The 'cliff' that isn't

Posted: October 25, 2012

By Gordon Adams

We are in the middle of a donnybrook about the threat that falling off a "fiscal cliff" poses for national security (to say nothing of what it would do to domestic discretionary spending). This is a crisis carefully engineered by the Budget Control Act, passed in August 2011: If the "supercommittee" failed, which it did, automatic cuts, dubbed a "sequester" in legislative language, would be imposed on Jan. 2, 2013.

In September, the Office of Management and Budget solemnly certified that these cuts would take 8.2 percent of fiscal 2013 appropriated funds away from every "program, project, and activity" in domestic discretionary spending, and a whopping 9.4 percent from the "nonexempt" parts of the defense budget.

But does this mean the end of our national security (and domestic well-being), as the political debate suggests? A little careful noodling about the impact of a sequester on the Defense Department suggests it might not be the end of the world. In fact, it might be exactly the fiscal discipline the Defense Department needs.

Flexible funds

Let me get technical for a moment, so we can actually see what might go on. First, the law made it clear that the administration could exempt funding for troops and their benefits (including retiree benefits) from the fiscal cliff. The administration has done that, so the troops will be OK. (Their number is coming down anyway as a result of the end of the wars in Iraq and Afghanistan.)

Then there is the matter of procurement and what some see as the almost cataclysmic level of devastation that such harsh cuts would impose on the defense industry. Except they won't. It turns out the industry is pretty healthy, has been for a decade, and is working on contracts that have been funded in prior budget years, which are exempt from sequestration.

As the director of defense procurement put it: "The vast majority of our contracts are fully funded, so there's no need to terminate existing contracts unless the product is no longer needed." Lockheed treasurer Ken Possenriede agreed that sequestration was not a near-term problem: "If sequestration happens, just based on our normal business rhythm, we're comfortable from a cash-on-hand standpoint that we'll endure that."

How about military operations, including the war? Well, the war budget, which has never really been separate from the nonwar budget - that's a political fiction the executive branch and Congress set up - is included in a sequester, which might sound terrible for the troops in Afghanistan.

But the reality is that the funds for Defense Department operations (war and much else) are very "fungible," meaning they can be moved among programs pretty flexibly - from training to education to base operations to the costs of operating troops in the field. So service managers would have 9.4 percent less than Congress gave them, but significant flexibility to move it around, setting priorities and making choices. They have a scalpel to work with, not a bludgeon.

So what about research - the investments in the future of defense technology? There would be 9.4 percent fewer dollars than appropriated, but research and development is what's called a "level of effort" area: You buy as much R&D as the money allows, but you don't have to cut items out of a production contract. And the Pentagon would have some flexibility as well, since most R&D "program elements" cover a variety of projects, so fewer resources means setting priorities and making choices.

Beyond this technical flexibility, Defense, like other departments, would also have recourse to reprogramming funds and its general transfer authority. The flexibility here is pretty great; over the past decades, some reprogram and transfer totals have been in the tens of billions. What it takes is making the same tough choices, many of them internal. A few would have to be communicated to Congress, where the senior leadership of the key authorizing and appropriating committees (who don't want to devastate Defense) would be likely to agree, especially as they were the most anxious to protect Defense.

And OMB could alleviate the short-term urgency by approving overall funding ("apportionment") at a higher level early in the year, delaying the cuts until Defense Department planning will be complete.

Not doomsday

It is not a pretty picture; no management expert would say this is the way to do defense (or any other) budgeting. But it is not doomsday. In fact, it might be discipline - the kind of budgetary discipline the Pentagon has not had for the past decade. Good management, priority-setting, and greater efficiency might be the result.

And since the sequester would be a one-time event, setting a lower baseline for future defense growth, the nation might just be as safe as it ever was.

Gordon Adams is a professor of international relations at the School of International Service at American University and a fellow at the Stimson Center. He wrote this for Foreign Policy.

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