CSIS Press Briefing: FY 2018 Defense Budget Report
December 7, 2017
TODD HARRISON: OK, so we should get started. So I don’t know you’ve all met Seamus Daniels. He started back in May, right, as our research assistant in the defense budget program.
So he and I co-authored this report together. If, you know, you’re used to my annual budget analysis, you will note that this is much later in the year.
SEAMUS P. DANIELS: I told Todd that it only took a short-term CR to get it out, so. (Laughter.)
MR. HARRISON: That’s right.
So, if we go to the next slide, speaking of being late – (laughs) – we did put a little – we did put some upfront analysis in this report about how things are late nowadays. And, you know, we often hear people talk about, like, oh, you know, the budget process is worse than it’s ever been. It actually has gotten worse. You can quantify this.
So, looking here, I’ll go back and give you kind of the history here. Back in the late ’60s, early ’70s, we, had a lot of very long CRs. As you can see here, they were extending in some years more than halfway through the fiscal year, more than 180 days. And Congress said, you know what, this process isn’t working, so as part of the – what was it, the Budget Impoundment and Control Act in 1974, they had the great idea to delay the start of the fiscal year by three months. Gives you three months’ more time.
And so, starting in FY ’77, the fiscal year began on October 1st . And it worked for a while. So, from ’77 to 2009, you can see that the length of CRs got a lot better. Now, it wasn’t perfect. There are still some years where we had three-month CRs. But no really long-term CRs during that period, and several years where the budget was enacted on time or early. There are negative bars here. Look at that. Four years they enacted the budget early. But since fiscal year ’10, 2010, we have had CRs every single year, and some of them have been pretty long CRs. We’ve averaged CRs that have gone 128 days into the fiscal year.
If you add it all up, during the – from FY ’10 to FY ’17, we spent one-third – a little over one-third of all of the days on CRs. (Laughter.) So a lot of continuing resolutions. So it really has started to get bad again. I suppose Congress could delay the start of the fiscal year to January 1st. But as we’ve seen historically, that may work for a while, but ultimately this is about getting the political process together in Congress.
So go to the next slide.
The budget request has also been later than usual in recent years. So I went down a rabbit hole of digging up old data here. I didn’t show it all on this graph, but I started going back looking, when is the latest a president’s budget request has ever been released? It turns out this year – ever – because we’ve only had presidents’ budget requests that are required since fiscal year 1923. (Laughs.) It used to be that they delivered the PB in December, so they would be delivering it, like, right now for PB ’19. And then in the 1950s they moved it to January. And it wasn’t until 1990 that Congress wrote into law that it’ll be the first Monday in February.
And what we’ve seen then is we’ve developed a habit, even though it’s not expressed in the law, is that the first budget of a new administration will be several months later, but the subsequent budgets really do get delivered on the first Monday in February; one exception in the Clinton administration. I think it was FY ’98. They missed it by, like, three days, so not a big deal.
But in the Obama administration, they only delivered a budget on time in two out of eight years. (Laughs.) And one of those years, FY ’14, was substantially delayed. It was delayed as the first budget request of some new incoming administrations. But the Trump administration, even though we expected the first budget request would be late, it went later than any previous other ones.
So you can debate here of whether or not CRs are causing the budget request to be late, which in FY ’14, that was the year where the PB ’14 was being delivered while FY ’14 was still under a CR. So, you know, they said at the time the two are related. But on the flip side, you can argue it the other way, that the later the president’s budget is delivered to Congress, the less time it gives them to enact it before the fiscal year starts. So it cuts both ways. The bottom line is none of this is good for budget stability in the long run.
The next slide.
OK, I won’t walk you through all of the analysis that’s in the report. We’ll focus on things that are kind of new and things you might not have seen before. We’re going to go by each of the departments here and look at force structure versus budget. And so there are some interesting trends here.
So we’re just looking since the end of Vietnam. If you go further back, you just see the force levels are so much higher, it throws off the scale of the chart. But we’ve got that data if you’re interested. But since the end of Vietnam, interesting trend.
So the end of the Cold War, the budget starts to come down and you see force structure coming down. So if you’re for the Navy, I’ll get you some numbers. In the Navy’s budget, we see that from FY ’87 to FY ’97 – so here we’re looking from here at the peak of force structure to FY ’97, the bottom of the budget – the number of ships in the active force fell by 40 percent, and the budget fell by 35 percent, so roughly in proportion to one another.
But from FY ’97 to FY ’10 – FY ’10 was the peak of the budget this cycle – the number of ships continued to decline. We lost another 20 percent in the number – in the ships. But the base budget – so we’re just looking at the base budget line here – it grew by 50 percent – 49, sorry – 49 percent. So the size of the force went down by 20 percent while the budget, base budget, went up by 49 percent.
So that’s not a good trend, right? We’re getting smaller, but costs are going up. Now, sure, there are war-related costs. But we’re not even talking about that. That’s the solid line up here. We’re just looking at the base budget in the dash line.
So now the Navy wants to grow to 355 ships. That would put the size of the force back to around the level it was in FY ’97. And the question is, is that affordable? Not just acquiring all the ships, because we know that that – the Navy has said that’ll take at least 10 to 15 years to grow to that level, probably more like 20 years if you look in the CBO report that just came out. But even once we acquire all the platforms, can we afford to operate and sustain them, given these trends? And especially if these trends continue, the O&S costs are just going to eat the budget alive.
Oh, and I would point out, Seamus’s work – when did you release the Navy –
MR. DANIELS: In November.
MR. HARRISON: In November. And you can find that on our website, Defense360. Seamus looked at the O&M cost per ship, you know, kind of trying to figure out the readiness challenges that are there. The O&M per ship that we’re spending in the Navy today is roughly double what we spent in the ’80s and ’90s. That’s the bottom line.
So we talk about readiness shortfalls. And there’s no doubt that there are. I mean, we’ve seen that from some of the accident reports. But is it a result of lack of funding? I don’t think it’s that simple.
All right, the next slide.
The Air Force budget, it’s a similar trend to what you see in the Navy. We peaked in the 1980s. And from the peak in the ’80s to the trough in the 1990s, the number of aircraft and the size of the budget fell roughly in proportion to one another. The reductions that we saw during that time were primarily in the fighting and bomber inventory. The number of fighters fell by 55 percent from the ’80s to the ’90s, and the number of bombers by 54 percent. Now, since the ’90s, the budget, of course, has started to grow again for the Air Force. But the number of aircraft continued to decline.
So the bottom line is here, for the Air Force as well as the Navy, force structure is just getting more expensive. And if we’re trying to replace a lot of the old systems with new systems on a one-for-one basis, the ONS costs are going to indicate that, you know, that’s going to be cost prohibitive to do that.
So go to the next slide.
So the Army, not to be outdone – got to include the Army – now the Army is not quite as exaggerated of a trend in the cost of force structure. You can see the solid line here. A lot of the Army’s budget growth in the 2000s was due to OCO. These are real operational costs for Iraq and Afghanistan. And the Army, of course, is more dependent on OCO than any of the other services. And it’s also worth pointing out that a greater share of the Army’s budget goes to personnel costs than any of the other services.
Now, the FY ’18 budget requests would return the Army’s base budget here to about the level it was in 1992—the 1992 budget. Not including OCO, and we all know there’s a fair amount of Army base budget that’s actually in OCO there. But even discounting that, FY ’18 would take the Army budget back to what it was in FY ’92. Of course, these are all in inflation-adjusted dollars. But the force that that would support is 24 percent smaller than it was in ’92. So, again, we’re spending more for a smaller force.
But the plan is, of course, to grow the force, to get larger, which is going to require even more money on top of the higher operating costs we have today. So this slide, we just looked at the overall defense budget over the same time period by titles in the budget. And the trend here you can see is O&M funding is taking up a greater and greater share of the budget. So O&M funding today is 39 percent of the base budget, 42 percent if you include OCO. Throughout the Cold War, O&M averaged 28 percent of the budget.
So it’s grown significantly as a share of the budget. And the growth in O&M has come at the expense of procurement. Procurement in the Cold War, it averaged about 28 percent of the budget. And now it’s only 20 percent of the budget. With both—with OCO and without OCO it’s 20 percent. So O&M is squeezing out procurement as a share of the budget.
