Defense Budget and Financial Management

Proposed Senate legislation would penalize DoD for failure to achieve audit readiness by 2017

Thursday, February 12th, 2015

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A bill proposed by four Senators would impose penalties on the Department of Defense if the department does not meet its goal of being audit ready by the end of 2017.

The Audit the Pentagon Act of 2015 (S. 327) was introduced by Sen. Joe Manchin (D-WVA), Sen. Ron Wyden (D-OR), Sen. Ted Cruz (R-TX) and Sen. Rand Paul (R-KY) last week.

In a press release, Sen. Manchin said “it is simply unacceptable that the Department of Defense is the only major federal agency that has not completed a financial audit. Our bill will help to solve that problem.” Noting that DoD has consistently expressed its commitment to achieving a full audit, Manchin said “Congress should hold them to that.” A similar press release was issued by Sen. Wyden.

Both Manchin and Wyden expressed frustration that the Government Accountability Office (GAO) continues to label “the Department of Defense “High Risk” for waste, fraud abuse and mismanagement due to the agency’s inability to adequately manage its funds.”

Under the proposed bill, if DoD does not meet its audit goal in 2017, congress will increase its oversight every year thereafter leading to the termination of reprogramming a transfer authority of funds. However, If DoD achieves an unqualified audit “which analyzes both the internal systems of control and the details in the agency’s financial records,” the department will get additional transfer authority to use in the following year.

The bill would also require that any individual nominated to serve as DoD Comptroller or as a military department Assistant Secretary for Financial Management must have served as the chief financial officer, or the equivalent, of a federal or state agency or a public company that has received an unqualified audit opinion.

In addition, if DoD does not achieve an unqualified audit by December 31, 2018, the bill would require the Defense Accounting and Finance Service (DFAS) to be transferred from the Department of Defense to the Department of the Treasury on April 1, 2019.

DoD leaders have stressed that the department is on track to meet the 2017 goal. The FY2016 DoD budget overview emphasizes that “DoD Leadership is committed to achieving audit ready financial statements by the end of FY 2017.” The overview provides a detailed description of the various programs in place to ensure the department meets that goal. A press release on the FY21016 budget stated that “during 2015, 90 percent of Defense resources have budget statements under audit.”

The bill was referred to the Senate Armed Services Committee (SASC) where it will be considered in conjunction with the FY2016 Defense Authorization bill.

FY2016 DoD base budget request totals $534.3 billion

Tuesday, February 3rd, 2015

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The FY2016 DoD base budget request totals $534.3 billion for discretionary budget authority, $38.2 billion higher than the amount enacted in FY2015 ($496.1 billion).

The budget request also includes $50.9 billion for Overseas Contingency Operations (OCO), about $13.3 lower than the FY2015 enacted amount.  

While the FY2016 budget request is essentially the same as that included in the FY2015 budget plan, DoD’s five-year budget plan for FY2016 to FY2020 is $15.5 billion higher than planned last year.

DoD’s press statement stressed that the budget “supports the 2014 Quadrennial Defense Review (QDR) strategy, beginning with its three pillars: protect the homeland, build security globally, and project power and win decisively.”

Introducing the FY2016 DoD budget at the Pentagon yesterday, Deputy Secretary of Defense Bob Work described the budget as strategy driven and resource informed. Noting that the request is $36 billion above the sequestration caps, Work pressed for congressional action to block the return to sequestration. He warned that a return to full sequestration will guarantee a “resource-driven, strategy-deprived budget.”

The Army’s FY2016 base budget request totals $126.5 billion (23.7% of the total DoD base budget) up $7.0 billion from the FY2015 enacted level. The Navy’s budget (including the Marine Corps) totals $161.0 billion (30.1%) $11.8 billion above FY2015.  The Air Force base budget request is $152.9 billion (28.6%), up $16.0 billion. The budget request for Defense-wide accounts is $94.0 billion (17.6%), $3.4 billion higher than the previous year.

DoD’s budget overview states that the FY2016 DoD budget reflects six key themes: balance the force; manage enduring readiness challenges; continue focusing on institutional reform; pursue investments in military capabilities; provide for DoD’s people; and support Overseas Contingency Operations.

The QDR calls for rebalancing within the Army. The Army will lower its active end strength level to from 490,000 in 2015 to 450,000 by 2018. Army National Guard strength will drop from 350,200 in 2015 to 335,000 in 2017. DoD warns that if sequestration returns to full force the active Army will have to go down to 420,000.

The FY2016 budget provides significant funding for modernization programs. The budget funds procurement of 57 Joint Strike Fighters and 9 ships. Development funding is included for the KC-46 tanker and the Long Range Strike bomber. The Navy funds the overhaul of the George Washington and development of the Ohio replacement strategic submarine. And, the Army includes $4.5 billion for helicopter modernization.

The FY2016 budget would raise military pay by 1.3 percent. The budget also funds a 1.3 percent pay raise for civilians. The FY2015 pay raise was 1.0 percent. The 1.3 percent pay raise is a full percentage point below that which is called for in current law. Planned pay raises will also be limited in the FY2016-20 budget plan. The planned pay raises are 1.3 percent in 2017, 1.5 percent in 2018 and 2019, and 1.8 percent on 2020.

The budget also includes a number of proposals to slow growth in military compensation and benefits. The budget slows the growth in Basic Allowance for Housing (BAH) costs by 4 percent until the BAH rates equal 95 percent of housing and utilities costs.

