What does the Budget Deal Mean for Defense?

Update: On October 30, the House-Senate budget conference committee convened to begin the process of agreeing on government funding levels for 2014 with a target of December 13 to reach an agreement. The existing budget resolutions are far apart, and it’s been 27 years since a budget conference agreement has been reached in a divided Congress. There are only 16 legislative days left for them to act. With that in mind, we are issuing a slightly updated version of last week’s Critical Questions. Most of the questions and answers remain the same.

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After 16 days of government shutdown and on the eve of a default on the U.S. debt, Congress passed and President Obama signed into law early on Thursday, October 17, an act that reopened the government and averted default. What does this budget deal do, what does it mean for defense, and what can we expect over the coming months?

Q1: What does the agreement do?

A1: The Continuing Appropriations Act, 2014, provides two short-term fixes that may buy time for a compromise over both ongoing budget obstacles, government funding levels and the debt ceiling.
The first short-term fix ended the government shutdown. The bill provides, or appropriates, funds under a Continuing Resolution (CR), a funding mechanism that funds government spending at the levels of last year (Fiscal Year 2013—or FY13), but only for a limited time. Funding expires on January 15, 2014, meaning that Congress must pass appropriations bills (or another CR) by that date, or the government shuts down once again.

Much of government spending is automatic, for programs like Social Security and Medicare and for interest on the debt, but roughly $1 trillion must be appropriated each year. In this case, the CR does that, but only for three months. By holding FY14 spending levels to an annual rate of $986 billion for regular discretionary spending, this CR essentially keeps every appropriation account at the same level as last year. Because plans for 2014 were not the same as 2013, these artificial constraints may cause problems for defense, by preventing new starts and planned changes in weapon production rates or by causing shortfalls in the accounts that fund operations and maintenance. A CR, by design, makes it hard for government agencies to use funds where they are needed most.

The second short-term fix kept the U.S. government from defaulting on its debts, by suspending the government borrowing limit (at approximately $17 trillion). This suspension lasts until February 7, 2014, after which the debt ceiling will be back in force (at whatever level was needed up to that day), and Congress will have to authorize another debt ceiling increase to keep pace with government spending. While further “extraordinary measures” could buy another month or two, absent another congressional increase, the next debt ceiling crisis could return shortly after February 7. So the two deadlines, January 15 and February 7, will come quite soon.

Q2: What does Congress need to do?

A2: The real problem with the Budget Control Act of 2011 (or simply BCA), which created the cuts called “sequestration,” is that the act traded 10 years of cuts for one year of debt ceiling increase, and it did this twice. The first $900 billion in 10-year cuts raised the debt ceiling $900 billion for 2011. The additional nine years in final BCA cuts of $1.2 trillion, often simply called sequestration, bought another year of debt ceiling increase, taking care of 2012. With last week’s Continuing Appropriations Act, Congress took care of the ceiling for 2013, with no additional cuts—yet. Now what does Congress do for its next act? Can they stave off one year of BCA cuts to defense and domestic agencies with another 10 years of permanent cuts or revenue increases, perhaps from entitlements or tax changes?

We should know the answer to that in a matter of weeks. Congress set an internal deadline of December 13, 2013, to agree on spending for all of FY14. Their starting points are the two budget resolutions, one from the House and one from the Senate. Since last April, the House and the Senate budget resolutions have been $91 billion apart on nondefense spending levels, or nearly 20 percent (for agencies and programs like Agriculture, Commerce, Education, Transportation, etc.). The two houses agree on defense spending levels, but their defense budget number is roughly $50 billion higher than permitted by current law, the second round of 2011 cuts or “final BCA caps.” The conference has to fix both of those FY14 problems, the $91 billion nondefense difference and the $50 billion defense gap.

Fixing these two gaps and reconciling the House and Senate resolutions will not be easy, although it helps that the conferees will start from a CR that partially splits the difference. Due to the likely difficulty of bridging these gaps, the conferees might instead decide to extend the CR, but there are problems here as well. At $986 billion, the annualized CR funding level is $72 billion below the Senate resolution and $19 billion above the House resolution. For the Department of Defense (DoD), the CR level is roughly $18 billion above the final BCA cap level, rather than $52 billion over, as it is in the budget resolutions.

Q3: Will we have another government shutdown?

A3: Regardless of whether the conferees produce a concurrent budget resolution that bridges the funding gaps between the House and the Senate, the real deadline Congress needs to meet is January 15, 2014, the end of the Continuing Resolution. In order to keep the government running, they need to pass appropriations or another CR. Failure to do that will create another government shutdown, but they also have another incentive to reach a deal.

