) could lead to cuts to nondefense programs. They are pushing for a deal to revise these caps. The White House has threatened a presidential veto of any bill that increases defense funding at the expense of nondefense programs.

Secretary of Defense Ash Carter also criticized this mechanism telling a Senate Committee that this approach is “a road to nowhere” that risks the incremental funding approach for OCO.

Sen. John McCain (R-AZ) SASC chairman, called the bill a “reform bill.” “It tackles acquisition reform, military retirement reform, personnel reform, headquarters and management reform,” he said. He stressed the reforms in the bill will yield savings that can be reinvested in military capabilities.

The SASC bill proposes a “multi-year effort” to improve DoD acquisition system’s structure and process. The SASC proposal is framed in five objectives: 1) establish effective accountability by streamlining decision making and giving a larger role to the service chiefs under performance agreements; 2) develop alternative acquisition pathways including “rapid prototyping and rapid fielding within five years; 3) improve access to non-traditional and commercial contractors by making it easier for such firms to do business with DoD; 4) deregulate and streamline processes by reducing unneeded requirements, reports, and certification; and 5) improve the acquisition workforce by reauthorizing the “Defense Acquisition Workforce Development Fund,” establishing direct hire authorities, and creating enhanced dual-track career paths.

The bill (similar to the House-passed bill) includes a recommendation from the Military Compensation and Retirement Modernization Commission calling for a “blended” military retirement system. Under the bill, new service members would be automatically enrolled in the Thrift Savings Plan (TSP) with a matching contribution from DoD that could go to 5 percent, starting in FY2018. Current servicemembers could choose to join the plan.

The bill also proposes a management reform plan that would “focus limited resources on operations rather than administration.” The proposal would cut funding for “headquarters and administrative functions” DoD-wide by 7.5 percent each year for four years, saving $1.7 billion in FY2016 and reaching annual savings of $6.8 billion by the fourth year. The bill directs the Secretary of Defense to conduct a “comprehensive review of the management, headquarters, and organization of the Department of Defense” and directs the DoD Inspector General to “perform financial statement audits by contracting with independent external auditors.”

The SASC bill approves the president’s request for a 1.3 percent military pay raise, lower than the 2.3 percent military raise included in the House-passed bill.

Like the House, the SASC bill rejects administration proposals to set enrollment fees for TRICARE for Life beneficiaries or consolidate the TRICARE program, retire the A-10 attack jet fleet, and to initiate another Base Realignment and Closure (BRAC) round.

Unlike the House-passed bill, the SASC bill approves the president’s request to reduce the Basic Allowance for Housing (BAH) and to use commissary surcharge funds to purchase operating supplies.

Agreeing with the House, the bill also funds 12 more F/A-18E/F Hornet aircraft for the Navy (+$1.2 billion) and 6 more F-35B aircraft for the Marine Corps (+$1 billion), which were identified by the Services as unfunded priorities.

The full Senate is expected to take up the bill in June after returning from the Memorial Day recess.

House passes FY2016 Defense Authorization bill over White House veto threat

Tuesday, May 19th, 2015

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The House passed its version of the FY2016 Defense Authorization bill, 269-151 last week. The vote was primarily along party lines as 228 Republicans were joined by 41 Democrats in voting for the bill. Only 8 Republicans voted against the bill.

The House bill authorizes $515 billion for the Department of Defense (DoD) and the Department of Energy (DoE) nuclear weapons program.  The authorized amount for the base DoD budget is about $496 billion.

The bill also authorizes $89 billion for FY2016 Overseas Contingency Operations (OCO) funding. The president requested $50.9 billion for OCO. The additional $38.3 billion in the House bill is for O&M requirements from the base bill.

Including base funding in the OCO account (considered emergency and not counted against the budget caps) allows the House to authorize $585 billion ($496 billion in base funds and $89 billion in OCO) for DoD in FY2016. This is essentially the same as the president’s request for total DoD funding ($534 billion in base funding and $51 billion in OCO).

Most Democrats strongly disapprove of this approach because they say it could lead to large cuts in nondefense spending. They call for a solution to sequestration that would increase nondefense as well as defense funding.

