Supporters of the bill pointed to the recommendation for a three-year civilian pay freeze by the President’s National Commission on Fiscal Responsibility.  Detractors of the bill argued that action on federal civilian pay raises should be delinked from that on members of Congress.  Rep. Chris Van Hollen (D-MD) introduced an alternative bill that would only freeze congressional pay, but the bill was not considered on the floor.

The freeze, if also approved by the Senate and signed by the president, would mark the 3rd consecutive year federal civilian salaries have been frozen.  It has been widely reported that the president’s FY2013 budget request will include a 0.5 percent civilian pay raise.

Senate approval of the bill in the Democrat-controlled Senate is uncertain.  Including a congressional pay freeze may make it difficult for some Senate Democrat’s to cast a no vote because it may be perceived as supporting a congressional pay raise.

The bill does not address any change in military pay raises for FY2013.

The CBO report also includes deficit estimates from 2013 through 2022.  These estimates show baseline deficits declining significantly in FY2013 (to $585 billion) and averaging about $275 billion a year through 2022.  But, these much lower deficit estimates may understate what actually happens to the deficit because CBO’s baseline projections assume a continuation of current law for both expenditures and revenue.  For example, CBO’s baseline revenue estimates reflect the expiration of the reduced social security payroll tax rate, which will expire on February 29, 2012 unless, as is likely, Congress acts to extend it.  Also, the baseline projections expect the “Bush tax cuts” to expire in 2013, an event that is highly uncertain at this point.

To account for potential changes to current tax and expenditure laws, CBO also prepared an alternative scenario.  Under this scenario, deficits stay at almost $1 trillion over the next five years.  About two-thirds of the difference between the higher deficit projections in the alternative scenario stem from much lower revenues due to the assumption that all expiring tax provisions are extended. 

Underlying CBO’s baseline deficit projections are economic assumptions that expect the economy to continue its slow recovery.  The Gross Domestic Product (GDP) is projected to grow by one to two percent per year until 2014, after which growth moves to the 4 percent level.  CBO expects the unemployment rate to reflect this slow economic recovery, projecting the rate to average slightly more than the current 8.5 percent until 2015.  The projected rate drops to 7.4 percent in 2015 and levels off at 5.5 percent after 2017 as economic growth gains steam.

The war budget for FY2013 will also be lower than in FY2012.  The FY2013 request for Overseas Contingency Operations (primarily for operations in Afghanistan) will be $88 billion, $27 billion lower than the FY2012 enacted level. 

Panetta said the new budget is “a balanced and complete package” that reflects the decisions made under the guidance provided by the new military strategy, announced recently. 

The FY2013 request and the long-term budget plan adhere to the budget totals included in the Budget Control Act of 2011, Panetta said.  The new plan calls for cutting $487 billion over the next 10 years.  As a result, the FY2013 budget request will be $45 billion lower than assumed last year.  More than one-half ($259 billion) of the 10-year cut will be taken from the FY2013-17 plan.

Even with significantly lower resources, Panetta said the U.S military will still be the strongest in the world, the force will not be hollowed-out, and DOD will keep faith with servicemembers and their families.

The FY2013 budget minimizes the effect of the budget cuts on personnel, according to the secretary, but he implied that in future years even personnel costs would have to bear a share of budget cuts.  “The budget will contain a road map to try to address the costs of military pay, health care and retirement in ways that we believe are fair, transparent, and consistent with our fundamental commitments to our people.”

The budget will “sustain and enhance critical support programs while reforming and reorganizing others to be more effective and responsive to the needs of the troops and their families,” Panetta explained.  Full military pay raises will be provided in FY2013 and FY2014, but he indicated that beginning in FY2015, those raises will be limited in order to meet budget constraints.  On health care, he said the budget protects health care services for troops and their families.  However, for retirees the budget plan recommends health care fee, co-pay, and deductable increases to be phased in over five years.  And, Panetta is recommending that Congress appoint a commission to comprehensively review military retirement. 

Panetta laid out some of the key elements of the FY2013 budget and the decisions it reflects (more details are available in Defense Budget Priorities and Choices).  The size of the force will decline over the next five years.  The Army will drop form a current force of 562,000 to 490,000 (-72,000) and the Marine Corps will go from 202,000 to 182,000 (-20,000).  Even so, Panetta said the Army and Marine Corps will be “more lethal, battle hardened, and ready.”

As part of restructuring the military force, DoD will rebalance overseas and U.S. facilities infrastructure.  The budget will ask Congress to authorize a new Base Realignment and Closure (BRAC) round as the most effective way to achieve savings in infrastructure, Panetta said.  And, DoD will move to rebalance “global posture and presence to emphasize Asian-Pacific and Middle East areas,” as outlined in the new military strategy.  To support this new emphasis, the budget will maintain the current bomber fleet, maintain an 11-ship carrier fleet and 10 air wings, and sustain Army and Marine Corps presence in the Pacific while having a “persistent presence in the Middle East.”

Panetta said the budget will achieve significant savings in overhead (an additional $60 billion over five years).  Planned actions include:  employing competitive contracting practices; using information technology better; streamlining staff, reducing contract services, and managing inventory better.” 

