Summary

Enacted on August 1, 2011, the Budget Control Act (BCA) as amended (P.L. 112-75, P.L. 112-240, P.L. 113-67) sets limits on defense spending between FY2012 and FY2021 that are playing a significant role in the debate about the appropriate level of defense spending. Each year, if Congress enacts a spending level that exceeds BCA caps for the defense base budget, the President is required to sequester or levy across-the-board cuts to each type of defense spending to meet the BCA caps. These spending levels are sometimes referred to as revised or "sequester" caps. War-designated funding (for "Overseas Contingency Operations") is not subject to BCA caps.

Under these limits, national defense spending decreased from the $578 billion requested in the FY2012 President's Budget to $553 billion in FY2012 and $518 billion in FY2013, including a sequester. In the next two years, Congress complied with revised BCA caps, providing $521 billion in FY2014 and the same amount in FY2015, thus basically setting a nominal freeze in spending for three years (without an increase to cover inflation). At the FY2015 low point of the BCA path, defense spending would be equivalent in real terms (the same purchasing power) to the level between FY2007 and FY2008 and would be somewhat below the recent FY2010 high point.

For FY2016, the BCA caps for defense are slated to rise from $521 billion to $523 billion, a continuation of the nominal freeze for the base budget. In FY2016, the President requested funding of $561 billion, $38 billion above the BCA defense cap. To the extent that FY2016 enacted appropriations for defense exceed this cap, a sequester will be triggered, requiring largely across-the-board decreases under current law.

Following the nominal freeze, BCA caps provide annual increases in defense spending starting in FY2017 that average $13 billion, rising from $523 billion in FY2016 to $644 billion by FY2021, the last year of the BCA caps. These increases would provide sufficient funds to more than offset the effects of inflation, setting defense spending at about .005% real growth each year through FY2021.

The current debate in Congress has centered on whether to (1) adjust the BCA defense caps upward; (2) move base budget spending to accounts designated for Overseas Contingency Operations (OCO) that are not subject to spending limits; (3) reduce the defense spending in the Administration's request to comply with BCA revised caps; or (4) use some combination of these approaches, all in order to avoid a sequester. While DOD and other policymakers contend that BCA caps could make it difficult to meet future threats, other policymakers argue that defense spending could be reduced to comply with the caps and still provide DOD with the necessary capabilities.

The recently passed conference version of the FY2016 budget resolution would meet sequester caps by transferring $38 billion from the defense base budget request to accounts designated for Overseas Contingency Operations that are exempt from the caps. This approach has been characterized as budget gimmickry and has reignited debate about whether war funding is a "slush fund." The House-passed version (H.R. 1735) of the FY20166 National Defense Authorization Act (NDAA) moves $38.2 billion in Operation and Maintenance (O&M) funds requested in the base budget request to funds to be designated as OCO, and the Senate-reported version moves $39.0 billion in the same fashion. The Administration signaled that the President's advisors will recommend a veto of both H.R. 1735 and S. 1376 in part because of these transfers, which are characterized as risking "undermining a mechanism meant to fund incremental costs of overseas conflicts and fails to provide a stable, multi-year budget on which defense planning is based."

The FY2016 House-passed Defense Appropriations bill (H.R. 2685, H.Rept. 114-139), passed on June 11, 2015, and the Senate-reported bill (S. 1558, S.Rept. 114-63) both move $37.5 billion from the base request to OCO-designated accounts in Title IX. In statements of Administration Policy on both H.R. 2685 and S. 1558, OMB Director, Shaun Donovan, states that the President's senior advisors would recommend a veto of these bills for the transfer as well as other reasons, as well as recommending a veto of "any other legislation that implements the current Republican budget framework, which blocks the investments needed for our economy to compete in the future."

This raises the possibility that all appropriations bills could face a veto prospect. The Senate was unable to bring up its DOD appropriations bill earlier in July, and discussion is ongoing about the need for a budget deal that would raise BCA caps with offsetting reductions elsewhere. If a deal is not reached, the prospect arises of a continuing resolution and possible government shutdown in October when the fiscal year begins.

To count as OCO and be exempt from BCA caps, individual accounts in appropriations bills must include an OCO designation and the President must designate such funds as OCO after enactment. It is not clear whether the Administration would do that. The recently reported FY2016 Defense Appropriations bill (unnumbered) also moves $38.3 billion from the base request to OCO-designated accounts.

