Defense Financial Highlights

President requests additional FY2017 funding for DoD operations against ISIL

Wednesday, November 16th, 2016

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President Obama sent Congress a FY2017 budget amendment request last week that would provide $5.8 billion in additional Overseas Contingency Operations (OCO).  This funding will support U.S. military operations in Afghanistan and operations against the Islamic State of Iraq and the Levant (ISIL) in the Middle East

The FY 2017 OCO amendment of $5.8 billion brings the FY 2017 total Department of Defense (DoD) OCO request to $64.6 billion.

Congressional defense oversight committees have been pressing the administration to submit a request for additional funding to support increased operations since the president announced this summer that 8.400 military personnel would stay in Afghanistan and because of the increased pace of operations against ISIL.

Almost 50 percent ($2.8 billion) of the total $5.8 billion budget amendment request would be for operations and force protection including:  special pays and subsistence for deployed personnel, operating tempo, communications, and deployment and redeployment costs.  Base and installations support costs and support for forces located in other parts of the U.S. Central Command (CENTCOM) region account for 22 percent ($1.3 billion) of total costs.  Funding for the Afghan National Defense and Security Forces Aviation Modernization program is 14 percent of the total ($0.8 billion). 

Other costs include: classified programs ($0.4 billion); Iraq Train and Equip Fund to support Kurdish Peshmerga forces ($0.3 billion); equipment and reset ($0.2 billion); and Joint Improvised-Threat Defeat Fund ($0.1 billion).

Looking at the total request by operation, $3.4 billion would be for Operation FREEDOM’S SENTINEL (OFS) in Afghanistan.  These additional funds would support the higher troop level (8,400) approved by the president ($2.5 billion) and provide for Afghan aviation modernization ($.8 billion).

An additional $2.4 billion would be for Operation INHERENT RESOLVE (OIR) in Iraq to support about 5,500 U.S personnel (2,000 more budgeted) deployed to the U.S. Central Command area of operations, support Kurdish Peshmerga forces, and address emergent force protection issues.  The additional forces approved by the president are providing training and advice to coalition partner security forces in efforts to defeat ISIL.  

The budget amendment would also provide $20 million for the incremental operational costs for Operation ODYSSEY LIGHTENING (OOL) in Libya.

Details of the DoD request are available on the DoD Comptroller’s website.

The president also requested an additional $5.8 billion for the State Department and the Agency for International Development (AID).  These funds would be used to “implement the diplomatic engagement, governance, and stabilization components” of the administration’s strategy against ISIL, and humanitarian aid for areas in Iraq liberated from ISIL control. 

Support included in this funding are: removal of unexploded ordnance; immediate stabilization needs in areas liberated from ISIL control; police training in the Northern Nigeria region and other areas affected by Boko Harem/ISIL; longer term stabilization needs for areas liberated from ISIL control; technical assistance to the transitional government in Libya and support for the political process in Yemen; humanitarian assistance; and increased embassy security.

Defense Business Board recommends the new administration run DoD like a “modern business”

Thursday, November 10th, 2016

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Presidential transition teams open for business this week at federal agencies to provide for the transition of power to the new administration. 

A prime subject during transition at the Department of Defense is usually how to make the department run more efficiently and effectively.  Each new administration develops its own set of defense management and acquisition improvement reforms aimed at making the Office of the Secretary of Defense (OSD) and the Military Services operate better.

The Defense Business Board (DBB) has developed a set of recommendations for the DoD transition team directed at making DoD run more like a “modern business.” The DBB is an authoritative, advisory committee that provides independent advice to DoD’s senior leadership on the use of best business practices and management improvement programs for DoD.

In its report, Focusing a Transition:  Challenges Facing the New Administration, the DBB opines that the defense department is “too costly, too slow and often unable to devote the resources necessary to enhance modernization and readiness.”  The report further states that “without a disciplined effort to rein in costs and overhead, the Department will not only be unaffordable, it will be unable to swiftly and shrewdly adapt to maintain superiority over determined adversaries.”  The goal, the report says, should be to free up more resources for readiness improvement and modernization efforts.

The DBB stresses that the department must develop and aggressively execute an “outcomes-based program of change to overcome bureaucratic inertia.”  The Board argues that “organizations, contracts, activities, etc., must be eliminated.”  It warns against only making marginal piecemeal cuts.  Doing so, the report emphasizes, “leaves the door open for adding them back during the next budget cycle.”  Change must come as a result of “major surgery,” the Board says.

