The Weekly Wire: For Your Situational Awareness 3.15.19

 In Weekly Wire

An in-depth look at the US Defense Budget

On Tuesday, March 12, the Office of Management and Budget (OMB) and the Department of Defense released the initial outlines of the 2020 President’s Budget Request, and Avascent Analytics has spent the last few days reviewing the FY20 materials to provide an initial overview. Whether it is analyzing shift in the R&D priorities, contracting winners and losers, or assessing the impact of emerging technologies on the budget, Avascent has already begun to analyze the impact of what portends to be the signature defense budget of the Trump Administration, and is ready to help our clients understand the effects upon their portfolio and business strategy and adapt to face its strategic implications.

Download PDF:  FY 2020 President’s Budget: Initial Perspectives on the 2020 Federal budget request

Topline Budget Overview

The DoD topline would rise by 4.9% to $718.3 billion, and the entire National Defense enterprise (including the Department of Energy’s nuclear weapons activities) would grow to $750 billion. With growth this substantial, nearly all categories of spending increased. Each of the Services would see their budgets increase in FY20, although Defense-Wide accounts would decline slightly. Funding for Military Personnel, Operations & Maintenance, Military Construction, and especially Research, Development, Test & Evaluation (RDT&E) would grow well above inflation. Procurement is the one major funding category that would decline in this budget, by about 2.9% from FY19 to FY20. (More on that below.)

Base, OCO and the Budget Control Act

The budget request will be met with opposition in Congress for a number of reasons, including its use of Overseas Contingency Operations (OCO) spending to skirt the Budget Control Act (BCA) cap on defense spending. Instead of requesting that Congress raise the caps for defense and non-defense discretionary spending, the 2020 Budget Request keeps the caps in place at their adjusted levels ($544.5 billion for Defense) and seeks a very large OCO request of $174 billion in order to achieve growth.

Meanwhile, non-defense budgets would face significant budget cuts. Overall, non-defense discretionary spending under the FY20 President’s Budget would be held at the BCA cap level ($542 billion in FY20), with no substantial above-cap adjustment. Civil spending would decline by 7.7%, with future cuts projected after 2020.

Such a plan is dead upon arrival in Congress. The flaunting of norms surrounding the use of OCO for base budget requirements has already drawn bipartisan criticism. Previous budgets shifted some base budget requirements into OCO accounts. In this budget, however, whole accounts have been shifted to a category called “OCO for Base.”

It should be noted that this approach, driven by OMB’s aim to portray the Trump Administration as responsive to deficit concerns, has not affected the Services’ approach to program planning, only the way in which they present funding requests in FY20. All three Services made it clear in their budget roll-out presentations that their budget plans remain substantively the same, regardless of which base or OCO accounts are used to fund them.

Additionally, House Democrats and some Senate Republicans will oppose the drastic reductions to non-defense spending. Republicans associated with the appropriations process have already signaled their discomfort with the deep cuts in civil agencies, including the Departments of Agriculture, Education, Commerce, State, Transportation, Justice, and other Federal agencies.

Complicating the matter is that the Trump Administration included $8.6 billion in funding for Border Wall construction in its FY20 budget, and asked for an additional $3.6 billion in military construction funds to “backfill” spending of prior appropriations that the White House plans to repurpose under the recent national emergency declaration. Democrats, who control the House of Representatives and have enough votes in the Senate to filibuster most plans they oppose, will move to block border-related spending, as they did this winter. All of this suggests that fiscal year 2020 could begin in October with a continuing resolution or another government shutdown.

DoD Budget by Major Account

The growing budget will increase spending across nearly all DoD accounts except Procurement. Military Personnel accounts would see a 3.3% rise driven by big military pay increase (although DoD civilian pay would hold steady). The force is set to grow in endstrength over the FYDP, per the Services’ FY20 to FY24 plans. But the rate of increase will be modest.

RDT&E: A centerpiece of the FY20 President’s Budget is a 9.5% increase in the RDT&E accounts in order to fund advanced capabilities to stay ahead of China and Russia. This is consistent with the stated intent of the January 2018 National Defense Strategy, which committed the DoD to shift away from counter-insurgency and stability operations and more toward preventing great power conflict through sustaining dominance.

RDT&E spending would increase from FY19 to FY20 in areas related to space (19.2%), aviation (16.2%), land forces (40.5%), C4ISR (5.8%), weapons & munitions (11.5%) and classified accounts (7.8%). These increases are directed at a wide array of advanced capabilities, including major next-generation platforms (e.g., Next Generation Air Dominance, Future Vertical Lift (FVL), B-21 bomber, Optionally Manned Fighting Vehicle, Overhead Persistent Infrared Satellite), as well as advanced technologies related to assured positioning, navigation and timing, cyber, hypersonic weapons and defense, other next-generation missile systems, artificial intelligence, and many others.

O&M: The Services have been working to improve readiness, and the O&M budget request in FY20 continues this trend. The largest of these increases were directed towards addressing the readiness shortfalls within the aviation and naval portfolios, which have received significant attention in recent years due to a decline in some aviation readiness rates and fallout from the McCain and Fitzgerald incidents.