Of course, the other thing that’s driving the cost of force structure growth – that you’ve heard me talk about many times before so I won’t belabor it – is the growth in personnel costs. The good news is that the growth in personnel costs has stalled in the last few years. Now, we saw tremendous growth here from the late ’90s, all the way through 2012. So from ’98 to 2012, the average cost per active duty person in the military was – grew by 60 percent above inflation, without OCO funding. So 60 percent growth in the base budget in the cost of a person. Now, that makes everything that we operate, all of our force structure, costs more because of that.
But since 2012, Congress has put in place a lot of reforms, and in particular health care costs. Congress and DOD have been doing a much better job of controlling the growth in military health care costs. And so we’ve seen the cost per troop basically flatten out here, decline a little. And the cost of civilians also has flattened out. The question, though, is can they sustain that? And even if you sustain it and you don’t allow these to grow above inflation in the coming years, you’ve already locked in this much growth. So our people just cost us that much more. And it is highly unlikely we’re ever going to go back to personnel costs at the levels we’ve seen in the early 2000s. So this is locked in. Personnel costs are sticky.
Any questions about all that so far?
Q: Yes. So you contend that – I’m trying to think – do you have any idea why O&M has started to eat procurement?
MR. HARRISON: Yeah, it’s a – so it’s a lot of different factors that are part of it. So civilian costs are included in O&M. Many of those civilians work in the depots, doing maintenance. So, when civilian personnel costs go up, our maintenance costs go up as part of that.
We’re also – we’ve got a lot of old equipment in our inventory. We haven’t been able to replace it all as much as we want. And so the old equipment is getting worn out, breaks more often, requires more maintenance.
We’ve had disruptions in the maintenance cycle, especially for the Navy, because the Navy has to do very long-term planning in the shipyards. When we disrupt that, it makes everything operate less efficiently. And so I think the Navy has come out, you know, beating the drum about that in recent months.
But then, also, if you look at the new equipment that we have bought, in almost every case the new platforms we buy cost more to operate and maintain than the platforms they replaced. So platforms get older, they cost more to operate and maintain; then we finally replace them, and that costs even more to operate and maintain. So it’s this cycle that we’re in, and I don’t think there’s an easy way out of it.
And part of it, too, is driven by the high op tempo of the force, just peacetime. You know, we are nowhere near the level of deployments that we were back in, you know, 2010, 2011. You know, number of troops in Afghanistan, Iraq, Syria, much, much lower. It’s a fraction, a tenth of what it was at the peak of the surges. But we’ve still got a tremendous amount of peacetime – peacetime, if you will – operations and demands on the force that are keeping folks out there operating, puts more wear and tear on the systems, and all of that is just adding to our operating costs.
Q: So, just to clarify, you said that the cost of the new systems that come online to operate and maintain is more than the cost of the old systems. Does that include, like, all the really old systems that have parts obsolescence problems? And, I mean, the services have been beating the drums about how it costs more to maintain older systems.
MR. HARRISON: Yeah, and it costs even more to maintain the new systems. If you look at like the current flying-hour cost for like F-15s and F-16s compared to the flying-hour cost of the F-35, I mean, it is – both are true. (Laughs.) You know, the old systems are getting more expensive to operate and maintain, but the new systems are even more expensive.
Now, part of that is we’re buying new systems that are more technologically advanced and more capable, right? So, in theory, you’re getting more bang for your buck. But with higher operating costs, that means that for the same amount of money you can’t afford a one-to-one replacement. You may not need a one-to-one replacement, though, if the capabilities are significantly better.
Q: And, Todd, would you say it’s fair to say – I mean, there’s all this focus on acquisition reform, which there sort of perennially is. And that focuses on, you know, really your R&D and your, you know, purchase cost of the weapons systems.
MR. HARRISON: Yeah.
Q: And even if you make substantial reforms there, that’s not your real – your real problem is the operating costs. It’s not the purchase price.
MR. HARRISON: Right. I think – I think it’s time that we focus on the other two-thirds of the budget. (Laughs.) Personnel and operations and maintenance costs are the other two-thirds of the budget, and I see that’s the bigger issue, that that is what is making our force structure cost more and what is driving us to a smaller force structure over time. That’s how we got to where we are, is because of our O&S costs, if you will.
Q: So that chart, if I’m reading it correctly, it looks like – you know, I remember Gates saying something along the lines of our personnel are going to eat our – are going to – is going to eat us alive. But it looks more like, to me, from your – to you point, it’s actually O&M.
MR. HARRISON: Yeah, it’s O&M. Now, keep in mind, some of the personnel costs are in O&M, because that’s your civilian.
Q: OK, right, civilian personnel.
MR. HARRISON: And your health care costs. Your Defense Health Program is also in O&M.
Q: That’s weird.
MR. HARRISON: I know it’s weird. (Laughter.) It’s also – the Defense Health Program is also – not only is it in a O&M account even though it’s a personnel cost, it’s in a Defense-wide O&M account, so it’s not in any of the services’ budgets.
Q: Ah. Yeah.
MR. HARRISON: Yeah. It should not be there, but it is. So –
Q: It’s the maintenance of a resource.
MR. HARRISON: Sure. (Laughs.) A different kind of maintenance, right? But you do see that MILPERS, as a share of the budget it looks it’s gone down slightly, but the cost per person has still gone up.
Q: It’s just less people.
MR. HARRISON: So, yeah, it just means less people. That’s what we’re doing, right, and we’re spending more on operations and maintenance.
The other thing, too, is, as you have fewer active-duty military, you can substitute with civilians and contractors, because contractors would be paid out of here.
MR. HARRISON: Yeah.
Q: Some of the services complain that they don’t have money to upgrade their facilities, the infrastructure. Where does that come from?
MR. HARRISON: Infrastructure cost, that would be up here in MILCON. I put MILCON in the other section.
Q: So is that being squeezed, as well, by O&M? Or why don’t they have money for those types of things?
MR. HARRISON: It’s not so much being squeezed. If you look, like, right around here, there’s kind of a bump here. That’s because of the BRAC, BRAC 2005. So there was a lot of money that went into O&M at that time, so you saw a big spike in O&M.
You know, in terms of, like, you know, updating their facilities, I mean, that’s – it will come out of MILCON. They have robbed from some of the MILCON accounts in, you know, 2014-2015 timeframe. The reason they were doing it is you had to make budget cuts quickly. And you can defer maintenance and, you know, replacement of facilities. And so you look at those years. And for several years they were budgeting below the target rate, the replacement rate, for facilities. That’ll catch up to you eventually.
Q: But, Todd, for facilities, if you’re building a new building or something, that’s MILCON.
MR. HARRISON: Yeah.
Q: If you’re fixing the roof on your existing building, that’s O&M.
MR. HARRISON: That would be O&M, right. Right.
Q: Yeah. So it’s one thing to replace –
MR. HARRISON: Yeah. Upkeep is one thing.
Q: Upkeep is one thing, and building a new building is a different thing, yeah.
MR. HARRISON: Yeah. So there’s a line where, you know, you’re doing major rehab on a building.
MR. HARRISON: You’re stripping it down to the studs and rebuilding it. Then you’re talking MILCON.
MR. HARRISON: But they have been robbing that in recent years.
SOFIE KODNER: If you all want to use that microphones for your questions, we’ll get it recorded for the transcript too.
MR. HARRISON: yeah.
Q: So on the Navy, for example, where you have this divergence that started back here between the number – the size of the fleet and the actual budget, so if they start increasing the size of the fleet, do you expect those two lines to begin to converge again? Or is it just going to shift that gap upwards?
MR. HARRISON: I think it’s going to shift it upwards, and I fear the gap may continue to widen. (Laughs.)
MR. HARRISON: Yeah. Now, part of it – let’s look at what happened in the makeup of the fleet here during this time period. The green bars you see here, those are the small surface combatants. One of the things that happened, especially towards later years here, is we retired a lot of those. Those are the Oliver –
MR. DANIELS: Yeah, the Oliver Perry.
MR. HARRISON: Yeah, Oliver Perry.
MR. DANIELS: Yeah, the frigate class was being retired.
MR. HARRISON: Yes. So we’re retiring those. We retired over a hundred of them in that timeframe. And look what was filling up the gap – some large surface combatants and some SSNs. Now, those are bigger and more capable ships. They cost more to operate and maintain. Now, that only explains kind of right here in this timeframe. It doesn’t explain a lot of what happened back here, though.
