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Potential Defense Department Program Cuts to Offset Unexpected FY'04 Operational Costs in Iraq and Afganistan

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[NOTE: The Pentagon expects to run out of funds for military operations in Iraq and Afghanistan before the current fiscal year (FY’04) ends on September 30, 2004. See “Background Materials” below]

The V-22 “Osprey” Tilt-rotor Aircraft

FY’04 Authorization

Recommendation

Total V-22 Savings — $479 million

The Osprey’s long and troubled history warrants further delay and testing. The V-22 is currently in Low Rate Initial Production (LRIP). The aircraft was grounded in December 2000, after two fatal crashes in less than a year took the lives of 23 Marines. The aircraft underwent extensive examination and a redesign of its hydraulic and other systems following the accidents and allegations of fraudulent record keeping during the flight-testing program. Flight-testing resumed in May 2002, and is scheduled to enter Full Rate Production in 2005. The current testing program does not require additional aircraft, and units not funded in this year can be replaced more cheaply after the program begins full rate production.

Trident II D-5 Nuclear Missile

FY’04 Authorization – $675.2 million for 12 missiles

Recommendation – Terminate production

Savings — $675 million

The Trident II D-5 is a Cold War system that has outlived its time, and which is already available in sufficient numbers. The D-5 is a submarine-launched ballistic missile (SLBM), and the only nuclear weapon delivery system being purchased by the Defense Department. The D-5 has improved accuracy and greater range than the older C-4 missile, which it was designed to replace. Currently, the Navy plans to purchase 453 D-5 missiles, at a total cost of $27.2 billion, or $60 million apiece. As of FY’03, 409 D-5 missiles had been authorized. Equipping the 14 boat Trident II fleet would require 336 missiles, leaving 73 additional missiles for testing.

Aircraft Carrier Replacement Program (CVN-21)

FY’04 Authorization — $1,187 million for advanced procurement

Recommendation — Reduce advanced procurement to $500 million

Savings — $687 million

The current fleet of aircraft carriers gives the United States a technological and numeric capability far beyond dominance, with no rivals on the horizon. Construction on CVN-21 is currently not scheduled to start until Fiscal Year 2007. Delivery of CVN-77, the last of eight “Nimitz” class aircraft carriers, which the Defense Department describes as the “bridge” platform for advanced technologies to be incorporated in to CVN-21, will not occur until 2008. A reduction in advanced procurement will likely result in a modest delay in the program. Assuming the CVN-77 remains on schedule, such a delay would allow fuller testing of these new technologies – and increase the likelihood of identifying any problems — prior to their incorporation into CVN-21 construction

“Virginia” Class Submarine (SSN-774)

FY’04 Authorization — $1,512 million for 1 ship, plus $951.2 million for advance procurement

Recommendation — Delete advanced procurement funding

Savings — $951 million

The SSN-774 is intended to replace the “Los Angeles” class nuclear attack submarine, many of which still have half of their expected operational life before them and which remain the world’s most capable subs. The first four “Virginia” class submarines are under construction, the Navy awarded a six boat contract in 2003, and Congress approved a five-ship multi-year procurement in the Fiscal Year 2004 defense authorization bill, to be negotiated in FY’04. Total cost of this program, however, has sky-rocketed. According to the Defense Department, total program cost for the SSN-774 has grown from $65.7 billion to $83.2 billion in the last two years, an increase of 27 percent. [DoD’s “Selected Acquisition Reports” for the periods ending December 31, 2001, and December 31, 2003.]

DDG-51 “Arleigh Burke” Destroyer

FY’04 Authorization – $3,218.3 million for 3 vessels

Recommendation — Reduce procurement to 2 vessels

Savings — $1 billion

There is no pressing operational requirement that precludes a slight delay in the current acquisition schedule for the DDG-51. As a result of an agreement reached with the Navy and Northrop Grumman Ship Systems in June 2002, General Dynamics is now essentially the sole source for DDG-51 production. Under the agreement, work on DDG-51 was shifted entirely to General Dynamics in exchange for Northrop Grumman’s exclusive work on the LPD-17 “San Antonio” class amphibious transport. It is argued that the current rate of DDG-51 production (three vessels per year) is necessary to maintain the industrial base, yet General Dynamics has reported repeatedly in recent years a substantial backlog in its orders for the DDG-51. [14 vessels listed as backordered in General Dynamics press releases dated January 2, 2003, and September 16, 2002.]

