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.
As expected, the Obama Administration today issued amendments to its FY 2015 war spending (Overseas Contingency Operations) request, adding $5.6 billion for ISIS-related operations to the $65.8 billion already requested. The request includes $5 billion for the Defense Department and $520 million for support for opposition in Syria, Lebanon, and Jordan as well as humanitarian assistance in Iraq and Syria.
The Pentagon spending mostly goes to operations and maintenance accounts in support of the Army and Air Force. The request also includes a $1.6 billion Iraq Train and Equip Fund, which would provide military support and training for the Iraqi government through FY 2017. Other items include support for the moderate Syrian opposition and support for the Jordanian and Lebanese governments in securing their borders.
|Administration Amendments to War Spending Request by Category|
|Category||FY 2015 Spending|
|Previous OCO Request||$65.8 billion|
|Military Personnel||$0.1 billion|
|Operations and Maintenance||$2.3 billion|
|Iraq Train and Equip Fund||$1.6 billion|
|Research, Development, Testing, and Evaluation||$0.1 billion|
|Syrian Opposition Funding||$0.2 billion|
|Jordan and Lebanon Funding||$0.3 billion|
|Humanitarian Assistance||$0.1 billion|
|Amended OCO Request
Numbers may not sum due to rounding.
With the 2014 midterm elections mostly in the books, the current Congress will return from weeks of campaigning to finish some remaining items before the end of the year and the swearing in of the new Congress. This year's lame duck session will likely to be less busy than some years, but there are still a few key things to get done before the 114th Congress begins.
The current continuing resolution funding the government will expire on December 11, so policymakers will have to either extend it, enact appropriations bills, or cause a shutdown. This is the most important to-do list item for the lame duck Congress. Prior to the recess, appropriators indicated they wanted to get an omnibus appropriations bill done instead of a CR extending funding into the next Congress, and the chances of that look good -- thanks to the Murray-Ryan agreement setting defense and non-defense spending levels, House and Senate funding allocations are relatively close. Key questions that remain include whether lawmakers will provide supplemental funding for Ebola or ISIS and also what level of war spending they will provide (hopefully below the current level -- see "to-don't" list below).
For background on the appropriations process, see our Appropriations 101 document.
Pass Defense Authorization
Somewhat related to appropriations, lawmakers will also have to pass a defense authorization bill. For the budget world, this may be important to see if Congress will consider codifying a strict definition of war spending -- as the House budget resolution and an amendment to the House defense appropriations bill did -- or consider personnel savings policies that the Pentagon has long called for. Doing either of those things may help policymakers stay within the defense spending caps in the future and better ensure the integrity of those caps.
The Center for American Progress' Katherine Blakeley and Lawrence Korb recently issued a report recommending how lawmakers should wind down war spending, known as Overseas Contingency Operations (OCO), as U.S. involvement in Afghanistan wanes. OCO has become a headache for budget enforcement because, unlike base defense spending, it is not capped and so it has been used to avoid the discretionary spending caps.
Making matters worse, the continuing resolution funding the government for the first two-and-a-half months of FY 2015 continued OCO spending at last year's levels, $26 billion above the Administration's request (at an annualized rate). Congress should address this issue during the lame duck session by making prudent use of the OCO designation in any government funding bill to limit spending to war needs and codify criteria for use of the OCO designation in the defense authorization bill.
Blakeley and Korb make five main recommendations:
- Keep OCO funds tied to the costs of war
- Stop using OCO funds as a ‘safety valve’ for the base defense budget
- Do not make OCO a permanent emergency fund
- Exercise authorizing and oversight authority for military action
- Have the tough conversations about defense resources and trade-offs
The resolution setting next year's budget continues this year's levels of war spending, despite the fact that the federal government was supposed to spend much less after reducing troop levels in Afghanistan. It contains war spending at an annualized level $26 billion higher than requested by the President. Even if some funds are spent on operations against the Islamic State terrorist group, billions are still being appropriated above what is needed for overseas operations without a clear purpose.
Broadly, the continuing resolution extends last year's spending level of $1.012 trillion for regular discretionary spending. (See our blog House Resolution Continues Last Year’s Spending, Mostly for the exceptions). In addition, Congress designates an amount for Overseas Contingency Operations (OCO) not restricted by the same discretionary spending caps. The resolution continues OCO funding at the FY 2014 level of $92 billion, $26 billion higher on an annual basis than the Administration's $66 billion request.
Since the resolution only covers two-and-a-half months, continuing spending at the FY14 rate would provide about $5 billion more than requested for the length of the CR. The decision to continue funding for OCO at the last year's levels could be even more significant if Congress continues this policy when revisiting a long-term CR or omnibus bill after this CR expires in December.
Recent events in Iraq and Syria have raised the prospect of expanding military operations in the region beyond airstrikes. Gordon Adams in a Fiscal Times article roughly estimated that $10 billion-$15 billion per year would be required to expand air operations and provide ground support for a campaign against ISIS, though the estimate is uncertain because it is not clear exactly how the U.S. would respond. Regardless of the exact number, it is clear that if the military is to expand its operations in Iraq and Syria, it would cost billions of dollars.
Given high and growing debt levels, lawmakers should avoid substantially adding to the debt to fund the operation.
Of course, the "path of least resistance" would be for Congress to fund these new costs by designating them as Overseas Contingency Operations (OCO), which are not subject to the same statutory caps that constrain most discretionary spending. And to be fair, the increased costs would indeed be used toward overseas operations in Iraq. Yet, every major budget assumes OCO spending will decline, and using the OCO designation as a slush fund for any new military operation could significantly worsen the debt situation.
A sensible solution to this concern might be to accompany any new funding for ISIS with a set of OCO caps, designed to limit total funds spent on military operations in Iraq and Afghanistan.