So, yeah, we’re changing the makeup of ships. And, I mean, I should emphasize again – you all know this – but ship count is not a great metric for the Navy. Of course, number of aircraft is not a great metric for the Air Force, and end strength is not a great metric for the Army. But nevertheless, what else do we have to go on here?
So if you look at, like, you know, the Navy in terms of tonnage, you’d probably still see a decline, but not as much of a decline, because you’re shifting to larger ships. You can look at the Navy force structure in terms of number of missile tubes. You’d actually probably see it going up over this timeframe. So there are a lot of different ways you can measure it. But the Navy has chosen to use ship count, and 355 ships is their target. So let’s analyze that.
But if we take our force today and we just try to grow it, you should fully expect that what’s going to happen is our costs today, if we grow the force by 27 percent like they’re saying, our costs will go up by at least 27 percent. And that’s once you reach steady state.
MR. DANIELS: Which is sort of why – that’s sort of why, when you see these reports, is it the CBO, or whoever does the report every year on the Navy’s 30-year shipbuilding trend, and they always say that there’s just not enough money to meet the plan that the Navy has.
MR. HARRISON: Yeah. Right.
MR. DANIELS: They’re not budgeting for that plan.
MR. HARRISON: Right. Yeah.
So let’s go on – keep going through the slides here.
OK. So what we’re all going to be talking about for the next couple weeks, of course, is none of the details about growing the force and the cost of the force structure. What we’re all going to be talking about is the top line. And really, what we’re talking about is the – not the total top line, but the base budget, total national defense, the 050 budget function, because that’s what the budget caps apply to.
So I updated this chart. I always show this. So here’s what the budget request was, PB ’12, the last budget submitted for the BCA was enacted. Here are the caps that the BCA put into effect. Here’s how the budget request in the Obama administration changed over time. You know, empathize the point, we’ve never actually been cut all the way down to the original budget cap level, because we’ve had three budget deals in the past. In 2012 we had a deal, 2013 was a two-year deal, and 2015 was another two-year deal. But there has been no deal to adjust the caps from FY ’18 through the end in FY ’21. So if Congress did nothing, the Defense budget will be at $549 billion, base national defense budget.
FY ’17, when the adjusted the cap, they moved it up to 551 billion (dollars). Now, if you did a straight CR with no changes at all, would it trigger a sequester? Well, January 15th, OMB will do the check. If it was a plain CR, 551 billion (dollars), they would look at that and say you’re two billion over the cap and they would order a sequester of $2 billion out of Defense accounts. MILPERs would be exempted, but OCO and unfunded liability – I’m sorry – unobligated money would be included. So you’re looking at much less than a 1 percent cut.
MR. DANIELS: But now, the current CR –
MR. HARRISON: The current CR is not a straight CR, right? The current CR takes this into account. And it has an across the board 0.6 percent reduction, right?
MR. DANIELS: Point-six-eight.
MR. HARRISON: Point-six-eight. OK. (Laughs.) So, 0.68 percent reduction, which puts Defense below the cap, so that if they just extend the current CR with that provision in there, it will not trigger a sequester. But keep in mind, it’s basically a sequester. (Laughs.) Because what does the sequester do? It just cuts a uniform percentage across all accounts. So if you had a $2 billion breach with a plain CR, and it triggers a sequester, it would be of about that amount, and it would be across the board. Rather than doing that, they’re just writing it into the CR. It’s still an across-the-board cut, though. But it’s a tiny difference. And so it’s not – that is not a huge impact in itself.
Q: Yes. How likely do you think we will have a CR by January 15 th?
MR. HARRISON: I don’t know. I give it a 50/50 – (laughs) – that we’d still be under a CR by then. A coin toss, basically. So the real issue – you know, they’re going to pass a two-week CR and – well, everything’s unpredictable now. I think they’ll pass the two-week CR and get us to December 22nd. And in the intervening time, they’re going to try to work out a budget deal. Of course, the budget deal is to raise the caps.
And they got to – you know, they have to get 60 votes in the Senate to raise the cap. And Democrats, of course, are going to insist on something on the non-defense side of the budget. So really, this debate comes down to what do you have to give Democrats on the non-defense side of the budget? What kind of other policy riders are put in there as well—things like DACA, things related to the border wall, things related to Obamacare. Who knows what they might end up putting in there. They have to reach agreement on all of those things.
If they can do that, then they can get an increase in the defense cap put in there. Now, how much would they increase the defense cap to? I think the maximum possible would be the McCain level shown here. So this is the McCain budget that came out in January. And actually, the NDAA came in slightly below that. Like, it’s, like, 85 billion (dollars) above the cap. The Trump request is 54 billion (dollars) above the cap. The House Appropriations was out there almost at NDAA level. The Senate Appropriations – well, it’s just the chairman’s mark – it was slightly below that.
So I think the range we’re looking at that Republicans want is somewhere between, you know, the McCain and the Trump level. There’s no way on Earth I think they would go lower than the Obama projected level for FY ’18. And I think there’s no way they go above the McCain level, I mean, really. He’s asking for everything he probably could possibly do. So somewhere in this range, that’s the guess, right, is where do they end up. But it all depends on can they reach a deal on all of these non-defense steps that go into a budget deal. And can they do that by December 22nd, when this CR extension runs out?
If they don’t get it done before Christmas, and they have to pass another CR that extends into January, then I think it probably goes past January 15 th. And then OMB will have to, you know, make this calculation. But, again, in all likelihood they’re going to extend the CR with the percentage reduction so you don’t trigger a sequester. So it’s very, very unlikely that we end up with a sequester.
OK. Let’s go to the next slide.
This is some bonus material. (Laughter.) I was thinking about this as I was putting these slides together, so this is a surprise to Seamus too. So it was after we finished the report, and I started thinking, like, how to express this in a better way.
Now, of course, issues for FY ’19, all the things you see here, the outcome of all the various reviews that are going on – the, you know, National Defense Strategy – the Defense Strategy Review, I think they’re calling it; the Nuclear Posture Review, the Ballistic Missile Defense Review – all of that should be finished up and coming out in the next month or two, and that is supposed to influence what goes into the PB ’19 request. We could see some new starts. Undersecretary Ellen Lord alluded the other day to trying to kill off legacy programs. I’m not sure exactly what that means and what might be in the crosshairs, but there is the potential for cancellations. New administrations do cancel some old programs sometimes.
And, you know, shifts in priorities. I think we will see in the new strategy a more detailed description of what – the ways they want to grow force structure. It’s one thing to campaign on 355 ships, 540,000 in the active Army, and 1,200 active fighters in the Air Force, even though we have more than 1,200. You know, I think they’re going to have to flesh that out more, and so we’ll see that in the strategy and in the budget.
Of course, the big debate going on in the administration now is over the top line and OCO in the future, a debate between DOD and OMB. DOD’s been very clear. Mattis and Dunford have said they need 3 to 5 percent growth each year above inflation. I think they’re right. If you want to get on the trajectory to grow the size of the force like they do, and to take into account your growing O&S costs, you really do need 3 to 5 percent growth above inflation if you’re going to do that.
And of course, in the last budget they had a projection – OMB, I should say, had a projection over the FYDP for OCO. They showed it declining every year and not getting moved into the base budget either. There was no commensurate increase in the base budget. I imagine that’s an issue they’re discussing – (laughs) – of whether or not they’re going to do that.
And, of course, every administration, you know, they have to make choices among capability, capacity, and readiness. And so it’ll be interesting to see what choices they make in the new administration in their new budget.
But I think the bigger issue here is this point at the bottom. I think of it like it’s a force structure-readiness death spiral, to use an aviation analogy here. What happens is you have your higher operation and sustainment costs in your force, and oh, goodness, that then means you can only afford a smaller force. And when you have a smaller force and you have the same operational demands, that means a higher op tempo and more stress on your forces, which then makes your O&S costs even higher, which then leads you to reduce the size of your force even more. And this can get you into a death spiral, a force structure-readiness death spiral.
So how can you get out of this death spiral? Well, one way is efficiency reforms, which everyone tries to do. And you can say, well, you know, I don’t have to have higher O&S costs because I can just do it better. I can do it more efficiently. And there’s probably some truth to that, but good luck with it. A lot of – a lot of administrations come in thinking they can just do things more efficiently, and there aren’t good results to show for it.
