What’s Happening with the Pentagon Budget?

Just as Congress broke for its annual August recess, the Pentagon came out in public for the first time with the start of some serious thinking about cutting defense budgets in a way that will match the Budget Control Act caps. Congress continues to ignore those caps in budget negotiations. This Critical Questions outlines the current state of play, the options from here, and the timetable.

Q1: Where does the defense budget process stand for 2014?

A1: Fiscal Year 2014 (FY14) starts in just a few weeks. The House has passed only 4 of the 12 appropriations bills required to fund the government; none have passed the Senate. Unless Congress passes appropriations bills or a Continuing Resolution to fund the government, we will have a government shutdown on October 1. There are only nine legislative days on the calendar between now and then.

The President’s budget request has been on the Hill since April, but for the Department of Defense (DoD) it is $52 billion above the Budget Control Act (or “BCA”) caps. Both the House and Senate Armed Services Committees (HASC and SASC) have reported defense bills that reflect this higher number (roughly $525 billion, plus $80 billion in Overseas Contingency Operations, or OCO). Both houses passed Budget Resolutions that ignored the statutory caps of the Budget Control Act for defense.

The House has passed a Defense Appropriations bill, but floor action on the Senate committee’s bill is not scheduled yet. Support for the House Budget Resolution collapsed in late July when Republicans pulled an appropriations bill from the floor in the face of defections from both moderates and the Tea Party. The Senate did not have the votes to bring its version of the same bill to the floor for a vote. This appropriations gridlock includes defense spending as well as the rest of the government.

Q2: Will defense funds be appropriated by the start of the fiscal year?

A2: Although both the House and Senate passed budget resolutions for the first time in four years and those resolutions largely agree on defense spending levels, they are $90 billion apart on non-defense spending (also referred to as “domestic discretionary spending”). There has been no movement toward a conference to come up with a compromise level. It seems therefore to be unlikely that appropriations bills will pass by the beginning of the new fiscal year. Additionally, the President has threatened to veto any bill that supports the House Budget Resolution because it protects DoD from cuts by more than doubling cuts in domestic spending, a clear violation of the Budget Control Act. (The Senate’s budget resolution also violates the law by not cutting to the lower BCA cap level - they protect defense and domestic spending cuts by proposing a higher spending level).

Given these differences, DoD will likely start FY14 under a continuing resolution, or CR. By definition, a CR would be at the FY 2013 level, which means DoD funding would start the year at a level that is $37 billion below their proposed FY14 budget.  This matches the cuts made last March under sequestration and will cause new readiness problems and further delays or terminations of contracts and weapons procurement.

It could get worse. A CR is typical behavior when Congress can’t agree on spending levels, and nearly every fiscal year starts with some kind of a CR. Some Republicans oppose even a CR, with House Republicans circulating petitions demanding that no CR include funds to implement the health-care law and 12 Senate Republicans having joined in saying they would not vote for a CR either, if it funds the health care. Having neither a CR nor a signed appropriations bill means a government shutdown.

Q3: What about the debt ceiling? Will Congress force the US to default? 

A3: The problem of having no appropriations or perhaps even no CR is compounded by the approach of a government default if the debt ceiling is not increased. Technically, the U.S. hit that ceiling last May, but the Treasury Department is using what they call “extraordinary measures” to buy time. That time will run out in late fall or early winter. When faced with the same problem in 2011, Congress passed the Budget Control Act, trading ten years of cuts for one year of debt ceiling increases. When the problem returned last February, Congress found a new way to punt on the debt ceiling.  Instead of raising it, they voted to permit it to be whatever was needed to finance that day’s payments, with a firm date for the next ceiling.  That move was relatively painless politically and bought them 10 months.  Given the stalemate on one year’s spending over $90 billion in cuts, it seems unlikely that this debt ceiling crisis will be faced head on with a broad agreement on entitlements and revenue. It may be easier for Congress to punt again.

Q4: So, what’s wrong with having a continuing resolution, if it funds the government, complies with the Budget Control Act caps, and doesn’t require much negotiation? Haven’t we done okay this year, even with sequestration?

A4: It seems that most of the horror stories of predicted sequestration catastrophes have not yet come to pass. However, for DoD, the FY13 CR created major problems by misaligning funds with changes in programs, preventing new starts or terminations, and so on. For FY14, though, a CR is even worse, for two reasons.  The first is that some of the cuts under sequestration for FY13 were made simply by deferring spending to next year, which will mean even more cuts under a CR to offset those additional deferred requirements. Second, and this is complicated, under a CR the government will still be spending at a level higher than the BCA caps. This is because in last winter’s so-called “fiscal cliff” deal, Congress actually reduced the sequester levels, but only for FY13. Under a CR, then, FY14 spending will get sequestered again, to the tune of an additional $17 billion for DoD, under what would be kind of a “second sequestration” taken in order to reach the legislated cap. (Domestic agencies would suffer a lot less under that second sequestration, which would mostly hit DoD.)

