Defense Budget: Long-Term Challenges for FY2006 and Beyond

Order Code RL32877

CRS Report for Congress

Received through the CRS Web

Defense Budget:

Long-Term Challenges for

FY2006 and Beyond

April 20, 2005

-name redactedSpecialist in National Defense

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Defense Budget: Long-Term Challenges for

FY2006 and Beyond

Summary

Over the next few months, Congress will be considering Administration

requests for more than half a trillion dollars for national defense, including money

in the regular defense budget for Fiscal Year 2006 (FY2006), supplemental

appropriations for costs of ongoing military operations in FY2005, and, possibly,

additional funds in FY2006 to provide a “bridge” until future supplemental

appropriations for operations in Iraq and Afghanistan are available.

The Administration’s defense budget plans face some potentially daunting,

though by no means unprecedented, long-term challenges, including:

!

Will projected budget deficits constrain the Administration’s longterm defense budget plans?

!

Should Congress try to restrain further increases in military

personnel pay and benefits, as some Administration officials have

argued, in view of dramatic increases in personnel costs in recent

years?

!

What are the implications of continuing, perennial increases in

defense operation and maintenance costs for the affordability of the

Administration’s plan?

!

How affordable is the Administration’s long-term plan for

modernizing military forces in light of substantial and continuing

cost growth in many systems?

!

How might recent widely discussed changes in defense strategy

affect priorities within the defense budget?

This report reviews long-term trends in the defense budget and discusses the

challenges Congress and the Defense Department may face in trying to adjust plans

in the face of fiscal constraints. It will be updated periodically to reflect

congressional action and new information.

Contents

Will Budget Deficits Constrain Long-TermDefense Budget Plans? . . . . . . . . . . . 2

Should Further Increases in Military Pay and Benefits be Restrained? . . . . . . . . . 6

Will Increasing Operation and Maintenance Costs Compete with

Weapons Modernization? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Bow Waves, Train Wrecks, and Ship Wrecks:Are Long-Term Weapons

Plans Affordable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

What Are the Implications of Changes in Military Strategy for

Budget Priorities? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

List of Figures

Figure 1. National Defense Budget Authority and Outlays, FY1950-FY2010

............................................................3

Figure 2. National Defense Outlays Percentage of GDP, FY1950-FY2010 . . . . . 3

Figure 3. Federal Outlays by Major Category, Percentage of GDP,

FY1962-FY2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Figure 4. DOD Budget Authority by Title, FY1976-FY2006 . . . . . . . . . . . . . . . . 6

Figure 5. Military Personnel Budget Authority per Active Duty Troop

Indexed to FY1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 6. Operation and Maintenance Budget Authority per

Active Duty TroopFY1955-FY2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

List of Tables

Table 1. Real Growth/Decline in National Defense Budget Authority and

Outlays, FY2004-FY2010* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Table 2. Alternative Federal Deficit Projections, FY2005-FY2015 . . . . . . . . . . . 6

Table 3. Changes in Defense Funding by Title, FY2000-FY2006 . . . . . . . . . . . 10

Table 4. Allocation of Changes in Defense Funding by Title, FY2000-FY2006

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Defense Budget: Long-Term Challenges for

FY2006 and Beyond

Over the next few months, Congress will be considering Administration

requests for more than half a trillion dollars for national defense, including money

in the regular defense budget for Fiscal Year 2006 (FY2006), supplemental

appropriations for costs of ongoing military operations in FY2005, and, possibly,

additional funds in FY2006 to provide a “bridge” until future supplemental

appropriations for operations in Iraq and Afghanistan are available. These are the

details:

!

On February 7, the Administration formally released its budget

request for FY2006, the fiscal year that runs from October 1, 2005,

to September 30, 2006. The request includes $442 billion for

national defense, of which $421 billion is for the Department of

Defense, $17 billion for Department of Energy nuclear weapons

programs, and $3 billion for defense-related programs of other

agencies. This does not include any projected funding for operations

in Iraq, Afghanistan, or elsewhere in FY2006 or beyond.1

!

Subsequently, on February 14, the Administration submitted a

request for supplemental appropriations of $82 billion for FY2005,

of which $75 billion is to cover costs of military operations through

the remainder of the fiscal year, which ends on September 30, 2005.

The other $7 billion is for non-defense programs, mostly

reconstruction assistance to Iraq and Afghanistan run by the State

Department, plus about $1 billion for Tsunami relief activities.2

!

It is also possible that Congress will provide additional money to

cover costs of operations in Iraq and Afghanistan in the first few

months of FY2006. Last summer, Congress provided a down

payment of $25 billion for military operations in FY2005 as a bridge

between the start of the fiscal year and the time it would take to

provide supplemental funding.

1

Details of the Administration request are available from the Department of Defense at

[http://www.dod.mil/comptroller/defbudget/fy2006/index.html].

2

The overall Administration request is available from the Office of Management and Budget

at [http://www.whitehouse.gov/omb/budget/amendments/supplemental_2_14_05.pdf].

Additional information on the Department of Defense portion of the request is available at

[http://www.dod.mil/comptroller/defbudget/fy2006/fy2005_supp.pdf]. For a review of

congressional action, see CRS Report RL32783, FY2005 Supplemental Appropriations for

Iraq and Afghanistan, Tsunami Relief, and Other Activities, by (name redacted) and (name

redacted), at [http://www.congress.gov/erp/rl/html/RL32783.html].

