Financial Decision Making in Washington

Transcription

1 Financial Decision Making in Washington *Focus on DoD* Honorable Robert F. Hale Former DoD Comptroller/CFO PDI 2016 (Workshop 49) June 2,

2 Why Should You Care? o Understanding financial decision making processes permits you to: -- Anticipate problems -- Propose most practical solutions -- Explain issues to your bosses/colleagues o Bottom line: Understanding processes will help your career 2

3 Agenda o Financial decision making in the Pentagon -- Overall process -- Service decision making -- OSD decision making -- Special processes o Financial decision making in Congress o Decisions during budget execution o Tough financial decisions ahead 3

4 Steps in Overall Process (Planning, Programming, Budgeting, and Execution) Planning (Defense Strategy Review) Programming (POM) Budgeting (President s Budget) Execution 4

5 How Financial Options Are Selected ocapture major policy choices Usually includes last year s plan Goldilocks options ofeasibility Within DoD Acceptable outside DoD (OMB, White House, Congress) omeet budget targets Focus today on larger issues 5

6 Information Normally Presented odescription of option obudget changes (relative to latest President s budget) Budget year always included, almost always five-year costs Occasionally steady state or accrual costs Almost always in nominal dollars oquantitative assessment of effects oqualitative assessments of effects oviews of influencers Information Must Fit on a Few Slides 6

7 SAMPLE Limit 2014 Military Raise to 1% osavings: ($M compared to PB 13 President s Budget) FY14 FY15 FY16 FY17 FY18 FY ,022 opros: Military pay is competitive Reduction not likely to cause future recruiting/retention problems Avoids further cuts in force structure, readiness, modernization ocons: Could be viewed as erosion of benefits at war 7

8 Process for Making Decision -- Air Force as Example -- o Panels o Intermediate level review o Air Force Board o Air Force Council o Service Secretary and Chief 8

9 Process for Making Decisions -- OSD -- o Identify issues (CAPE/Comptroller and Services) Issues usually have a sponsor o Review and negotiation Budget changes reasonable Assessments of pros/cons complete and balanced Building consensus o Review by Office of Management and Budget DoD review unique in government o Deputy Secretary decision meeting o Secretary of Defense involvement 9

10 Is That How It Really Works? Super Issues White House Involvement Congressional Interest Senior-Leader Interests 10

11 Summary of Pentagon Financial Decision Making oprocess organized around options and information ochoice of options obudget changes opros/cons oreviews shape options oservice level oosd review odeputy Secretary decision (or SecDef) ooffice of Management and Budget Where to Get More Information 11

12 Praise for DoD Budget Process o Based on analysis o Multi-year focus o Relatively transparent oall parties views heard o Runs on time (usually) Outside Assessments Generally Positive 12

13 Agenda Financial decision making in the Pentagon o Financial decision making in Congress Process as designed Process since FY10 Deal making o Decisions during budget execution o Tough financial decisions ahead 13

14 Congressional Process As Designed (Discretionary Spending) Budget Resolution and Reconciliation (April) Authorization Legislation (Summer) Appropriations Legislation (by October 1) 14

15 Congressional Process Since FY10 Budget Resolution (only once) DOD Authorization Legislation DOD Appropriation Legislation At End of Session Continuing Resolutions Authorization (End Session) Omnibus Appropriation (End Session) 15

16 Steps at Each Stage o Committee/subcommittee hearings o Committee/subcommittee markups and votes o Floor amendments and votes o Conference committee o Final floor votes o Presidential approval -- Veto process 16

17 Why Can t Congress Meet Deadlines? Strong Views on Budget Issues Partisanship Stalemate 17

18 Summary of Congressional Process As Designed Budget Resolution and Reconciliation (April) Authorization Legislation (Summer) Appropriations Legislation (by October 1) 18

19 Agenda Financial decision making in the Pentagon Financial decision making in Congress Decisions during budget execution -- Fundamental shift: policy to law -- Normal process -- Special laws lead to turmoil o Tough financial decisions ahead 19

20 Fundamental Shift Budget Formulation Governed by Policy Budget Execution Governed by Law 20

21 Normal Budget Execution Process o Key Steps for DoD Budget -- Appropriation -- Apportionment -- OSD holds -- Commitment (sometimes) -- Obligation -- Expenditure -- Review of execution success o Services/agencies manage most execution activities -- OSD oversight o Reprogramming process important 21

22 Special Laws Alter Normal Process o Budget Control Act of 2011 Established budget caps for defense/nondefense Invoked sequestration (BBEDCA 1985) o Subsequent laws modified caps Caps + Stalemate = Budget Turmoil 22

