Defense Financial Highlights

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. 

House passes FY2015 appropriations for DoD and 10 other bills; CR for Homeland Security bill

Thursday, December 11th, 2014

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With the Continuing Resolution (CR) on FY2015 funding set to expire at midnight, the House passed a $1.013 trillion FY 2015 Appropriations bill that funds the Department of Defense Appropriations bill and 10 other bills (including Military Construction /VA) through the end of FY2015.

The Homeland Security Appropriations bill, subject to intense debate after the president announced an executive order on immigration, is funded in the bill under a CR through February 27, 2015. This action will allow the Republican-controlled 114th Congress time to address concerns about the immigration order.

The Senate is expected to take up the bill tomorrow. To avert a shutdown until the Senate acts both the House and Senate approved a two-day CR.

This bill is being referred to as a CRomnibus appropriations bill because it is a combination of full-year appropriations for 11 appropriations bills and a two and a half month CR for the Homeland Security bill.

After a day of high drama that included a razor thin vote (214-212) approving the rule to proceed to a final vote and an almost seven hour recess, the House passed H.R. 83 by 219-206. Fifty seven Democrats joined 162 Republicans in supporting the bill. Defections from the bill included Republicans unhappy that the bill did not more strongly rebuke the president’s order on immigration and Democrats who were outraged over provisions that changed the Dodd-Frank law regarding banks trading financial derivatives and relaxed restrictions on campaign contributions by individuals.

The final bill was the result of intense conference negotiations between the House and Senate Appropriations committees. The House had passed its version of the bill in June and the Senate Appropriations Committee approved a bill in July.

In a joint statement House Appropriations Committee (HAC) chair Rep. Harold Rogers (R-KY) and Senate Appropriations chair Sen. Barbara Mikulski (D-MD) said “this bill fulfills our constitutional duty to fund the government, preventing damage from shutdown politics that are bad for the economy, cost jobs and hurt middle class families. While not everyone got everything they wanted, such compromises must be made in a divided government.”

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 provides $64 billion for Overseas Contingency Operations (OCO).

The bill provides funding for a 1% percent military pay raise as proposed by the president, but freezes freeze pay for general and flag officers. It also allows for a 1 percent reduction in the Basic Housing Allowance (BAH) growth (the administration proposed a 5 percent cut). The conference agreement adds about $200 million to the Defense Commissary Agency funding request to maintain operations and block the president’s proposed cut to the commissary subsidy.

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, blocking the administration proposal to retire the A-10 fleet, and continues operations of the full Airborne Warning and Control System (AWACS), thwarting the administration’s plan to retire some AWACS aircraft in FY2015.

Operations and Maintenance (O&M) funding in the bill totals $161.7 billion, more than $4 billion below the administration’s request. The bill includes finding for a 1 percent civilian pay raise and provides funding increases for facility sustainment (+$900 million) and readiness, depot maintenance, and base operating support shortfalls (+$1.2 billion). Conferees cut $270 million or 2 percent from the information technologies O&M budget request.

Procurement funding in the bill totals $93.8 billion, more than $4 billion higher than the request. Included in the bill’s procurement funding are: two attack submarines and three Littoral Combat Ships; 38 F-35 (Joint Strike Fighter) aircraft and 7 KC-46A tankers; and 15 EA-18G Growlers. The legislation appropriates $1.2 billion for National Guard and Reserve equipment not requested by the administration.

The bill includes $63.7 billion for research and development, slightly more than the request. Among the programs receiving R&D funding are: the Armored Multi-Purpose Vehicle (AMPV); the long-range strike bomber; and the KC-46 tanker. The conferees also included $225 million for the Rapid Innovation Fund to support small businesses provide “leap-ahead” technologies. The bill also adds $1.3 billion for medical research (including about $100 million for the Ebola crisis) with a special focus on Peer-Reviewed Medical Research and Peer-Reviewed Cancer Research.

The conferees essentially continued language from the FY2014 appropriations bill to prohibit the transfer of detainees from Guantanamo to the United States or its territories or the modification or acquisition of facilities used to house detainees and eliminated the 5 percent discount for Military Exchanges sales of tobacco and tobacco-related products.

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