Budget Crunch Time: The Devil Is In the Details

In the wake of a bruising, and mostly unsuccessful, fight to avert steep spending cuts, the iron triangle of Pentagon leaders, congressional appropriators and industry groups now must buckle down and make unpalatable tradeoffs if they hope to have a budget in place before temporary funding runs out Jan. 15.

TheBipartisan Budget Act of 2013 gives the defense establishment temporary relief from the sequester cuts and raises discretionary spending limits, but does not provide funds for government operations through the remainder of fiscal year 2014. Appropriations bills must be passed before Jan. 15, or the government will once again either face the prospect of a shutdown or another stopgap funding measure that perpetuates fiscal uncertainty.

The BBA set the overall level of defense and non-defense spending, but it will be up to the appropriations process to allocate the dollars for each agency and individual programs.

All eyes over the next several days will be on the appropriations committee staffs as they put together a giant spending package for 12 federal agencies. Proposals would have to get clearance from committee chairs Rep. Harold Rogers, R-Ky., and Sen. Barbara Mikulski, D-Md. The challenge for lawmakers will be to compress a cycle of give-and-takes that normally would take months into a few days. Subcommittee staffs worked over the holidays and are expected to submit proposals this week to the House and Senate appropriations committees. A Capitol Hill source said the appropriations conference report would have to be completed this week so the House can publish it and send to the Senate next week. Considering the logistics and the tight schedule, it will be a scramble to meet the Jan. 15 deadline.

The fiscal year 2014 package should come in the form of a $1 trillion-plus omnibus measure. A single omnibus package would include defense and nondefense discretionary spending and it would be up to legislators to negotiate the allocations within the defense and nondefense caps. Budgets for departments and agencies such as Transportation, Interior, Environmental Protection Agency and Health and Human Services could end up funded by a full-year continuing resolution formula, while security-related departments such as Defense, Veterans Affairs and Homeland Security are more likely to have detailed funding prescriptions, according to Bloomberg Government analysts.

The 2014 spending cap for nondefense agencies is $491.8 billion. The defense target is $520.5 billion.

This means roughly a $32 billion reduction for the Defense Department, compared to the president’s original goal. The BBA trimmed the $52 billion sequestration cut in fiscal year 2014 by roughly $21 billion, and provides about $10 billion in relief for fiscal year 2015, when the defense-spending cap will be about $521 billion.

There has been rampant speculation on how the Pentagon plans to absorb the cuts. Defense Secretary Chuck Hagel has provided few clues. “We'll use those funds to restore spending on readiness. We will also work to minimize disruption to our most critical modernization efforts,” he told reporters Dec. 19.

The two-year BBA, which provides the Defense Department about $70 billion less than the president's budget request for 2014 and 2015, might force the Pentagon to make tough decisions on troop cuts and weapon systems, analysts have said. Hagel has directed his staff to reduce overhead and infrastructure costs, and to overhaul the weapons procurement process, but such reforms will not yield enough savings to offset the spending cuts. Force structure cutbacks and compensation changes are expected, although Hagel recognizes he faces political head winds in this area. “We can no longer put off military compensation reform,” he said. “We need to slow cost growth in military compensation. Otherwise, we'll have to make disproportionate cuts to military readiness and modernization.”

As lawmakers race to assemble spending bills, Hagel said he expects to be involved in the process. “We will be spending a lot of time on Capitol Hill,” said Hagel. “Our chiefs will be, our senior leaders will be, the comptroller will especially be spending a lot of time on Capitol Hill going through the specifics.”

The most contentious item in the BBA so far is a proposed reduction in cost-of-living adjustments to pension payments made to working-age military veterans. A number of lawmakers have vowed to oppose any such measures.

With the military still at war in Afghanistan, the Pentagon has a bit of a fiscal cushion in the $80 billion overseas contingency operations budget. “This account will be an important safety valve to help the Army and Marine Corps pay for manpower, operations and maintenance, and equipment ‘reset’ efforts over the next two to three years — essentially bridging the gap until growth resumes,” wrote Roman Schweizer, defense industry analyst at Guggenheim Partners, in a note to investors. “Congress hasn’t balked at the administration’s $79.5 billion war-spending request for this year, and it probably won’t in the future either,” said Schweizer.

For defense industry, there are still many wild cards, with several major weapons programs still in budget limbo. Some force structure and program cuts such as the Air Force’s A-10 fleet and the Army’s Ground Combat Vehicle have been discussed openly, noted Schweizer, “But we think there will have to be more substantial cuts across the new five-year spending plan released next year.”

Personnel budgets are not sacrosanct in this markup, he noted. “If lawmakers find a way to lower personnel costs, perhaps with help from the Pentagon, then some of the reduction may come from manpower. If it does not, then operations, maintenance, procurement, and R&D will have to endure a cut deeper.”

Topics: Defense Department, DOD Budget, DOD Leadership