As we have predicted, SecDef Lloyd Austin has tapped DepSecDef Dr. Kath Hicks to lead an intense 60 day review of the Pentagon's FY22 budget for submission to OMB by 12 April and to Congress by 3 May. The three month delay in submission will pressurize Congressional review timelines and will almost certainly result in a Continuing Resolution beginning 1 October.
Beginning the week after her confirmation on 8 February, Dr. Hicks initiated a department-wide, issue-oriented review of the FY 2022 budget that had previously been prepared by the Trump Administration. The process in place this year looks remarkably similar to the comprehensive review conducted by SecDef Robert Gates for incoming President Obama in 2009, a process in which Dr. Hicks (as well as the author) participated.
More than a dozen Issue Teams consisting of representatives from the Services, COCOMs, OSD and the Joint Staff and led primarily by OSD's Cost Assessment and Program Evaluation (CAPE) Directorate are organized along specific topics designated by the Secretary and the DepSecDef. The issue teams will review the existing program to include what is being proposed in FY 2022 and then identify and compare alternatives (status quo, decrease/kill or increase) for senior leadership decision.
While speculation on the DoD topline has ranged from a "flat" budget in FY 2022 compared to FY 2021 to as much as a 10% cut as proposed by Senator Sanders, a specific "bogey" (budget target) or fiscal guidance has apparently not yet been assigned. One of the purposes of the review is to identify any issues, policy or otherwise, that the Biden Administration may want to reverse as well as to prepare senior leaders for rapid budget decisions when fiscal guidance is finally issued.
Specific topic areas and potential investor impacts:
- Climate. A focus area during the Biden campaign, it will be new for the Pentagon to start looking at this as a separate issue. Areas of potential budget change could include specific measures to reduce carbon footprint and improvements to the resiliency of bases.
- Long Range Fires. The ability to reach out and "touch" Chinese and Russian forces from much longer distances than ever before considered or allowed by treaty is a hot topic. This is a critical capability but there is overlap among the services' programs and US doctrine has not yet caught up with how this is all going to work C2-wise. GD, BAE, LMT, RTX, et al have programs to win this business.
- Shipbuilding. On the way out the door, the Trump Administration took over the development of the Navy's 30 year shipbuilding plan in an effort to correct their inability to achieve their own 355 ship goal. The result was a plan to raise the goal to 500 (including unmanned ships) creating a need for another $39B over the next five years as well as questions about the capacity of US shipyards to get it done. The Navy shipbuilding plan won't get fixed in this initial review but expect some changes to bring it more in line with available resources. GD and HII are certain to see more submarine business, the desire for smaller ships/craft and more of them could benefit smaller yards. CVN work is going to be a bill payer at some point.
- TACAIR. This will be an extension of the perennial discussion about how many F-35s LMT is really going to build, are we really going to buy over 100 of BA's 1970s-derivative F-15EX, do we need a high-low mix, etc. Expect total investment in TACAIR of whatever stripe to be reduced.
- Nuclear Enterprise. OSD will be looking to see if the current proposal keeps their options open for a much longer and more detailed review of strategy and our nuclear deterrent that will shape the FY 2023 budget. NOC's ICBM replacement program ("GBSD") will remain intact in FY 2022 but will face a major "fill or kill" decision before FY 2023.
- Unmanned/autonomous systems. Reliance on these systems is the cornerstone of the incoming Administration's plans. The review will likely find a way to increase resources in this area to show that it is important.
- CENTCOM. Trump plans to be totally out of AFG and Iran by spring are being scrutinized now and any changes will have budget implications, mostly in the Overseas Contingency Operations (OCO) budget.. There will also be a strong effort to get away from OCO funds altogether through reduced operational tempo and forcing bills back into the baseline (non-OCO) budget. OCO has been running at ~$68B per year but expect to be only ~$10-20B in FY 2022.
- Legacy Divestment. As a way of generating near term funds for new capabilities, the Pentagon has frequently proposed retiring or halting the procurement of "legacy" equipment, e.g., A-10s, antique KC-135 tankers, U-2s, MQ-9 UAVs etc. Because of local interests, Congress almost never allows it. The DOD short review will take another run at some of these. The very unpopular topic of reducing excess infrastructure, "BRAC," will be discussed later this year but will be a large lift.