The other way you can get out of this is reassessing your strategic commitments around the world, basically the demand function down here. And I think that’s the situation the Navy’s in right now. If you’re reading between the lines in these reports that have come out about the accidents, you know, clearly, they didn’t have proper training to operate the equipment. That’s clear. Why didn’t they have the proper training? It looks like it’s because of the op tempo, that they were – they were out at sea doing real-world operations so much they did not dedicate necessary time for training. And, you know, there’s evidence of that across all of our forces.
And the services have been talking about this readiness crisis, that they haven’t been able to do all of the training that they need to do. They’re not confident that their forces are 100 percent ready in all of their mission-essential tasks, and a large part of that is because we’ve got such a high operational tempo because we have so many things going on around the world – not just warfighting, but peacetime presence operations and exercises. And we’re finding out more and more every day about the number of troops that we’ve got deployed in places like Niger and more troops that we know about in Syria. This is going on all over the place, and it is stressing the force. And that is, you know, burning up readiness. It’s adding to our O&S costs.
So what do you do? You could just say, you know what, I’m going to do less. I’m going to say no to some of these things. I’m not going to be present as much. I’m not going to participate in as many exercises, or I won’t commit forces to some particular part of the world, saying no to some. And we haven’t been saying no a lot for the past 16 years.
Q: And none of the current military leadership feels – they don’t seem to feel that’s their place to even say that, right? That’s a civilian decision.
MR. HARRISON: Right. Well, it is a civilian decision, civilian control of the military, of where we do things and we don’t do things. The military’s job, though, is to make this tradeoff clear to the civilian leadership and to the president, and say, look, we can go put more troops there or we can go and do more presence operations here, but here is the cost to our force. It’s irresponsible for the military to just salute and go do it, and incur the risk and incur the cost without informing the leadership that that’s what’s going to happen. And I’m not suggesting that they have done that, but the job of the military leadership is to come back and make that clear to the civilians.
Q: So what impact would a war in Korea have on all these scenarios? (Laughter.)
MR. HARRISON: (Laughs.) Yeah.
Q: Risk, O&S, personnel –
MR. HARRISON: And turns it all upside down.
Q: Yeah, and turns it all upside down.
MR. HARRISON: OK. So, obviously, a war with North Korea is not like – today it would not be like any war that we had before. It’s not that North Korea is a peer adversary by any means, but they have nuclear weapons. We know that. They’ve detonated them. Do they have – you know, can they deliver them on, you know, long-range missiles? You know, that is not as clear. But certainly there’s a risk that they could, and certainly Seoul is within range of the capabilities that they have.
So we’re talking about, you know, a massive conflict that could very quickly escalate into nuclear and attacks on South Korea, potentially Japan, potentially Guam. If that happens, then you’re talking major attrition of forces. And that is not a situation that we’ve seen in Iraq, Afghanistan, the first Iraq War. Even Vietnam we didn’t see that kind of major attrition that we could see if there’s a nuclear exchange on the Korean Peninsula.
And then there’s the question of what follows, right? Once we’re into a shooting war with North Korea, I don’t see how it ends in anything other than the removal of Kim Jong-un, and then who’s going to occupy North Korea? Who is then going to rebuild it? You know, Colin Powell famously was attributed – although he denied it – as saying, you know, Pottery Barn rules, right? You break it, you own it. And Pottery Barn denied that that’s their rule. (Laughter.) But, you know, I mean, I think that would be the case. If we started the war, we would be left holding the bag from that.
Of course, if there is a shooting war on the Korean Peninsula, then there’s the question of China and how does China intervene. They’re a treaty ally with North Korea. They have interests as well. They probably don’t want a U.S. occupation force all the way up against their border.
Q: We’ve kind of seen this movie before. (Laughter.)
MR. HARRISON: Well, we’ve seen it, but now with nuclear weapons.
Q: The Korean War.
MR. HARRISON: Yeah, but now with nuclear weapons is the difference.
Q: I feel like that would also –
MR. HARRISON: And missiles.
Q: Wouldn’t that also possibly impact our economy – (laughs) – and how much money we have to spend on –
MR. HARRISON: Yeah. There’s a lot of trade that goes on in that region that the U.S. is dependent on, in South Korea, in their economy. And if Seoul is attacked in a massive way, it’s a city of like 25 million people in the metropolitan area, what is it, 30 kilometers from the border – (laughs) – not far –
Q: In artillery range.
MR. HARRISON: Yeah. The Olympics venue, I understand, is also very close to the border.
Q: Worst Olympics ever. (Laughter.)
MR. HARRISON: So there are a lot of huge unknowns.
But if you just try to – you know, if you fast-forward to after that, however it played out, I think then the defense budget becomes focused on rebuilding our forces and replacing things that were attrited in the conflict.
And, I mean, I don’t even know how to think through that. What if we lost an aircraft carrier? And nuclear weapons are pretty good at taking out carrier strike groups. You don’t have to be that accurate. What if we lost a massive number of aircraft, a massive number of troops? I mean, it’s just hard to imagine what that looks like after the fact. So I think the defense budget is just totally turned upside down.
Q: Can you remind us, too, how much defense spending went up from 2002 to 2010, both baes and OCO? You know, the narrative from the right wing on the Hill, and in the media, and their right-wing commentators is that Obama gutted defense spending after 2010. Could you remind us of the arc and –
MR. HARRISON: Yeah, so I went up about 50 percent in the base budget.
Q: Fifty percent?
MR. HARRISON: In the base budget. More than that with OCO. But then a lot of the increase in OCO has since come out.
Q: So a CR is less funding than the request for ’18. So at what point do they have to start cutting programs because they’re not getting their ’18 targets?
MR. HARRISON: Yeah. So, if you get into an extended CR again this year, at the FY ’17 level, with that percentage reduction, well, basically it’s not a matter of cutting, it’s just you never get to start. You never get to start the new starts. You never get to ramp up production like you had planned. Everything is just on hold. And so some programs, you know, depending on when they had planned to get started, or when they had planned to award contracts, they have to start slipping those dates. Now, the Pentagon is smart about this. They already anticipate, you know, it’s foolish to plan a contract award or a new start, production increase, something like that, in the first quarter of a fiscal year. So those kind of impacts are pretty minimal in the first quarter.
When you start getting into the second and third quarter of the fiscal year, then it becomes hard to avoid it. You have to plan to sign a contract sometime during the fiscal year. You can’t backload everything into, like, the last week. (Laughs.) And so the longer you go, you know, past January, the longer we go on a CR, we’ll see, you know, an exponential increase in the impacts that are happening.
Q: I mean, it does look like it’s going into the second quarter.
MR. HARRISON: We’ll see if they reach a deal by the 22nd. I understand that 3:00 Pelosi and Schumer are supposed to be meeting at the White House, is that right? (Laughs.) So we’ll see how that goes. You know, everything we had heard was that they were serious and getting close to a deal last week, last Monday, when the meeting got canceled, so.
Q: So I got a question for you.
MR. HARRISON: Oh, she had her hand up. Sorry.
Q: Oh, sorry. (Laughs.)
Q: Oh, I was just going to ask, President Trump campaigned on rebuilding the military, obviously. Obviously, this budget didn’t really do that, but he said that they’re going to try doing that next year and the year afterwards. So, given what’s going on with the budget situation and what you saw in this last budget request, what do you think the chances are that he makes good on that promise? And then – and how, I mean, will he reach that 3 to 5 percent goal?
MR. HARRISON: If you go back one slide here.
So that’s right. The Trump ’18 budget request, that was not a budget that you could actually grow the military under. That was some short-term increases and then just sustaining that over time, because this looks like growth, but this is in then-year dollars. When you adjust it for inflation, that’s flat. Now, one of the things I’d point out in here, a little bit facetiously, is that when the rolled out this budget, the DOD comptroller made it very clear – had a quote in there where he said the SecDef has not spent one second looking at anything beyond FY ’18. Hard to believe, literally.
So where do those numbers come from in the top line? They look like they came from OMB, that it was just straight line for the budget. And so they didn’t make a decision here. So that’s kind of the baseline you’re starting from. That’s a no-growth scenario. And, I would argue, that zero growth with inflation, given what we’ve seen in the increasing costs of force structure over time and your increasing O&M costs, it actually means a slight reduction in the size of the force.
