Flexible Spending Account

How the Pentagon is wriggling its way through sequestration.

It is by now virtually certain that the sequester is with us at least through this year and, some speculate, maybe even next year as well. It is becoming equally clear that the Pentagon will survive the sequester, for all the management challenges it poses.

People have been writing about the flexibility given for air traffic controllers and the Agriculture Department as Congress tries to work its way around some of the tough issues sequestration imposes.

It might seem like it is time to pity the Defense Department, because Congress does not seem to be preparing a new set of flexible cards for the Pentagon. But there is no new deal for DOD because there doesn't have to be one. "Flexibility-R-Us" is the way the Pentagon is managing, and they are doing a mighty fine job.

As I have been writing for some time, the Pentagon already has a number of ways to play its budgetary cards under the sequester, and it is using all of them. And the flexibility cards just keep coming.

First, the definition of what was to be sequestered waived the pay and benefits funds, so no harm to the troops. Then, any funds already tied to existing contracts were off the table under the Budget Control Act, meaning the impact on defense contractors was delayed (watch for declining procurement budgets in the future, though).

Then, the Office of Management and Budget agreed that the funds that remained vulnerable to the sequester -- DOD's operating funds (civilian pay, operating the force, maintaining equipment, training, base maintenance, and operations) -- could be moved around. Not every account needed to be sequestered equally.

And Congress increased this flexibility when it passed a final appropriations bill for DOD in March, adding $10.5 billion to operating accounts for this year above the level provided in the continuing resolution that expired that month. (Not every department got a final appropriation; most just have to suck up the continuing resolution level, which was the FY 2012 amount.)

The next set of Pentagon flex-cards were dealt last week, when DOD transmitted its reprogramming request and its war budget for this year to Congress.

DOD has significant flexibility when it comes to reprogramming. Internally, without telling anyone, they can and have moved money within accounts totaling more than $10 billion a year every year since FY 2000. There is no formal report on how much they have already moved around to deal with the sequester, but they have surely used this authority up to the limits provided in law.

In addition, current law allows the department to transfer another $7.5 billion across accounts, as long as it notifies the key congressional panels (the armed services committees and the defense appropriations subcommittees).

When the department sent its reprogramming up to the Hill last week, it actually proposed moving more than $9.6 billion around, using additional transfer authorities. DOD proposed to move this money exactly in the way you might expect -- to relieve its operational account problem.

It took more than $3.6 billion out of procurement accounts (buying stuff) and put it (along with funds from other areas, including personnel, since the force is getting smaller) into the operational accounts, solving more than $6.5 billion of its operations money woes (especially for the Army, which saw its operations accounts go up $4.8 billion).

Not much for Congress to worry about here, unless some of those procurement dollars were headed to companies in members' districts, and some surely were.

The war budget request of $79.6 billion, on the other hand, should raise some questions. I have already suggested that the Pentagon might use the politically popular war funds (Overseas Contingency Operations, or OCO, funds) to cover some of its operational problem.

The reason DOD could be tempted is because in reality there is no separate war budget, in accounting terms, when it comes to operational funding. This is by far the most flexible part of the defense budget.

Operations are operations; all the money looks the same, whether it is being spent here or there. It's still training, flying, sailing, and base operations. And Congress does not do much to track exactly where these operational dollars are being spent.

So, over the years of Iraq and Afghanistan, operational funding could kind of slop back and forth, depending upon need. We tried pretty hard in the Obama transition to tighten down what DOD could ask for in a war budget. It was easier when it came to hardware -- if it wasn't lost or damaged in the war, it couldn't be in the war budget. If it was training and troop planning that would be part of what the Army would do in the absence of the war, DOD couldn't use the war budget to pay for it.

It looks like those days of discipline are over and done with. The OCO budget request already looked like it was going to be a problem when the administration delayed sending it to Congress. Then, when it was only $9 billion less than what the Pentagon asked for last year, even though the number of troops in Afghanistan has gone down by 39 percent, my suspicions rose even higher.

