Sequestration: Coming Soon?

Sequestration Defined

Sequestration is the cancellation of budgetary resources provided by discretionary appropriations or direct spending laws. In a given fiscal year, sequestration automatically cuts spending (across the board) if discretionary appropriations exceed discretionary spending limits or legislation affecting mandatory spending and receipts increases the deficit or reduces the surplus. In the current setting, the BCA of 2011 already reduced targeted federal discretionary spending by roughly $900 billion over several years. Of that, $487 billion came from DOD. The additional burden of sequestration was conceived as a more drastic cut designed to force the congressionally-mandated so-called “super committee,” (Joint Committee on Deficit Reduction), to craft a more palatable debt reduction agreement. Without agreement on further deficit reduction, sequestration will trigger on Jan. 2, 2013 resulting in government spending reductions totaling another $1.2 trillion over ten years. It also focuses on discretionary funding (defense spending is roughly half) and not entitlement programs (the bulk of federal spending). The roughly $110 billion annually comes through across-the-board reductions in defense and discretionary domestic spending. Some programs are exempt; notably for veterans and military personnel, VA benefits and the Obama administration plans to exempt military personnel accounts (at least in FY 13). The remainder of defense spending faces the sequestration budget knife.

Sequestration has lately been hotly debated and often derided. Many probably have heard the term, aware it involves budget reductions, and possibly many know it could come to pass on Jan. 2, 2013. These potential spending reductions and simultaneous expiration of tax cuts have been collectively dubbed the “fiscal cliff,” receiving increased, post-election media attention as the President and lame-duck Congress negotiate a potential deal to change or avert both. But what does sequestration mean, and in context of the Department of Defense (DOD), what is its impact?

Sequestration could still be avoided (the President alluded to this in the Oct. 22 final campaign debate). Likewise, another outcome could be modification of the amount of budget reduction and/or the mechanisms by which it is conducted. However, worst-case sequestration under current provisions, coupled with previous budget reductions under the Budget Control Act (BCA) and compounded by other long-standing trends in defense spending, will be extraordinarily disruptive and damaging to the long-term defense program. Any change to sequestration requires passage of new legislation and presidential signature before Jan. 2, 2013 which very well may not happen. Therefore, assuming sequestration does trigger as planned in both timing and manner, let’s consider implementation impact on DOD.

Sequestration Applied to Defense

Sequestration is challenging by the manner in which cuts are applied — not by strategic design but rather across-the-board percentage reductions. According to the Office of Management and Budget (OMB), “with the single exception of military personnel accounts [which the President has exempted], the Administration cannot choose which programs to exempt, or what percentage cuts to apply. These matters are dictated by a detailed statutory scheme.” Some question whether that “statutory scheme” of blind, across-the-board cuts must in fact occur, or whether another method of reductions could be achieved. “There is a general resignation that we’re not going to get rid of [sequestration],” House Armed Services Committee member Rep. Roscoe Bartlett stated. “The question now is, do we apply it [sequestration] rationally or stupidly? If we do it the way the law is written . . . it will be totally devastating.

Beyond personnel exemptions, other factors constrain choices making reductions more acute in select defense accounts. First, sequester does not begin until Jan. 2, 2013, the second quarter of Fiscal Year 2013 (which began Oct. 1, 2012) so the entire $55 billion reduction in that year must be taken from programs with either no obligations during the first quarter, or from program funding in the remaining three quarters — potentially causing greater program disruptions as the percentage of reductions will accordingly increase. To any extent OMB delays applying the cuts, the percentage reductions only increase as funds continue to be obligated and spent.

Second, within DOD, unobligated balances (money authorized and appropriated in previous years but not yet obligated and spent) are subject to sequestration. These unobligated balances result for various reasons, the most common in DOD is due to long construction timelines. This has increased relevance in capital-intensive procurement common in the Air Force and Navy, such as the Navy’s Shipbuilding and Conversion-Navy (SCN) appropriation, where by funds can be spent over a five-year period. Since appropriated funds are not all “obligated” and spent in one year, the carryover balance is considered unobligated funds. The result is an increase in the amount considered for sequestration. Case in point: Fiscal Year 2013, DOD requested a combined $109 billion in procurement funding in both its base budget and wartime Overseas Contingency Operations (OCO) funds to purchase equipment. The amount of procurement funding in FY 2013 actually subject to sequestration is $163 billion — significantly higher than the combined budget request. Because many defense accounts investing in infrastructure, technology and equipment (military construction, research and development and procurement) have funding that stretches across multiple years, this unobligated balance provision applicable to DOD has a greater negative impact during sequestration.