CRS-2

The Administration’s defense budget plans face some potentially daunting,

though not unprecedented, long-term policy challenges, including:

!

!

!

!

!

Will projected budget deficits constrain the Administration’s longterm defense budget plans?

Should Congress try to restrain further increases in military

personnel pay and benefits, as some Administration officials have

argued, in view of dramatic increases in personnel costs in recent

years?

What are the implications of continuing, perennial increases in

defense operation and maintenance costs for the affordability of the

Administration’s plan?

How affordable is the Administration’s long-term plan for

modernizing military forces, particularly in view of recent decisions

to slow or terminate some major weapons programs and in light of

continuing cost growth in many systems?

How might recent widely discussed changes in defense strategy

affect priorities within the defense budget?

Will Budget Deficits Constrain Long-Term

Defense Budget Plans?

Leaving aside supplemental appropriations to cover war costs, the FY2006

Department of Defense budget is about 4.5% above the regular, FY2005 non-war

budget, or about 2% higher after adjusting for inflation. Projections show a similar,

modest rate of growth over the next five years (see Table 1).

Table 1. Real Growth/Decline in National Defense Budget

Authority and Outlays, FY2004-FY2010*

(current and constant FY2006 dollars in billions)

Actual

Est.

Proj. Proj. Proj. Proj.

Proj.

FY04

FY05

FY06 FY07 FY08 FY09 FY010

National Defense Budget Function

Budget Authority

Current year dollars

490.6

423.6 441.8 465.4 483.9 503.8

513.9

Constant FY2006 dollars

516.8

433.5 441.8 454.3 461.0 468.1

465.4

Real growth/decline

4.6%

-16.1%

1.9%

2.8% 1.5%

1.5% -0.6%

Outlays

Current year dollars

455.9

465.9 447.4 448.9 466.1 487.7

504.8

Constant FY2006 dollars

480.1

476.5 447.4 438.1 443.9 453.0

457.2

Real growth/decline

9.4%

-0.7% -6.1% -2.1% 1.3%

2.1%

0.9%

Source: Congressional Research Service from Office of Management and Budget data.

* Administration projections. Figures for FY2005 and beyond do not include additional supplemental

appropriations for Iraq and Afghanistan, while the FY2004 figures includes such funds.

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Th i s relativel y Figure 1. National Defense Budget Authority

modest pace comes after

and Outlays, FY1950-FY2010

several years of

substantially higher

g r o w th.

Be t w e e n

FY2000, the last budget

controlled wholly by the

Clinton Administration,

and FY2006, the regular,

“non-war” DOD budget

has grown by about 45%

in nominal terms or about

22% after inflation. The

increases of the last few

years have boosted

defense spending,

excluding funding for

Iraq and Afghanistan, to a level above the peacetime average during the Cold War

and about equal to the peaks of the Vietnam War and the buildup of the 1980s.

Figure 1 shows the trend in national defense funding, adjusted for inflation, since

FY1950.

Even with the Figure 2. National Defense Outlays Percentage

recent increases,

of GDP, FY1950-FY2010

h o wev er , d e f e n s e

spending as a share of

the economy has

continued to decline

over time. Figure 2

shows national defense

outlays as a share of

GDP since FY1950. In

more recent years, the

decline reflects, in part,

real reductions in the

defense budget between

FY1986 and FY1998.

For the most part,

however, the trend is

due simply to

continuing growth in the U.S. economy that progressively reduced the economic

burden of maintaining the Cold War and post-Cold War military establishment.

Some defense advocates argue that the nation can easily afford substantially

greater defense spending, since it sustained a measurably larger burden in the past.

The issue is not only a matter of economics, however, but also of evolving Federal

budget pressures and priorities. As Figure 3 shows, overall Federal spending has

remained fairly steady at about 20% of GDP for the past 40 years. Within the budget,

mandatory programs, mainly entitlement programs like Social Security, Medicare,

and Medicaid, plus interest on the debt have grown substantially, both as a share of

CRS-4

the budget and as a share Figure 3. Federal Outlays by Major Category,

of the economy.

Percentage of GDP, FY1962-FY2010

Meanwhile, non-defense

discretionary spending has

remained quite stable as a

share of GDP, while the

decline in the defense share

of the budget has offset the

increase in mandatory

spending.

To increase

defense spending

substantially as a share of

GDP, therefore, would

require either increasing

total Federal spending

above historical norms or

imposing offsetting cuts in

other parts of the budget.

Increased spending would require either higher taxes or greater borrowing. Growth

in mandatory budget accounts may put even more pressure on other parts of the

budget — including defense — after 2010, as members of the “baby boom”

generation reach retirement age.

