The Defense Department in Sequesterland

The Pentagon will make it through sequestration better than most.

Sequestration is not pretty and managing it is not easy. But go back a year or so, to those days when our military was about to be devastated by the sequester. The rhetoric was hyperbolic; the damage to national security would be severe.

Just a few short months ago, DOD was handed the biggest megaphone in the executive branch to protest the consequences. Sequestration would bring Doomsday, readiness would be fatally damaged, and the United States would become a second-rate power.

During the campaign last year, the defense politicians and lobbies stepped up to the mic. Senators McCain, Ayotte, and Graham toured the country, "defending defense." With the support of the Aerospace Industries Association, George Mason regional economist Steven Fuller asserted that a million jobs would be lost as a result of the sequester.

Fooled me once, your fault. All that time, the Defense Department was better off in "sequesterland" than virtually all of the other federal agencies. DOD, it turns out, has the greatest flexibility to handle sequestration of all of them.

I have been suggesting this for months, despite the cacophony of horror stories. It was clear from the first day of the Budget Control Act that if sequestration happened, most of the defense budget would be exempt or touched only slowly. And the most vulnerable part of the defense budget had the greatest flexibility to adjust to a lower level.

Pay and benefits for military personnel -- a third of the defense budget -- would be exempt, waived by the president under the law. Contractors found out that the dollars already committed to their contracts would be untouched. Once DOD reassured them that they did not need to send WARN Act layoff notices to their workforce (and that any legal costs incurred by not doing so would be allowable costs under their contracts), the industry stepped back and became mute.

That left the military's operating funds -- about another third of the overall defense budget -- as the primary target of sequester. The Pentagon fretted heavily, trotting out the dangerous consequences. These are the funds that cover equipment repairs, training and education, wartime operations, fuel purchases, buying services, and paying civil servants. And the impact of the sequester would be severe -- perhaps a $35 billion hole in the operating budget.

The operating funds sequester problem is slowly eroding, however; the mirage of Doomsday is lifting. It turns out there is a lot more flexibility in these accounts than one thought. For one thing, last September and again this February, OMB defined the "line item-by-line item" nature of sequestration flexibly when it came to DOD operating accounts. Rather than cut equally from every training session, military exercise, fuel purchase, and civil servant, OMB said DOD would have the flexibility to lump them all together in the standard military operating accounts: Army Operations and Maintenance, for example. The Pentagon could make tradeoffs between these expenditures, setting priorities.

Then, a third of the Pentagon's problem went away when the Congress passed the full defense bill in March this year. That bill added $11 billion to the operations accounts above the level provided in the continuing resolution, just as the administration had requested.

The military services discovered that the threatened 22-day furlough of civil servants might not be needed. It dropped to 14 days, or even 7 days, and, in the Navy's case, conceivably to zero. The new bill helped, as did the search for other ways to set priorities.

Today the Pentagon is working, sensibly, on another flexible instrument it has to move funds around in those operating accounts and reset those priorities: reprogramming. Every year, Congress provides DOD with a set amount of funds it can reprogram to other purposes -- so-called General Transfer Authority (GTA). This year, it amounts to $4 billion. Congress has also provided another $3.5 billion in transfer authority in the Overseas Contingency Operations accounts.

So that makes a total of $7.5 billion DOD can move around, as long as it notifies its key committees it intends to do so, unless they have a strong objection. There is a major reprogramming notification coming this month, eating up almost all of that ceiling but turning another piece of the sequester Doomsday into a whimper.

It is not an easy task to find the sources for this reprogramming, because "sources" must be found to provide the funds the Pentagon wants to add to key operating programs. So the "scrub" is on to find those sources and maybe the Navy and the Air Force will have to pony up some operating fund "give backs" to fix the most serious operating fund problems, which are largely in the Army budget (including underestimating war operations costs).

But the scavenger hunt for offsets is well underway, and found they will be. No other federal agency has as big a pot of sources for the hunt as the Pentagon has, even more so because of the significant growth over the past 10 years in DOD's "back office," the administrative overhead.

Even that is not all. Every year the Pentagon reprograms significant sums of money at levels that fall below the congressional reporting requirement for General Transfer Authority. In fact, between FY 2000 and FY 2011, they reprogrammed nearly $175 billion, or an average of over $14 billion a year. In FY 2008, between GTA and below-the-threshold reprogramming, DOD managed to move nearly $50 billion in all, no doubt a good deal of that inside the operating accounts.