The final BCA caps for FY14, $475 billion for DoD and $492 billion for non-DoD discretionary spending, means there would also be a second sequestration. Since the current CR annualized level is still $19 billion above the final BCA caps, even with no new deal and just an extended CR in January, a new sequester would hit on the same day as the end of the CR, cutting DoD funding by $18 billion immediately (from the CR level of $493 billion to the final BCA cap level of $475 billion). For DoD, this puts a premium on success in the budget negotiations. All non-DoD funding is largely unaffected by this.

Q4: How can Congress fix this next sequestration?

A4: There are only two ways to avoid that sequester:

1) The budget conference could lower the CR or produce appropriations bills at or below the final BCA cap level of $967 billion for defense and domestic spending combined; or,

2) Congress could repeal or amend the BCA, perhaps by either a grand bargain or a small compromise to lift the capped spending levels for FY14.

The question is, are the votes there for either of these options? And, if other cuts are found to offset the caps change for FY14, what about the next year, FY15?

Q5: What does this mean for defense?

A5: The president’s budget submitted to Congress last April for FY14 planned spending for DoD at $526 billion in base funding. The CR funds DoD at $493 billion base—a $33 billion cut from planned spending. Unless the BCA cap is changed in law, the sequester level would cut another $18 billion from defense.

If DoD does have to absorb this full $52 billion, or 10 percent, in cuts from the president’s budget, other factors could worsen the short-term impact. First, the president has declared his intent to exempt pay and benefits for military personnel from sequester, which would serve to increase the hit to other accounts from 10 percent to about 13 percent. Other exemptions could try to protect funds for readiness, shifting additional cuts to investment accounts (procurement and R&D), leading the impact of the final BCA caps to 20 percent or more of planned FY14 spending. For a variety of reasons, the short-term impact of sequester in FY14 looks to be substantially more severe than that felt in FY13. In part for that reason, internal DoD guidance has been reported to be “spend consistent with the lower sequester level” in order to be ready if the full sequester does occur.
The House and Senate budget conference could, however, reach a deal that would raise the BCA caps for FY14 and avoid some or all of the $52 billion DoD cut. Even this would solve only part of DoD’s near-term budget problems, because there are some additional shortfalls that Congress is not likely to fix. First, some of last year’s sequester cuts were dealt with simply by delaying or deferring costs from FY13 to FY14. While no public totals have been reported, it would probably take an additional $10 billion to $15 billion to cover those deferred costs in FY14. Second, each year’s defense budget sees $10 billion or more in unbudgeted funds needed for growth in military pay and benefits, operations and maintenance (O&M), and investment costs, including assumptions DoD made for changes in military pay and health care costs that Congress simply rejected. Third, there are funds in the Overseas Contingency Operations account (known as OCO) that belong and will one day need to be moved back into the base budget. These could require an additional $10 billion per year. Finally, DoD probably spends at least $5 billion on unneeded bases and maintenance that could be saved if Congress authorized another round or two of base closures. So even if Congress creates a one-year reprieve on the final BCA caps, there are additional issues that could add up to an additional $40 billion of DoD budget problems.

Q6: What about next year’s defense budget?

A6: It would take a combination of other cuts and revenues totaling roughly $100 billion for Congress to cancel the BCA cuts for FY14, but it would take nearly $1 trillion to offset all of the BCA cuts through 2021. A deal of such magnitude seems unlikely in the next two months. Meanwhile, the administration is preparing next year’s budget, including the FY15 DoD budget and its accompanying five-year plan, for submission to Congress next February. Which spending level will DoD assume for the FY15 budget, the final BCA cap of $475 billion or the higher level that the FY14 budget aimed for? So far, DoD’s answer has been to prepare two separate budgets, one that is $50 billion higher than the other. As the time for submitting that budget draws closer, it seems unlikely that the administration would propose a lower number without a corresponding offset from the Congress. If the higher number is proposed for the entire government in the FY15 budget, then DoD and Congress may replay the same cycle next year, with a DoD budget proposal that is $50 billion above the final BCA caps and the need for Congress to make changes to the law or face the potential for yet another sequester. The real answer to this question today rests with the budget conference committee. We will be watching them closely.

David J. Berteau is senior vice president and director of the National Security Program on Industry and Resources at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ryan Crotty is a fellow with the CSIS National Security Program on Industry and Resources.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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