To ensure that tough decisions are made and the whole department is focused on achieving the necessary changes, the DBB argues that the role of the Deputy Secretary of Defense must be redefined.  The Deputy does not pay enough attention to the primary function—managing the department, the report states. The Deputy spends too much time away from the Pentagon representing the Secretary or attending to coordination with other agencies, allies, or the White House.

The DBB strongly recommends that the Deputy must become the department’s Chief Management Officer (CMO) in fact as well as in name because managing the department demands the full-time attention of the CMO.

To this end, the DBB recommends that the Deputy must “drive the Department to continue to shrink overhead.”  As an active Chief Management Office, the report urges the Deputy to: 1) Exert “constant fiscal discipline;” 2) Streamline processes to be “more agile and responsive;” 3) Make speed and cost “valued commodities;” 4) Cut layers of decision making and increase accountability and track performance; 5) Address “an unaffordable health care system and pension benefits;” and 6) Establish metrics and track written goals and objectives for senior leaders.

In addition, the DBB recommends that the department engage in a “zero baseline” effort to identify and eliminate duplicate and redundant functions and capabilities, and the Service Secretaries become an executive committee to support the secretary’s priorities.  The DBB stresses that the department’s civilian and military leaders must “collectively drive tradeoffs that support the Department’s National security priorities, often at cost to their individual organizational priorities.”

DoD will implement recommended innovation practices

Monday, October 31st, 2016

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Secretary of Defense Ash Carter announced a set of innovation practices that he said supports DoD’s aggressive move “toward a more innovative future.”

Speaking at a conference held by the Center for Strategic and International Studies (CSIS) conference (Assessing the Third Offset Strategy) last week, Carter said he will implement three of the recommendations made by the Defense Innovation Board.

Carter established the board earlier this year to “advise me and my successors on how the DoD can better connect to innovation and make better use of it—including by changing ourselves.”

The department’s wide-ranging effort to innovate technologically is to “plant the seeds for a number of different technologies that we think will give us a warfighting advantage in the future, but also to be more innovative and agile in all aspects of DoD,” Carter said.

The secretary cited the fast, relentless pace of change, competition with and between other nations, and competition with terrorists and other adversaries as reasons to innovate “to stay the best.”  “Being more innovative in every way we can is critical to the future success of our military and our Defense Department,” he said.

The first Innovation Board recommendation Carter will implement is to “focus on recruiting talented computer scientists and software engineers” [military and civilian] into the force.  DoD will use recruiting initiatives across a broad spectrum from Reserve Officer Training Corps (ROTC) programs to civilian “scholarship-for-service” programs, he said.  The aim is to make computer sciences “a core competency” in DoD.

DoD will invest in “machine learning, through targeted challenges and prize competitions,” rather than investing in new “brick and mortar” institutions, Carter said.  Using a “virtual center of excellence” model will establish stretch goals and incentives for academic and private-sector researchers.  The initial challenges will target computer vision and machine learning.

Following another Innovation Board recommendation, Carter will create a DoD Chief Innovation Officer.  This new post will serve as the Secretary’s senior advisor for innovation activities.  Carter noted that many organizations have such a position, citing high tech companies IBM, Intel, and Google.  He said that “it’s time we did as well, to help incentivize our people to come up with innovative ideas and approaches.”

Carter promised to continue to work on building the force of the future and said to watch for “more to come” in these efforts.  “We must ensure that we keep leading the way, and keep disrupting, challenging, and inspiring all of us to change for the better,” he said.

DoD issues annual acquisition performance review

Friday, October 28th, 2016

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The Department of Defense has recently released the fourth in a series of annual performance reviews of the DoD acquisition system.

Frank Kendall, who has been Under Secretary of Defense for Acquisition, Technology, and Logistics for five years said the report “continues my long-term effort to bring data-driven decision making to acquisition policy.”

Kendall said the report shows that DoD is making progress to improve acquisition and is “moving in the right direction with regard to the cost, schedule, and quality of the products we deliver.”  He cited moderating program cost growth as an example. “The 5-year moving average of cost growth on our largest and highest-risk programs [is] at a 30-year low,” he emphasized.

The acquisition performance report complies with the Improve Acquisition Act of 2010 and the Weapon Systems Acquisition Reform Act of 2009 and Office of Management and Budget (OMB) requests on analytical studies on acquisition performance.