It's deucedly difficult to read the OCO cards, precisely because operations are operations and the OCO budget request does not specify where they are taking place. But there are some questions Congress needs to ask, unless it is willing to let DOD slide in order to deal with sequestration.

The Pentagon has once again put funds for wages and benefits of all the soldiers and Marines in excess of FY 2016 troop targets (182,000 for the Marines and 490,000 for the Army) into the OCO budget -- $5.1 billion worth -- under the dubious assumption that those folks are only there because of the war. Of course, if they could keep them, even without the war, they would -- but, ya know, budgets are coming down.

Then there are other pieces of terminology that suggest operations budget issues have crept into the OCO budget: the department estimates shortfalls in its Operations and Maintenance accounts, for example. And undisclosed amounts for undefined "personnel pay for mobilized forces." (That's not in the field -- would they be mobilized anyway?) And "pre-deployment training," training they might be doing anyway? And "various classes of supplies" not otherwise described. These categories add up to $25.7 billion of the total.

There is funding to support forces that are not in Afghanistan that "also support activities other than those in Afghanistan." You're telling me all of that is ongoing activity that has nothing to do with the war and ought to be in the base budget?

And there's a hardy perennial at least partly outside the operations accounts: $8.9 billion to "repair and replace equipment as DOD resets the force," despite the reality that the Army already substantially repaired and reset its equipment using billions of dollars of OCO and supplemental funding over the past decade, as my colleague Russ Rumbaugh has pointed out.

The OCO request provides a tempting option for repairing some of the impact the sequester has had on basic DOD operations funds. And the Hill might be lenient, providing yet more flexibility to the Pentagon.

Bottom line: DOD is the dealer when it comes to surviving the sequester, and the house usually wins. As I have said before, the sequester is not fun, but it is manageable.

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National Security

Food Fight

Why is the agricultural lobby so mad at Obama?

We can spend a lot of time (and I do) on the politics of the defense budget and the Iron Triangle that binds the Pentagon, the defense industry, and key members of Congress, making reform in the defense world difficult to execute. But there are a lot of other triangles that close around pieces of the federal budget. One of them comes up this week as the Senate marks up the Farm Bill and addresses the administration's proposed reform of the U.S. food aid program.

Budget discipline notwithstanding, elected officials have strong incentives to support wasteful or unnecessary spending as long as it takes place in their states and districts. Beneficiaries out in the private sector thrive off the proceeds. And federal agencies fiercely defend the turf around their programs. This phenomenon gives birth to the kind of casual budgetary hypocrisy that gives members of Congress a bad name. So it is with food aid.

Congress has always loved food aid. It looks like the quintessence of American generosity: share the fecundity of American agriculture with the poor and the starving overseas. Nothing warms the cockles of American politicians' hearts like that "gift from the American people" stamped on the side of a bag of wheat being delivered to the starving people of [insert the name of your favorite "poor" country here].

Food aid costs American taxpayers roughly $2 billion every year, and, unlike most foreign aid, Congress often adds funding to the president's budget request. But it is also expensive, an inefficient way to help the starving, and an obstacle to economic development -- things the president's new proposal would begin to change.

The suggested reforms are technical, but they make sense. The budget for food aid would move from the Department of Agriculture to the U.S. Agency for International Development, which has actually implemented the program for decades. (On the way, the jurisdiction for food aid funding would pass from the Agriculture subcommittee of Appropriations to the State and Foreign Operations subcommittee).

About $1.1 billion of this funding would become part of the disaster assistance program at USAID, which deals with known food crises and humanitarian needs. Another piece would go to a new fund to address chronic poverty and programs to prevent food crises from occurring. And a third piece would support a contingency fund for unanticipated food emergencies.