Defense Secretary Ash Carter also decried the use of this method of increasing defense finding. In his testimony before the Senate Appropriations Committee Carter said “while this approach clearly recognizes that the budget total we’ve requested is needed, the avenue it takes is just as clearly a road to nowhere.” Carter further said the House proposal “risks undermining support for a mechanism – OCO – meant to fund incremental costs of overseas conflicts in Afghanistan, Iraq, and elsewhere.”

The White House reacted strongly to the House bill issuing a Statement of Administration Policy (SAP) that threatened a presidential veto. The SAP expressed strong concerns that “shifting base budget resources into OCO…fails to provide a stable, multi-year budget on which defense planning is based.”

The House FY2016 Defense Authorization bill would provide military personnel with a 2.3 percent pay raise by allowing the current pay raise calculation procedures to go into effect, unless the president recommends an alternative. The president has requested a 1.3 percent military pay raise for FY2016.

The bill also rejects administration proposals to increase commissary prices to pay for operating costs, raise TRICARE fees, and lower the Basic Allowance for Housing (BAH). The bill denies the administration’s plan to retire the A-10 attack jet fleet and rejects a proposal to initiate another Base Realignment and Closure (BRAC) round.

The House bill includes a recommendation from the Military Compensation and Retirement Modernization Commission that called for a “blended” military retirement system. Under the bill, new service members would be automatically enrolled in the Thrift Savings Plan (TSP) with a matching contribution from DoD starting in FY2018. The servicemember’s contribution (3 percent initially) would be matched by a 1 percent contribution by DoD (that could go up to 5 percent).

The bill also puts forward the first components of a plan to reform defense acquisition. The bill calls for streamlining the acquisition process, reducing the number of legal certifications, giving acquisition program managers greater flexibility to address programmatic risk, providing a “Defense Acquisition Workforce Development Fund,” and authorizing expedited authorities for hiring and training the acquisition workforce.

The bill also adds funds 12 more F/A 18-F Hornet aircraft for the Navy (+$1.2 billion) and 6 more F-35B aircraft for the Marine Corps (+$1 billion), which were identified by the services as unfunded priorities.

The full House considered more than 135 floor amendments approving all but a few. The House approved a floor amendment that would require the secretary of defense to certify that Army Active end strength levels below 490,000 will support the security strategy. Of broader interest to policymakers, the House rejected a Committee provision allowing children of illegal immigrants to serve in the armed forces in the future.

Cost of U.S. operations against ISIL tops $2 billion in FY2015

Friday, May 15th, 2015

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The cost of U.S. military operations in Iraq and Syria (Operation Inherent Resolve) to combat the Islamic State of Iraq and the Levant (ISIL) since August 8, 2014 reached $2.11 billion in April 2015, the Department of Defense (DoD) reports. This averages out to $8.6 million a day.

In September 2014, DoD reported that the cost of operations against ISIL was averaging between $7.5 million per day. DoD has pointed out that the daily cost of operations fluctuates as the level of effort changes.

These costs are being funded from the Overseas Contingency Operations (OCO) approved by Congress. The administration requested $3.4 billion for Operation Inherent Resolve (OIR) in FY2015. For FY2016, the OCO request includes $4 billion to support OIR plus another $1.3 billion to train Iraqi forces (including Kurdish forces) and moderate Syrian opposition, Secretary Ash Carter told the Senate Appropriations Defense Subcommittee earlier this month.

DoD reports that 6,981 close air support, escort, and interdiction air sorties were conducted in 2014 and 5,668 such sorties have been carried out in 2015 as of March 31.

DoD has emphasized that operations against ISIL, especially airstrikes, involve contributions from partner nations. According to a DoD news release, “coalition nations conducting airstrikes in Iraq include the United States, Australia, Belgium, Canada, Denmark, France, Jordan, the Netherlands and the United Kingdom. Coalition nations conducting airstrikes in Syria include the United States, Bahrain, Canada, Jordan, Saudi Arabia and the United Arab Emirates.”

OMB directs agencies to cut FY2017 budget plan by 5 percent

Wednesday, May 13th, 2015

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Federal agency heads will prepare their FY2017 budgets at levels 5 percent below the “net discretionary total that was planned for FY2017 in the FY2016 budget request, according to guidance (M-15-11) issued by the Office of Management and Budget (OMB).