Q5: What is DoD doing to plan for and cope with these cuts?

A5: This sounds like a lot of uncertainty and potential chaos, and it is. Last year, DoD directed that there be no planning for sequestration, and when it actually hit, this lack of preparation made things worse.  This time, DoD is beginning to plan. At the direction of Secretary of Defense Chuck Hagel, the Pentagon undertook a review to identify possible ways to deal with sequestration. As Congress broke for its recess, Secretary Hagel briefed the Hill and the media on the results of this Strategic Choices and Management Review, or “SCMR”. This review presents several sets of hard choices between cutting the size of the forces (capacity) and cutting modernization (capability), but that set of choices masks deeper issues.  The SCMR paid little attention to excess numbers of civilian personnel or to reducing the cost drivers of annual operations expenditures (called Operation and Maintenance, or O&M), Military Pay and Benefits, or the Health Care accounts, all of which have increased at high rates that show no sign of abating.  The SCMR did not address reforming Military Retirement, citing a congressionally-mandated commission that has been set up and is awaiting DoD’s recommendations. 

Still, the SCMR options show publicly how deep the cuts could have to go, starting with the next budget for FY15 and beyond, in order to comply with the BCA caps and take $52 billion out of DoD’s budget every year through 2021.  The Army could fall to 380,000 active duty soldiers, the Navy to 8 carriers, with the Air Force dropping hundreds of aircraft – all of these falling to their lowest levels since before WWII, when the Air Force did not even exist as a separate Service.  Under one scenario, first reported by the Wall Street Journal, the Joint Strike Fighter is cancelled.  Under another scenario, consistent with the Senate Budget Resolution, DoD plans for only half of the $500 billion in cuts over 10 years, with more of those cuts in the outyears than in the near years.  But these are just choices, not decisions, and the “half” cut scenario does not meet the caps in the law. The SCMR also makes no mention of the strategic consequences that would result from these budget choices, nor of the trade-offs in risk among them.

In essence, the SCMR punted all strategic decisions to the Quadrennial Defense Review, or QDR, which is due in February 2014 and is just barely under way.  Secretary Hagel has talked about using the QDR to balance strategy with the lower defense budget levels of the Budget Control Act, but we won’t likely see whether that happens until the report is completed.

Q6: How will the QDR work if it has to match the existing Defense Strategic Guidance with spending levels that meet the final BCA caps (another $500 billion in cuts)?

A6: Just days after briefing the results of the SCMR, Secretary Hagel released the Terms of Reference that frame the QDR. The Terms of Reference for the QDR are classified and not available to the public, nor is there a publicly-released timetable.  For preparing this document, each Service has a QDR office, led by a 2-star general or admiral, which is also heavily involved in the simultaneous process that will prepare yet another set of budgets, for FY15, but we don’t know the central organizing principles or guidance from OSD. Still, the QDR is mandated by law to be released with the FY15 budget, and there is a new twist this time. Congress mandated a separate National Defense Panel to do an assessment in parallel with the DoD effort, which would require access to DoD’s internal analysis and processes.  The ground rules for that simultaneous effort will be difficult to finalize, and it’s unclear how this will play out at the same time as multiple budget options are being developed and decided.  The QDR is supposed to be unconstrained by budgets while at the same time the law requires that it reflect an analysis of how much the strategy would cost.  This creates a potential disconnect that will be hard to resolve until the next question is answered, and that will likely be late in the QDR cycle.

Q7: Will the FY15 President’s defense budget be at the Budget Control Act level or, as it was for FY14, at a level above that cap?

A7: It’s not clear when we will know the answer to that question, but if the FY15 defense budget will take out the additional $52 billion needed to meet the BCA final cap, we will likely be seeing signs of this from within DoD before the new year.  Keep in mind that the Office of Management and Budget, in a memo last May, tasked every federal agency to prepare two budgets, one at the pre-sequestration level and one that cuts 10% from that.  This means that all agencies, not just DoD, are unsure of what their FY15 budget level will be.

However, with the current congressional gridlock on spending levels, it’s hard to see much incentive for the White House to propose a budget that complies with the BCA cap.  DoD on the other hand will continue to suffer from not planning for the lower level, because without building in reductions in the budget, both a CR and an additional reduction under sequestration in January will produce arbitrary reductions that undermine defense missions, readiness, and capability.  However, DoD may be held hostage to the larger political dynamics, and within DoD, the Services and Defense Agencies have little incentive to propose cuts in advance. 
 

David J. Berteau is senior vice president and director of the International Security Program at the Center for Strategic and International Studies (CSIS) in Washington. Ryan Crotty is a fellow with the CSIS International Security Program and the Defense-Industrial Initiatives Group.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2013 by the Center for Strategic and International Studies. All rights reserved.