A big discussion has ensued in both the House and Senate about defense spending, and for the FY 2016 budget, that has meant how much to increase war spending (Overseas Contingency Operations) above the President's request which would effectively provide a defense slush fund. The original Senate budget had no slush fund at all, setting war spending at $58 billion and creating a point of order against exempting more than that amount from statutory spending caps that could only be overcome with 60 votes. However, an amendment in the committee markup increased war spending by $38 billion so that total defense plus war spending would match the President's budget, with the difference being that the President's budget provided $38 billion of sequester relief in 2016 and paid for it.
For background, the Budget Control Act established statutory caps on discretionary spending which have subsequently been reduced by sequestration, with any spending above the caps offset by an across-the-board cut in spending. For FY 2016, the limit on defense discretionary spending set by sequester is $523 billion, an increase of just $2 billion above the FY 2015 level. However, any spending designated as being for “Overseas Contingency Operations” is effectively exempt from those spending limits, creating temptation to use the OCO designation as a way to circumvent spending limits. The budget resolutions reported by the House and Senate legitimize this gimmick by setting defense spending levels that purport to comply with the spending limits under sequestration but blatantly create a slush fund by providing for substantially higher spending levels for OCO than the President requested.
The amendment offered in committee increased the amount of OCO spending in the Senate budget resolution, but it did not remove the point of order against the amount of spending that could be designated as OCO funding exempt from the statutory budget caps created by the Budget Control Act. This meant that an appropriations bill which used the $38 billion slush fund for "war spending" above the President's request could not exempt that extra spending from the BCA spending caps without 60 votes to get around the point of order. Otherwise, lawmakers would have to increase the normal defense spending caps by $38 billion and offset that spending or simply live within the current spending cap and $58 billion of war spending.
In order to resolve disagreement between defense hawks and fiscal hawks, the House will vote on two competing budgets with different approaches to funding for Overseas Contingency Operation spending (also known as OCO or war spending) and offsets. Neither of these versions is responsible, but one is more irresponsible than the other.
The first and less irresponsible version is the original House budget provision, which would provide $94 billion for OCO, $36 billion above the President's request for FY 2016 and $20 billion above the current level of $74 billion. This increase fills in almost all of the difference in the non-war defense budgets between the House and the President, thus creating a slush fund to slip normal defense spending into the war category. This would effectively provide the same amount of sequester relief for defense spending for next year while purporting to comply with the sequester caps on paper. However, the budget does require that the $20 billion of spending above current law be offset, so it at least partially pays for this increase.
As potentially irresponsible as this approach is, it is not as bad as the alternative, which would eliminate the requirement that the $20 billion in spending above the FY15 level be offset. This approach is counterproductive in both legitimizing the use of OCO as a slush fund and undermining the principle that sequester relief must be offset by savings elsewhere in the budget.
There was a lot of discussion in the run-up to the release of the Senate budget about disputes within the Republican caucus over defense spending. The original budget proved to be responsible compared to the House budget on defense, and particularly on war spending, but it took a clear step back during the mark-up yesterday. Here’s how.
As we’ve already discussed, the House budget took an irresponsible stance on war spending by spending in FY 2016 $36 billion above the President’s requested $58 billion, essentially to provide backdoor sequester relief for defense. It provided further sequester relief for defense by cutting non-defense discretionary spending below sequester levels, which may prove difficult to sustain over a long period of time.
The originally-released Senate budget took a more realistic and responsible approach on defense. For war spending, not only did it spend at the President’s request of $58 billion, but also it created a point of order, which could be overridden with 60 votes, against any bill that raises it above that amount. This enforcement was especially helpful considering that lawmakers spent $8 billion more than what the President requested in the CRomnibus last year.
One of the most important functions of budget resolutions is to set the spending limits for the coming fiscal year. At first glance, the House budget would seem to take a straightforward approach by abiding by the sequester-level defense and non-defense caps for FY 2016. But as David Rogers of Politico points out, the budget in effect breaks with the caps by increasing war spending by $36 billion above the Pentagon's request. Although the budget would follow the President's budget path for war spending after that, the 2016 figure represents a dangerous precedent that could significantly undermine the spending caps.
We have long warned about the practice of lawmakers using the uncapped war spending category (Overseas Contingency Operations, or OCO) as a slush fund to slip in non-war defense spending to get around the spending caps. We have shown how they have done this in the past two omnibus bills by overfunding categories in the OCO category relative to the Pentagon's request. By stretching the definition of war spending or sometimes outright ignoring it, lawmakers make extra room in the non-war defense budget for other spending.