Now, I put in here the CBO estimate, because they just came out recently. Now, they didn’t give detailed year by year. But I went and looked, and over their 10-year estimate what they assumed is 4 percent nominal growth, which is about 2 percent growth above inflation. So I just drew that line in here. Two percent growth above inflation is what they were saying in that regard that you would need to gradually and quite slowly – (laughs) – grow the force to the size that Trump had campaigned on.
So I would look, do you see the FY ’19 request get on a trajectory that’s more like this or more like the McCain trajectory here, or something different? And I think that’s the battle that’s going on between DOD and OMB, is what kind of top line growth do they get in the future.
Q: But realistically, they may only have this next budget. I mean, if they lose the midterms, you know what happens then.
MR. HARRISON: Well, you know, so all FYDPs are just a, you know, tentative plan. All that really matters is the year – (laughs) – of execution in the budget. That’s all Congress enacts, is one year at a time. So, you know, always take it with a grain of salt. I think I have – if you go in the backup, I’ve got a chart showing previous FYDPs compared to – keep going – there. I think they call this the hairs on the back of the dog. (Laughter.) They’re kind of like riled up.
But all of these dashed lines, these are previous FYDPs that came out with budgets. And the black line is where the budget actually went. It doesn’t include OCO funding. So, I mean, look, President Obama was constantly submitting budget requests that had FYDPs that were higher than where the budget ended up going. And people seem to have this perception that President Obama was the one trying to cut the budget that whole time.
You know, and look at Reagan. Reagan was, you know, shooting for the stars there – (laughter) – but that wasn’t happening. The budget kept going down his entire second term in office, you know. You know, was he cutting it? Well, Congress was cutting it, but he did sign it into law. You know, they weren’t passing those appropriations bills over his veto.
Q: People say Reagan built up the budget, so –
MR. HARRISON: Right. Well, at first he did, but so did Carter. (Laughs.) You know, Carter was projecting growth in the budget in his last year. And it is true that Clinton was trying to cut the budget deeper, and the Republicans in Congress were pumping the budget back up in the 1990s. That one’s just true.
So, yeah, the FYDP, what does it really mean? It’s only one year at a time in the budget request. The FYDP is really an indication of what they’re thinking, what they’re planning, what they want, the trajectory that they want to be on.
Now, the other factor with the top line is look at what are they doing with OCO. Of course, as you know, Mick Mulvaney is not a big fan of OCO. And so in the last budget he’s trying to wind it out, and it wasn’t getting rolled into the base budget. But Mattis basically disowned that and said haven’t paid any attention to those out years. Only focus on FY ’18. And they did not try to roll base-budget funding back into the base budget in the FY ’18 request.
Q: So, just to be clear, they say they need 3 to 5 percent growth, but the current trajectory based on ’18 is flat.
MR. HARRISON: Flat. No growth above inflation.
Q: Right, no growth, OK. So –
MR. HARRISON: Yeah. So they’ve got – the next budget, in theory, if they’re going to get on the growth track that they want, and just to take into account a growing O&S cost that we’ve seen historically, they need to get on a trajectory that’s higher than that.
Q: So you talked about the areas where the budget is growing and stuff, and I thought maybe I could ask it in a different way and kind of get at the issue of how do we get out of this situation that we’re in. I’m looking at this and I’m just wondering how the Reagan administration was able to buy so many ships and aircraft with the money they had. Why were they doing so much better?
MR. HARRISON: Yeah. Well, so the – we didn’t have the personnel costs that were growing at quite the same rate. There were many years in the Reagan administration that the pay raise went below the employment cost index, which is measure of cost increases to the overall – labor cost increases in the overall private sector. So that’s effectively a cut.
So they did a better job, I think, of holding the line on personnel costs, for better or worse, yeah. And, you know, they were buying ships and planes and tanks in very large quantities, and they were doing it more efficiently than we have today.
Q: And they were running up huge deficits.
MR. HARRISON: Well, yeah – (laughs) – until –
Q: And they didn’t have a Budget Control Act.
MR. HARRISON: Until Gramm-Rudman-Hollings kicked in, and that’s when the budget turned around. And that’s where we got sequestration from.
Q: What about the – wasn’t there more competition in the industry, more companies, so that kind of kept prices lower?
MR. HARRISON: Yeah. I mean, yeah, you could argue that. It’s hard to prove a counterfactual, though, of, like, what would prices have been had there not been as much competition. But, yeah, there was a larger, more robust defense industry. Defense was also a larger share of the overall economy at that time. Since then our economy has grown a lot faster than our defense budget.
Q: And what are a couple – DOD’s going to come out with horror stories about CR extension. I’ve asked them to give examples. What are some fair – what were the areas that you think would be fair for them to like – I mean, in some – the other areas where it would be more hype?
MR. HARRISON: So, if I was – if I was in DOD and I was, like, going around, like, really looking for legitimate stories of CR impact –
Q: Legitimate, yeah.
MR. HARRISON: – I would look at where we were going to have to breach a contract.
Q: Breach a contract. OK, fair.
MR. HARRISON: Yeah, where we weren’t going to be able to meet payment schedules for, like, a multiyear procurement, something like that.
There was a story back a few years ago during one of the extended CRs on the tanker program.
Q: Right, they would lose a billion dollars.
MR. HARRISON: Right. And, you know, that’s a good story because – it’s not a good story for Boeing, but for the Air Force. The Air Force has got that locked into a contract and they don’t want to touch it. You know, they just want to keep to their end of the contract, they do not want to have to renegotiate that because Boeing is, at this point, eating all of the cost overruns.
Q: So –
MR. HARRISON: Yeah, and Boeing can do that, and Boeing seems fine with that, that, you know, that they’ll make it back eventually. But that’s one where you don’t want to, because of the CR, be put in a situation where I don’t have the funding available, I can’t obligate the money on the contract according to the current schedule; and therefore, I have to renegotiate. That would be a really bad thing for the Air Force if that happened.
And if you look at the budget for the KC-46 program over the past few years, what they’ve been requesting in each FYDP, it’s remarkably stable. I would put a chart up here, except the lines are right on top of each other and it doesn’t look interesting. It’s just remarkably stable in that program. So that is kind of an acquisition success story in a way that could then be totally undercut by a CR.
And so I’m sure there is some shipbuilding programs like that where we’ve got a multiyear procurement where we have payment schedules, and if you can’t make one of those schedules, you don’t want to have to go back and renegotiate and disrupt the whole contract.
Q: Like the FY ’17 – ’18 budget, it authorizes a seven-year multiyear for B-22s. Would that be an example if they say we can’t sign the contract for a – on the B-22?
MR. HARRISON: Yeah. Yes, if they don’t have the money and the authority then, yeah, they can’t sign the contract, that slips it all.
MR. HARRISON: Mmm hmm. And, you know, there could be some examples of, you know, additional training that they were planning to do that they just don’t have the money at the CR spend rate to conduct the additional training. I would look for things like that.
Q: What would be examples of red flags where they’re bullshitting just to get public attention, broadly?
MR. HARRISON: Yeah, I mean ‒ no, I mean, you know, like, rotations through the National Training Center, things like that, they might have to slip, or international exercises that they’ve planned, they might have to delay if they don’t have the funding. Because all those plans for FY ’18 were set based on a higher level of funding in virtually all accounts, you know, O&M, procurement, everything. So, yeah, in the CR they can’t spend at that higher rate that they had been planning.
For the first quarter, they probably already took this into account in their plans and they weren’t going to do those higher rate of operations activities in the first quarter. But, you know, there’s no way you can plan to never do those things during the year. At some point, you have to plan to do them. So in the second and third and fourth quarter is when you would plan those things. And in most years, you will have a budget by then.
Q: Now, Todd – I’m sorry.
Q: Go ahead.
Q: I was just saying, Todd, during a CR, they can sign a contract, they just can’t obligate funds to the contract.
MR. HARRISON: Well, they can’t – they can’t start a new start program.
Q: Right. They can’t sign any new contracts.
MR. HARRISON: And they can’t – they can’t increase production rates.
MR. HARRISON: But, yeah, if they have other contracts that they can fit within –
Q: Like services and things like that, yeah, yeah.