F/A-22 “Raptor” Fighter Aircraft

FY’04 Authorization – $3,566.1 million for 22 aircraft

Recommendation — Reduce procurement to 10 aircraft (@$108 per aircraft)

Savings — $1.1 billion

The F/A-22 continues to be one of the Pentagon’s most troubled acquisition programs. In 1991, the Air Force planned to spend $96.4 billion dollars to develop the F-22 and produce 648 aircraft, a per-unit cost of $149 million. In 1993, the Pentagon’s “Bottom Up Review,” citing a declining threat as a result of the end of the Cold War, reduced the proposed purchase to 442 aircraft, increasing the per unit cost to $162 million. A further reduction recommended in the 1997 Quadrennial Defense Review reduced the number of aircraft to 341, which drove the per-unit cost up to $187 million. By 2001, the per-unit cost for 341 aircraft had risen to $204 million. According to the most recent DoD “Selected Acquisition Report,” at a total program cost of $71.7 billion, the per-unit cost for 279 aircraft is $257 million — an increase of 73 percent since 1991.

During its consideration of the FY’04 defense authorization act, the Senate deleted two aircraft from the request due to concerns about program delays and the Air Forces’ proposed plan for addressing software problems. According to the Senate Armed Services committee “it would not be prudent to authorize the ramp-up of procurement…to 22 aircraft,” and that cutting the two aircraft would save $217 million. [“Report to Accompany S. 1050,” page 100.] At this rate, reducing procurement by 10 aircraft generates $1.1 billion in savings. The Senate Armed Services committee has already proposed reducing FY’05 procurement by two aircraft below the Pentagon’s request.

Joint Strike Fighter

FY’04 Authorization (RDT&E)

Recommendation

Total JSF Savings — $1 billion

In addition to saving money in the short term, the Pentagon acknowledges that a slight delay in the JSF will likely benefit the program. Amid concerns about the aircraft’s weight and significant cost growth, the Defense Department earlier this year announced a one-year delay in the JSF program, and is considering more schedule changes. The Defense Department indicated that the delay in purchasing some of the aircraft was to ensure that the program had enough time to solve the aircraft’s weight problem. First flight of the aircraft will be delayed from October 2005 to early 2006, and the first aircraft purchases, scheduled for FY’06, will not occur until FY’07. [“Defense Department Eyeing More Schedule Changes for JSF,” Aerospace Daily, February 23, 2004.]

Missile Defense Agency (MDA)

FY’04 Authorization – $9.1 billion

Recommendation — Cut MDA funding to $5 billion

Savings — $4.1 billion

The Bush Administration is pouring increasing billions of dollars into a program of dubious technological and strategic merit that was described by the Pentagon’s Welsh Commission as “a rush to failure.” [“Report of the Panel on Reducing Risk in Ballistic Missile Defense Flight Programs,” February 27, 1998.] Since President Ronald Reagan’s famous 1983 “Star Wars” speech, the United States has spent roughly $125 billion on ballistic missile defenses. Prior to FY’02, total funding for ballistic missile defense was roughly $4 billion annually. The initial deployment of 10 land-based interceptors is expected by the end of September 2004. It is likely that the Defense Department will deploy fewer than 10 interceptors by that date, although it may declare the system operational earlier in the year once a few interceptors are in place. Yet Thomas Christie, director of the Pentagon’s Office of Operational Test and Evaluation, confirmed in a March Senate Armed Services Committee hearing that there is no way to determine if the system will work. When Sen. Jack Reed asked: “At this time, we cannot be sure that the actual system would work against a real North Korean missile threat?” Christie replied: “I would say that’s true.” [Senate Armed Services Committee hearing on the FY 2005 DoD budget, March 11, 2004.]

Total Savings — $10 billion

Background Materials

BACKGROUND

Prior to the annual Memorial Day recess, both the House and Senate continued their work on the Fiscal Year 2005 Defense Authorization bill, legislation that shapes Pentagon spending for the coming fiscal year which begins on October 1, 2004. Both houses considered bills that would allocate $422 billion to fund the Department of Defense and the nuclear weapons activities of the Department of Energy. Meanwhile, on May 12, the White House sent to Capitol Hill a request for an additional $25 billion in supplemental funding to pay for military operations in Iraq and Afghanistan during FY’05.

Still unaddressed, however, is the expected shortfall in funding for operations in Iraq and Afghanistan which will occur before the current fiscal year ends on September 30. Last October Congress appropriated $87 billion in supplemental funding for Afghanistan and Iraq, $64 billion of which was earmarked for military operations. Yet the unanticipated high operational levels (OPTEMPOs) of U.S. forces due to unexpected continued resistance from insurgents, and the resulting delays in the scheduled departure of 20,000 U.S. troops have caused these funds to be used up more quickly than expected.

When asked about this potential shortfall during a hearing of the House Armed Services Committee on April 21, General Richard B. Myers, Chairman of The Joint Chiefs of Staff replied, “we’re in the middle of that analysis right now and I know that when the service chiefs last talked about this, that there was, I think, a $4 billion shortfall, we thought we could get through all of August, we’d have to figure out how to do September.”