O&M would rise by about 8% from FY19 to FY20 and would grow across all the Services. O&M would grow at particularly healthy rates in activities related to aviation (7.9%, counting both base and OCO), ships (8.4%), classified accounts (6.8%), and space and C4ISR capabilities (11.8%). However, if Congress does ultimately pass appropriations for DoD, they have shown in the past an inclination to shift funds from O&M to bolster Procurement programs.

Procurement: The reduction in Procurement spending is primarily driven by the Army and the Missile Defense Agency, with spending levels in the Air Force and Navy roughly flat from FY19 to FY20.

The Air Force and Navy largely kept on track with procurement plans stated in last year’s budget. The Air Force would buy 48 F-35A aircraft in FY20, in line with its prior plan, which would then be augmented by the purchase of 8 F-15X aircraft. In contrast, the Navy and Marine Corps shifted their planned buy of F-35B and F-35C variants, procuring a total of 30 in FY20 versus last year’s plan to request 36 in FY20. Notably, the Navy’s F-35 buy pivoted from a F-35B-focused allotment to one concentrated upon F-35C. The Navy held to its prior plan to buy 24 F/A-18E/F jets in FY20. In a few areas, both Services elected to trim existing program production rates from prior plans, as in the case of C-130J variants, KC-46 tankers, CH-53K helicopters, MQ-9 Reaper, and others.

The Navy’s shipbuilding budget is reflective of a service that is increasingly concerned with its ability to compete with expanding Chinese naval power in the Pacific. As a result, the Navy FY20 budget has increased purchases of battle force ships while featuring drastic reductions to planned amphibious force procurements. The most notable of these increases was the accelerated procurement of CVN-81 as part of a recently-announced block purchase with the USS Enterprise (CVN-80). The fleet will also be augmented with three Virginia-class submarines, three Arleigh Burke destroyers, and the first FFG-X frigate. While purchase of an Arleigh Burke destroyer will certainly be a boon for Navy planners given how the McCain and Fitzgerald incidents revealed how thin the destroyer fleet was stretched, the addition of a third Virginia-class submarine has long-term implications as the Navy looks to build its industrial base in order to sustain dual Virginia-class production once Colombia-class construction begins. Meanwhile, the Strategic Capabilities Office development budget contains several hundred million dollars for the procurement of the first Large Unmanned Surface Vessels or “Arsenal Ships” to be used as test-beds for a follow-on procurement. The major bill payer as a result of these shifts are the amphibious ships. The FY20 budget cuts the procurement of the first LPD Flight II ship, eight Ship-to-Shore Connectors, and an Expeditionary Sea Base. This comes at a time when the amphibious force is facing increased scrutiny over their low survivability and lethality during a time of great power competition.

But the worst of the procurement cuts in FY20 comes in the Army’s budget. The Service has been vocal about the wrenching process it undertook last year to cull savings from current programs to fund next-generation capabilities. While many of these cuts and reductions will be backloaded over the FYDP, the effects of the pivot are already apparent in the FY20 budget. The aviation budget sees some of the effects of this as cuts to AH-64 New Build, potential early cancellation of CH-47F Block II, and increased frontloading of UH-60M production in the budget paves the way for Future Attack Reconnaissance Aircraft, Tactical Unmanned Aerial System, and FVL development and acquisition. The cuts are far more notable, however, within the combat vehicle portfolios as the Army has made it clear that it plans to adjust procurement ramp for both the Joint Light Tactical Vehicle and Armored Multi-Purpose Vehicle in order to fund new priorities. Meanwhile, the Bradly A4 program will be curtailed after five brigades in order to accommodate the Next Generation Combat Vehicle spending increases in 2023. In contrast, the Missile Procurement spending remained at a historical high as the Army continues to buy PAC-3 MSE, Hellfire, and GMLRS missiles at rates significantly above those in the FY19 budget, even as it begins procurement of new systems like M-SHORAD and the Lethal Miniature Aerial Missile System this year.

Cuts in some high-profile platform procurement programs could very well be mitigated in the appropriations process. As noted above, Congress has in recent years often shifted funding from the O&M requests to procurement programs, particularly Major Defense Acquisition Programs that drive substantial employment and local economic value. Thus, it would not be surprising to see Congress add to the FY20 request for programs like LX(R), Ship-to-Shore Connector, F-35 Joint Strike Fighter, P-8A Neptune, CH-53K King Stallion, AH-64E Apache, and others.

Looking Ahead

All of this presupposes that Congress will pass a Defense Appropriations Act for FY20. As noted at the outset, there are real risks that this may not happen in a timely way. There is widespread expectation that DoD and other Federal agencies could start the new fiscal year under an extended Continuing Resolution. The political conflict over Border Wall funding could also yield another shutdown. This week’s Political Report contains some thoughts on how this might play out, but it promises to be a particularly contentious process.

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