Moreover, defense spending may be constrained, for the foreseeable future as

it has been in the past, by pressures to reduce the Federal budget deficit. For most

of the past 25 years, congressional debate about both defense and non-defense

Federal spending has been dominated by apparently intractable budget deficits. In

November 1985, in an effort to cope with budget deficits that reached a peak of 6%

of GDP in FY1983, Congress passed the Gramm-Rudman-Hollings deficit control

act, P.L. 99-177. The Gramm-Rudman-Hollings law set annual targets for reducing

the deficit to zero in five years and imposed automatic cuts in spending if

congressional action fell short, with 50% of the cuts in defense and 50% in nondefense expenditures. Congress amended the law in 1987, 1990, 1993, and 1997,

each time pushing out the date for balancing the budget.3

In each of the 13 years from FY1986 through FY1998, defense spending

declined in inflation-adjusted dollars. Initially driven by deficit concerns, the decline

in defense spending continued with the end of the Cold War and the subsequent

reduction of almost one-third in the size of the force. Throughout the period,

pressures to reduce the deficit remained a major factor shaping the debate over

defense spending. The defense budget began to turn up again in FY1999, once the

budget situation began to ease, and increases accelerated during the first four years

of the Bush Administration.

3

The 1997 deficit control measures expired after FY2002. In 2002, Congress did not extend

automatic deficit reduction measures, and limits on spending are now established only in

annual congressional budget resolutions.

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For a few years, projected budget surpluses fostered an atmosphere of budgetary

abundance that propelled tax cuts, increased spending on defense, and more money

for domestic priorities like transportation and, even after surpluses had disappeared,

Medicare prescription drug coverage. That interlude was very brief, however. Now

the Bush Administration has announced its intention to reduce the budget deficit by

one-half between FY2004 and FY2009. And in Congress, a sober, late-1980s-style

tone of fiscal abstinence has returned. Last year, proposals to reduce defense

spending were, for the first time in many years, on the congressional agenda. Though

the Senate rejected a Budget Committee recommendation to pare $7 billion from the

Administration’s defense plan, the final, regular FY2005 defense appropriations bills

were about $2 billion below the request. More recently, in December 2004, in the

final stages of preparing the FY2006 budget request, the White House Office of

Management and Budget directed the Defense Department to trim $30 billion from

the six-year FY2006-FY2011 program.

If the past is a guide, current plans to reduce budget deficits may prove more

difficult to implement than official projections anticipate. As the Congressional

Budget Office and others have pointed out, Administration estimates do not take into

account additional war costs, the effects of extending tax cuts after FY2009, or the

costs of indexing or repealing the Alternative Minimum Tax. The Administration

plan also assumes cuts in spending that have not yet been identified or enacted, and

it includes no contingency for potential costs of changes in Social Security. Table 2,

based on CBO projections, shows alternative baseline deficit trends under various

assumptions.4 If deficits remain stubbornly difficult to control, as they have proven

to be in the past, then it may be too optimistic to expect defense budgets to grow at

even the moderate pace the Administration is now projecting.

4

For a similar analysis and a discussion see CRS Report RS22045, Baseline Budget

Projections Under Alternative Assumptions, by Gregg Esenwein and (name redacted).

CRS-6

Table 2. Alternative Federal Deficit Projections, FY2005-FY2015

(outlays in billions of current year dollars)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CBO baseline deficit, March 2005 -365 -298 -268 -246 -219 -201 -95 57 69 99 122

Include war costs after FY2004*

-30 -73 -82 -76 -59 -47 -44 -48 -51 -54 -57

Extend tax cuts*

0

-5 -17 -32 -49 -53 -207 -324 -355 -388 -424

Index AMT to inflation*

0 -12 -35 -44 -56 -69 -62 -42 -50 -60 -70

AMT/tax extension interaction**

0

-1

-2

-5

-7

-8 -30 -47 -52 -57 -62

Adjusted baseline

-395 -389 -404 -403 -390 -378 -438 -404 -439 -460 -491

Increase discretionary with GDP*

0 -15 -41 -71 -103 -135 -168 -201 -234 -269 -306

Baseline with discretionary growth -395 -404 -445 -474 -493 -513 -606 -605 -673 -729 -797

Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 2006 to

2015, January 2005, Table 1-3, with revised March 2005 baseline from Congressional Budget Office,

CBO’s Current Budget Projections, March 2005, online at

[http://www.cbo.gov/showdoc.cfm?index=1944&sequence=0].

* All figures include interest costs resulting from increased borrowing. Additional war cost outlays

in FY2005 are amounts resulting if the pending FY2005 $76 billion supplemental appropriations

request is enacted.

** AMT/tax extension interaction estimated by CRS as a proportion of the cost of tax extensions.

Should Further Increases in Military Pay and

Benefits be Restrained?

Within the defense

Figure 4. DOD Budget Authority by Title,

budget, when budgets are

FY1976-FY2006

declining or growing only

slowly, there are necessary

trade-offs between, on the

one hand, costs of paying

personnel and operating the

force and, on the other

hand, investments in

modernizing the force by

developing and procuring

new weapons. As a rule,

the most variable part of

the budget has been the

amount spent to procure

new weapons. Figure 4

illustrates the point.

Funding for weapons

procurement has varied dramatically, climbing rapidly when overall budgets were

growing but also plunging disproportionately when budgets declined.

In contrast, Military Personnel and Operation and Maintenance costs have been

considerably more stable, though there are some noteworthy trends. Military

CRS-7

Personnel funding fell in the 1990s, as the size of the force declined following the

end of the Cold War, but then began to climb. Operation and Maintenance costs

leveled off for several years after the mid-1980s, again as the size of the force

declined, but then also began to climb.

The leap in military personnel costs between FY2000 and FY2005 is

particularly dramatic. Beginning with the FY2000 defense authorization bill,

Congress approved substantial pay and benefits increases, partly with Administration

concurrence and partly over its objections. The increases include

!