To provide additional resources to protect strategic priorities, the budget makes changes to the shipbuilding program including:  retiring seven cruisers early; slipping a large deck amphibious ship (LHA) by one year and one new Virginia class submarine out of the FYDP; and reducing two Littoral Combat Ships (LCS) in the FYDP.  The budget also proposes disestablishing six Air Force tactical-air fighter squadrons and one training squadron.

Hale said Secretary Panetta’s full support for DoD’s overall approach to audit readiness provides the leadership commitment necessary to “set the tone and priority for audit readiness.”  In October 2011, Panetta directed the department to accelerate efforts to achieve full audit readiness by 2017.

Panetta  directed Hale to prepare a revised plan to cut in half the time to achieve audit readiness for the Statement of Budgetary Resources (SBR)—the reported status of what budget authority DoD received, obligated, and spent.  Hale said the revised plan emphasizes interim milestones and a heightened level of governance and accountability and includes:  1) detailed integration of service-provider plans; 2) more-focused discovery efforts to identify audit impediments; 3) concurrent work streams; and 4) increased emphasis on Defense Agencies.

Hale also responded to the major findings of the Defense Financial Management and Auditability Reform Panel, established by the HASC to address the ongoing challenges of DoD financial management.  DoD finds the report “balanced and constructive,” Hale told the committee.  He noted that the panel acknowledges the progress DoD is making and endorses the approach of the Financial Improvement and Audit Readiness (FIAR) plan. 

The panel expressed concern that DoD’s asset valuation method has insufficient detail.  Hale said DoD wants the components to achieve success on the SBR and on audits of the “Existence and Completeness” of assets (count and location) before addressing the balance sheet, but would continue to develop the approach to asset valuation.

Hale said the department is committed to sustaining “a strong defense financial management workforce.”  He acknowledged that DoD needs to adapt training to the challenges of a changing business environment.  To do this Hale said in the short term DoD will deliver “immediate practical training to both financial managers and non-financial operators on the importance of audit readiness.”  For the long term, DoD is establishing a course-based certification program to “ensure that financial managers have the skill and experience in key areas of financial management.”  Congress included the necessary legislative authority for this program in the FY2012 Defense Authorization Act.

DoD is well underway in fielding Enterprise Resource Planning (ERP) to achieve a “modern business environment” throughout the department, Hale said.  But, he told the committee, DoD still faces major challenges.  He said the department agrees with the panel on the importance of linking audit readiness more closely with ERP acquisition and implementation efforts and is now linking business outcomes to acquisition milestones.  Hale also emphasized that the department is applying business process reengineering (BPR) methods early in the program lifecycle to improve cost estimating and requirements definition challenges in ERP acquisition.  Hale agreed the department must deal with difficult challenges implementing ERP in the current legacy environment and the associated increased costs associated with high manual workloads and the need to re-input data.

Hale made a strong case for improving internal controls across organizations and functional areas to achieve auditability.  “Business and financial information that is passed from system to system must be subject to a control environment,” he told the committee.  He cited the need to achieve “sound internal controls over financial reporting,” but acknowledged that reporting is often poorly documented and inconsistently executed.  To exert better internal controls, each military service, through its audit agency, has developed a strategy to focus “solely on evaluating controls and the organizational level.”

Improving financial information is not only a CFO effort, Hale emphasized.  He said DoD is aware that successful financial management improvement will be achieved only if process improvements and enhanced training occurs throughout the entire organization, in both financial and non-financial communities:  All organizations must play a role in ensuring the accuracy and proper accounting of financial data.

Kendall has been the acting AT&L chief since Ashton Carter became the Deputy Secretary of Defense in September.  He was appointed as AT&L’s principal deputy in March 2010 and had previously served in DoD from 1982 to 1994 in a number of senior acquisition positions.  His private sector experience includes two years (2008-2010) as Managing Partner at Renaissance Strategic Advisors, Vice President of Engineering for Raytheon Company, and consultancies in technical and program management.  He is a former member of the Army Science Board and the Defense Intelligence Agency Science and Technology Advisory Board.  Kendall served as an officer in the U.S. Army from 1971 to 1982.

Miller succeeds Michele Flournoy, who will step down as USD(Policy) next month.  He has served as Flournoy’s deputy since April, 2009.  Earlier, Miller served in DoD as Deputy Assistant Secretary of Defense for Requirements, Plans, and Counterproliferation Policy from 1997-2000.  He was a Vice President and then Senior Vice President at Hicks and Associates, Inc, an assistant professor at Duke University, and a professional staff member for the House Armed Services Committee from 1988 to 1992.  Miller has also served as an advisor to the Defense Science Board and as a senior associate at the Center for Strategic and International Studies (CSIS).

Conaton replaces Clifford Stanley, who left the USD(P&R) post in October, 2011.  She currently serves as the Under Secretary of the Air Force, a post she began in 2010.  Prior to joining DoD, she was a staff member of the House Armed Services Committee for almost 10 years, serving as Staff Director from 2007 to 2010.  Conaton also served as Research Staff Director for the U.S. Commission on National Security/21st Century (Hart-Rudman Commission).