However, the House budget's approach goes further in both scope and purpose than previous attempts. It provides $94 billion for OCO, more than was provided in FY 2013 when full combat operations were ongoing in Afghanistan and $36 billion more than the Pentagon's request for 2016. The $36 billion increase is much greater than the amounts actual spending has exceeded requests in the past, and the increase seems more explicitly designed to provide nearly the entire amount of sequester relief the budget seeks in other years rather than reflect actual funding needs. In other words, rather than having appropriators marginally game the OCO category late in the budget process, the budget would give lawmakers license up front to shift large portions of non-war spending into OCO.
President Obama sent a letter to Congress yesterday asking for a formal three-year authorization for a campaign against ISIS. At the same time, though, the President's budget includes a plan for phasing down the war spending category, known as Overseas Contingency Operations or (OCO), over time. Not only does the budget lay out an aggressive drawdown plan, it also states that the Administration will develop a plan to transition all OCO spending that will remain back to the non-war defense budget by 2020. This blog will take a look at the recommendations of the budget for OCO.
As combat troops have withdrawn completely from Iraq and mostly from Afghanistan, war spending has fallen by 60 percent from its peak in FY 2008 (from $187 billion to $74 billion in FY 2015). The reduction in the spending path for OCO as a result of the drawdown going forward has been made uncertain by the tendency of lawmakers to use the uncapped OCO category to backfill the non-war defense budget that is subject to spending caps. For example, the FY 2015 "CRomnibus" legislation provided $7 billion more than the Administration's OCO request. This included $1.7 billion for Migrant and Refugee Assistance, an amount larger than the State Department's request for that category in both the base budget and OCO combined.
In order to lock in the savings from the drawdown and try to shut down OCO as a slush fund for defense, the budget would cap total OCO spending through 2021. It would establish an aggregate cap of $450 billion of total OCO budget authority between 2013 and 2021, which after a FY 2016 request of $58 billion would allow an average of $27 billion per year after that. Beyond 2021, the OCO category and separate spending for war activities outside the regular defense budget is completely eliminated even though the regular spending caps would be extended through 2025. In total, this path "saves" $557 billion compared to growing current spending with inflation (which nobody plans on doing). CBO's drawdown path has a similar amount of spending but assumes continued troop presence after 2021, so it saves $100 billion less.
After a more than a year-long process, the Military Compensation and Retirement Modernization Commission released its final report yesterday, recommending changes to military pay, pensions, health benefits, and other benefits. The report is highly anticipated because of the Pentagon's repeated insistence that personnel costs need to be addressed to avoid other areas from getting squeezed by the defense caps. Lawmakers so far have often ignored or only partially implemented their policies. Since the Pentagon spends some of its current budget paying for future retirement and health benefits in addition to current costs, the longer policymakers hold off, the tighter the defense budget gets.
The report includes fifteen specific recommendations in the three areas of Pay and Retirement, Health Benefits, and Quality of Life programs. The Commission was prohibited from recommending changes to the benefits of existing servicemembers (who could still opt into the new retirement system), so these changes generally only apply to new troops. Using policies that only apply to new servicemembers, as policymakers did for the Murray-Ryan cost-of-living adjustment change, has trade-offs: it reduces upfront savings and creates disparities in benefits among new and old servicemembers, but it also makes changes more politically palatable and ensures that servicemembers can still claim the benefits they were promised, while ultimately achieving similar savings in the long run. Importantly, the report indicates that servicemembers would prefer the new benefit structures by wide margins.
The Commission's recommendations are:
The biggest piece of deficit reduction that lawmakers have accomplished so far is the series of caps on annually appropriated discretionary spending through 2021. The Budget Control Act specified spending caps that would reduce spending by more than $750 billion over ten years. It also put in place a sequester which would further reduce those caps by roughly $90 billion per year if the Super Committee did not agree on $1.2 trillion of deficit reduction. The Super Committee did indeed fail, and the sequester went into effect in March 2013. After partial sequester relief in 2014 and 2015, the discretionary cuts will return in full force in fiscal year (FY) 2016. As a result, discretionary spending will fall to a record low share of GDP in ten years.