The report notes that analysis and data support the following improvements: 1) Cost control has improved significantly (as shown in fewer Nunn-McCurdy breaches and cost overruns) ; 2) Most programs deliver the original baseline quantity (planned at Milestone B); 3) Operation and support costs are largely driven by external inflation factors (which cannot always be controlled); 4) High-level requirements don’t usually change on major programs (85 percent of Major Defense Acquisition Programs-MDAPS-show no requirements changes); 5) DoD acquisition can be timely and responsive (development schedule growth is lower than cost growth); 6) Contracting processes are generally fair, rigorous, and objective (protests average about 2,5 percent of solicitations-GAO); and  7) Major defense companies remain profitable (cost performance improvement align industry and DoD goals).

The report stresses that budget constraints are leading to fewer programs in the “new product pipeline,” which could “put technological superiority at risk.”  To mitigate this risk, DoD is adding early stage experimental prototyping efforts, but the report cautions that this does not add capability ready for production.  Tight budgets also require realistic program baselines.  If baselines are not realistic, the report states, higher cost growth could result.

There is also a need for a metric for weapons system design and performance O&S costs, according to the report.  Many of these costs (e.g., compensation, health care, and fuel prices) are outside of acquisition control, but need to be addressed separately from acquisition program effects, the report advises.

The report underscores the importance of focusing on acquisition fundaments and cost control.  “Proactive management and creative thinking contribute significantly and measurably to cost control.”  “Should cost” management has proven successful and should become permanent in the acquisition culture, the report concludes.

Fixed-price contracting should be used “judiciously” during development, the report states.  Study has shown that fixed-price contract during development can be risky and counterproductive.  On the other hand, incentive contracts “can yield good cost control at lower risk and lower price,” according to the report.

Finally, the report identified changes that have improved acquisition management and performance including: the Defense Acquisition Workforce Development Fund and Force of the Future initiatives; implementation of Better Buying Power (BBP) 3.0; a new DoD Instruction (DoDI) 5000.74 that establishes a management structure for acquisition of contracted services; issuance of a new Risk, Issue, and Opportunity Management Guide, to identify and quantify risks; issuance of DDPAP, 2016b, a guidebook update providing guidance on “selection and negotiation of the most appropriate and effective contract type and incentives” for specific acquisitions; issuance of an O&S cost management guidebook with tools and best practices for cost analyses; and  an update of the Performance-Based Logistics (PBL) Guidebook to include guidance on intellectual property issues.

FY2016 budget deficit increases to $587 billion

Friday, October 21st, 2016

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The Treasury Department and the Office of Management and Budget (OMB) announced that the final FY2016 federal budget deficit was $587 billion, up $148 billion from FY2015 ($439 billion).  The administration had estimated in the annual Mid-Session Review in July that the FY2016 deficit would be $616 billion.

This is the first increase in the deficit in five years.

The increase in the deficit came as higher government expenditures (+$166 billion) more than offset a small increase in revenues (+$18 billion).  The administration does point out that part of the increase in outlays was due to the timing of benefit payments.  Because October 1 fell on a weekend, benefit payments were made in September.

Data on government expenditures and receipts and the deficit are reported in the Monthly Statement of Receipts and Outlays of the United States Government (MTS) prepared by the Treasury Department.

When measured as a percent of Gross Domestic Product (GDP), the FY2016 deficit increased to 3.2 percent (from 2,5 percent in FY2015), about the average for the past 40 years.  During the period FY2009 to FY2012 the deficit’s share of GDP averaged about 8.5 percent.

The modest revenue growth (+$18 billion) in 2016 was led by a 4.7 percent increase in social insurance and retirement receipts (+$49.8 billion).  Miscellaneous receipts increased by 5.8 percent (+$8.4 billion), estate and gift taxes rose by 11 percent increase (+$2.1 billion), and individual income tax receipts increased by a very small 0.3 percent (+$5.3 billion).  However, these increases were partially offset by an almost 13 percent decline in corporate income tax receipts (-$44.2 billion), a 3.3 percent decrease in excise taxes (-$3.2 billion), and a 0.6 percent drop in customs duties (-$0.2 billion).

Spending on health programs and Medicare increased by $77.5 billion in FY2016 (+7.5 percent). Social Security outlays rose $28.3 billion (+3.2 percent), and spending for veterans benefits and services rose by $14,8 billion (9.3 percent). Outlays for net interest payments increased by $17.4 billion (+7.8 percent).  Spending on national defense increased by only $3.9 billion in FY2016 (0.7 percent). 

Looking ahead, OMB projected in its Mid-Session Review that the FY2017 deficit would be $441 billion.  However, both OMB and the Congressional Budget Office expect deficits to rise again by 2020.

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