Analysis of the Bipartisan Budget Act of 2015
The budget deal negotiated by the President and the Congressional leadership is on balance a positive deal for the Department of Defense. The Department did somewhat better than splitting the difference between the President’s budget position on the high end, and the sequester caps in current law on the low end, even without taking into account the additional flexibility regarding Overseas Contingency Operations (OCO) funding in this deal.
Looking only at the base budget, the difference between the President’s position for DoD on the high end and the sequester-level Budget Control Act (BCA) caps on the low end was about $36 billion per year in FY2016 and FY2017. In FY2016, the Department got about $24 billion of that difference and lost $12 billion. In FY2017, the Department got about $13 billion of the difference but lost about $22 billion. Taking the two years together, the Department got $37 billion more than the worst-case BCA levels and $34 billion less than the best-case President’s budget levels.
Compared to FY2015, the Department’s FY2016 base budget would grow by about $26 billion or over 5% in nominal terms (about 3.6% in real terms), the biggest increase during this Administration.
The bill was also designed to give the Department some additional headroom by providing more OCO funding for FY2016 and FY2017 than the negotiators thought the Department needed – in theory up to $8 billion a year above current levels. However, I estimate the unfunded additional cost of the President’s decision to keep extra troops in Afghanistan at over $3 billion annually, which will eat up much of that OCO headroom.
In addition, the President may approve additional activities in the fight against terrorist organizations that will add to OCO costs, and of course the enemy always has a vote. So the Department cannot count on being able to completely control its OCO costs. However, at this time the Department does anticipate being able to recover some of the base budget topline lost in this deal by using $4 to $5 billion per year of OCO flexibility.
Including that OCO flexibility, the Department could end up with as much as 80% of the difference between the sequester caps and the original position in FY2016, and 50% in FY2017.
Put another way, the OCO flexibility provides around 1% a year of additional resources ($5 billion). The Department should end up with about 98% of its original base budget position in 2016 and 96% in 2017 without this OCO flexibility, and up to 99% in 2016 and 97% in 2017 with it.
Structure and content of the deal
In terms of scope and duration, this deal is what we expected, but no more. It’s a two year deal that will carry us through the 2016 election and change of Administrations and is silent regarding any years beyond that. After FY17, the sequester-level BCA caps drop back down to their current status, and the next Administration and Congress will have to decide whether to live with them, repeal them, or further amend them.
Still, by solving both the debt ceiling and budget/sequester issues in one package, this deal does represent a return to bipartisan governance rather than continued lurching from crisis to crisis.
This agreement is silent on what programs would be cut to meet these targets. That is left to the Appropriations Committees (for FY2016) and to the Department (for preparing a FY2017 budget that complies with the deal). Although the Department provided our input to the Appropriations Committees, Congress has ultimate control over what programs are cut to meet the new FY2016 targets.
This deal, by itself, doesn’t give us a dime. The Department still needs Congress to follow this up with appropriations bills in December and again next year to avoid potential shutdowns.
Among the notable aspects or impacts of this deal:
- It re-baselines the DoD budget upward about $30 billion per year above the funding levels of the past three years, so there is reason to believe DoD will be permanently better off by that amount, because future negotiations will begin from a higher starting point. This is just as important a win for the long term as the immediate help we got in 2016 and 2017.
- It marks the first time contingency or war funding targets have been written into a budget deal in advance.
- Therefore the Department now has base and OCO funding trading off against each other, in terms of setting budget priorities, to a greater degree than ever before in 2016 and 2017.
- I expect, as a result, that this deal will almost certainly leave DoD at least as dependent on OCO at the end of this Administration as we were before, it not more so.
Two notable things the budget agreement does not do, both of which represent wins for the Department:
- The bill does not extend the discretionary caps further into the 2020s beyond their current expiration date at the end of FY2021. One of my biggest concerns was that near-term help with our topline would come at the price of extending these statutory caps pressing down on the Defense topline into the peak years of modernizing the nuclear triad after 2020, and fortunately that did not happen.
- Unlike some recent budget deals, this agreement did not freeze federal civilian pay or reduce federal civilian retirement benefits to offset the cost of this deal.
Impact on finalizing the FY2017 budget
While the Department won’t have as much to spend in FY2016 or FY2017 as we had hoped, these cuts were to some degree expected and we can manage them. They came early enough in November to give us time to make informed tradeoffs on how to accommodate that lower funding level and still make substantial progress on Defense priorities and readiness and modernization goals. I am confident we will submit a budget for FY2017 that supports Secretary Carter and the nation’s key national security objectives. I am grateful for all the hard work by the DoD financial management community to make that happen.