With the sequester hanging over the appropriations process, the Brookings Institution held an event last week discussing the sustainability of these caps. The event brought together a panel of four experts with different perspectives on the caps, including:
- Robert Hale, Former Under Secretary for Defense (Comptroller) and Senior Fellow at Booz Allen Hamilton
- Ron Haskins, Senior Fellow of Economic Studies at Brookings
- Michael O' Hanlon, Foreign Policy Director of Research at Brookings
- Alice Rivlin, former Congressional Budget Office (CBO) and Office of Management and Budget (OMB) director and Senior Fellow of Economic Studies at Brookings
The eagerly awaited $1.1 trillion "CRomnibus" bill was released yesterday, and given its far-reaching nature, many aspects are being scrutinized. From a spending and debt standpoint, the bill wasn't expected to make many waves since discretionary spending levels were already set by the Murray-Ryan agreement last year. On a positive note, the bill includes 11 of 12 full-year appropriations bills which avoid a government shutdown and make real decisions about how the government allocates its resources. Unfortunately, it also includes a number of gimmicks that violate the spirit of budget enforcement. So far, we've found about $30 billion of transgressions.
Hidden Revenue Losses and Spending Increases
The bill violates pay-as-you-go (PAYGO) principles by increasing spending and reducing revenue by what looks like roughly $3.5 billion. The largest provision, $1.4 billion, comes from a fix to exempt expatriates from the requirement to buy health insurance. A bill which allows financially-troubled defined-benefit pension plans to reduce benefits to stay solvent costs $1.1 billion – that reduces Pension Benefit Guaranty Corporation spending upfront, which goes back into extending its solvency, but reduces federal revenue from lost taxation of pension benefits. The final $1 billion comes from various other mandatory spending increases included in the bill. The CRomnibus explicitly exempts the revenue reductions from PAYGO rules which would otherwise require these reductions to be offset.
Before debating a potential "CRomnibus" bill to fund the government, lawmakers are ready to check one item off their lame-duck to-do list: a defense authorization for FY 2015. The House and Senate Armed Services Committees agreed to a bill that addresses a number of issues involving military operations overseas and military compensation, among other items.
On the first issue, the authorization sets war spending -- mostly intended for combat related activities in Iraq and Afghanistan -- at $63.7 billion, the level requested by the Administration. It encouragingly scales back a $4 billion Counterterrorism Partnership Fund, which is only tangentially related to combat spending, to $1.3 billion. However, it also shifts $350 million of funding previously designated for Iron Dome, an Israeli missile defense system that is clearly not directly related to Afghanistan and Iraq war spending, to the war category. Note that since this is just an authorization, these funding decisions are not final and will be made in the Defense appropriations bill. The soundness of the decisions they made is mixed: encouraging on the funding levels but less so on the gimmickry with Iron Dome. It would be better if the authorization had gone further and outlined criteria for what could qualify for the war designation.
In terms of military compensation, we highlighted last month two decisions that lawmakers were considering on TRICARE drug co-pays and the Basic Allowance for Housing (BAH). In both cases, the authorization does make changes but only partway to what the Defense Department suggested. The bill raises co-pays by $3 for generic and brand-name retail drugs and for brand-name and non-formulary mail-order drugs. Generally, these increases are much lower than the ones the Pentagon included, saving $2.4 billion over ten years. The only area where lawmakers exceeded requests is in generic retail drugs -- the Pentagon had a $1 per year increase over the next nine years starting in 2016. Regarding housing changes, the authorization would reduce the BAH by 1 percent of housing costs (to 99 percent); that is, one-fifth the size of the 5 percent decrease the Pentagon suggested.
CQ is reporting (subscription required) that the main obstacle to the defense appropriations authorization, which must be addressed during the lame duck session, are a pair of Defense Department proposals to slow the growth of military personnel spending. These recommendations would save $16-$18 billion over five years, providing room for other spending under the defense caps. However, while the Senate Armed Services Committee accepted these proposals, the House rejected them. If Congress requires the Pentagon to cut its budget but keeps rejecting the Pentagon's ideas for budget savings, they will ultimately need to make even more difficult choices.
The first policy, which would slow the rapidly rising cost of health care, would increase co-pays for pharmaceutical drugs in TRICARE. Co-pays for 30-day supplies would gradually increase over ten years from $5 to $14 for generic drugs and $17 to $45 for brand-name drugs. For 90-day mail-orders, they would increase similarly from $0 to $14 for generic drugs and $13 to $45 for brand-name drugs. Non-formulary brand-name drugs would see co-pays of $90, up from $43. The Pentagon has stressed that these increases are necessary to control health care costs and further encourage the use of cheaper generic drugs.
The second policy would slow the growth of the Basic Allowance for Housing (BAH) so that its coverage would fall on average from 100 percent of housing costs to 95 percent. The 5 percent of housing expenses that servicemembers would be expected to cover would still be well below the 20 percent they had to cover in the 1990s.