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six years of pay raises of ½ percent above the “Employment Cost

Index,” an economy-wide measure of wage costs,

three rounds of “pay table reform” that gave much larger pay raises

in middle grades to improve retention of skilled personnel,

a multi-year plan to eliminate differences in on-base and off-base

housing costs,

approval of a phased-in plan to allow military retirees with a

veteran’s disability rating of 50% or greater to receive both retired

pay and veteran’s administration disability benefits,

a program known as “TRICARE for Life” under which 65 and older

military retirees will have access to DOD provided health care in

addition to Medicare,

repeal of the 1986 “Redux” retirement program which gave lower

pensions to those recruited after that time, and

repeal of a measure that lowered benefits to survivors of military

retirees once they qualified for Social Security benefits at age 62.

Taken together, as Figure 5. Military Personnel Budget Authority

Figure 5 illustrates, these

per Active Duty Troop Indexed to FY1972

changes have driven up

active duty personnel

costs by more than 30%,

after adjusting for

inflation, since 1999. The

rate of increase in

personnel costs may slow

over the next few years,

though starting from a

higher base than just a

few years ago, provided

Congress does not

authorize additional

major increases in

personnel benefits. But

that proviso has become a

matter of some

controversy. In January, David Chu, the Under Secretary of Defense for Personnel

and Readiness, argued against further boosts in benefits for military retirees, saying

“The amounts have gotten to the point where they are hurtful. They are taking away

CRS-8

from the nation’s ability to defend itself.”5 That judgment provoked some harsh

recriminations from veterans organizations and some Members of Congress.6

The problem for defense planners is that many of the recent, large benefit

increases, such as TRICARE for Life, concurrent receipt of VA disability benefits

and retired pay, Redux repeal, and increased survivor benefits, do not necessarily

promote recruitment and retention of high quality military personnel. They are,

however, costly for the Defense Department, which is required to contribute the

actuarially determined cost of future benefits for current personnel into the military

retirement fund in order to capture the full costs of personnel.7 From the Pentagon’s

point of view, if recruitment and retention falter, it would be much cheaper to expand

enlistment and reenlistment bonuses. As Under Secretary Chu commented, “I’d like

to believe 19-year-olds paid attention to their annuity package, [but] ....

[n]ineteen-year-olds want cash to buy a pickup truck.”8 For veterans groups and for

many legislators, however, the question has been whether military retirees and their

survivors are being treated equitably in view of their contributions to the nation, and

Congress has approved benefit increases for reasons quite apart from their effects on

recruitment and retention.

5

Gregg Jaffe, “As Benefits For Veterans Climb, Military Spending Feels Squeeze,” Wall

Street Journal, January 25, 2005, p. 1, quoting Undersecretary of Defense David Chu.

6

See, for example, Rick Maze, “Hurtful Benefits Comment Draws Wrath from Hill,” Army

Times, January 26, 2005 and Joseph L. Galloway, “U.S. Must Keep Promises to Veterans,”

Miami Herald, February 13, 2005.

7

The principle is known as “accrual accounting,” which holds that agencies should pay the

total costs of hiring personnel, including the costs of future retirement benefits, out of

current budgets. Benefits to retirees are then paid from the retirement fund rather than by

the agency. Accrual accounting was first applied to uniformed military personnel in 1985.

8

Gregg Jaffe, “As Benefits For Veterans Climb, Military Spending Feels Squeeze,” Wall

Street Journal, January 25, 2005.

CRS-9

Will Increasing Operation and Maintenance Costs

Compete with Weapons Modernization?

The growth of Figure 6. Operation and Maintenance Budget

Operation

and

Authority per Active Duty Troop

Maintenance spending is

FY1955-FY2010

a

longstanding

p h e n o m e n o n.

As

Figure 6 illustrates,

O&M funding per troop

has increased at an

average annual rate of

2.6% above inflation ever

since the end of the

Korean War. Many things

explain the trend: (1) the

steadily growing cost of

operating

and

maintaining new

generations of more

capable and sophisticated

weapons; (2) efforts to

improve the extent and

quality of military training; (3) efforts to ensure that the quality of life in the military

keeps up with the quality of life in the civilian sector as the military has shifted to an

all volunteer, older, more commonly married, and more skilled force; (4) the growth

in health care costs for military personnel and their dependents; (5) requirements that

the Defense Department, like other Federal agencies and private organizations,

reduce pollution and clean up earlier contamination; and (6) modest but steady real

growth in the compensation of DOD civilian personnel, most of whom are paid with

O&M funds. The cost of maintaining aging equipment in recent years does not

appear to be a major factor.9

The growth in Military Personnel costs after 1999, together with ongoing

increases in Operation and Maintenance costs, account for the largest share of the

fairly substantial increases in military spending in the first years of the Bush

Administration. As Table 3 shows, under the Administration plan, the overall

Department of Defense for FY2006, not including war costs, is about 45% greater

than the FY2000 budget. It is about 22% higher after adjusting for inflation. Much

of the increase, however, has gone, not to buy or develop new weapons, but simply

to pay the cost of paying the troops and operating the force.

9

Congressional Budget Office, The Effects of Aging on the Costs of Operating and

Maintaining Military Equipment, August 2001.

