Setting Priorities for Defense Programs
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by Lawrence P. Farrell, Jr.
As we approach the beginning of a new budget cycle at the Defense
Department—the president’s fiscal 2003 budget—there
is the usual talk about funding shortfalls and potential program
terminations. It may be useful to review what we know about defense
budget cycles and, in the process, remind ourselves what has and
has not changed in the defense programming and budgeting business.
The intent here is not to hypothesize about the fate of any one
weapon system. But I think that it’s important for the defense
industry to be aware of the issues that affect the Pentagon’s
decisions on what gets funded and what doesn’t.
This is particularly relevant today, because, even though the defense
budget is going up, modernization dollars are tight. As we have
seen with recent program decisions, there are no sacred cows.
To begin with basics, it is difficult to remember when the nation
has ever fielded the forces to fully underwrite any declared strategy.
Except for a few years during the Reagan administration, the United
States has not fully resourced the forces that it did field. That
is the situation we face today. After years of under-funding, the
service programmers and budgeteers face the same dilemmas each budget
cycle—what to fund fully, what to fund partially and what
to cancel.
This exercise in setting priorities, in most cases, puts the emphasis
on near-term combat readiness. The upshot is that resources are
directed to training activities (steaming days, tank miles and flying
hours, for example). Other accounts are used to sustain the readiness
of the fighting systems (depot maintenance and war-readiness spares).
There are also some must-pay bills, such as salaries and medical
benefits.
Other accounts are vulnerable, to a greater or lesser degree. While
some major acquisition programs tend to get protected, others—such
as procurement of munitions—tend to get stretched out with
lower annual production runs. Other accounts get hit even harder.
Base operating support, real-property maintenance and military construction
often are funded at fractions of the real need.
The Pentagon’s budget currently on the Hill is significantly
higher than last year’s, but is still under-funded. Most of
the increase covers expenses associated with the current war on
terrorism, past unpaid bills, increased health-care costs, inflation
and program-cost growth. Even though the budget overall is $48 billion
higher than last year’s, only $10 billion of that is for new
requirements.
The real question is: How will the administration prioritize defense
spending? A quick reading of the concept documents and speeches
provides insight into the decision processes of the Bush administration.
The Quadrennial Defense Review is a document well worth reading
more than once. It lays out the strategy for defense, anticipated
scenarios, regions of the world for action and criteria for system
goodness—namely, “transformation.”
In a speech at the National Defense University, Secretary Rumsfeld
gave the concept of transformation a place of prominence. It must
be concluded that being “transformational” is a key
attribute for systems that compete for funding.
Another important consideration is program performance. In this
context, it is useful to go over comments made recently by Undersecretary
of Defense for Acquisition, Technology and Logistics Edward “Pete”
Aldridge, who has put the word out that his office is watching closely
every program and that he will not tolerate excessive cost overruns
and performance problems. Aldridge has placed several major programs
on a special watch status, based on their compliance with the Nunn-McCurdy
law.
That legislation stipulates that when a program is 15 percent over
budget, the Pentagon has to notify Congress. When there is a 25
percent overrun, the secretary of defense has to certify four criteria
for the program to continue: Is the program essential for national
security? Is there an equally capable alternative of lesser cost
available? Is cost under control? Is there management in place to
keep it under control?
If those four criteria cannot be certified, then the fund obligation
stops. Aldridge believes that Nunn-McCurdy is a good tool to deal
with programs that are sick. “It is the hardest thing to do,
to take a weapon out of the budget,” Aldridge said. “It
is just so easy to put one in.”
A factor that figures prominently in program stability is the ability
of the service program managers to predict the cost of a weapon
system over its entire life. Both Aldridge and Dov Zackheim, the
Pentagon’s comptroller, have said repeatedly that they will
take a harsh stance toward programs that underestimate their cost,
under the assumption that Congress will make up the difference.
To determine whether a program is over budget, the Defense Department
no longer relies on the services’ or the contractors’
own estimates, but on the CAIG (Cost Activities Improvement Group)
figures. The CAIG’s figures usually are within 2 percent of
the actual cost of a program, according to Aldridge. The service
estimates, conversely, are anywhere between 17 and 19 percent too
low.
For the past 15 years, we tried to buy defense capability on the
cheap—avoiding hard choices about how to restructure the post-Cold
War force, while neglecting to adequately fund the forces we inherited
from that era. Despite the large increases contained in the 2003
budget, more “hard choices” are on the way. The traditional
priorities—force readiness and current operations—will
continue to dominate funding allocations. Programmers and budgeteers
will continue to look for programs to cut or eliminate. Funding
decisions about program survival, force recapitalization and new
systems will be guided by the new criteria laid out by the administration—program
performance and contributions to transformation.