MR. HARRISON: Yeah, if it can fit within their existing resources that OMB allocates, yes. And, I mean, if they have prior-year money, they can obligate.
Q: Right. And you can obligate, obviously, the prior-year money.
MR. HARRISON: Right. But now, OMB will push back and, you know, the comptroller folks will push back on people and will try to force them to be more conservative, since you don’t yet know what you’re going to get as the final number for the year.
Q: How do you think soon losing McCain’s voice in the Senate is going to affect FY ’19-’20, the congressional calculations going forward?
MR. HARRISON: So I think Senator McCain has been a really powerful champion in the Senate for defense issues. And I think there’s several recent years that I think he singlehandedly forced the leadership in the Senate to move ahead on the NDAA when it might not have otherwise been a priority for the leadership. And so I think that, you know, it’s not clear that there’s anyone else in the Senate that will fill that role, that will be that champion to make sure that defense bills get pushed through.
Q: So are we looking at for the first time in forever maybe not having – or not forever, but really long time – not having the NDAA passed in –
MR. HARRISON: Yeah, like 54, 55 years. (Laughs.) Yeah, I mean, possibly next year.
MR. HARRISON: I mean, you know, obviously, we can’t predict something this far in advance, but I think there are a few recent years where if it hadn’t been for McCain we very well might have been looking at no NDAA or a much-delayed NDAA. But he’s been the force, basically, you know, the squeaky wheel that keeps the pressure on McConnell that gets it on the agenda, that it eventually gets to the floor. And you remember, what was it, last year that – or the year before; it all blurs together now – when President Obama vetoed the NDAA. They still came back and got it passed. (Laughs.) They had to get a budget deal, but then they ended up getting it passed. So, you know, that takes a lot to get it passed twice. (Laughs.)
Q: To what extent do the O&S trends that you talked about earlier apply to nuclear weapons? And, you know if new systems come online, you know, will there potentially be the same issue with, you know, how similarly to how, you know, new aircraft are costing more? You know, I know one argument made by, you know, the generals and admirals involved in this say, well, you know, sustaining the current systems is a lot more expensive than bringing in new ones. But if the trends you just showed held up for nuclear weapons, that might actually not be the case, it sounds like.
MR. HARRISON: So I don’t – I don’t have enough data to know, because you look at our subs, our Ohio-class SSBNs, they’ve been in the fleet for so long already. It’s been so long since we’ve had a transition to a new generation of SSBNs that I think it would be a major assumption to, you know, go one way or the other and say, you know, whether these are going to cost more or the same in terms of O&S. When I’ve done estimates of the cost of nuclear forces in the past, I have just made the conservative assumption that the O&S cost per ship would be about the same. It could be higher, but I have no basis for that.
In terms of ICBMs, it’s – I mean, it’s been since the 1970s since we’ve had a new ICBM. And before that, the ICBMs that we had in the force were very different. I mean, we used to have liquid-fueled ICBMs. So there’s really not a good basis of comparison because, you know, we were just rolling them out in like, you know, the early ’60s through the early ’70s, and we’ve had the same missiles since then. We’ve been through a rehab program. But if you look at O&S costs for our ICBM forces, at least in recent years they’ve been pretty stable. But if you switch to a new missile, could it cost more? Can’t say. We don’t have a good basis. And, you know, if you look at the cost estimates that they put out for the GBSD program, you know, CAPE, you know, wrote a special thing about this in their report from I think last year where they said that there’s just too many unknowns in estimating the cost of this future system.
And – let’s see – and so for the airborne leg, they’re dual-use. (Laughs.) Now, we haven’t had a transition in bombers in a very long time, and we don’t know enough about the B-21 – (laughs) – to know. Like, we don’t even have a rough idea of the size. So is it the same size as the B-2, or is it smaller? If it’s smaller, you would expect that the O&S costs probably scale down a bit. If it’s the same size, then the O&S cost would be similar, maybe more. We also don’t know all the technology behind it. So that’s too hard to say.
Now, the other part of the airborne leg, the F-35, dual-capable fighters, we already know those O&S costs are going to be higher. (Laughs.) Yeah. But they’re such a small percentage of the cost of the airborne leg that is really attributable to the nuclear mission. So the F-35s, you know, it’s really only about 5 percent of the fleet that would be on a nuclear mission at any given time.
Q: So how do you see – how do you see missile defense eating into it? Because it’s a little bit of a different strange hybrid that I have a hard time wrapping my head around, because you have the Missile Defense Agency, and then the Army’s responsible for certain portions of it, the Navy’s responsible for certain portions of it. And there seems to be an intense congressional interest that everybody get more. And the Army, I think, I don’t know how often Milley thinks about missile defense or, you know, when he gets up in the morning if that’s what he thinks about. I mean, how do you see that sort of impacting the budget picture, at least on the Army end?
MR. HARRISON: I think that in FY ’19 it’s almost a near certainty that missile defense is going to get more and more money, and more for everything. So more for, you know, GDI. More for Aegis SM-3. More for THAAD. More for Patriot. And more for probably new systems too.
It’s interesting that in the NDAA – and I’m surprised people haven’t reported this more – but there’s a line in there, in the NDAA, that says: You’re going to plan for and field a prototype, I think by FY ’22, of a space-based missile intercept system. This is Brilliant Pebbles. And it specifies it has to be boost space intercept, which is the hardest to do from space. So you’re going to need a massive constellation of satellites to do that. You know, previous estimates have been hundreds. I think, you know, if you run the numbers on it, it’s probably over a thousand satellites that you need in constellation to be able to hit boost space.
Q: So when do we get X phase?
MR. HARRISON: And that’s intercepting one at a time, right? If a country launches two missiles from the same place at the same time, you want to have enough interceptors in place, you need double your constellation. What if you launch three at a time? Right, triple it. That’s in the NDAA. It says that DOD is going to do that. It does have some, like, per the ballistic missile defense review language in there. But look for things like that.
Now, also, another thing that I think does make a lot of sense is an additional space layer of our sensors that can do better tracking and target discrimination. If you look at what’s the one investment that can improve the effectiveness of all of our existing missile defense systems, it’s better tracking and target discrimination. And the best way to do that, on a global basis, continuously, is from space. And so, you know, a satellite constellation in low Earth orbit that is just looking and sensing, you know, you only need a few dozen satellite to provide continuous coverage to do that. And they can be relatively small satellites.
Q: I was wondering if you could truth squad something, this claim by mostly defense hawks on the Hill that the defense budget has been cut. I was just looking at something Thornberry said a few months ago. He said that we’re roughly 20 percent below what it was in 2010. And I was wondering what the best shorthand way is to describe what’s happened to the defense budget over, like – since then.
MR. HARRISON: The total budget since 2010 has gone down by about 20 percent. That includes OCO funding. The vast majority of that reduction was due to the drawdowns in Iraq and Afghanistan. The base budget has not been reduced by that much, less than 10 percent of the base budget.
Q: So it’s a misleading – that would be a misleading statistic.
MR. HARRISON: Well, here’s another statistic that you could throw back, is that the budget today, when adjusted for inflation, the base budget alone is about at the level of the peak at the Reagan buildup.
Q: When we had a Soviet Union.
MR. HARRISON: Well, and we had a much larger force. So, you know, the budget peaked in ’85 – FY ’85. And we are at about that level in the base budget today. And, I mean, if we go back through the service budget charts, you can see it. We didn’t put the total budget chart in here. Oh, look, here’s Navy base budget today – OK, the Navy was higher. Go to the next. Air Force was a little higher. Army, well, look at that, about the same. And Defense-wide has grown dramatically.
Q: Plus, it’s – as I asked you earlier, from a base that went up exponentially from 2002 to 2010.
MR. HARRISON: Yeah. It went up quite a bit.
Q: So actually you’re cutting from, actually, a higher base. So –
MR. HARRISON: Right. I mean, you know. So this part, yeah. Army OCO, it did get cut a lot. (Laughs.)
Q: So I have a question.
MR. HARRISON: Yeah.
Q: So this is 2018. Do we have any sense of when 2019 is going to come out or what it’s going to include, or? (Laughter.) If it’s supposed to be coming out in, what is it, February –
MR. HARRISON: First Monday in February.
