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Flexible Spending Accounts

The OMB's secret plan on what gets cut in sequestration.

The fiscal cliff looms, at least to some. The defense industry has known for some time that defense budgets are going down; sequester just spurs the contingency actions already underway. But the government has been more reluctant to anticipate the future, near-term or long-term. An almost unreal aura of "hear no evil, see no evil, speak no evil" had overtaken the Obama administration ever since the Super Committee failed a year ago to produce a grand bargain on federal spending and revenues.

Whenever Pentagon officials were asked, they said that no planning was underway. Secretary Panetta repeatedly said that the defense budget the president sent to Congress in February, which provided for a flat budget in real dollars for the next decade, was the minimum DOD needed. Anything else might require revisiting the interim strategy the department issued last year. Sequester would be "doomsday," a "meat cleaver" that would undermine the strategy and our security. Panetta, Deputy Secretary Ash Carter, and Undersecretary Bob Hale repeatedly said they were doing no planning for the fiscal cliff. They, and other agencies, were waiting for the White House Office of Management and Budget to provide guidance.

But until this week, they did not get it. OMB had not defined what constituted "programs, projects, and activities" (PPA) -- the funding for which will be sequestered under the Budget Control Act. It sounds really technical, but it matters. The more granular the definition of what PPA are, the less flexibility DOD (or any other agency) would have to deal with the automatic cuts. For example, if OMB defined PPA as a budget account, like "Air Force Aircraft Procurement," that would give DOD a lot of flexibility to move funds around to protect specific aircraft, like the new tanker aircraft and the F-35 fighter, and maybe take the hit on trainers or modernization of the B-1 bomber. But if PPA were what the Pentagon calls a "program element," then each aircraft in that account would have its resources cut 9.4 percent, a lot less flexible option.

So DOD has been lobbying for OMB to define PPA at as high an aggregate level as possible. On December 5, DOD (and the rest of the government) apparently got the answer. No document has been released, as yet. But conversations I have had suggest that what OMB said to DOD will make some people happy and some not so happy. For weapons programs, it seems PPA are likely to be defined as program elements -- so there can be no felicitous tradeoffs between tankers and fighters, or ammunition and tanks, or aircraft and ships. Planning has to take the same cut across each program element.

It's not the end of the world. Within each program there are sub-categories like "spares" and contract terms that include contingency funding, giving program managers some flexibility. A 10 percent cut in funding does not end a program. And, in any case, we're talking about funding the next set of contracts -- sequester does not apply to funds already locked (obligated) into existing contracts. So there will be no immediate "cliff diving" on the contract side, but there will be fewer resources for the next round.

The happier folks may be those responsible for operating the Pentagon -- buying the fuel, managing the contracts, doing the planning, maintaining the bases, supplying the forces in Afghanistan, contracting with the guards and cooks at Bagram airfield, delivering training, conducting exercises, or just sailing, driving, or flying around. There, the definition of PPA may provide substantial flexibility, by being set at the account level. In other words, the roughly 10 percent reduction would apply to "Army Operations and Maintenance," which is an $82 billion account in the FY 2013 Army budget request. While nobody likes losing $8 billion, the Army would at least have the flexibility to move the remaining funds around and, as it were, cut the grass less often at Ft. Belvoir in exchange for supporting the Bagram services contracts.

Sequester is not about closing the government; it's about cutting back on spending. If I were betting, the impact will most likely be felt by services contractors (the lawn service company) and by folks almost nobody is talking about -- the civilian workforce at the Pentagon, some of whom could be taking an involuntary day or two off, without pay.

None of this will happen right away. In fact, although OMB has not said what it will do if there is no budget deal by January 3, one possibility is that it will use its existing authority to tell agencies how fast they can spend their money (apportionment) conveying to them the message: "Keep spending like you were before. We'll get back to you on sequester when we know what Congress is going to do." In other words, if OMB anticipates that Congress might reach a deal sooner rather than later, sequestration might be short-lived, even if there's no agreement by the January 3 deadline.

So this is all contingency planning. The ball is still in President Obama and Speaker Boehner's court. At least DOD may now have a clearer view of the track ahead, just in case.

