Steady as she goes: FY 2021 Defense Operations and Maintenance Funding

Key Takeaways

• DOD is coming off of several years of very high overall funding.
• A drop in O&M funding is probable given the high levels of funding DOD has received in recent years.
• DOD’s overall funding is likely to be flat or down only slightly in FY 2022.

We here at Federal Market Analysis are beginning to hear concerns from industry about upcoming declines in Operations and Maintenance (O&M) funding across the Department of Defense. Comments by government personnel appear to be behind much of this anxiety as people become concerned about the possibility that defense funding will fall under the new presidential administration. These concerns, while understandable, are probably overstated. Federal officials often voice concerns about lower funding for their department, agency, or program office. Nowhere does this happen more that at defense industry events. Having been in this business through three presidential administrations I can honestly say I’ve only heard government officials say once or twice that they’ve received sufficient fiscal support to achieve their goals. Typically, everyone expresses worries about funding in the upcoming fiscal year.

Concerning defense O&M specifically, here is a chart showing the DOD’s base O&M enacted budgets and requests over the last two years.

As we can see, already in the FY 2021 request both the Air Force and the 4th Estate expected to receive less funding than they received in fiscal 2020. Army and Navy requested more, but only $1B each, which amounts to little more than a rounding error as far as the DOD’s full annual budget is concerned. Once Congress finally got around to enacting a full fiscal 2021 budget, the numbers for base O&M came in roughly equal to the president’s request. The reason the O&M numbers from the Consolidated Appropriations Act for 2021 look so much smaller is because the act funds the DOD through three quarters of the fiscal year. The funding for defense organizations and military departments received in Q1 equaled the level of the previous fiscal year. This is standard procedure for Continuing Resolutions.

Summing up, the DOD’s base O&M funding in FY 2021 is on pace to be flat compared with FY 2020. Does this mean that defense budgets as a whole will face dramatic cuts in fiscal 2022 and beyond? Probably not. If they do fall it will be because defense spending for the last four years has been high and it is time for the cycle to turn down. Even if there had been a second Trump administration defense spending would probably be flat, if not down a small percentage, due to the highs of the previous years. Industry should probably expect the same from the new administration, this being a slight drop of between 1-3% in total defense spending. Defense O&M will of course take a hit as part of that, but it is doubtful we’ll see a return to the days of sequestration. COVID-19 response remains a priority and the new administration still needs to contend with its adversaries. Both of these things pretty much guarantee the defense budget in FY 2022 will remain in the same ballpark as it is in FY 2021.