23 Nature of Turmoil* o Sequestration in 2013 o Shutdown in 2013 o Numerous shutdown planning efforts o Multiple budget plans (some years) o Continuing resolutions every year o Critical reprogrammings * Robert Hale, Budgetary Turmoil in DoD, Brookings, August

24 Turmoil Harmed DoD o Mission degradation o Furloughs -- Wartime activities protected -- Readiness harmed -- Harmed training, depot work, more o Wasted money -- $400 million just during shutdown o Wasted time o Adverse effects on employee morale 24

25 Turmoil Continues o House legislation borrows from OCO and ends OCO on April 30, Supplemental would be required early next year -- President has threatened veto o Senate amendment will hike OCO o Likely result this year -- Yet another continuing resolution -- Hopefully Congress will finish during lame-duck session 25

26 Summary of Budget Execution ogoverned by law oorganized sequence of events (normally) oapportionment oobligation oexpenditure orecent special laws have caused turmoil obudget Control Act of 2011 Where to Get More Information 26

27 Agenda Financial decision making in the Pentagon Financial decision making in Congress Decisions during budget execution Tough financial decisions ahead -- Topline levels and ending sequestration -- Future of OCO -- Accommodating the bow wave -- Controlling operating/support costs -- Limiting end-year spending spree 27

28 Defense Budget Picture Today (Dollars in Billions) $610 $590 $570 $550 $530 $510 Original BCA Caps $490 $470 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 28

29 Defense Funding Goals (Dollars in Billions) $610 $590 Goal Minimum $570 $550 $530 $510 $490 Original BCA Caps FY18 gap >$30B $470 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 29

30 Looking Ahead on Defense Topline o Desirable outcome Broad budget deal -- Address mandatories (> 60% of federal budget) -- Consider revenues -- Establish higher caps for discretionary spending -- Control deficits History suggests next year is key o Undesirable outcome Continued focus on discretionary spending Muddle thru with small budget deals 30

31 $800 Importance of OCO (DoD Discretionary Budget Authority in $ Billions) $700 $600 $500 $400 $ $ $100 $0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Base Budget OCO Supplementals 31

32 Future of OCO o Overseas Contingency Operations (OCO) key to defense budget success Intended to finance war costs Not subject to caps o Pros/Cons of OCO Permitted DoD to meet warfighter needs Avoided timing problems caused by supplementals But increasingly used for non-war needs o Options Restrict OCO to temporary needs (most desirable) Keep OCO but revise (most practical) 32

33 Bow Wave of Spending in the 2020s o High rate production for current major weapons programs -- F KC-46 o New programs -- Ohio-class replacement submarine -- Bomber -- Army ground combat vehicle o Continued demand for readiness o Growth in operating and support costs o Additional force cuts problematic 33

34 How Big is Potential Bow Wave? (Projected increases above FY16 funding in FY16 $B*) $90 $80 $80 $70 $60 $50 $40 $30 $20 $10 $44 $60 $0 FY19 FY25 FY30 * Source: CBO Study (November 2014), adjusted 34

35 Accommodating the Bow Wave o Added topline o Transfers among services o Offsetting cuts within a service -- Further cuts in lower priority programs o Delay start of new programs o Reduce total buys o Stretch programs 35

36 Sharp Growth in Operating and Support (O&S) Costs* o Rapid long-term growth Consider cost per troop : real O&S divided by active military personnel Up 25% since 2000 Has grown relentlessly for past 50 years o Causes are diverse Health care costs Military pay costs Growth in maintenance complexity and costs Training to operate and maintain more complex weapons *O&S defined as O&M plus military personnel costs (excluding OCO) 36

37 Cost Growth Exerts Downward Pressure on Size of Force o Budgets and force size Since 2000: real base budget up 18%, size down 4% (# milpers) Since 1960: real base budget up 24%, size down 44% o Examples of actions needed Health care reform Limits on military pay so long as recruiting/retention sustained Monitor O&S during early phases of weapons design Make trade-offs early Look for technology that holds down costs, especially O&S costs Acquisition Reform Needs to Focus on Costs, esp O&S 37

38 Limiting End-Year Spending o End-year processes seek to obligate almost all available funds o Result Spending on lower priority programs o Tough problem to solve Incentives are strong o Approach worth trying Permission to carry over small amount of 0&M and military personnel funding 38

39 Summary of DoD Financial Decision Making in Washington Budget Formulation (Pentagon) Budget Formulation (Congress) Budget Execution Understanding Process Can Help You Anticipate issues Propose practical solutions Explain process to your bosses and colleagues 39