Q: First Monday in February
MR. HARRISON: So it will be interesting to see if they make it on time. (Laughter.) I worry that we’ve gotten into a rut, a trend, that the president’s budget request come in late. And so part of me wonders, are they going to make the statutory deadline? You know, there’s no penalty if you don’t submit it on time. No one, you know, gets arrested. No one gets fined. But it is in the law. It’s supposed to be the first Monday in February. So, yeah, it should come out in February. You know, what’s it going to show? Well, I think we’ll get a better idea when they start rolling out strategy review or nuclear posture review or missile defense review. When they start previewing those, I think we will get a better idea of what we’re going to see in the budget request.
Q: So when McMaster says – I think it was McMaster – says things like the strategy is not as far along as people keep saying it is, that doesn’t bode well for the budget?
MR. HARRISON: Yeah. Yeah, that doesn’t ‒ yeah, that doesn’t reflect well for the status of the budget. And, you know, I’m not totally convinced that Mattis and Mulvaney have come to an agreement on the top line. So if the top line is still in play, then the budget is going to be pretty far from being locked. Now, in a normal budget year, you know, they would have been doing the program review in the OSD right now, doing some pass-backs with OMB, asking for a little more here, a little less here, whatever, and then they would be in the process in December of locking it all down, making all the final changes, dotting the I’s, crossing the T’s and transmitting it to OMB. And then OMB takes it and does their business with it and basically puts it in the budget format. So it should be locked pretty soon, in a normal year.
So if we’re starting to hear things that indicate it’s not locked, then that is early warning that it may not be ready in time for the first Monday in February. Yeah.
Q: Just to clarify, going back to the beginning of the briefing, what ‒ so you said that the O&S costs have gone up while what we’re actually doing, able to do, has gone down and that’s been driven by personnel costs, the fact that O&S is down?
MR. HARRISON: Well, so our O&S costs have been going up while the size of our force has been going down.
MR. HARRISON: But anecdotal evidence is that we’ve been still trying to do the same amount of work. The demand has stayed high.
Q: Right. Right, but that’s driven by ‒ well, personnel costs. So why are personnel costs are going up?
MR. HARRISON: So, well, so it’s driven by personnel costs and our maintenance costs going up. And personnel costs have been going up ‒ well, we had a big increase in the 2000s, from, like, ’98 to 2012 is when we saw the biggest increase for military personnel costs. Higher pay raises, so higher than ECI pay raises. You saw a, you know, change in retirement benefits that costs more because they undid REDUX, they went back to the old retirement system. And then we saw an addition of new benefits, like TRICARE for Life, that weren’t in the budget before. And then we saw just general growth in health care costs. And more and more military retirees and dependents are staying in their military health care system.
We have 9 ½ million Americans that are eligible under the military health care system ‒ not talking veterans’ health care, that’s part of the budget ‒ 9 1/2 million Americans in the military health care system. How many do we have ‒ how many people do we have in our military? You know, 1.4 (million), 1.3 million in the active force and about 800,000 in the Guard and Reserve? The vast majority of people in our military health care system are not in the military. They are retirees and dependents and dependents of retirees.
Q: And we are very grateful. Thank you very much. (Laughter.)
MR. HARRISON: Not to single anyone out. Yeah, I mean, so that’s – that was a lot of what drove up the cost. And in the 2000s, the cost military retirees paid to be in the TRICARE system, the annual enrollment cost was fixed in law. I think it was $480 a year – a year.
Q: Jeez. Now it’s 560 (dollars) for TRICARE Prime.
MR. HARRISON: Yeah. So I think in 2012 they let it start growing. Yeah. So 560 (dollars) a year to cover your whole family.
Q: My family of five.
MR. HARRISON: Yeah. So I don’t know about you all –
Q: My kids are 23 years old.
MR. HARRISON: Don’t report this, but that’s about what we pay per month on the CSIS plan. And CSIS is covering the other 75 percent of the cost. But my share is about – it’s about $500 a month. I mean, that’s a deal to pay 560 (dollars) a year. So more and more people are going to use the system.
Q: Related to that, though, if the military were to change that, I mean, what would it cost them to keep people in the service? Because that’s – that’s a reason why people stay in for 20 years is, like, it’s ‒ that’s a deal that you’re not going to find anywhere else.
MR. HARRISON: Yeah. I don’t have this chart – or maybe you can find it on Defense360. My bad ideas paper, there’s a chart in there. (Laughter.) So what I did is I just went and I looked at cash compensation at different ranks and levels. And I don’t think a lot of people realize what cash compensation is like now in the military. Most people think, like, you know, if you’re a junior enlisted or a junior officer in the military you’re making peanuts. They’re making a lot more than people here.
I just went and looked up cash compensation. And so cash compensation doesn’t include, like, free health care for your whole family, it doesn’t include the retirement benefits, it doesn’t include reduced-price daycare, all those other things. It’s just literally what’s in your paycheck. So scroll down to my chart there. Blow that up if we can. Will that blow up? I don’t know if it will show well.
MR. DANIELS: We’ll see.
MR. HARRISON: Yeah. So here’s officer cash compensation. So a second lieutenant with zero years’ time in service, so coming right out of school, you’re going to be making ‒ your cash compensation is almost $70,000 a year. Yeah, you all picked the wrong line of work. (Laughter.) But get this, get this, after four years, four years out of college, you’re making almost 110k in cash compensation, 110(,000). Do you know what the best-paying jobs right out of college in America today are? You look at a survey, seriously, you look at a survey that was recently done of the highest-paid graduates from colleges and universities across America. You know what colleges and universities had the highest-paid graduates?
Q: Service academies.
MR. HARRISON: Not the – not Harvard, not MIT, not Stanford. No, it was the service academies had the highest-paid graduates right out of school. Yeah. So, I mean, this is real. And, you know, this is a huge bump here. And even enlisted, so you’re coming right out of high school, 18 years old.
MR. HARRISON: Of course, you stay at E-1 for, like, that amount of time, so really you start at E-2 your first year, you’re going to be making over $40,000 a year in cash compensation, plus free health care for your whole family. And you probably don’t have a family then. But, you know, you look how then it goes up. By the time you’re at four years’ time enlisted, again, you know, you’re making, like, over $65,000 a year cash. It’s not bad. So we wonder why things are costing more, we can only afford a smaller force. I’m not saying that this is bad, but – (laughter) – it costs a lot of money.
Now, at the same time, you look at this ‒ you look at these pay charts, we are having trouble recruiting and retention. You know, for certain specialty skills in the force, like pilots in the Air Force, they’re having trouble retaining them. And so what are they doing? They’re throwing more money, bonuses. Oh, yeah, this does not include bonuses or special pays, right? So if you’re a pilot, you make more than this, you know, or if you’re in a dangerous line of work, you make more. It doesn’t include sea pay or anything like this. This is, like, what, you know, a desk jockey at the Pentagon would make.
Q: A nuclear engineer bonus ‒ I think it’s, like, a hundred thousand.
MR. HARRISON: Yeah. So it’s not including any of that. So this is just regular old person.
Q: The Air Force just started a pilot program for enlisted pilots.
MR. HARRISON: Yeah, yeah.
Q: So that’s ‒
MR. HARRISON: That’s cost effective.
Q: In an effort to address ‒ because enlisted pilots are going to get paid a lot less than an officer pilots.
MR. HARRISON: Yeah. So the question becomes, like, what else can we do if we’re having recruiting and retention problems? And I think this screams to me that the answer is not the compensation system. The answer must be in the personnel system. And as much as Brad Carson’s “Force of the Future,” you know, might have been maligned by the Pentagon, there are a lot of good ideas in there. Yeah. We can fault the implementation and maybe some of it went too far too fast, but fundamentally, if you want to help recruiting and retention and try to keep, you know, O&S and your personnel costs from growing like this in the future, you know, I think you’ve got to look at changes in the personnel system.
Q: Have you looked at how this has, like, changed over time? I know it’s easily tracked. But, like, is it ‒ like, have you done the math?
MR. HARRISON: Yeah, I just did the snapshot on this for this report. This is an example of me kind of going down a rabbit hole because I started doing it and I was interested in it. So I’m, like, I’m just going to do this for a whole career for someone. This is a snapshot of what it looks like right now. I haven’t gone back and tried to do the same thing for how the pay tables existed in the past.