CRS-10

Table 3. Changes in Defense Funding by Title, FY2000-FY2006

(current year dollars in billions)

Military Personnel

Operation & Maintenance

Procurement

RDT&E

Military Construction

Family Housing

Other

Subtotal, DOD

Atomic Energy Defense Activities

Other Defense-Related Activities

Total, National Defense

Actual

FY2000

73.8

108.8

55.0

38.7

5.1

3.5

5.6

290.5

12.4

1.2

304.1

Request

FY2006

111.3

148.4

78.0

69.4

7.8

4.2

1.9

421.1

17.5

3.2

441.8

Change

+37.4

+39.7

+23.1

+30.6

+2.7

+0.7

-3.6

+130.6

+5.1

+2.0

+137.7

Percent

change

+50.7%

+36.5%

+42.0%

+79.2%

+52.9%

+19.7%

-65.0%

+45.0%

+40.6%

+167.7%

+45.3%

Source: Congressional Research Service calculations based on data from the Department of Defense

and the Office of Management and Budget.

Specifically, Table 3 compares the FY2006 request with the FY2000 budget,

broken down by titles of the annual defense appropriations bill. Of the $131 billion

difference in the DOD portion of the budget, $77 billion, almost 60%, is in the

“Military Personnel” and “Operation and Maintenance” accounts (see Table 4). In

effect, this is the cost of maintaining the current force, without significantly

increasing the pace of weapons modernization.

The remaining 40% of the increase has still permitted substantial increases in

weapons procurement and, particularly, in research and development, in which the

growth rate, though from a smaller starting point, far outstripped any other category

of the defense budget. In the future, however, assuming that defense spending levels

off as the Administration is projecting, increases in personnel and operating accounts

may leave relatively little room for new initiatives in weapons acquisition. Tradeoffs between major weapons programs may become more contentious. Increased

funding for Army programs, for example, may come only at the expense of funding

for Navy and Air Force programs. In addition, cost growth in major programs will

drain funds for other priorities. An environment in which a growing budget allows

new priorities to be funded without cutting something else is very different from one

in which any new initiative may be seen as a threat to established programs — and

it may be less fertile ground for innovation.

CRS-11

Table 4. Allocation of Changes in Defense Funding by Title,

FY2000-FY2006

(budget authority, current year dollars in billions)

Total Increase in DOD Budget

Increase for Military Personnel + O&M

Increase for Procurement + RDT&E

Amount of

increase ($)

+130.6

+77.1

+53.7

Percentage of

total increase

—

59.0%

41.1%

Source: Congressional Research Service calculations based on data from the Department of Defense

and the Office of Management and Budget.

Bow Waves, Train Wrecks, and Ship Wrecks:

Are Long-Term Weapons Plans Affordable?

A perennial issue in defense policy is whether future weapons acquisition

budgets will be large enough to finance all of the programs that are in the pipeline.

There are a couple of variations on the theme.

One issue is whether a “bow wave” of acquisition costs will become

unsustainable at some point in the future. The term “bow wave” technically refers

to the normal funding profile of a major program: funding is small in the early stages

of development, climbs during engineering development, peaks during full rate

procurement, and then declines again as production winds down. When several

weapons programs appear likely to grow in concert, then a large collective “bow

wave” may appear to be looming in the future.

A second issue is whether projected weapons procurement budgets are large

enough to replace aging weapons as they reach the ends of their nominal service

lives. A 1999 report by the Center for Strategic and International Studies (CSIS),

entitled The Coming Defense Train Wreck, argued that projected procurement

budgets would fall as much as 50% a year short of the amount needed to maintain a

modernized force.10 That study evoked considerable controversy. Very different

estimates of the amounts needed to finance the weapons inventory would result from

minor changes in assumed rates of cost growth from one generation of weapons to

the next, in assumptions about possible extensions of nominal service lives with

upgrades, and in assumptions about whether some elements of the force (such as

strategic nuclear weapons) need to be updated at all.11

Since 1999, the Congressional Budget Office has done a series of closely related

studies of what it calls a “steady state” procurement rate (i.e., the rate at which

10

Daniel Goure and Jeffrey M. Ranney, Averting the Defense Train Wreck in the New

Millennium, (Washington: Center for Strategic and International Studies, 1999).

11

See Steven Kosiak, CSIS ‘Train Wreck’ Is Off Track Backgrounder, Washington: Center

for Strategic and Budgetary Assessments, March 28, 2000.

CRS-12

weapons would have to be replaced to maintain a modernized force of a given size)

and also of the cumulative cost of the Pentagon’s actual weapons plans.12 These

assessments have been much less alarmist than the CSIS “train wreck” scenario.

CBO’s initial “steady state” studies found a shortfall, but not of the magnitude CSIS

projected. CBO’s most recent affordability studies, however, have warned against

a potentially substantial “cost risk” if program costs grow above what the services

have been projecting.

Now it appears that the future “cost risk” that CBO warned against is becoming

an imminent threat. Cost growth in major weapons programs has become so endemic

and so severe that it may be producing, if not a train wreck, then, perhaps, a ship

wreck. A key issue in Congress this year is “Whatever happened to the shipbuilding

budget?” The Navy’s FY2006 shipbuilding plan calls for constructing just four new

ships, two fewer that the Navy planned for the FY2006 budget last year, and far short

of the 8-9 ships per year that the Navy has said are needed to preserve the current size

of the fleet in the long term.13

Navy plans have also been revised to procure fewer ships over the following

five years. A Defense Department budget decision in December 2004, called

“Program Budget Decision 753” or PBD-753, reduced the planned procurement rate

of DD(X) destroyers from two per year to one, cut planned submarine production

from three boats every two years to one per year, eliminated funds for an amphibious

ship from the FY2008 plan, and delayed by one year planned funding for a new

aircraft carrier.

