CBO: Budget Sequestration or Not, the Department of Defense May Be Scrambling in FY 2013
There is just 166 days remaining in calendar year 2012 and until – barring legislative intervention by Congress and the White House – budget sequestration takes effect under the Budget Control Act of 2011 (BCA). Since the passage of the BCA and the failure of the joint (super) committee to identify the additional reductions as mandated by the Act there has been increasing attention on the potential impacts of sequestration on the Department of Defense (DoD) from a mission as well as an economic perspective. In the midst of this, the Congressional Budget Office (CBO) recently released a report analyzing the budgetary impacts of DoD’s Future Years Defense Plan (FYDP) for 2013 and CBO’s findings suggest that budgetary gymnastics may be only beginning.
Last February, DoD submitted a fiscal year (FY) 2013 budget request totaling nearly $615 billion – about $526 billion for base programs and day-to-day operations and about $88 billion for overseas contingency operations (OCO). Similar to most budget requests that the DoD submits to Congress each fiscal year, the department provided an accompanying five-year plan called the Future Years Defense Program (FYDP). The FYDP describes the DoD’s plan for its standard activities and, therefore, it generally relates to the base budget. Given the impact of current plans and decisions on future budgets the CBO routinely reviews the FYDP to project its budgetary impact over several decades. CBO’s latest report released this week analyzes the budgetary impact of the current 2013-2017 FYDP for its impacts from fiscal year 2013 through 2030.
Key CBO Conclusions
- The department would require $535 billion in FY 2013 to execute its FYDP base-budget plans for 2013. This is $9 billion higher than DoD’s budget request. Here, CBO includes the cost of all active-duty personnel instead of the department’s proposed shift of the cost of some personnel out of the base budget to overseas contingency operations (OCO.) (The BCA caps do not apply to OCO and certain other activities.) CBO shifts a total of $15 billion of personnel costs back to the base budget over the 2013–2017 timeframe. This contributes to CBO’s estimate that the overall cost of implementing the FYDP for 2013 through 2017 is about 4.7 percent higher ($123 billion) than DoD’s own estimate.
- To follow through on its FYDP base-budget plans after 2013, the department would need to return to near their 2012 level of $543 billion in 2014 and then grow at 2 percent on average annually through 2017. CBO projects that the current FYDP would require defense appropriations to grow at an average annual rate of 0.9 percent from 2017 to 2030.
- Under DoD’s current plans, from 2013 to 2030 the primary cause of growth in DoD’s costs would be in the area of operation and support (O&S), in which DoD projects significant increases in the costs of military health care, compensation of the department’s military and civilian employees, and various operation and maintenance activities. Weapon systems replacement and modernization costs would grow from $168 billion in 2013 to $212 billion in 2018 —a 26 percent increase.
- In constant dollars, the cost of DoD’s base-budget plans for 2013 through 2021 is $508 billion higher than the BCA’s defense discretionary funding limits before sequestration reductions and $978 billion higher than the available funding after sequestration.
The bottom line is this: Under CBO projections the costs for DoD’s plans would exceed the funding available through 2021 under the caps established by the BCA.
Aside from the non-trivial implications to national security and defense readiness, there are already current and ongoing implications to the defense industrial base and the larger economy and we are seeing increasing awareness and concern. Just yesterday, in a House Armed Services Committee Hearing entitled Sequestration Implementation Options and the Effects on National Defense: Industry Perspectives, Lockheed Martin CEO Robert Stevens testified that the looming threat of sequestration and ongoing uncertainty is already impacting the defense industry by stalling investments in people, plans and infrastructure. Stevens cited the Worker Adjustment and Retraining Notification (WARN) Act that requires companies to give affected employees 60 days notice (or more) of any plant closings or significant layoffs. But given the “fog of uncertainty" on if/how the Congress and Administration will avert or implement sequestration it is impossible to effectively plan and target notices, resulting in a much wider disruptive impact. Stevens estimated that sequestration “is likely to result in about a 10 percent, across-the-board reduction, at the program, project and activity level for most accounts.”
Earlier this week, the Aerospace Industries Association released research led by George Mason University economist Stephen Fuller on the broader economic effect of sequestration. In short, Fuller estimates that in 2013 alone, the nation would lose over 2 million jobs, $215 billion in gross domestic product, and more than $100 billion in the personal earnings of the American workforce if sequestration takes effect in January.
With or without sequestration, DoD may need to scramble to manage its 2013 budget situation. CBO estimates that for 2013 DoD’s current plans would cost $14 billion more than the BCA’s limits before sequestration and be $66 billion higher if sequestration occurs. To further squeeze things, DoD would have just 9 months after the January 2013 sequestration taking effect to deal with the mandated cuts.
This immediate and ongoing budget pressure will require the DoD to revamp their plans even more dramatically for fiscal 2014 and beyond and this will likely have further ripple effects through the defense industrial community, the substance of which is even murkier than what is currently faced under the current fog under impending sequestration. Ongoing uncertainty may be the only thing we can know for certain.