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National Security

Budget Agreement Reached!

5 think tanks warn of things to come for the Pentagon.

The fiscal cliff is all the rage. The lame-duck Congress is back and the tidal wave of pressure for a budget agreement is almost overwhelming. The public discussion and the negotiations are about taxes and entitlements, as anyone could have predicted. And, despite a year of special interest lobbying, the defense budget is headed down further, as a byproduct of those talks.

We're not talking about sequester; that drama is almost over. We are talking about defense budgets that will go as much as another $500 billion below the 10-year forecast Secretary Panetta offered last February -- making the overall reduction, including his budget request, at least $1 trillion. Real defense cuts, not a budget that keeps up with inflation, the way Panetta wanted. And it is time to plan accordingly.

Think tanks are often the canary in the coal mine when it comes to change in Washington, and their perspective on defense has changed dramatically since the election. Over the past few weeks, think tanks right, left, and center have issued reports that lay out the road to a disciplined defense drawdown, in which they rethink strategy, military force, weapons buying, and management. The reports come from the Stimson Center/Peterson Foundation, the Center for American Progress, the Project on Defense Alternatives, the Center for Strategic and International Studies, and, interestingly, the RAND Corporation. They agree on a surprising number of things, and all of them suggest deep cuts are inevitable.

The Stimson report, endorsed by a wide range of analysts (disclaimer: with a dissent, I am one of them), carefully describes a series of budgetary options, including one that would increase defense spending (however unrealistic) and one with additional cuts ranging from $350 to $590 billion beyond Panetta's. The CAP report strongly advocates $1 trillion in defense reductions (including the Panetta reductions). The PDA report calls for an additional $560 billion in defense cuts. The CSIS report (disclaimer: I am also part of its working group) starts with the assumption that defense budgets (including war costs) will decline around 30 percent in constant dollars (consistent with past drawdowns). As CSIS working group leader (and former DOD official) Clark Murdock puts it: "DOD needs to accept the likely reality that it will absorb a deeper reduction in defense spending and plan accordingly." And the RAND study, while eschewing any support for defense cuts, says it is realistic to think that defense budgets will go down $300-$500 billion below the Panetta estimate.

I think these estimates are actually on the low side. The last defense drawdown, from 1985 to 1998, saw defense budgets fall 36 percent in constant dollars. If the FY 1985 defense budget had been allowed to grow with inflation over the same period, DOD would have had $1.6 trillion more in resources than it got. So there may still be a way to go and, frankly, we won't know until we get there how deep the drawdown will actually be. But when we look back, we will see it was very deep, indeed.

Readers can surf the reports at will. But there are a number of strikingly consistent options they propose:

  • All agree that the days of long-term stabilization operations, nation-building, and insurgent-chasing (read: Iraq and Afghanistan) are over. The Panetta strategy from January 2011 said this; all the reports endorse that view, and more. (Though RAND, to be fair, does provide an option that has the United States still chasing insurgents and instability in the Middle East through the next decade.)
  • All of them agree that shrinking U.S. ground forces (Army and Marines) is the easiest and most appropriate way to cope with the new national security challenges in light of fewer resources. Some would have the overall military shrink below 1 million troops, while others suggest 1.15-1.2 million (again, except RAND's Middle East option).
  • All of them would sharply reduce U.S. strategic nuclear forces, though none of them appears to endorse my favorite option: a submarine-based monad. This means, for many of them, between seven and nine nuclear-missile subs (down from the current 14), smaller ICBM forces, and an end to nuclear bombers and fighters.
  • All agree that a robust investment in defense research and development is a suitable hedge against the future.
  • None of them thinks China is a near-term military threat, which flies in the face of the Washington cottage industry that seeks to make China the next major enemy. For the most part, however, they hedge with a continued Pacific presence (RAND has a Western Pacific option).
  • All agree that terrorist organizations are not a strategic threat to the United States and do not necessitate a large military force. Some, particularly CAP, argue that non-military instruments -- diplomacy, law enforcement, training -- are key to dealing with terrorist organizations. But virtually all of them, left or right, endorse special operations forces (which the PDA proposal would grow) as the military arm of a counterterrorism strategy.
  • All say cyber threats present a strategic challenge. However, none of them analyzes this challenge in any depth, tells us why the military should lead the response, or looks for even a moment at the risk of a rapidly-growing U.S. cyber-offense capability.
  • Virtually all of them, from left to right, call for greater "burden-sharing" from U.S. allies as a way of reducing the U.S. load.