Budgetary and implementing responsibility for food aid would be housed in the same organization, doing the job it is doing today and creating new, flexible capabilities. Under the proposal, USAID would have greater freedom to pick and choose the commodities being provided, depending on the specific needs of recipient countries.

An even more important reform would allow the agency to buy some of the food provided (perhaps 45 percent) in other countries, particularly those where starvation could be met by local agricultural production, stimulating development. And the reform would end the requirement that 75 percent of U.S. food aid be shipped on American carriers, thus reducing the cost of the program and allowing more of the funding to go to the food itself.

Finally, the proposal would end the current practice of "monetization," by which food shipments are sent to recipient countries where U.S. and international nonprofit organizations sell them on the local market and use the proceeds to finance their local assistance work and administrative costs. The U.S. Government Accountability Office believes this is an inefficient way to deliver development assistance and, perversely, discourages local agricultural production.

Bottom line: The proposed reforms would streamline the program and better provide food to those who need it. Instead of subsidies for U.S. farmers, subsidies for U.S. shippers, and subsidies for nonprofit organizations, which consume 30-40 percent of the food aid budget, the food and some economic stimulus might actually get to the intended recipients.

I bet you can see where this is going. The food aid Iron Triangle has come out of the box in opposition, making it clear that a good part of this apparently altruistic program is really about self-interest. Agribusiness, American shippers, some of the nonprofit world -- not to speak of the agriculture appropriators and the Agriculture Department -- don't appear warm to the idea.

I saw this Iron Triangle up close when I was at the Office of Management and Budget in the 1990s. Every year, the folks in the first corner -- the private sector -- would lobby me about the food aid program. Shippers, farm lobbyists, and the nonprofits would link arms around my conference table justifying the budget request. For agribusiness, food aid is another piece -- albeit a small one (food aid is less than 1 percent of total U.S. agricultural exports) -- of the subsidies the taxpayer provides for their crops. For the nonprofits, monetizing bags of food is an important, taxpayer-supported subsidy for their administrative costs. And the shippers, well, that's pretty clear -- the American maritime industry needs every subsidy it can get, given its inability to compete on the global market for shipping. (GAO says the number of available American ships has fallen 50 percent over the past 10 years.)

In the second corner of the triangle is the federal government. In this case, even though USAID has been administering this program for donkey's years, the budget shift would take turf away from the Department of Agriculture, which owns the budget for the program. Now, presumably, President Obama and OMB worked that out when they put the budget proposal together, but I would not be shocked to learn that some over at Agriculture are not happy and are letting it be known, end-running the president's budget proposal.

Over in the third corner we have Congress. One of USAID's authorizing committees -- the House Foreign Affairs Committee -- has already come out in favor of reform; the chair and the ranking member both say they like the proposal. But it seems the Agriculture Committee folks are unhappy about losing jurisdiction (and the accompanying budget allocation) for food aid. After all, who provides their campaign contributions? Why, it would be like breaking up a family, or, maybe, the already nearly invisible family farm. And the appropriators, who really handle the money, can get more done that way.

Meanwhile, the nonprofit world is divided. My conversations tell me some, like World Vision, have lined up behind the shippers and agribusiness. Others, like the Modernizing Foreign Assistance Network, like the proposal. No unity there.

Change is really hard in Washington, even when it makes good common sense. More food could be shipped, growers in developing countries could get a stimulus, and local famers could keep a piece of the action. The proposal even throws a bone to shippers, proposing that some of the funding be shifted to the Maritime Administration.

But Iron Triangles are hardy things; that's why and how they are "iron." They don't always respond to common sense. And Congress is particularly rigid, since the committees and members are deeply embedded with the interests that have a stake in the programs.

If "normal" congressional politics prevail, I can see who will win this fight. USAID's authorizers don't have the domestic clout the Ag committees have. Their appropriators don't get campaign contributions from the countries overseas that receive the food -- that would be illegal. So stay tuned for an outcome that doesn't change the current program very much at all.

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