With a week left to go on its Easter recess, Congress has only given itself four session days to pass a bill to keep the government running. We expect some drama next week but in the end we think that Congress will pass a Defense appropriations bill at Obama request levels.
Senate and House appropriations staffers and leadership have been quietly working on an omnibus FY17 appropriations bill that can get 60 votes in the Senate and still be approved by the House and signed by the President. The intent is to avoid having to extend the Continuing Resolution for the rest of the year, particularly for defense. That essentially means threading the needle between increasing Defense spending, showing some movement toward Republican agenda items, avoiding third rail items for essential Democrat votes all while staying within Budget Control Act caps on discretionary spending. A challenge.
There are essentially three possible outcomes next week with a couple of branches and sequels:
- Option 1: Extend the Continuing Resolution. The politically easiest path for Congress is to merely extend a "clean" CR beyond April 28 to the end of the fiscal year. While this would avoid government shutdown, maintaining the FY16 status quo in FY17 does nothing to advance the Republican agenda and does not meet the needs of the government. Although even a 24 hour extension is opposed by John McCain and others, there may need to be some time (a week?) added to the clock. A CR is particularly damaging to the Pentagon since there is a mismatch of appropriated funds:
- Under a CR there is more procurement money than can be obligated, given the inability to execute new program starts or increase production over FY16 levels. Because procurement cannot be executed as planned, delivery of products and services and satisfaction of warfighter needs is delayed.
- At the same time, there are insufficient Operations and Maintenance funds. Increased Optempo and inflation since FY16 have driven up current Pentagon costs. Since priority of resources goes to forward deployed and next-to-deploy units, home station units and ships have to carry all of the budget shortfalls, doubling or even tripling the impact. Maintenance windows are missed, training is curtailed. This results in a rapidly accelerating downward spiral of deteriorating readiness from which it takes years to recover. Many of the readiness problems in today's tactical and ship fleets are a result of the extended CR and subsequent sequestration that took place in FY13, four years ago.
- There are insufficient funds in military personnel accounts to pay for NDAA mandates that include various increases to each of the services' endstrengths.
- Option 2: Pass an omnibus appropriations bill that covers all departments and complies with the BCA split of defense and non-defense spending. This is the goal of current negotiations.
- Accommodating as many elements of the disjointed Republican agenda, i.e., increase defense and DHS spending, as possible and staying within the Budget Control Act caps is the ultimate challenge. The President's plan to shift $18B of non-defense spending to Defense would require changing the BCA with many aspects of the proposal adamantly opposed even among Republicans.
- Expect a Republican compromise on some of its more controversial policy objectives and a modest increase in OCO spending to relieve some of the pressures (OCO/emergency spending does not have to comply with BCA caps).
- Republicans can be mollified knowing that they will get an immediate second opportunity soon given the FY 18 budget discussions begin the day after this is done.
- Option 3: Pass an appropriations bill for Defense and extend the CR for the rest of the government. This compromise is the fall back position if a "big" omnibus cannot be agreed. It complies with the BCA, satisfies Pentagon legal requirements and with some level of increase in OCO spending can satisfy most of the Pentagon's immediate budgetary needs. It delays non-defense policy fights but does little to advance Republican policy objectives.
Assuming that it does not get stuck with an extended CR, the range of budget uncertainty for the Pentagon in FY 17 is relatively narrow.
- Baseline spending of $524B and OCO spending of at least $62B is set. The FY17 NDAA was signed into law in December. The House sent an updated approps bill to the Senate in early March that is 0.2% above the Obama request and which differs little from previous Senate Approps Committee marks to these amounts. The ongoing conference will resolve those few differences.
- The only real question is how to handle the Administration's request for $30B in additional FY17 spending authority: $25B in additional baseline spending and $5B in additional OCO. This would raise total DoD spending authority to $619B. The request includes a $13.5B (+13%) increase in planned procurement spending, $13B in increased operations and maintenance, $2B in increased R&D and $1B in MilPers. There are a couple of strikes against the supplemental being approved. It is so late in the fiscal year that getting all of the money obligated by 1 October is doubtful so delay doesn't look like a bad option to reluctant Congressmen. The Administration's plan to increase the defense baseline at the expense of non-defense spending has strong bipartisan opposition. Changes to the Budget Control Act (BCA) simply aren't going to happen in the next few months.
When all is said and done, we believe that the Congress will approve ~590B in total Pentagon spending and then add $5 to $10B in additional OCO spending, bringing the total for FY17 to ~$600B, about 3% higher than FY16 but about 3% less than the total requested by the Trump Administration. Then, the fight for the FY18 budget will begin...