OMB Director Shaun Donovan said the 5 percent reduction applies to “defense (defense function 050) and nondefense programs.” He instructed agencies to build on proposals in the FY2016 budget, fund presidential priorities, and “continue efforts to increase effectiveness and reduce fragmentation, overlap, and duplication.”

OMB guidance for the FY2017 budget instructs agencies to avoid using across-the-board cuts, cutting mandatory spending in appropriations bills, shifting costs to other parts of the budget, reclassifying discretionary to mandatory, or enacting new user fees to offset existing spending. These the same instructions OMB gave agencies last year for preparing the FY2016 budget.

OMB guidance directs agencies to make budget choices that are “driven by the agency’s strategic plan and prioritization across their goals and objectives as informed by their strategic review.”

Agencies are encouraged to continue investments in the President’s Management Agenda priorities: effectiveness; efficiency; economic growth; and people and culture. OMB wants agencies to focus on: 1) implementing Cross-Agency Priority (CAP) goals; 2) leveraging data-driven management, including supporting Agency Digital Service Teams; 3) freezing or cutting the federal real property footprint; 4) reducing improper payments; 5) financing shared services; and 6) implementing the Digital Accountability and Transparency Act of 2014 and the Federal Information Technology Acquisition Reform Act.

OMB wants agencies to continue the progress already made to institutionalize efforts to “strengthen the use of data and evidence to drive better decision-making.” OMB directs agencies to submit policies that have been proven to work and proposals that develop capacities that utilize evidence, evaluation mad data to improve outcomes.

Donavon decried congressional inaction on sequestration, which he called “senseless austerity.” If congress does not act to change or mitigate sequestration, Donovan said “both defense and nondefense discretionary finding in FY2016 will be at the lowest levels in a decade, adjusted for inflation.” The administration has threatened presidential vetoes of appropriations bills that “locks in” sequestration cuts or reverses defense cuts, while not reversing nondefense reductions.

House passes FY2016 Military Construction/VA appropriations bill; White House threatens veto

Thursday, May 7th, 2015

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The House passed the FY2016 Military Construction/Veterans Affairs appropriations bill (H.R. 2029). The vote (255-163) was essentially along party lines with 19 Democrats joining 236 Republicans in voting for the bill and four Republicans voting with 159 Democrats against passage.

This bill and the FY2016 Energy and Water Appropriations bill, which the House also passed, are the first two appropriations bills to advance in Congress this year.

Before final passage, the House rejected efforts by Rep. Chris Van Hollen (D-MD) and Rep. Mick Mulvaney (R-SC) to prohibit the use of Overseas Contingency Operations (OCO) funds ($532 million) for base budget requirements. The use of OCO funds for base budget requirements is a key element in FY2016 Budget Resolution as a way of increasing defense while staying within the statutory cap levels, because OCO funding is considered emergency spending.

Most Democrats strongly disapprove of this approach because it could lead to large cuts in nondefense spending. In fact, the White House issued a Statement of Administration Policy (SAP) recommending a presidential veto of the bill. The SAP expressed concern that “shifting long-term defense costs to OCO is bad budget policy and bad defense policy, since it undermines long-term planning.” The SAP further stated that the White House “will not accept attempts to fix defense without non-defense by using OCO as a mechanism to evade the defense budget cap.”

The Military Construction portion of the MilCon/VA bill provides $7.151 billion for military construction projects, family housing, Base Realignment and Closure (BRAC), and the NATO Security Investment Program. This amount is $1.3 billion less than the president’s request. However, $532 million of this reduction was funded in the Overseas Contingency Operations (OCO) appropriation (Navy & Marine Corps $244 million, Air Force $75 million, and Defense-wide accounts $213 million). Therefore, the actual cut to requested military construction programs was $755 million.

The bill also reflects $386.5 million in rescissions from prior appropriations Acts. 

The House approved an amendment by Rep. John Ratcliffe (R-TX) that prohibits the use of any funds in the bill for a new Base Realignment and Closure (BRAC) round. The president’s budget request proposes a new BRAC round.

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