Navy officials have said that cost growth in Navy shipbuilding is at the root of

the problem. In testimony before the Senate Armed Services Committee on February

10, 2005, the outgoing Chief of Naval Operations, Admiral Vernon Clark, said that

costs of the major types of ships had grown by as much as 400% beyond inflation

over the past thirty years, that greater capabilities explain only part of the increase,

that so few ships are being built that overhead costs are spread too narrowly, and that

the Navy cannot afford more than 250 ships in the long run unless costs are brought

under control.14 In his prepared statement for the hearing, Admiral Clark said:

12

The most recent reports are Congressional Budget Office, The Long-Term Implications

of Current Defense Plans: Detailed Update for Fiscal Year 2005, September 2004, and

Congressional Budget Office, The Long-Term Implications of Current Defense Plans:

Summary Update for Fiscal Year 2005, September 2004.

13

The math is straightforward. Assuming an average service life of 35 years for each ship,

a Navy of 300 ships requires building 300 ÷ 35 = 8.6 ships per year on average. Recently

the Navy responded to a congressionally mandated requirement that it provide an estimate

of long-term ship building requirements with a report that showed two alternatives, one with

260 ships in 2035 and one with 325 ships. See Department of the Navy, “An Interim Report

to Congress on Annual Long-Range Plan for the Construction of Naval Vessels for

FY2006,” March 2005.

14

Scott Nance, “Clark Calls for Reform in Shipbuilding Practice,” Defense Today, February

11, 2005. For an overview of recent cost growth in Navy shipbuilding, see Government

Accountability Office, Defense Acquisitions: Actions Can Be Taken to Reduce Cost Growth

(continued...)

CRS-13

Among the greatest risks we face is the spiraling cost of procurement for modern

military systems, and shipbuilding is no exception. When adjusted for inflation,

for example, the real cost increase in every class of ship that we have bought

since I was an Ensign, United States Navy, has been truly incredible. It becomes

more so when taken in comparison to other capital goods like automobiles, where

the inflation-adjusted cost growth has been relatively flat over the same period

of time. Shipbuilding cost increases have grown beyond our ability to control as

compared to decades prior. As we seek greater combat capability and greater

operational efficiencies through upgraded power, propulsion, and computing

technologies, we find a ratio of cost growth beyond our seeming control, which

may not be fully explainable solely by reduced economies of scale.15

In recent years, the pace of growth in shipbuilding costs has not abated. For the

past several years, the Navy has requested additional appropriations to cover cost

growth in ships already under construction. In the FY2006 budget, the Navy is

requesting $394.5 million for “Completion of Prior Year Shipbuilding Programs,”

and the Navy’s long-term program includes and additional $449.8 million in FY2007

and $502.5 million for cost growth. Moreover, the Navy is now beginning to

reestimate future shipbuilding costs in light of recent experience. The President of

Northrop Gumman’s Newport News shipbuilding division recently acknowledged

that the CVN-21, the next-generation carrier, will likely cost more $13 billion,

compared to last year’s estimate of $11.7 billion.16 And Navy officials are beginning

to increase estimates of DD(X) destroyer costs substantially. As recently as 2003, the

Navy estimated costs of $1.5-1.8 billion per ship after the initial design models of the

ship were built, but more recently has said $2.2-2.6 billion. Now it appears the cost

of later ships in the production run could exceed $3 billion each.17

PBD-753 made cuts in a number of other major acquisition programs as well,

notably, terminating F/A-22 fighter production after FY2008, terminating C-130J

cargo aircraft production after FY2006, cutting $5 billion over the six year FY2006FY2011 period from missile defense, and trimming funds for a number of satellite

programs.

The fate of the F/A-22 may be an object lesson. Originally, as the aircraft was

being developed in the late 1980s, the Air Force planned to buy 750 aircraft as

replacements for 1970s-era F-15s. When the Defense Department formally decided

to begin engineering development in 1990, the program timeline was delayed by two

years and the plan was for 648 aircraft. The Clinton Administration’s 1993 BottomUp Review of post-Cold War requirements reduced the planned total to 442 aircraft,

14

(...continued)

in Navy Shipbuilding Programs, GAO-05-183, February 28.

15

See Statement of Admiral Vernon Clark, USN, Chief of Naval Operations, Before the

Senate Armed Services Committee,10 February 2005, pp. 20-21, available online at

[http://armed-services.senate.gov/statemnt/2005/February/Clark%2002-10-05.pdf].

16

Dave Ahearn, “Northrop Aide Urges Splitting Ships Funding; Killing Subs Yard Costly,”

Defense Today, March 10. 2005.

17

See CRS Report RL32109, Navy DD(X), CG(X), and LCS Ship Acquisition Programs:

Oversight Issues and Options for Congress, by Ronald O’Rourke.

CRS-14

enough for four deployable wings of 72 aircraft each, with spare aircraft for training,

maintenance, and replacement reserves.