The other chart I showed you that shows the average cost per person, you know, that’s just averaging all the ranks, pay grades together. That shows the overall increase in costs. So, you know, again from ’98 to 2012, it was a 60 percent growth in personnel costs above inflation. So it’s been a lot.
Now, I’m showing cash compensation. I’m a true believer that cash compensation is the best compensation. If you’re going to put money into your compensation system, this is the most effective place to do it. If you’re going to cut, this is the last thing you want to cut, because cash compensation, people know how to value it because it’s in their paycheck. The other forms of compensation, like health care, like retirement benefits, people don’t know how to value those quite as well, so there’s a discount rate that’s implicitly implied in people’s minds. And so you’re not getting as much bang for your buck.
So if you’re going to cut something, you want to cut noncash deferred benefits, even though people will scream about it. You cut there, give them a little bit more in cash, you’ll make them happy.
Q: Well, and the retirement benefits only go to ‒ the 20-year retirement. I mean, you’re talking 17 or 18 percent of the force will get those benefits.
MR. HARRISON: Yeah, yes. And to give you an idea ‒ so on top of that cash compensation, if you go back down and look at the basic pay part of it ‒ so here’s your basic pay. Your retirement pay is based on your basic pay, your last three years of it, and then you get, under the old system now, you get 50 percent of that for life after 20 years of service.
What we have to set aside to cover that retirement benefit that only goes to about 17 percent of the people who serve, we have to set aside 33 cents on the dollar for every dollar in basic pay. So imagine in everyone’s paycheck, this portion of basic pay, the Pentagon is separately putting aside 33 cents on the dollar, and they put it in the Military Retirement Trust Fund. And then all of that money that accrues there off of everyone only gets paid out to 17 percent of the force.
Now, you know, what your ‒ you know, think of in the private sector. What does your employer contribute to retirement? Probably, like, a matching 401(k) and what do they match? Five percent, 10 percent? The military is setting aside 33 cents for this pension that only goes to 17 percent of the force.
Q: Now, the newer system is a little bit different.
MR. HARRISON: Yeah, the newer system you’ll get 40 percent of pay after 20 years of service, instead of 50. And it goes down to 40 ‒
Q: And there’s a match for people who have served less.
MR. HARRISON: And you get a matching 401(k) plan, a match up to 5 percent, I believe. Yeah. So that is the system. Yeah, so if you’re ever looking for a change in career, you should consider enlisting. (Laughter.)
Q: Well, and it’s important to know what you said about the reforms. When they redid the retirement system to the new retirement system, where Congress and that commission that did that, they started with the basic assumption that we’re not changing the profile of years of service, or – in other words, the services came in and said: You can’t change any of that. You can change the compensation, but you can’t change – like, they couldn’t think about maybe people should retire in 25 years, or anything. They couldn’t even entertain those assumptions.
MR. HARRISON: And that’s part of the personnel system that we need to look at is, you know, if you enlist at age 18, then you hit your retirement eligibility. And from that point on, you know, you’re only working for half your pay, because you get half your pay even if you leave, right? (Laughs.) You’re 38 years old after 20 years of service. And we’re basically incentivizing people get out at that point, because we have a cliff vesting system. Is that the right length of career, 20 years? You know, there’s not that many people that stick around that long anyway. About half the people leave, you know, within five years of joining.
But is 20 years right? And if you’re an officer, you know, you get out of college. You’re age 22. You’re eligible to retire at 42. You know, is that the right length of career now or should we stretch that out more? Yeah. And, you know, look at the career model in terms of all the things you have to do. It’s an up or out promotion system all the way up. So there’s no level at which you can plateau. You know, who does that anymore in your career?
So surely at the lower levels, yeah, you want an up or out system as a way of filtering people, but shouldn’t it be OK for mid-level people to plateau and you not have to promote them to keep them? Don’t you know people who are being promoted in the military, just because they need to keep them? When we see these promotion boards happening, it’s 100 percent promotion rate. That’s because they need to keep the people. They have to promote them to keep them. That’s a weird incentive, you know?
I mean, I kind of wish that they would do that here, then I could get promoted. (Laughter.) But, you know, that’s not the way it works in most jobs. You can plateau, get at the level where you’re good, you’re competent. And you don’t have to be forced to a higher level where you may not be competent. But we got a system that’s up or out. So maybe we need to reexamine that.
Q: You noted that if the personnel growth, like, one sort of hit roughly a peak in 2012, was kind of flattened out. Do you expect that trend to continue, or do you see it kind of going up or down?
MR. HARRISON: It depends on Congress keeping focus on this. So the reason the personnel costs have flattened out since 2012 is because Congress has pushed for reforms, and particularly in health care. And they’ve done some smart things in health care. In DOD’s estimate is they’re saving about $5 billion a year now because of the health care changes that Congress implemented over the past few years. That’s real money in the budget. You could buy joint strike fighters with that kind of money. (Laughter.) Even a joint strike fighter.
But, yeah, so they have to keep that up if they want to keep it flattened out. They have to keep reforming. And I think, you know, the big, ripe area now is personnel system reform. The other thing about up or out promotion is that if you then need to promote people to keep them, look at the things you have to do to promote them because of all the joint service requirements in DOPMA. Then you have to move them around from job to job all the time. They have to go to all these different schools and check all the boxes to keep getting promoted, just so you can keep them. So the utilization rate of the forces goes down because of all those things.
It would be great if you could just track some people into – you know, they’re never going to be the chief of staff of the service. They are flattening out. They’re never going to be above an O4. But we like them. They’re doing a good job. Maybe, you know, the person’s just an excellent pilot. Keep them in a flying job. They don’t need to go get three master’s degrees. They don’t need to go to the Air War College and get another master’s degree. You know, they don’t need a joint service tour. They just need to keep flying.
Q: And there are plenty of guys who would love to do that.
MR. HARRISON: Who want to do that.
MR. HARRISON: And when they can’t do that, they leave and they go to an airline. (Laughter.) An airline, that may actually not be paying them much more than they’re already making. And they’re giving up huge bonuses to do it. So that ought to tell us that this may not just be about money, that there may be a career, you know, model issue here, that we need to change the model that we expect people to follow. Now, I get on my soapbox about this. I don’t see any indication that either Congress or the military is seriously pursuing this now. The best chance was what Brad Carson was trying to do at PNR. That didn’t happen.
Q: Although, your force enlisted pilot, whatever about that –
MR. HARRISON: Yeah.
Q: Making pilots enlisted pilots, that’s a big deal.
MR. HARRISON: Well, they’re being forced to, and –
Q: Right, because – (laughter) – the numbers just don’t work.
Q: Because all the officers are leaving.
MR. HARRISON: Right. And maybe it takes a crisis to force this. Yeah, I mean, folks in the think tank world who’ve done great work on this – Tim Kane, not the senator, he’s an analyst at Hoover who’s done – he wrote the book, “Bleeding Talent.” And he came out with a report last year about reforming the personnel system. He had great ideas in there on how to do it. And Phil Carter over at CNAS and a whole team of people there have been doing really great work on reforming the all-volunteer force. So there’s a lot of good ideas out there, it’s just is anyone willing to spend the political capital?
Q: Yeah. The politics are hard.
MR. HARRISON: It is.
Q: Got to support the war fighter.
MR. HARRISON: And, you know, maybe the way we’re supporting them is not the right way, is the thing. (Laughter.) It’s the hard argument to make. Maybe they need different support other than this.
Q: Oh, yeah. I mean, I think when I made my own stay/leave decision it was like I felt like I had shitty leadership, and didn’t really enjoy my job very much. I think that probably gets it – and the majority of my friends that got out, got out for the same reason. So I think you’re looking at different problems that you can’t really solve with money, because they offered me $30,000 to stay and I said no.
MR. HARRISON: Yeah. And, you know, why do you sometimes have poor leadership? Maybe it’s because people are having to get promoted to stay in, and they shouldn’t have been promoted.
MR. HARRISON: OK, I know we’re way beyond time here, and I’m overdue to record a podcast. (Laughs.) Any other questions or anything, feel free to follow up.
Q: Thank you.
MR. HARRISON: OK.
Q: Thank you.
MR. HARRISON: Thanks for coming, even though the comptroller was briefing. (Laughter.) We did not intend to schedule it that way.