Defense Financial Highlights

OMB Mid-Session Review shows short-term improvement in budget deficit

Monday, July 14th, 2014

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The FY2014 federal budget deficit will be $66 billion lower than the previous administration estimate, according to the Office of Management and Budget (OMB). 

In its annual Mid-Session Review of the budget and the administration’s economic projections, OMB now expects the FY2014 deficit to be $583 billion compared to $649 billion projection made when the FY2014 budget was released in March.  

Measured as a share of total Gross Domestic Product (GDP), the deficit will decline from 3.7 percent in FY2014 (down from the previous estimate of 3.4 percent) to 2.2 percent by 2018. OMB projects the deficit share of GDP to rise to 2.6 percent through FY2022 before falling again to 2.1 percent by FY2024.

The lower deficit estimate in FY2014 is due almost entirely to lower estimated mandatory (-$53 billion) and discretionary (-$27 billion) spending. Total discretionary outlays are expected decline due to slower spending patterns for defense and nondefense programs and reduced expenditures for Overseas Contingency Operations (-$6 billion).

However, this improvement will be short-lived according to OMB estimates. While the FY2014-16 deficits are lower than OMB previously projected, deficits for FY2017-24 are estimated to be $600 billion higher than OMB’s March projections. This adjustment is due primarily to lower revenue (-$745 billion), resulting mostly from a lower economic growth forecast, offset slightly by higher projected outlays (+$31 billion) and lower interest payments (+$123 billion). Discretionary outlays are expected to stay essentially flat between 2017 based on administration long-term spending plans.

The OMB projections are based on the administration’s economic assumptions and its proposed spending and revenue proposals. The unemployment rate is expected to average 6.3 percent in 2014 and is projected to decline to 5.4 percent in 2017 and stay 5.4 percent through 2024. OMB expects the annual change in consumer prices (CPI-U) to be 1.8 percent in 2014, increase to 2.2 percent by 2017 and level off at 2.3 percent for the period 2018 to 2024.

Shaun Donovan confirmed a new OMB director

Friday, July 11th, 2014

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The Senate has confirmed (72-22) Shaun Donovan to be Director of the Office of Management and Budget (OMB), the government’s chief budget officer.

Donovan has been Secretary of Housing and Urban Development (HUD) since 2009 and replaces Sylvia Mathews who recently became the Secretary of Health and Human Services (HHS).

When President Obama announced Donovan’s nomination in May for the OMB post he said Donovan “has earned a reputation as a great manager, a fiscally responsible leader, and somebody who knows how the decisions we make here in Washington affect people’s lives all across the country.” 

While serving as HUD secretary, Donovan chaired the Hurricane Sandy Rebuilding Task Force, which was charged with developing a regional plan to guide future disaster recovery. Along with Homeland Security Secretary Janet Napolitano, Donovan headed the Long-Term Disaster Working Group that developed the National Disaster Recovery Framework.

Prior to becoming HUD secretary, Donovan served as commissioner of the New York City Department of Housing Preservation and Development (HPD). Before that he worked in the private sector on financing affordable housing and was a visiting scholar on the preservation of federally-assisted housing at New York University. Donovan also was a consultant to the Millennial Housing Commission established by Congress to expand housing opportunities.

During the Clinton administration, Donovan served as a Deputy Assistant Secretary for Multifamily Housing at HUD. He has also worked at the Community Preservation Corporation (CPC) in New York City and earlier as an architect.

Donovan becomes the government’s 40th budget head. In 1921, the Bureau of the Budget was established in the Treasury department under the Budget and Accounting Act. In 1939, it moved to the Executive Office of the President and in 1970 became the Office of Management and Budget.

President requests $58.6 billion for FY2015 Overseas Contingency Operations

Monday, June 30th, 2014

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The budget request for DoD Overseas Contingency Operations (OCO) for FY2015 is $58.6 billion, the White House announced late last week. The enacted level of OCO funding in FY2014 was 85.3 billion.

The amended budget request submitted by the president is $20.8 billion less than the $79.4 billion funding placeholder included in the budget request sent to Congress in March.

The OCO request will fund $54.3 billion for DoD costs for Operations Enduring Freedom (OEF) in Afghanistan, $0.3 billion for transition activities in Iraq, $4 billion for the Counterterrorism Partnership Fund (CTPF), and almost $1 billion for the European Reassurance Initiative (ERI).

Based on the president’s recently-announced redeployment decision, U.S troop levels in Afghanistan will decline to 9,800 by the end of December 2014, with further decrease to 5,000 by December 2015. Average troop levels in Afghanistan will decline from 37,234 in FY2014 to 11,661 in FY2015.

However, the DoD costs for war-related support will not decline proportionately, according to DoD justification material. DoD’s forward presence around the Middle East in support of OEF will not decline significantly in FY2015. Costs for transporting troops and equipment back to the United States and to retrograde equipment and reset the force will continue, as will costs to close bases, conduct associated environmental remediation, and to dispose of unexploded ordnance. Continued costs are also necessary to meet the demands for high-end Intelligence, Surveillance, and Reconnaissance (ISR) and to support the Afghan National Security Forces, according to DoD.

The OCO request includes $11 billion for operations and force protection in Afghanistan. These costs support special pays and the pay and allowances for mobilized Reserve Component personnel, deployed civilian personnel costs, ground combat and aviation operating costs, C4I, and supplies and sustainment costs.

The funding request also will provide $18.1 billion for in-theater support outside of Afghanistan. Forces providing this support include afloat and expeditionary forces, engineers and fire support, and other capabilities that support troops operating in Afghanistan. In addition to OPTEMPO costs and transportation, this funding includes maintenance and contractor logistics and Defense Logistics Agency (DLA) services, fuel losses, and fuel transportation.