Reduced commissary subsidies will come from operating efficiencies rather than a direct cut to the commissary subsidy, as proposed last year. Commissary operating days and hours will be reduced and the budget requests approval to include second destination transportation costs in the cost of goods.

The budget proposes to streamline the TRICARE options (Prime, Standard, and Extra) into a more simplified structure that includes in-network and out-of-network cost sharing. Active duty personnel will continue to be exempt from co-pays and fees. Modest enrollment fees would be implemented for new TRICARE-for Life Medicare-eligible retirees and pharmacy co-pays would be increased under the budget proposal.

The FY2016 DOD budget again requests congressional authority to conduct a new Base Realignment and Closure (BRAC) round to reduce excess infrastructure. Congress has repeatedly denied such requests in recent years.

The budget also renews other proposals that were rejected by the congress last year. The Air Force requests divestiture of the A-10 aircraft program to reallocate funds from supporting excess force structure to readiness needs. The Army requests, in its Aviation Restructure Initiative (ARI) to divest the oldest, least capable aircraft and retain more capable aircraft.

Additional detail (including Military Service briefings) on the FY2015 DoD budget request is available on the DoD Comptroller website.   

FY 2016 federal budget will be released on Tuesday, Feb 2

Thursday, January 29th, 2015

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President Obama will release the FY2016 federal budget to the public and the Congress on Tuesday Feb 2, 2013. This will be the first budget submitted by the Obama administration on the required date. Previous Obama budgets have been submitted one week to two months later due to late congressional action on the prior budget.

After the FY2016 budget is released on Tuesday, senior administration officials will brief the press and begin testifying before congressional oversight committees.

OMB Director Shaun Donovan is scheduled to testify on the FY2016 budget at the Senate Budget Committee (SBC) on February 3rd at 10:00am. He will appear before the House Budget Committee on February 4th at 10:30am.

Defense budget oversight committee hearings on the budget, normally held soon after the budget is released, will be delayed this year until after Ashton Carter is confirmed (as expected) as Secretary of Defense. Both the House (HASC) and Senate (SASC) Armed Services Committees leaders have said this delay will allow the committees more time to study the president’s proposals before the new secretary testifies.

SASC chairman Sen. John McCain (R-AZ) announced that the committee will hold a confirmation hearing on Carter’s nomination next week. While Carter will be grilled on the administration’s security policies, SASC approval and full Senate confirmation is expected to occur soon. In anticipation of a new secretary’s Senate confirmation, a farewell ceremony was held for outgoing secretary Chuck Hagel at Joint Base Myer-Henderson Hall, VA yesterday.

Next week, Defense Highlights will include a brief overview of the FY2016 DoD budget request and identify links to official statements and available budget material.

Defense Business Board identifies $125 billion in potential DoD savings

Wednesday, January 28th, 2015

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The Defense Business Board (DBB) has completed a study that demonstrates how the Department of Defense (DoD) can achieve savings of over $125 billion in the next five years through a series of productivity improvements. The study was directed by Deputy Secretary of Defense Bob Work.

The DBB report suggests that these savings could be used to help fulfill modernization plans or fund warfighter needs. Savings of $125 billion could fund operations for either 50 Army brigades, 10 Navy Carrier Strike Groups deployments, or 83 Air Force F-35 Fighter Wings, according to studies cited by the DBB.

In completing its work, the DBB interviewed more than 85 officials from private industry, DoD, and civilian experts in business process redesign and enterprise architecture. The panel also researched the best business practices with the private sector, academia, DOD, and other federal agencies.

The report leans heavily on the private sector assumption that productivity gains are driven by improvements in technology, processes, and innovation. The DBB points out that such productivity gains are considered “business as usual.”

The DBB identified recommendations for DoD productivity gains in four areas: 1) Contract Spend Optimization; 2) Labor Optimization; 3) IT Modernization; and 4) Business Process Re-engineering. Implementing these recommendations, according to the DBB, could achieve $75 to $150 in savings over the period 2016-20.

The bulk of the savings would come from contract optimization and labor optimization. The implementation of more vigorous vendor negotiations, gaining economies of scale, reducing contract fragmentation, increasing productivity in labor contracts and eliminating unneeded spending could achieve $46 to $89 billion over five years.

Optimizing the labor footprint by removing unnecessary or excess organization layers and increasing spans, reducing areas of complexity and redundancy, and optimizing the civilian-contractor mix could produce between $23 and $53 billion.

In addition, the DBB estimates that between $5 and $9 billion could be saved in Information Technology (IT) from application rationalization and consolidation, prioritizing requirements and eliminating programs with low return on investment (ROI), process redesign, and data center consolidation and cloud migration.

Successful implementation of best business practices starts with strong leadership and governance structure, the report asserts. This is best achieved by active and visible leadership at the highest level. Governance committees are led by senior leaders and functional leaders. The report stresses that priority accountability is the responsibility of all members and all efforts should be supported by the necessary budgetary resources and expertise.

The DBB asserts that “early mobilization” of these recommendations is the key to achieving these savings. “Every billion saved in 2016 is worth 5 billion [in] FY16-FY20 due to the compounding effect,” the briefing stresses.

Along with the importance of getting started on these recommendations now, the DBB cites several factors that are critical to the success its recommendations. Among these are: committed and visible leadership; a powerful vision statement; clear targets and metrics; implementing an early retirement program and incentives to retain critical talent; and organizational restructuring to create permanent efficiencies.

The final DBB report will include detailed discussion of the points made in the briefing parts.

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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