No End in Sight for Defense Acquisition Roller Coaster

For the Pentagon and the defense industry, it’s déjà vu all over again. Appropriations bills are stalled, defense policy legislation is under veto threat and another debt ceiling showdown looms.

“This year I’m afraid we could end up with as messy of a budget year as we had in 2013,” said Todd Harrison, defense budget analyst at the Center for Strategic and International Studies.

Even if Congress approves a temporary measure to keep the government open after current funding runs out Sept. 30, the Pentagon is known for not functioning smoothly under continuing resolutions. The absence of a long-term budget likely will precipitate more acquisition programs delays and disruptions of military training schedules.

“The question is how long we go with a CR,” Harrison said at a defense policy forum. When the government hits its next debt ceiling in December, it will be “crisis time.”

Four years into the Budget Control Act that set spending limits for defense and nondefense agencies, the Pentagon has not managed to live within the reduced caps, and this continues to wreak havoc on military readiness and acquisition programs, Harrison and other analysts said.

Pentagon officials and congressional defense hawks continue to sound alarms about sequester cuts coming back in fiscal year 2016, but the scare tactics are not helping to solve anything, Harrison said. “There is very little risk of sequestration this year.” Sequester only happens if appropriations exceed the caps. Both the House and Senate appropriations bills set the defense base budget right at the cap level of $523 billion. Rather than go along with the president’s proposal to increase the base budget by $38 billion to $561 billion, lawmakers added $38 billion to the overseas contingency operations fund, which isn’t counted toward the budget cap. The administration has warned the president will veto the defense bill unless there is an equal increase for nondefense agencies, a scenario that congressional Republicans said they would never support.

Defense Secretary Ashton Carter repeatedly has pleaded with lawmakers to lift the caps and add $38 billion to the base budget, as OCO does not provide stable funding.

Carter’s admonishments have not moved the needle, as the impasse is really about nondefense spending. “This fight has been the issue since 2011,” said Harrison. The past two years have been relatively stable because of the Ryan-Murray compromise that gave the Pentagon relief from the caps in 2014 and 2015, but no comparable deal appears to be in progress. “So I’m a bit pessimistic,” said Harrison.

These games of budget chicken are “hurting us in the defense industry and the Department of Defense,” said John Bonsell, vice president of defense contractor SAIC and a former minority staff director of the Senate Armed Services Committee.

“You can’t predict budgets,” he said. “We are wasting money in DoD by not having predictable budgets.”

Prognosticators said there is a strong chance the president will veto the 2016 National Defense Authorization Act to make a point about his intent to oppose the addition of $38 billion to the war budget without equivalent nondefense add-ons. Veto nor not, the picture is ugly for defense, Bonsell said. “We’re headed for a major crisis at the end of the year as the debt ceiling approaches. All these things will come to a head in December. That’s when the president will have the most leverage to get something done. Members are going to have to do something at the end of year.” Only the prospect of a government shutdown as the 2016 presidential season ramps up might bring the parties to the negotiating table.

Bonsell said it makes little sense politically for President Obama to waste a veto on the NDAA, which does not provide funding, he said. Even if Congress fixed the offending OCO provision in the NDAA, it would not mean anything unless the appropriators agree. “I would encourage the president to not waste his time doing this,” he said, as it would provide more ammunition to critics who would seize on the veto to blame Obama for weakening the military.

Giving the Pentagon more money in the OCO account is wasteful and continues to perpetuate budget instability, said Roger Zakheim, an industry attorney at Covington & Burling LLP and a former deputy staff director of the House Armed Services Committee.

“OCO avoids the requirement to change caps. But despite the creative efforts by the committees, base and OCO are not the same color of money,” he said. The Pentagon gets a poor return on OCO dollars because they are not applied to long-term programs. The Pentagon does not manage its resources well when it faces uncertain budgets, he noted. When confronted with sequester in 2013, for instance, the Pentagon cut troops, weapons maintenance and other accounts but left overhead untouched.

Zakheim estimates the standoff over the NDAA and defense appropriations will not be solved until early 2016. “A veto would add another element of pressure, next to the debt ceiling, a government shutdown, a CR and troop pay,” he said. Again, Washington will manage to “manufacture a crisis to get a policy outcome.”

Sen. John McCain, R-Ariz., chairman of the Senate Armed Services Committee and a key proponent of adding defense funds to the OCO account, warned the measure may not survive partisan politics. “All this goes to show that replacing the Budget Control Act will be enormously difficult.”

For the defense industry, there is a lot at stake in the timely passage of the NDAA beyond the $38 billion boost to the Pentagon’s budget. The bill has significant procurement-focused provisions and other defense reforms that would bolster spending on new equipment.

The big cliffhanger in the coming NDAA Senate-House conference is whether both sides agree to adopt McCain’s proposal to transfer key authorities over weapon acquisitions from the undersecretary of defense to the individual military service leaders.

“If there is one priority, besides doing away with sequestration for defense, it has to be acquisition reform,” McCain said July 15 at the Heritage Foundation.

Pentagon procurement chief Frank Kendall opposes the proposed shakeup of the procurement system. McCain said he discussed the issue with Carter and chided Kendall for voicing opposition to the bill in the news media.

This is not personal, McCain said, it is about the dismal performance of Pentagon programs. “All you have to do is look at the record. There has to be some accountability.” The bill does not diminish the authority of the secretary of defense, he noted. “The service chiefs work for the secretary of defense. He doesn’t work for them. We’re making them responsible for many of these programs that have gone amuck. … To say the status quo is satisfactory is an insult to anyone’s intelligence.”

Pentagon contractors have hailed NDAA provisions that would make it easier for the Defense Department to buy industry-developed products under commercial contracting rules, rather than under the onerous defense procurement regulations.

More significantly, the defense industry would benefit from NDAA provisions that mandate cutbacks in defense headquarters spending, reduce layers of management and reform benefits like military retirement, in order to free up funds for weapons modernization. “The NDAA delivers sweeping defense reforms that will enable our military to rise to the challenges of a more dangerous world,” McCain said. “We identified $10 billion of excess and unnecessary spending from the president's budget request, and we are reinvesting it in military capabilities for our warfighters and reforms that can yield long-term savings for the Department of Defense.”

Zakheim believes many of McCain’s provisions will run into rough headwinds. The House NDAA conference, led by House Armed Services Committee Chairman Mac Thornberry, R-Texas, is taking a much more cautious approach. “It’s a real moment to watch Mac Thornberry,” Zakheim said. “It’s going to require a lot of interesting movement on his part, on the one hand, to get the gist of what McCain is trying to do, and what he thinks is doable at the department under Ash Carter.”

Many of McCain’s reforms would put jobs at risk in members’ districts, and lawmakers will struggle to reconcile conflicting priorities to cut Pentagon waste and defend constituents’ interests.

Topics: Defense Department, DOD Budget, DOD Leadership, DOD Policy