On February 15, 2012, I had the chance to interview Mike McCord, from the comptroller’s office for the Department of Defense, with some other bloggers. He talked about the 2013 DoD budget that had just been publicly released. Others will provide a far better analysis than I can, but I would like to talk about how you build a budget for the DoD.
Two caveats: The Congress has not approved a federal budget in three years. Funding for the existence of the Federal Government has been provided by a series of continuing resolutions. In addition, in the last several decades, no budget submitted by a president to Congress has survived in any sort of intact form. The budget request that we see now, historically, will bear little resemblance to the final budget. If our Congress critters even get around to adopting a budget for 2013 [/sarcasm].
I have twenty some years in senior accounting positions where I developed budgets. The process at the DoD is similar with one glaring exception. At the federal level, the budget is all about expenses for the departments and agencies. In the private and not for profit sectors where I worked, revenues are most important. You estimate revenues first and work the expense budget within the constraint of your income projection.
McCord and I talked about the reality of the DoD budget. The three services produce most of the budget request. As in the private sector, bottom up budgeting makes sense. Budget development begins at the lowest level possible in the organization and moves up the chain of command.
There is no “zero based” budget. You will never have zero troops or zero bases, for example. The DoD budget begins with some givens, which also include existing contractual obligations such as the construction of the Bush class aircraft carriers. X amount of the DoD budget is far less flexible when it comes to cuts.
McCord estimated that about two thirds of the DoD budget falls into that category. DoD is like any other employer. The largest expense is for people, wages and benefits. Cuts in the force structure will drive cuts in base costs and procurement of things like uniforms and bullets. But, the costs for personnel, including retirement, health care and other benefits, will fall within a relatively narrow expense range.
About one third of the DoD budget is available for significant cuts. About $70 billion goes to research. In the past, cuts in this area have provided savings but have left the United States lagging at the cutting edge of technology. Private sector firms cut in this area, too, with often the same results. There is a fine line in research and for the DoD, coming in second is an unattractive option.
Procurement occupies about $100 billion of the DoD budget. In the private sector, fewer pens, paperclips and toilet paper are where controllers eke out pennies when cutting expenses. The DoD is asking Congress to approve two rounds of BRAC, the process that looks at base utilization and closure. Closing unneeded facilities is very good way to reduce expenses. DoD facilities are as much a political expense as a defense expense as so many have been located in key states and congressional districts.
In the past, readiness costs have been reduced in order to save the DoD money. That has meant, before WWII, soldiers drilling with broomsticks because there were no rifles. In the 1970’s, it meant tank crews that often fired a handful of live rounds each year while pretending for the rest of their training. It has also meant cutting back on the many schools and courses offered or required of service members, which allow our professional military to remain professional. McCord felt that cuts in readiness would be counter-productive. There will be some, as the services will move funds around based upon the needs at the time.
Reversibility is a buzz word in the budget documents. McCord said that any BRAC decisions would include consideration of how the closings could be reversed if necessary. He suggested that methods like partial closures may be part of the solution. Retaining the newest buildings, such as barracks, is also a possibility. Mothballing facilities and storing well maintained equipment for future necessity is done in the private sector but they are far more concerned with the costs of the investment in unused capital items.
The DoD is asking for $525 billion, less than the $531 billion provided by Congress in 2012. The biggest savings in DoD spending is actually “off the books” in the reduction in Overseas Contingency Operations (OCO), dropping by $27 billion. OCO is the funding for the War on Terror, the wars in Iraq and Afghanistan, and it should drop given the withdrawal from Iraq and draw down in Afghanistan. The DoD’s stated goal is to reduce OCO to zero and fund operations from the budget in the next several years.
OCO is great. If I were handling spending in the military at any level, I would spend OCO funds first. Then I could use my budget for other needs. In the private sector, grant money is spent first whenever possible. The reduction in OCO will, however the DoD may see it, affect spending on the budget side. I suspect the effects will surprise some managers as I would guess that some cost centers have become overly reliant on these “off budget” funds.
The Department of Defense 2013 Budget website has much more data.