Subsequently, projected program costs grew, procurement plans were delayed

and trimmed further, Congress imposed a ceiling on total production costs, costs

grew yet again, and the planned total production run was further reduced. By 2004,

the total planned procurement was reduced to 279 aircraft, about one-third of the

original plan, to fit within the cost cap, though the Air Force still wanted more than

330 to equip three deployable wings. The initial Air Force development estimates

in 1990 projected a total program unit cost of $93 million per aircraft in FY1990

prices, or about $140 million in FY2006 prices. In the end, the spiral of cost

increases, production cuts, and further unit cost increases had pushed the price up to

over $300 million per aircraft in FY2006 dollars. Now the Defense Department,

against the wishes of the Air Force, has decided to halt production after building

about 180 airplanes.18

Cost growth has also been severe in many other programs, including,

18

!

Air Force/Navy/Marine Corps F-35 Joint Strike Fighter: Official

DOD estimates of JSF costs, provided to Congress in quarterly

Selected Acquisition Reports, grew by $45 billion, from $199.7

billion in the September 30, 2003 estimates, to $244.8 billion in the

December 31, 2003 estimates, in current year dollars, not adjusted

for inflation, a 23% increase.

!

Space launch systems: Over the same period projected Air Force

Evolved Expendable Launch Vehicle (EELV) program costs grew

by $11.6 billion, from $20.8 billion to $32.3 billion, a 56% increase.

!

Space-Based Infrared System-High (SBIRS-High), Space Tracking

and Surveillance System (STSS) (formerly called the Spaced-Based

Infrared System-Low (SBIRS-Low)), and Airborne Laser (ABL)

programs: The SBIRS-High, an Air Force-run program to develop

a new missile launch detection and tracking satellite that would be

tied into a national missile defense, has more than doubled in cost

since 1995 to over $8 billion, including a $2 billion estimate

increase in 2001, and it still appears to be experiencing delays and

cost growth. Last year, the Air Force confirmed reports that the cost

would grow by another $1 billion and that satellite launches would

be delayed another two years. There have been similar, though less

severe delays and cost growth in the Missile Defense Agency-run

STSS program to develop a low-earth-orbit missile tracking satellite,

though costs are now classified. And the Air Force-run, Missile

See CRS Report RL31673, F/A-22 Raptor, by (name redacted), available online at

[http://www.congress.gov/erp/rl/html/RL31673.html].

For initial and current cost

estimates, see Department of Defense, “Selected Acquisition Report Summary Tables,” as

of September 30, 2004, available online at [http://www.acq.osd.mil/ara/am/sar/2004-SeptSST.pdf].

CRS-15

Defense Agency-funded Airborne Laser program has been delayed

and has suffered enough cost growth that the Air Force has decided

to use available R&D funds for one rather than two aircraft.

!

The Army Future Combat System (FCS): The FCS program remains

at a very early stage of development, with several differing design

alternatives still under consideration. Until last year, production was

planned to begin in 2008 with an initial operational capability in

2010. In an April 2004 report, GAO found that 3/4 of the necessary

technologies for the system were immature when the program started

and that prototypes would not be available for testing until shortly

before production was planned.19 Subsequently, the Army

announced a major restructuring of the program which will delay

major components for at least two years and increase total program

costs by $25 to $30 billion.20 A year ago, estimated procurement

costs (not including R&D) were estimated at $92 billion. Recently,

Army officials said that procurement could total as much as $145

billion, not including $25 billion for an associated communications

system.21

Taken together, constraints on future amounts of funding for procurement and

for R&D, plus widespread, substantial cost growth in major weapons programs,22

draw into question the viability of long-term service weapons acquisition plans. The

program cuts imposed in PBD-753 in December may very well turn out to be only

the first in a number of fairly substantial changes needed to keep acquisition costs

within bounds.

What Are the Implications of Changes in Military

Strategy for Budget Priorities?

A final long-term question is how changes in the international environment —

and in U.S. perceptions of it — will affect defense budget priorities. Currently, the

Defense Department is engaged in a congressionally-mandated “Quadrennial Defense

Review” (QDR), which is required to be completed no later than February 2006, but

which may well be reported before then. This QDR is the fifth such reassessment of

U.S. defense policy in the post-Cold War era — the others were the “Base Force”

19

U.S. Government Accountability Office, Defense Acquisitions: The Army’s Future

Combat Systems’ Features, Risks, and Alternatives, GAO-04-635T, April 1, 2004.

20

Jonathan Karp and Greg Jaffe, “Army Plans To Postpone Modernization Program:

Boeing-Led Development Of Technology Will Require At Least Two More Years,” Wall

Street Journal, July 14, 2004.

21

See Tim Weiner, “An Army Program To Build A High-Tech Force Hits Cost Snags,” New

York Times, March 28, 2005, p. 1.

22

For a similar assessment, see Government Accountability Office, Defense Acquisitions:

Assessments of Selected Major Weapons Programs, GAO-05-301, March 31,2005, available

online at [http://www.gao.gov/cgi-bin/getrpt?GAO-05-301].

CRS-16

analysis of 1990, the Clinton Administration’s “Bottom-Up Review” of 1993, and

two previous QDRs in 1997 and 2001.