Investment and equipment reset costs of $9.2 billion in the request will fund the replenishment of ammunition and missiles expended in combat ($0.6 billion), replacement of equipment that was lost in combat ($0.3 billion) and worn out equipment for which repair was not considered economical ($1.4 billion). This reset request also includes $6.6 billion to repair tactical vehicles, radios, and support equipment at the depot or field level. Another $0.3 billion will fund the reset of force protection equipment, including communication and electronic, physical security, and aircraft survivability equipment.

Non-DoD and other classified costs totaling $6.5 billion, funding for the Afghanistan Security Forces Fund ($4.1 billion) for training and operations, coalition support ($1.7 billion) to reimburse key coalition partners and provide support for specialized training and equipment, and $4 billion for the Counter Terrorism Partnership Fund (CTPF) account for most of the remaining $4 billion.

House passes FY2015 DoD Appropriations bill

Monday, June 23rd, 2014

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Last week the House passed the FY2015 DoD Appropriations bill 340-73. The bill (H.R. 4870) provides $491 billion for the base DoD budget (except Military Construction, which is funded in a separate bill), $200 million above the request.

The House bill also includes $79.4 billion for Overseas Contingency Operations (OCO) in FY2015. This amount is the same as the placeholder request included in the president’s budget.

House Appropriations Committee (HAC) chairman Rep. Hal Rogers (R-KY) said the House bill “helps to meet the most pressing needs to address current and arising threats to the security of our nation, while finding ways to trim excess and reduce lower priority programs without negatively affecting our troops or the success of our military missions.”

The House bill funds a 1.8 percent military pay raise that is authorized in the House-passed FY2015 Defense Authorization bill, almost twice the 1 percent raise proposed in the president’s budget request.

The bill rejects the president’s proposals to reduce the cost of military personnel benefits. The House denies the proposed cut in the Basic Allowance for Housing (BAH), the $1 billion reduction to the annual commissary subsidy, and proposals to modernize and consolidate TRICARE programs for retirees under age 65, including some TRICARE co-pay increases. The House approved a floor amendment to prohibit funding to initiate another Base Realignment and Closure (BRAC) round.

The House bill also denies the administration proposal to defer a decision on refueling the USS George Washington until the FY2016 budget. The bill provides almost $800 million in FY2015 to refuel the aircraft carrier.

The House approved a floor amendment offered by Rep. Candice Miller (R-MI) that prohibits funding to retire the A-10 aircraft fleet that was proposed in the administration’s budget request. This action overturns the decision by the House Appropriations Committee, which had rejected pressure to keep the program alive. However, because the floor amendment does not add funding necessary to keep the program operational, the Air Force would have to absorb the cost by reducing other programs. Another House floor amendment blocks retirement of the KC-10 tanker.

The White House issued a Statement of Administration Policy (SAP) that strongly criticized the House bill’s positions on the administration’s savings and reforms proposals. “Without congressional support for meaningful compensation reforms and other costs savings measures, force structure changes and flexibility to manage weapons systems and infrastructure, there is an increased risk to the Department’s ability to implement the President’s defense strategy,” according to the SAP. However, the statement stopped short of threatening a presidential veto of the House bill.

The House now awaits Senate action on the FY2015 DoD spending bill. 

DoD issues annual acquisition performance report

Friday, June 20th, 2014

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The Department of Defense (DoD) last week released the annual performance review of the DoD acquisition system.

Initiated last year, this year’s report “provides a review of the efficiency of incentives in improving costs and performance as well as updating earlier analyses with more recent data,” according to a press release issued at the pentagon.

The report provides includes background material on acquisition budgets and trends, analyzes performance outcomes by commodity type, military department, and by prime contractor, and discusses insights and lessons learned.

The review focuses on incentive techniques (contract types, profits, fees, etc.) used by organizations in the acquisition process. It placed special attention on how effective the incentive techniques are in controlling costs, schedules, and technical performance.

Frank Kendall, Under Secretary of Defense for Acquisition, Technology, and Logistics, noted in the report that analysis is showing that not all the incentives being used work. For example, the report concludes that contractual incentives are effective only if “they are significant, stable, and predictable and they are tied to our [acquisition] objectives.”

The report notes that the use of either Cost-plus or Fixed-price contracts is not clear cut when evaluating their effectiveness. Not all cost type contracts effectively control costs. And, while fixed-price contracts can effectively control costs, evidence shows that they should not be considered the “magic bullet” that solves all acquisition problems.

It is not the type of contract that necessarily controls costs the report concludes. Rather, incentives that link profit to performance, control price, and share costs savings are the best determinants of the effectiveness of controlling costs. The findings from this analysis may lead to a wider variety of contract type, Kendall said.

Kendall called uncertainty about defense budgets the primary obstacle to improving the efficiency of the defense acquisition process. He said that sequestration is the main driver of this uncertainty.

He also cited declining budget levels as having limited the number of opportunities to achieve more effective competition. But, he said many opportunities still remain especially in the area of improving tradecraft by the acquisition workforce in acquiring services. He said DoD has done much to educate and train the acquisition workforce to be creative and think critically. Current analysis is looking beyond that however, seeking to determine correlations between workforce factors—technical background, certifications, and experience—to program outcomes..

Kendall said much progress has been made to improve DoD’s acquisition process, but much work remains. He cautioned that “defense acquisition is complicated and varying and there are no simple ‘schoolhouse’ solutions that should be mandated.” The performance report and its findings provide “fresh insights into what generally works in what circumstances, and why,’ he stressed.

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