Defense Financial Highlights

President vetoes FY2016 Defense Authorization bill

Friday, October 23rd, 2015


Yesterday, President Obama vetoed the FY2016 Defense Authorization bill (H.R. 1735), which passed congress early this month. The president has threatened to veto defense authorization bills throughout his presidency, but this is the first time he has actually taken the veto pen to the defense bill.

Although the president identified opposition to provisions in the bill about detainees at Guantanamo and Congress’ failure to approve requested defense reforms, the main reason for the veto is White House opposition to $38 billion of base budget requirements that the bill includes in funding for Overseas Contingency Operations (OCO). OCO funding is considered emergency funding not constrained by the budget caps.

The president and most Democrats oppose this approach because they believe it circumvents the budget act to increase defense spending and could lead to significant cuts to nondefense programs.

In his veto statement, the president called this use of OCO to fund defense base budget requirements “an irresponsible budget gimmick” and charged it “does not provide the stable, multi-year budget upon which sound defense planning depends.” This sentiment has been echoed by Secretary of Defense Ash Carter.

Congressional republicans called the president’s veto irresponsible. House Armed Services Committee chair Rep. Mac Thornberry (R-TX) said the veto was unprecedented and reckless and that the House would move to override.

It is uncertain, but unlikely that Republicans will be able to garner enough votes to override the veto. While some Democrats voted for the final bill in both the House and Senate, Democrat leaders believe they have enough votes to thwart any effort to override.

Both the House and Senate need a two-thirds vote to override the president’s veto. Rep. Thornberry announced the House will hold an override vote in early November. If the override fails in the House, a Senate vote cannot hold an override vote.

If Congress does not override the veto, the bill will go back to the committees to try to work out a bill that the president will sign.

This is President Obama’s fifth veto, a historically small number of vetoes for a president. Congress did not override any of the other four Obama vetoes.

FY2015 budget deficit falls to $439 billion

Friday, October 16th, 2015


The final FY2015 federal budget deficit was $439 billion, down $44 billion (9 percent) from the FY2014 deficit of $483 billion. This drop in the deficit resulted from higher revenues (+$228 billion) offset by a smaller increase (+$184 billion) in government spending. In July, OMB projected the 2015 deficit would be $455 billion.

This marks the lowest recorded budget deficit since 2007 ($161 billion). From FY2009 to FY2012 the budget deficit exceeded $1 trillion.

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 FY2015 deficit dropped to 2.5 percent from 2.8 percent reported for FY2014.  This is the lowest the deficit share of GDP since FY2007 (1.1 percent). During the period FY2009 to FY2012 the deficit’s share of GDP averaged about 8.5 percent.

Revenue growth in 2015 was led by a 10.5 percent increase in individual income tax receipts (+$146 billion). Corporate income taxes rose more than 7 percent (+$23 billion) and social insurance and retirement receipts increased by almost 5 percent (+$23 billion).

Spending on health programs and Medicare increased by $106 billion in FY2015. Social Security spending rose $37 billion and education programs (led by higher spending on student loans) increased by $31 billion. Outlays for national defense declined by $14 billion in FY2015.

OMB expects the brighter deficit picture in FY2015 to continue into 2016. However, both OMB and the Congressional Budget Office warn that deficits will begin to grow again due to revised assumptions showing slower economic growth.

No COLA for federal retirees in 2016

Thursday, October 15th, 2015


Federal civilian retirees will not receive a cost-of-living adjustment (COLA) in 2016. 

This will be the first year since 2011 that federal retirees do not receive a COLA. In 2010 and 2011 retiree pay was frozen along with pay of federal civilian employees. Federal retirees received a 1.7 percent COLA in 2015.

The reason why federal retirees will not receive a COLA in 2016 is that consumer prices have declined over the past year. The annual retiree COLA is calculated as the change in the average Consumer Price Index for Wage Earners and Clerical Workers (CPI-W)—published by the Bureau of Labor Statistics (BLS)—from the third quarter of the previous year to the third quarter of the current year. BLS reported that the (CPI-W) actually decreased from the third quarter of 2014 to the quarter of 2015, primarily due to the decline in gasoline prices.

Social Security recipients will also not receive a COLA in 2016 as the Social Security Administration uses the same calculation for Social Security COLAs.

In late August President Obama notified Congress that federal civilian employees should receive a 1.3 percent pay raise in 2016. The 1.3 percent pay raise is a combination of a 1.0 percent across-the-board raise announced in last week’s letter and an increase in locality pay raise the president said he will request later this year. If Congress takes no action on the pay raise when it completes the FY2016 appropriations bills, the president can issue an executive order implementing the raise.

Congress passes FY2016 Defense Authorization bill, awaits presidential veto decision

Wednesday, October 7th, 2015


Today the Senate passed the FY2016 Defense Authorization bill (70-27) that reconciles the differences between the House and Senate versions of the bill. The House passed the conferenced bill last week (270-156).