While the 2001 QDR was released after the terrorist attacks of September 11,

2001 — specifically on September 30 — it was prepared very early in the Bush

Administration, and it did not reflect the full weight of developments in the post-9/11

period. Significantly, it also preceded the Bush Administration’s first statement of

the “National Security Strategy of the United States,” which the White House issued

in September 2002,23 and which, among other things, called for the United States to

act preemptively to prevent potentially unacceptable threats to U.S. security from

arising. And, of course, it preceded the wars in Afghanistan and Iraq.

So the 2005-2006 QDR will be the first to reflect fully the lessons the Defense

Department has drawn from its post-9/11 experiences. And it will be the first to

reflect, as well, the full imprint of changes in Pentagon organization and procedures

that have been instituted under Secretary of Defense Donald Rumsfeld.

Perhaps the key issue in the QDR is to what extent Defense Department

priorities may be reshaped in view of new assessments of long term challenges to

U.S. security. Over the past year-and-a-half or so, senior defense officials have laid

out what they call a new “strategic framework” that identifies “four challenges” to

U.S. security.24 Priorities among the four challenges in turn, are based on the

likelihood that threats will appear and on the perceived vulnerability of the United

States to such dangers.

!

“Traditional” challenges from regional competitors like Iraq under

Saddam are seen as unlikely and U.S. forces are seen as fully

capable of coping with them, so vulnerability is low.

!

“Irregular” challenges of unconventional warfare are highly likely,

but the vulnerability of the U.S. homeland is seen as low.

23

The White House, National Security Strategy of the United States of America

(Washington, September 2002). Available online at [http://www.whitehouse.gov/nsc/

nss.pdf].

24

The “four challenges” framework was first briefly mentioned publicly in March 2004 in

a congressionally mandated report on base closures, entitled, “Report Required by Section

2912 of the Defense Base Closure and Realignment Act of 1990, as Amended through the

National Defense Authorization Act for Fiscal Year 2003” (March 2004), available online

at [http://www.defenselink.mil/brac/docs/04_0_body032403.pdf]. The framework was later

discussed in May 2004 in Joint Chiefs of Staff, The National Military Strategy of the United

States of America (May 2004), available online at [http://www.oft.osd.mil/library/library_files/

document_377_National%20Military%20Strategy%2013%20May%2004.pdf]. The fullest

discussion is in a briefing for the Department of Defense “Senior Level Review Group,”

entitled “A Framework for Strategic Thinking,” (August 2004), not released publicly by the

Defense Department and restricted as “For Official Use Only,” but available online at

[http://www.fas.org/irp/agency/dod/framework.pdf]. The briefing was first discussed in

Thomas E. Ricks, “Shift from Traditional War Seen at Pentagon,” Washington Post,

September 3, 2004, p. 1.

CRS-17

!

“Disruptive” threats from a future global peer or near-peer

competitor that would attack U.S. military advantages — through,

for example, attacks on satellites or cyberwarfare — are seen as

unlikely, but vulnerability is seen as high.

!

And “catastrophic” threats from states or non-state actors with

weapons of mass destruction are seen as likely and U.S. vulnerability

as high.

It is possible to read into this list of priorities some far-reaching implications for

future U.S. defense programs. The F/A-22 and the Navy ships that the Pentagon cut

from its plan in December, 2004, for example, might well be classified as forces for

traditional challenges. An obvious question, then, is whether the reductions imposed

by PBD-753 are harbingers of deeper contractions in major programs yet to come.

For their part, Navy officials have said that they are redesigning forces to be more

relevant to future challenges, so conflict in the littorals (i.e., in coastal areas) and the

concept of sea-basing of forces to project power ashore are being emphasized.25

Army officials, similarly, have cast the current wholesale reorganization of the Army

as an attempt to make the Army more deployable in order cope with irregular threats

that, in DOD’s view, are highly likely.26 It remains to be seen, however, how

disruptive and catastrophic challenges will be reflected in future budget trade-offs.

Meanwhile, in Congress and elsewhere, China’s potential to pose a military

challenge to the United States has become a matter of increasing discussion,

particularly since China passed an anti-secession law threatening military action if

Taiwan declares independence.27 Recent assessments from the Defense Department28

and the intelligence community29 have stressed Chinese investments in military

capabilities, including air and naval forces, that might challenge U.S. naval

predominance in East Asia.30 A potential future threat from China may be cited as

a rationale for more and more substantial shares of U.S. defense budgets

25

John T. Bennett, “Clark: QDR Likely Will Endorse Shift in How Navy Designs New

Ships,” Inside the Pentagon, January 13, 2005.

26

Jen DiMascio, “Chief Cites Modularity, Balancing and Stabilizing Force as Focal Points,”

Inside the Army, January 17, 2005.

27

See, for example, Jim Yardley and Thom Shanker, “Chinese Navy Buildup Gives

Pentagon New Worries,” New York Times, April 8, 2005

28

Department of Defense, Chinese Military Power, May 2004, available online at

[http://www.defenselink.mil/pubs/d20040528PRC.pdf].

29

National Intelligence Council, Mapping the Global Future, December 2004, available

online at [http://www.cia.gov/nic/NIC_globaltrend2020.html].

30

For an independent assessment, see Harold Brown, Joseph W. Prueher, and Adam Segal,

Chinese Military Power, Council on Foreign Relations Independent Task Force Report,

May, 2003, available online at [http://www.cfr.org/pdf/China_TF.pdf].

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