The so-called congressional super committee in 2011

Finally, Operations and Maintenance (O&M) is the other big DOD sequestration bill-payer. From a Navy perspective, less O&M means fewer steaming days for ships, flying hours for aircraft, less training and less maintenance. It also means civilian government employees face potential job loss. While DOD may not enact a reduction in force (permanent job loss), it will likely implement hiring freezes on potential new employees and furloughs without pay for current employees. The result will be reduced services and support with civilian counterparts gone and extra workload to make up the loss. If war-related OCO contingency accounts gain any sequestration exemptions this will further pressurize and contract O&M funds for routine operations, training and maintenance.

Over time, sequestration creates greater imbalances in the types of spending DOD requires. Up front it drives acquisition reductions and force structure changes without commensurate personnel changes. At the same time, O&M is reduced, the very funding essential to sustaining training and current readiness. Eventually, it must force manpower reductions commensurate with new force structure realities, but the rate and pace of these changes may lag the speed of decline in other force decrements. Exempting manpower reductions up-front only to find need to accelerate those cuts and associated changes to personnel benefits later runs the perception risk as breaking faith with an All-Volunteer Force completing a decade-plus of sustained, active conflict. This formula of acquisition, O&M and manpower reductions, if allowed to react and play out over time, will contribute to a new kind of evolving hollow force.

Strategically, sequestration will force a re-examination of our National Security and Military Strategies at a time the nation faces multiple and mounting challenges for which DOD is expected to posture responses. Just a sampling include: the global tentacles of Islamic extremism; Iran; North Korea; transnational organized crime and the nexus to terror networks; Arab Spring fallout and attendant transition turmoil in those countries; ever increasing challenges in cyberspace; increasing tensions in the South China Sea region, as well as an overall intended strategic “pivot” towards Asia. For the Navy, sequestration reductions directly impact what enables global naval presence, exacerbates current operations tempo (OPTEMPO) strains and will force a re-examination of the Maritime Strategy and Fleet Response Plan. Fiscal imbalance in our defense plans and programs may also raise doubts in the minds of friends and foes alike regarding U.S. commitments to our allies and alliances.

Aside from the current mechanistic way in which sequestration is applied, in context, its larger challenge is that it is not the only force putting downward pressure on the defense budget. The half a trillion $500 billion reduction in sequestration is additive to the already nearly half a trillion $500 billion reduced via the BCA, and both of these follow a series of program reductions initiated by Secretary of Defense Gates. All of these reductions are also influenced by the fact the bulk of the defense fiscal build-up in the past decade came in manpower and O&M vice procurement leaving less equipment force structure available to ride out the coming lean years [for details on other defense spending trends impacting this downturn, see the forthcoming article, This Time Is Different - Dollars and Sense and Looming Defense Budget Challenges in the January 2013 edition of Proceedings]. Defense and other discretionary funding cuts resulting from the BCA and sequestration do nothing to tackle the largest drivers of growth in federal spending – entitlements. Without entitlement reforms, the long-term budget trajectory remains fundamentally unchanged, leaving one to wonder when the next round of discretionary cuts may come.

In the short term, we need to manage the current downturn with as much forethought and flexibility as possible. For Defense, the best immediate change, even if the total reduction is not mitigated, would be to allow DOD (other departments and agencies as well) the flexibility to determine in what activities and programs they take the overall allotted reductions. This is smarter planning rather than across-the-board percentage reductions. Also, within DOD, immediately removing military personnel exemptions enables the Services to better manage reductions and not begin an era of significant fiscal decline by creating a defense program that starts off in an unbalanced way. If sequestration is here to stay, DOD will see at least a roughly $1 trillion dollar reduction over the next decade. That amount of fiscal decline is disruptive regardless, but to echo Congressman Bartlett, can we at least apply it rationally and not stupidly?

Capt. Miller is a Surface Warfare Officer with multiple tours as a Defense Resource Manager and Programmer. He is author of the book, Funding Extended Conflicts.