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Psst, Congress: You Don’t Really Know Sequestration’s Bite

Posted by Mackenzie Eaglen on

uscapitol2After four months, we still know precious little about how sequestration — or automatic budget cuts in the name of debt reduction — is being implemented or what Pentagon priorities are most affected. But one important detail has become clear after the Pentagon recently released two reports. Leaders are trying to navigate near-term fiscal uncertainty, as well as blunt the hard-edged impact of sequester’s blind mechanism for cutting, by applying reductions against both 2013 funding and unobligated balances (money that Congress appropriated but the Pentagon has not spent).

The Pentagon comptroller recently released a report that detailed the impact of sequestration at the program, project and activity level as required by the Budget Control Act. It provides the most specific information yet regarding the impact of sequestration for hundreds of military procurement programs. While the report is not comprehensive (it fails to demonstrate how reductions will impact the eventual number of units procured in a particular program, for example), it provides a valuable glimpse into Pentagon planning and prioritizing — an effort heretofore thought impossible under sequestration.

Pentagon leaders are avoiding the so-called “peanut butter” or “meat axe” method of cutting by using unobligated balances, in select cases, to essentially pay down sequestration-required cuts instead of taking the hit out of 2013 funding. Some accounts, such as Army “other procurement” and Air Force “missile procurement,” for example, were spared from sequestration entirely or in large part. They have been deemed “winners” in various press reports as a result.

Under sequestration, the service’s procurement accounts are facing hefty but seemingly manageable reductions. Army procurement accounts face about a 4.4 percent reduction, while Navy procurement will see a 7.7 percent reduction and Air Force procurement a 7 percent drop.

These reductions illuminate a piece of sequestration’s impact, but they do not tell the whole budget story.

A senior Pentagon official explained in a recent Inside Defense article that the Pentagon is also employing a budgetary procedure known as “crediting” that uses reductions in the 2013 appropriations bill in lieu of sequestration cuts to select accounts. For instance, Army “other procurement” was funded at about $9.5 billion in 2012. Under final 2013 appropriations, this account was reduced to roughly $6.9 billion — a 27 percent cut. Since this reduction exceeded the amount that the account would have paid under the sequester, the Pentagon credited this reduction against the account’s bill and did not apply any additional sequestration cuts.

What this means is that there are, in effect, two baselines from which defense cuts are being applied in fiscal year 2013. The first baseline was created on March 1, when sequestration went into effect. This resulted from funding levels established by the Continuing Resolution that governed federal spending at the time. When Congress passed a 2013 defense appropriations bill at the end of March, it created a second baseline.

For most programs, the Pentagon’s June sequester report calculated a percentage reduction according to final 2013 appropriations (counting a number of smaller modifications, rescissions and reductions) and, in certain cases, existing unobligated balances. Many reports have been focused on this set of reductions, or those made against 2013 appropriations.

Lost in the analysis has been the first baseline. Accounts that seemingly “won” under sequestration were actually often big “losers” so to speak in the 2013 appropriations process relative to their funding levels under the CR, which was based on 2012 spending.

Examining sequestration casualties without an eye toward the bigger budget picture often tells only half the story. If sequestration-related budget adjustments are the trees, many seem to be missing the budget forest in front of them.

Take again the Army, for example, which is viewed by some as a relative winner under sequestration compared to the other military departments. Its 2012 total obligational authority for procurement was $24.1 billion. In 2013, the service procurement budget dropped to about $20.5 billion — a reduction of over $3.6 billion, or 15 percent. If you then combine that cut from 2012 funding levels with its 4.4 percent procurement hit under sequestration, it becomes clear the Army is far from a budget winner.

Similarly, there is more than meets the eye when examining Air Force sequestration cuts. While the service is facing a 7 percent cut to procurement as a result of sequestration, the Air Force had already lost over four billion in these same dollars between 2012 and 2013; a 10 percent reduction.

Conversely, while the Navy faced the largest sequestration procurement cuts — 7.7 percent of its total available funding — its procurement budget only declined by about 4 percent between 2012 and 2013, making it the only service procurement budget to decline by less than double digits.

To be fair, at least part of the discrepancy between 2012 funding and 2013 funding is due to adjustments made to bring spending more in line with the priorities contained in the president’s 2013 defense budget request. For instance, although Army procurement was cut by about 15 percent in 2013 compared to 2012 levels, President Obama requested a cut of nearly 5 percent to this account in his budget request this year. So while Army procurement was cut disproportionately more than the other services, at least some of this seems to have mirrored the Pentagon’s preferences. And when examining both Navy procurement accounts and total funding, the service received more in 2013 than the Pentagon originally requested even as the topline was reduced.

The fact remains however, that even if some of the reductions made in 2013 overlapped with Pentagon plans or desires, the year-over-year reductions in 2013 often exceed sequestration amounts.

Congress should examine sequestration cuts as part of a total budget picture rather than single or isolated cases.

There are still many unanswered questions surrounding the implementation of sequestration. How will it be carried out in fiscal year 2014 after the Pentagon has already played the bulk of its unobligated funding card? With much of that money expected to be used up in 2013, the Pentagon will lack a fiscal cushion as it faces more automatic budget cuts.

As policymakers consider sequestration’s many effects, foremost in their minds should be the simple fact that 2013 cuts are exceeding what Pentagon leaders have laid out. Coming to grips with the twin baselines is a necessary step toward understanding sequestration. It is hard to see Congress acting to change or overturn the law unless they really understand its effects.

Charles Morrison, a research assistant at the American Enterprise Institute, co-authored this piece with Mackenzie Eaglen, a member of the Breaking Defense Board of Contributors.

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