Gates to Pentagon: Prepare for Budget Pain

Posted May 10, 2010 at 5:58pm

Most of the attention last week may have been paid to the gyrations in the stock market, the debate on Wall Street reform in the Senate, the continuing efforts to clean up the oil in the Gulf of Mexico, the election in the U.K., and the continuing competition between “American Idol” and “Dancing With the Stars” to be the most-watched program.

[IMGCAP(1)]But as a budget guy, for me the real story was that the fiscal 2012 federal budget debate, that is, the plan that technically will start to be debated next January, actually began last week when Secretary of Defense Robert Gates was widely quoted as saying his department’s health care costs were out of control, pay raises for the troops had been too generous and Pentagon overhead had to be reduced.

Gates was delivering four budget messages.

First, Gates clearly was saying that he has been told that the deficit will be a big issue for the White House next year.

Second, he was telling the military community that, because of the deficit, the Pentagon will not be immune from budget pressures. To the contrary, Gates was saying in no uncertain terms that the deficit will have an effect on the DOD’s spending plans and that the department is very likely to be required to come up with savings in 2012.

Third, he was telling the White House and everyone in the budgeting community that large immediate spending reductions from the Pentagon budget will be very hard to achieve. Published reports indicate that Gates thinks he can come up with $10 billion to $15 billion in savings for 2012.

By any outside-the-Beltway standard, that is a great deal of money. But it is also a less than 3 percent cut from the current level, would come close to freezing but not actually reducing the DOD budget, and would have little immediate effect on a baseline budget deficit that could be close to $1 trillion.

Fourth, Gates was telling both those inside the Pentagon and those who do business with it that the military budget pie is not going to be getting bigger and, therefore, that the fiscal 2012 military spending debate will be more of a zero-sum game than it has been at any time over at least the past decade. Not finding the $10 billion to $15 billion in administrative savings will mean that the other parts of the department’s budget will have to take the hit: He specifically cited weapons procurement and personnel benefits as two areas that will likely be the alternative place to look.

In effect, Gates was telling everyone that they should either help him find the savings through efficiencies or it will be every man, woman, service and contractor for themselves.

Much of this is actually very basic Pentagon budgeting. In spite of the overall size of the DOD budget, coming up with reductions quickly is difficult because many of the department’s activities take a great deal of time to implement and, in budget parlance, “spend out” over a period of years.

For example, deciding not to proceed with a new weapons system might save next to nothing in the first few years because little of the work would have been done during this time and few payments would have been made. Canceling contracts for an existing system might cost the government as much or more than if the procurement is completed.

Some savings are possible from research and development, but they are relatively small in the first year. Family housing and military construction, which in fiscal 2009 totaled less than $4.5 billion, are too small to make much of a difference.

Reducing the number of people in uniform could produce rapid spending reductions if the Pentagon moved quickly at the start of the fiscal year to make it happen, but it’s not likely the White House will want to get people off the DOD payroll anytime soon given the employment situation in the private sector. That leaves one category — operations and maintenance — the day-to-day activities the Pentagon needs to do to carry out its mission. Some of the fastest savings can be achieved here, but not without harming readiness.

What Gates was saying, therefore, is that finding and agreeing to administrative savings such as reducing health care costs, determining pay differently and reducing the reliance on some contractors will be the only way the Pentagon will be able to avoid making other, more painful changes in staffing and operations.

In effect, he was saying what many private-sector companies said to their employees over the past year or so when they were faced with flat or declining revenues: We have to reduce benefits and get more efficient or cut people and programs.

This is the time of the year when every department begins to formulate its budget for the coming year, so Gates’ remarks either were based on some initial Office of Management and Budget or White House guidance about what’s expected from the Pentagon or on his own reading of the tea leaves.

Either way, given what Gates was told by the White House (or intuited) about its coming emphasis on the deficit next year, it’s a conversation that will likely be repeated in some way in every federal agency in the weeks ahead.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of “The Guide to the Federal Budget.”