2017 Budget: Showdown Likely Over War ‘Slush Fund’

By Sandra I. Erwin

The Obama administration’s final budget proposal for fiscal year 2017 — scheduled to be released Feb. 9 — will be the president’s last chance to put his stamp on Pentagon spending priorities and military strategy.

The coming funding debate, however, is likely to focus on budget tactics such as the use of “overseas contingency operations” funds — created to finance the wars in Iraq and Afghanistan — to pay for activities and programs that have little to do with those wars.
The use of OCO funds is shaping up to become yet another heated political battle between the White House and Congress, said Katherine Blakeley, a research fellow at the Center for Strategic and Budgetary Assessments.

The administration has criticized the use of contingency war budgets as a gimmick that allows the Pentagon to break legally mandated spending caps and lets Congress off the hook for not raising those caps. The OCO portion of the Pentagon’s budget is likely to be the most contentious part of this year’s budget battle, Blakeley said Feb. 1 at a CSBA news conference. “There will be more showdowns over the base versus OCO budget.”

The OCO fund has been a source of controversy since it was originally put in place in 2001 to pay for the wars in Iraq and Afghanistan. Over the years, it has been used to fund routine military activities that don’t necessarily fit the original intent of OCO. “Everyone calls it a slush fund, a budget gimmick or a safety valve, but nobody seems to know how to live without it,” she said. This year, again, a “vociferous debate is expected.”

Nearly $30 billion of last year’s $58.8 billion OCO funding paid for base budget costs. In addition, the October 2015 budget deal negotiated by congressional leaders with the White House allowed the shift of $9.1 billion in base operations and maintenance costs into OCO.

The administration’s request for the Defense Department next week likely will adhere to the top line of $524 billion that was agreed upon in October, but it is still unclear how it will handle OCO.
“For fiscal year 2017, the overall OCO level will be closely watched and is likely to become a piece of political ammunition,” Blakeley said.
Many lawmakers regard OCO as their only politically viable option to boost defense spending without having to renegotiate top line limits, as OCO is not subject to the Budget Control Act spending caps.

The October deal that established a $524 billion base defense budget for 2017 explicitly set $58.8 billion as an OCO floor, but legislators ultimately retreated from that position because the Congressional Budget Office would have required that OCO be “scored,” or analyzed for its potential impact on the federal budget.

“The GOP will argue that $58.8 billion was a floor, but I think the Obama administration sees it as a ceiling,” Blakeley said. The president last year initially requested $51 billion but eventually agreed to $58.8 billion.

With the Pentagon feeling the squeeze after years of spending cuts, the administration will be pressured to accept as much OCO funding as it can, she said. “I do think Obama reluctantly will take advantage of $58.8 billion being the target rather than the $51 billion.”

The crux of the issue is that there is a big philosophical difference of opinion on how much base budget costs can be stuffed into OCO, Blakeley said, although Obama's stance against piling things into the war budget was weakened by allowing $30 billion in base costs in last year’s OCO.

“It is a politically tough issue,” said Blakeley. “It will be a leading indicator of how the politics of this year’s budget are going to go.”

Besides OCO-related disputes, the administration faces a wide array of fiscal challenges in the defense arena. The 2017 request will bring back many familiar dilemmas for the Defense Department: Trying to find money for modernization, not getting everything its wants, trying to keep up force readiness levels. “They will try to keep all the plates in the air,” said Blakeley, and continue to push many big-ticket programs further into the out years, in hopes of getting more money.

“Fundamentally, I think you will see near-term slicing and dicing, rather than a decisive strategic shift,” she said. “They will be keeping their fingers crossed for more money in the out years.”
The gap between the administration’s original defense budget plan for fiscal year 2017 and the cap set by the October budget deal is nearly $23 billion. This means “putting off a lot of investments,” said Blakeley.

Unless the Budget Control Act is repealed, the Pentagon faces a $104.5 billion shortfall between 2018 and 2021.

Topics: Defense Department, DOD Budget

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