This is not as easy to do today because we are in a defense drawdown and the sources are getting scarcer. In the heady days of the last decade, finding the bill-payers was a piece of cake; today, it takes some scratching.

But what is interesting about all of this is that, for all the difficulties of dealing with a deep reduction like the sequester, it is the Pentagon that has, relatively, the easiest task and the greatest flexibility, compared to the rest of the executive branch. And it was the Pentagon that was leading the parade toward Doomsday.

In the end, this flexibility is a good thing. Not because it is fun, but because it is bringing some discipline to a department the budget of which grew beyond control over the past decade. And good, because the sequester seems likely to be with us all year, bar an unlikely general agreement on the federal budget. Sequestration, it seems, is a kind of deus ex machina, a "God-like" appearance from the sky, lowering the federal budget with no one to blame.

The Defense Department will get through it, not unscathed, but not rendered helpless by any account. Given its flexibility, and, truthfully, its planning capabilities, it may be more successful than other departments.

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National Security

Channeling Bush's Budget Tricks

Will war funding save the Pentagon?

The war budget is late and that could mean trouble. One of the less-discussed elements of the administration's defense budget request is the delay in submitting a request for the so-called Overseas Contingency Operations (OCO) account, which funds the military's effort in Afghanistan and counterterrorism operations globally. Instead of submitting the war budget with the regular "base" budget, the administration simply provided a "plug" of $88 billion for next year and said the real war budget would come later.

In delaying the war budget, President Obama has violated a pledge he made before taking office: that he would submit an OCO budget request simultaneously with the overall defense budget submission. During the presidential transition, moreover, the Obama administration negotiated an agreement with DOD that only direct war costs would be included in the war budget.

The simultaneous submission of the war budget, and the restrictions on its use, were supposed to end the Bush administration's repeated delays on war funding that allowed DOD to avoid the normal budget planning process -- what is known as the Programming, Planning, Budgeting and Execution System. It also allowed the Pentagon to lard up the war budget with items that were not directly linked to the war, like the costs of modifying ground forces into Brigade Combat Teams, or buying ground equipment that was part of the Army's long-term plan while not replacing equipment damaged in the war.

Obama's decision was good budget practice. It was never entirely clear why the war budget was sent to Congress separately, in any case. In past wars -- Korea, Vietnam -- war costs were generally folded back into the basic DOD budget after one or two years, once the costs of operations became relatively clear, as this Congressional Research Service report makes clear.

And it was certainly important to tighten the definition of what went into a war budget. Letting other spending slip into the war budget deeply eroded the integrity and discipline of the Pentagon's normal budget process. For the services, the war budget became a kind of "safety valve" for spending that was otherwise hard to justify. And the definition of what was a "war cost" was expanded in 2006 to cover almost anything the services wanted. The result, as another CRS report made clear, was that war budgets were significantly abused.

Despite Obama's promises, this year the budgetary dogs of war have slipped loose again. At least one military leader, Air Force Chief of Staff Gen. Mark Welsh, has made it clear that this process may allow the services to escape the discipline of budget planning, combined with the restraints imposed by the sequester. In testimony to the House Armed Services Committee last week, he noted, "In the past, we've relied on Overseas Contingency Operations funding to partially fund...flying-hour programs and to maintain our current and substandard readiness levels," and went on to say the Air Force would continue this process through FY 2015.

This kinda suggests the discipline negotiated in 2008 has not been as tight as promised, and that's worth a question or two in the budget hearings. The $88 billion plug makes it even worse. Eight-eight billion dollars is what the war is supposed to cost this year. The FY 2014 plug put in the FY 2013 budget request last year was $44 billion, so the plug itself has doubled in size.

That leaves room for budgetary skullduggery. Now we don't have anything close to a realistic "suggested" amount for war costs. The Pentagon has let it be known that it has already underestimated this year's war costs by close to $10 billion, most of it in the Army. According to Foreign Policy's Kevin Baron, Comptroller Bob Hale said in testimony: "Here there's a simple story about fiscal '14 OCO budget: We don't have one yet."

That's a shame. Thirteen years of war and the Pentagon still can't tell you what the war costs? Not plausible. Watch out for the OCO budget when it comes. With sequestration underway and ineptitude showing up in the planning, it could be a doozy.

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