When asked what options might be available to the Pentagon to cover this $4 billion gap in September, Gen. Myers stated that money could be found within the current budget. “We do have some flexibility as you know, inside the budget, to address those additional costs, acquisition programs that aren’t executing timely and so forth.” Deputy Secretary of Defense Paul Wolfowitz echoed this view later during the hearing. While urging Congress to provide the Defense Department with greater flexibility in transferring funds between accounts, Mr. Wolfowitz noted that, “there are accounts that are under executing.”

SUPPLEMENTAL SPENDING

One of the most popular misconceptions about the annual defense budget is that these funds pay for actual combat operations, when by and large they do not. The reason for this is simple; it takes more than two years for the White House to develop and for Congress to approve a budget that covers just one year. It is impossible to plan that far in advance for unexpected events that will require federal funds. For example, in the spring of 2000, as Pentagon planners were putting together their FY’02 budget request for the fiscal year starting October 1, 2001, there was no way they could know the United States would be involved in military operations in Afghanistan as of October 7, 2001 – more than eighteen months in the future.

In addition to wars, unexpected events include natural disasters such as floods and droughts. These events are referred to as “contingencies,” and federal law provides mechanisms for funding these unanticipated requirements outside the normal budget process.

Because unexpected federal expenditures often do arise, the federal budget process allows for the enactment of special supplemental appropriations that are used to pay for unanticipated federal initiatives such as disaster relief. Supplementals are generally funded by making cuts — referred to as offsets — in other areas of the federal budget. Thus, supplementals normally represent a reallocation of assets and not new federal obligations. If, however, the spending package is deemed by Congress and the administration to be emergency legislation, then offsets are not necessary.

While prior to the terrorist attacks of September 11, 2001, supplemental appropriations for the Defense Department were frequently funded as emergencies without offsets, this trend has become universal since then. Four supplemental appropriations have been enacted since the attacks, totaling over $235 billion, roughly $165 billion of which has been for the military. Still, given the political climate in a presidential election year, administration officials have, until recently, avoided any discussions of additional supplemental appropriations for Iraq and Afghanistan. Thus, Pentagon officials and military leaders are looking at ways of funding the anticipated $4 billion shortfall from other Defense Department accounts.

METHODOLOGY

In an effort to assist in this process, the Center has assembled a list of funding cuts from a range of Pentagon programs that could be made to offset the costs of continued operations in Iraq and Afghanistan. In developing these recommendations, the Center focused on the procurement and research and development accounts, and opted not to make any cuts in personnel, operations and maintenance or military construction funding. With roughly 150,000 troops deployed in Iraq and Afghanistan, it would be inappropriate to make reductions in pay and benefits for service personnel and their families, or impede Defense Department efforts to upgrade its inventory of military housing. Likewise, reducing funding for new construction at U.S. military installations, facility and equipment maintenance, and troop training would be equally ill-timed during ongoing military operations. Obviously, however, if funds remain in these accounts at the end of the fiscal year, they could be made available to offset costs in other areas of the Pentagon budget.

In order to provide sufficient resources to cover the anticipated $4 billion funding shortfall, the Center has identified roughly $10 billion in potential cuts. This was done for two reasons. First, with a substantial portion of the fiscal year having already transpired, some of the funds in these programs will already have been allocated.

The second reason has to do with the difference between budget authority (the changes in law which permit federal agencies to commit federal funds) and outlays (the actual expenditure of these funds). Outlays that occur in a particular fiscal year are the result of legislative changes made either in that fiscal year (new budget authority), or were already in existence (existing budget authority). For example, in order to fund construction of an aircraft carrier, most of that funding would be authorized in a single fiscal year. But construction of an aircraft carrier takes a number of years, and so the outlays resulting from the new budget authority would be stretched out over a multi-year period. Therefore, in order to achieve a specified savings in annual outlays, it is necessary to make larger cuts in annual budget authority.

Further, according to the Congressional Budget Office (CBO), different Defense Department accounts have different budget authority to outlay ratios – what is referred to as the “spendout rate.” For instance, CBO figures show that in FY’05, a cut in personnel budget authority results in a 95 percent outlay savings in that fiscal year, while a cut in military construction authority results in only a 12 percent savings in that year, with total savings spread out over a longer period. To put it another way, in a single fiscal year a $100 cut in personnel results in a $95 actual savings, while a $100 cut military construction saves only $12. According to CBO, the savings ratios for procurement and research and development are 32 percent and 63 percent respectively. [“Aggregate Spendout Rates for Function 050, National Defense,” the Congressional Budget Office, March 1, 2004.]

Thus, in order to achieve the $4 billion in savings, the Center has recommended cuts in the FY’04 budget authority for the selected programs that is significantly larger than the necessary savings.