High Stakes and the Sequester Squeeze

When defense budgets get tight, politics can get a little complicated.

It's all about national security, isn't it? Or is it? Rick's back room is alive and well in Washington, D.C. And it is shocking, just shocking, to learn that as the defense drawdown continues, not a single player at the defense table has stopped placing bets, stopped trying to fix the outcome of the game, or tried another role of the dice to end-run the impact of the sequester.

The past few days have seen a lot of these political games. The Washington Post is only the latest media source to rediscover the ancient verity: cherchez l'argent. (That's "follow the money" for those who do not consume snails and garlic butter with gusto.) The Post headline said it all: "Defense cuts pose an economic quandary for liberals."

Anyone who has heard President Dwight Eisenhower's 1961 farewell address knows that there is a political nexus that links the Defense Department to its contractors. But Ike conveniently left out the middle player who makes the game possible: Congress. Go ahead, add them back in, making an "iron triangle," as I coined it more than 30 years ago, standing around the table in the back room.

But perhaps it's some shock that congressional liberals might find themselves in a little bind between supporting stimulus for economic recovery and jobs, and seeking budget discipline for DOD -- or at least greater discipline than it has had for the last 12 years. And that contradiction can become stressful when the jobs are in a member's home state or district.

See, for example, Sen. Carl Levin (D-MI), who supports keeping an unneeded M-1 tank production line open, with subcontracting jobs in Michigan, while he supports lowering the defense budget $100 billion below the level proposed by the administration.

Indeed, the smell of pork is thick in congressional backrooms. While the Post leaned on the Democrats, Sen. Rob Portman (R-OH) has also been lobbying hard for the M-1, as has Republican Rep. Jim Jordan, and their fellow Ohio senator, the Democrat Sherrod Brown. Seems the main production plant is in Lima, OH, making the stakes very local, indeed.

Next door in Pennsylvania, Democrat Robert Casey and Republican Pat Toomey are equally convinced that stopping work on the Bradley Fighting Vehicle would be a bad idea for American national security. Never mind that the Army sensibly upgraded and modernized all the M-1s and Bradleys they need (and bought over 15,000 MRAP vehicles and all the Stryker light vehicles they wanted, to boot) spending all those additional dollars for the wars in Afghanistan and Iraq to do so, as my colleague Russ Rumbaugh demonstrated more than 18 months ago. Never mind that cuts are bringing the Army down by 100,000 people over the next couple of years, making the equipment inventory more than satisfactory. And never mind that the tanks and personnel carriers it has are more than adequate today against any known or likely military threat.

Let's be clear: Congress is worried about jobs, campaign contributions, and reelection -- even when they cloak the argument in national security verbiage. The defense budget is one of the biggest political games in town. When every contract has subcontractors peanut buttered across the country, the politics can be very persuasive, even when the national security argument is not.

To be fair, it is not just the elected members of Congress who play the game and sometimes feel the conflict between their policy goals and local interests. Playing the politics of defense goes well beyond the Congress into the other corners of the triangle.

Take the endless rumble about sequestration, for example. Supporters of the military's tuition assistance program pushed Congress to pass legislation safeguarding that program from the sequester, which in turn created precedent for a country riled by flight delays blamed on furloughed air traffic controllers. So, why wouldn't other well-endowed interests try the same?

Here's how the game of "Washington Monument" works: pick the most visible, symbolic target, make sure it is in the sights of the sequester gun, pull the trigger, and then see if the Congress draws back in horror. This is a game the military corner of the iron triangle plays very well.

Rest assured, the lesson was not lost on DOD, which, as I pointed out last week, has the greatest sequestration flexibility in the federal government.

The Washington Monument game at DOD began early, with the threat of furloughs for civil servants and the high visibility announcement that a second carrier would not be deployed to the Gulf. It continues: In a striking blow to our national security, for example, the Navy's Blue Angels and the Air Force's Thunderbirds have been grounded. Local air shows will no longer be able to attract the thousands of visitors who came to see the extraordinary flight routines these acrobatic wings produce. Grounding these elite flyboys is a national story, however; their contribution to national security is, at best, minimal.

We haven't heard as much recently from the third corner of the triangle -- the defense contractors. Well, that's not entirely true; they are out front for the M-1 tank and the Bradley, for example. And last year, the Aerospace Industries Association put high stakes on the table to exempt defense from sequestration or, failing that, eliminate the sequester altogether.

Industry has been relatively spared from cuts up to now. But it is not business as usual, not when the U.S. defense market is shrinking -- down 20 percent over the past three years, while the overall defense budget has declined only 10 percent (pre sequestration). Contractors have been responding for two years already, by consolidating businesses, hiving off unwanted capacity, and laying off workers. But the sequester rules did not take money away from existing contracts, somewhat delaying the impact.

That impact will come, however. The Pentagon, of course, is already making it clear that the business base is shrinking. As Brett Lambert, the Pentagon's industry guru says, "there's going to be a lot of bad news that's given out to companies."

And you'd better bet that the industry is already working overtime to close the loop with the other two corners of the triangle.

We are a defense drawdown. Nobody should be shocked that less cash means more political tokens on the gaming tables, amplifying the noise coming from the back room. It always has, and only some of those punters will walk away with winnings when the wheel stops spinning. Game on.

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National Security

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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