The Senate vote sets the stage for a presidential veto that the White House has threatened ever since the House passed its version of the bill in May.

Although the president has expressed strong opposition to provisions about detainees at Guantanamo, the main White House concern is the $38 billion of base budget requirements that the bill includes in funding for Overseas Contingency Operations (OCO), which is considered emergency funding not constrained by the budget caps. Defense Secretary Ash Carter recommended that the president veto the bill. Earlier this year Carter told the Senate Appropriations Committee that this approach “risks undermining support for a mechanism – OCO – meant to fund incremental costs of overseas conflicts in Afghanistan, Iraq, and elsewhere.”

If the president vetoes the bill and the veto is upheld in Congress, the bill would go back to the House and Senate Defense Authorization Committees.

The conferenced bill authorizes a total of almost $612 billion, including about $496 billion for the Department of Defense (DoD) base budget and $89 billion for Overseas Contingency Operations (OCO). OCO funding includes $50.9 billion requested by the administration and $38 billion in base budget requirements for Operations and Maintenance (O&M) readiness requirements.

The bill also includes $18.6 billion for the Department of Energy (DoE) nuclear weapons program. An additional $7.6 billion is provided to meet the statutory requirements for DoD Concurrent Receipt payments.

The agreement 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.

The bill rejects most of the administration’s proposals for TRI-Care pharmacy co-pays, but does approve an increase in co-pays for brand name and generic medications. Conferees also approved the president’s request to reduce the Basic Allowance for Housing (BAH) by one percent each year for four years.

The agreement denies the administration’s plan to retire the A-10 attack jet. It also rejects a proposal to initiate another Base Realignment and Closure (BRAC) round, but directs the preparation of a capacity study that reflects the current threat and “makes conservative assumptions about future end strength.”

The conference report includes reforms to military compensation and retirement. Under the agreement, new service members would be automatically enrolled in the Thrift Savings Plan (TSP) with a matching contribution from DoD starting in FY2018. The bill also would allow retirement-eligible servicemembers to take from 25 percent to 50 percent of their retirement benefit in a “lump sum.”

The agreement also includes significant reforms to defense acquisition. The bill calls for streamlining the acquisition process by advancing critical decisions, reducing the number of legal certifications, and giving acquisition program managers greater flexibility to address programmatic risk. The bill also makes permanent the “Defense Acquisition Workforce Development Fund,” requires workforce training on the commercial market, and authorizes expedited authorities for hiring and training the acquisition workforce.

The conference report also includes a provision allowing post commanders to establish procedures (by December 31, 2015) for servicemembers to carry firearms for self-defense on DoD installations, reserve centers, and recruiting centers.

OMB provides operating guidance to agencies for FY2016 CR

Tuesday, October 6th, 2015


The Office of Management and Budget (OMB) has issued guidance setting the rules under which federal agencies will operate during the FY2016 Continuing Resolution (CR) enacted (H.R. 719) last week. The CR period runs from October 1 through December 11, 2015.

Under guidance in a memo from Director Shaun Donovan, OMB will apportion (distribute funds to agencies to be available for obligation) funds automatically to appropriations accounts during the CR period, unless language in the CR provides for specific levels of funding or special rules.

The amount provided in the FY2016 CR is the “rate for operations provided in the applicable appropriations acts for fiscal year (FY) 2015 and under the authority and conditions provided in such Acts,” according to the OMB memo. The amount is net of any rescissions, plus or minus mandated transfers, and includes a 0.2108 percent reduction required in the CR (Section 101(b). However, funds designated for Overseas Contingency Operations/Global War on Terrorism and disaster relief are excluded from the 0.2108 percent cut.

OMB calculates the automatic apportionment rate by multiplying the annualized amount by the percentage of the year covered in the CR.  In this case the automatic apportionment rate is 19.67 percent to cover the 72-day CR period.

Not all accounts receive funding during the CR period.  Agencies cannot obligate funds for accounts for which no funding was included in an FY2016 appropriations bill that has been passed or reported out of committee in either the House or the Senate. If a program (PPA) within an account has not been funded (zero-funded) by the House or Senate, the account will receive an automatic apportionment and the agency can, at its discretion, fund the program within the account total.

The CR does provide limited authority (Section 112) to mitigate civilian furloughs during the CR period. The bill does not provide additional budget authority for this purpose, but allows OMB to apportion for civilian personnel compensation and benefits higher than the pro-rata share.  However, OMB advises that agencies must receive written pre-approval to receive a higher rate, but expects few if any written apportionments using this authority.

OMB advises that written requests for amounts higher than the automatic apportionment (“exception apportionments) must include a written justification based on legal grounds. OMB expects, according to the memo, to grant approval for such requests “only in extraordinary circumstances.”

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