Bank Examiner Carter: “I trust you had a good year?”
George Bailey: “A good year? Uh, well, between you and me, Mr. Carter, we're broke.” — It’s a Wonderful Life
“We’re broke.” In essence, that’s the message Deputy Secretary of Defense Bob Work delivered to Defense-Secretary-in-Waiting James Mattis at the December 5 Future Strategy Forum.
Mr. Work admitted that DoD has breathtaking liabilities—as much as $88 billion a year—that ought to be addressed before procuring a single additional plane, ship or tank. Unfortunately, the situation is even worse than that.
Military leaders have testified to the problems caused by five straight years of budget cuts and how these cuts, combined with an extraordinarily high operational tempo, have resulted in a smaller, less capable military force.
What has received less attention is the degree to which the Pentagon’s future plans bank on questionable assumptions and budgetary sleight-of-hand to balance the books for 2018 and beyond. These gimmicks include: relying on rosy future estimates for the cost of labor, fuel and currency exchange; pushing the costs of large modernization programs like the nuclear triad into the ill-defined “out years,” and using Overseas Contingency Operations funds to help cover normal DoD operating costs. Taken together, these liabilities, combined with the administration’s decision to submit budgets in excess of the Budget Control Act caps, constitute about $100 billion dollars per year of unbudgeted liabilities or risk—a staggering sum that will severely limit the new administration’s ability to quickly rebuild the U.S. military.
In October 2016 a Pentagon spokesman publicly acknowledged, and Secretary Work confirmed, what many have known for some time: that as much as half of the money requested in the DoD Overseas Contingency Operations (OCO) funding is planned to go to normal Pentagon operations such as training soldiers, steaming ships or flying planes—not the extraordinary wartime operations which OCO was designed to cover.
The President-elect’s nominee to head the Office of Management and Budget, Rep. Mick Mulvaney, (R-SC), has decried such misuse of OCO funds, calling it a “backdoor loophole” in the budget process. Considering that comment, if Congress and the country want DoD’s normal operating costs captured in the appropriations process versus the wartime funding mechanism, this $30 billion annual cost must be eventually covered in the base budget, further adding to DoD’s liabilities. And while it may be a worthy goal to move these enduring costs into the base appropriation it’s important to note that this shift by itself won’t do anything to restore military capabilities.
Here are some other liabilities Secretary Work didn’t mention:
Future Costs of Labor
Section 1009 of Title 37 United States Code requires military pay raises to equal the Economic Cost Index (ECI), a common measure of the cost of labor, unless the president invokes his authority to request an alternative pay raise. The Congressional Budget Office estimated in August that “the ECI will grow by more than 3 percent a year, on average over the next several years.” However, in its budget request, DoD has planned on much smaller raises than CBO forecasted. The 2017 DoD budget projects pay raises of only 1.6 percent for 2017-2019, and 1.8 percent and 2.1 percent for 2020 and 2021, respectively.
From 2014-2016 President Obama used his authority to lower the requested pay raises, and Congress complied. After three years of smaller than prescribed pay raises, this year Congress disregarded the president’s recommendation and set the pay raise at 2.1 percent in the 2017 NDAA, matching the growth in ECI.
Because the DoD has banked on being able to lowball military and civilian pay raises for the next five years, the liability incurred by Congress’ inconvenient compliance with law this year, and potentially in the future, will run to the tens of billions of dollars. Just next year’s change in pay will cost DoD about $800 million in 2017 than planned.
Hopeful Fuel Cost Assumptions
The DoD budget estimate projects that fuel costs for fiscal year 2017 will drop 8.2 percent from 2016. For future years, DoD used planning assumptions that reflected minor increases ranging from 4.8 percent in 2018 to only 1.8 percent in 2021.
However, the latest forecast from the U.S. Energy Information Administration predicts crude oil prices will gradually rise, not fall, next year. And future year energy estimates vary widely, with high end price per barrel of crude oil reaching $150 by 2020. If energy costs grow at even a modest rate of 5 percent annually, the Pentagon will be short billions of dollars compared to its plan.
Living Large In an “Out-year”
Former Secretary of the Army John McHugh famously commented that he always wanted to “live in an out-year.” In Pentagonese, “out-years” fall outside the rigid five-year planning window; they are, consequently, years in which unrealistic procurement plans magically come to fruition and normal budget rules don’t apply.