These studies tell us that the drawdown is now inevitable; with less money, we need to do some serious thinking. But there is more road to travel here, and there are several issues the reports do not discuss in much depth that will be a critical part of the drawdown.

First, the national security world is still reluctant to think strategically in the broadest sense. What is America's role in the world in the next decade and what part of the U.S. government needs to implement that role? Most of these studies emerge from the defense stovepipe, not the diplomatic, intelligence, or foreign assistance worlds. As a result, their analysis is still locked into a military perspective on our national security challenges. Only the CAP study deliberately looks at what we should do with our civilian diplomatic and assistance capabilities. Halting nuclear and biological weapons proliferation and dealing with terrorists are not predominantly military missions.

Second, most of these reports ignore the relative decline of U.S. power and the impact of military operations on the country's reputation. Locked, as some are, in the defense universe, they are searching for ways to reassert U.S. leadership and to "shape" the security universe in a way that advances U.S. interests. Even if the money is not there to dominate, they do not question our capacity to be the world's hegemon. The default position is that our allies must share the defense burden more than they do, as measured by the share of GDP they spend on defense. This is a dodge, not a policy. There is no unanimity among U.S. allies on what the burdens are, nor agreement on whether military forces are the appropriate way to deal with those burdens. And the share of GDP dedicated to defense does not help anyone answer those questions.

Third, U.S. strategic analysts are still too fascinated with using the military to defend something they call the "global commons." We gotta be out there patrolling it, or who knows what terrible things will happen. But civilian international institutions and laws govern the use of air, sea, and space. And cyber is largely a private enterprise, not subject to military control and badly in need of international agreements like the other three. If you hear the phrase "global commons," reach for your gun...or perhaps your laptop.

Fourth, not all of the reports deal with the more basic management challenge at DOD. The reason we spend too much on defense doesn't have to do with capabilities; it has to do with DOD's failure to discipline its out-of-control acquisition system, a back office that is much larger than necessary, and a pay-and-benefits system that is eating the defense budget. The Stimson study is an exception. It provides options for between $200 and $400 billion in savings from management and personnel actions, which, it argues, could reduce the need for force structure and hardware reductions, but it does not provide much detail. The CSIS report also notes the possibilities for savings on the management side. And RAND, which has done good work in the past on compensation and benefits, gives lip service to the personnel issues. But, frankly, unless DOD and Congress are willing to reduce overhead and force savings, little will be accomplished; none of the reports calls for those kinds of cuts.

Fifth, the new mantra for coping with less is "building partner capacity." It is the default position for strategists who can see that large-scale U.S. military deployments overseas are counter-productive, producing a "blowback" that runs counter to U.S. interests. Most of these reports get right on board, calling for significant DOD support for training, equipping, advising, and strengthening the security forces and institutions of other countries.

The risk of expanding these programs is three-fold: the military does not do them well, as Iraq and Afghanistan testify, especially the farther the mission strays from pure military training and into governance issues. Second, giving DOD this "governance" mission further weakens the civilian tools in our national security toolkit. And, third, we have invested too much history in arguing that the militaries of other countries should stay in their barracks to now argue that they should be deeply entrenched in governance, development, and reconstruction. (For more on this, see the report I co-authored with Becky Williams for Stimson last year.)

Shortcomings are inevitable in such reports; they reflect the modus operandi and interests of the organizations that produce them. But they tell those whose heads are buried deep in the sand of "business as usual" that it is time to wake up and pay attention. As New York Times writer Bill Keller put it, we have "a historic opportunity to push the ‘Refresh' button on our national security." It is time to get down to the kind of planning the reports recommend, for the defense budget is most surely coming down.

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