Since enactment, both Congress and the Administration have adapted to the BCA caps. While Congress has raised the caps in the near term to ease DOD's adjustment, it has left intact caps in later years. The Administration has made substantial adjustments to BCA limits by reducing its defense budget plans, shrinking the savings required to meet BCA caps for the decade from $1.0 trillion in savings to $180 billion.

With four of the ten years of the BCA limits completed, the gap between the FY2016 Administration plan for total defense spending and BCA limits now in effect has narrowed. Over three-quarters of the savings needed are already incorporated in current Administration plans as of the FY2016 budget. To close this gap for the six remaining BCA years, Congress would have to reduce the Administration's FY2016 plan by an average of 5% instead of the 16% originally required.

There are a variety of savings approaches that DOD could take to adapt to BCA spending limits, such as:

• temporary cuts (as were typical of the FY2013 sequester);
• recurring savings from force structure decreases or compensation restraints: both would contribute enduring savings; and
• efficiency savings that reduce the cost of carrying out various programs and activities.

In a report to Congress last year, DOD outlined how it would meet the 4% cut of $115 billion in BCA cuts for FY2015-FY2019, its planning horizon at the time. DOD's plan would rely heavily on cuts to its modernization programs, and would make significant cuts to service readiness programs. In adapting to the BCA, DOD faces uncertainties in its future projections of cost, exacerbated by long-term trends in rising costs per troop that it is beginning to reverse.

Defense Spending Limits and the Budget Control Act (BCA)

Enacted August 2, 2011, the Budget Control Act (BCA, P.L. 112-25) sets limits for National Defense spending for each year from FY2012-FY2021 that applies to the base budget. War spending—designated by both Congress and the President as for "emergencies" or for "Overseas Contingency Operations" (OCO)—is essentially exempt from these caps.¹

Since enactment, the appropriateness and potential effects of the BCA spending caps on defense spending have generated a vigorous debate. Passed by strong majorities in both houses—269-161 in the House and 74-26 in the Senate—the spending limits reflected concerns about increases in the federal deficit.²

In return for a $2.1 trillion increase in the debt limit, the BCA reduced the Congressional Budget Office (CBO) baseline for total discretionary spending by the same amount by setting annual limits for FY2012-FY2021 that, if necessary, would be enforced by a sequester. The decrease to the deficit focused almost entirely on the discretionary spending that is appropriated annually and makes up about one-third of total federal spending; the two-thirds of the budget for direct or mandatory spending, primarily for entitlement programs like Social Security and Medicare, was not affected.

To achieve the $2.1 trillion in required savings, the Budget Control Act set "initial caps" that would reduce discretionary spending by $1.0 trillion over the ten-year decade, FY2012-FY2021—with half for defense and half for nondefense. A second tranche of savings was to be based on a plan to be developed by the congressionally established, bipartisan, Joint Committee on Deficit Reduction (or Super Committee).

When that committee was unable to develop a plan to ensure these savings, the BCA provided that a second set of "revised caps" or "Joint Committee limits" would go into effect for National Defense, budget function 050 that is comprised primarily of the Department of Defense or DOD (budget function 051) and "nondefense" or all other discretionary programs. For FY2013, the Act required that the President order a sequester to reduce the enacted level for defense by the amount specified.³ Under a sequester, OMB calculates the pro rata percentage cut to each type of spending or program that is necessary to reach the BCA limit and cancels that budget authority.⁴ (For more detail, see Appendix A.)

After FY2013, a sequester is required only to the extent that annual enacted appropriations breach or exceed separate defense and nondefense "revised caps" or "limits" set in the BCA. The breach would be eliminated by the sequester. Some commentators refer to these limits as "sequester" caps, presumably because spending above these levels would trigger a sequester (for more detail, see Appendix A).

The President's request for FY2016 exceeds the BCA cap by $38 billion. If Congress were to enact that amount, a sequester would be triggered. Congress is currently debating its response, which could range from raising the caps themselves with new statutory language, to cutting defense spending to comply with the cap, to designating base budget spending as Overseas Contingency Operations (OCO) to avoid breaching the caps. S.Con.Res. 11, the FY2016 budget resolution, H.R. 1375, House-passed FY2016 National Defense Authorization Act (NDAA), S. 1376, the Senate-reported NDAA all propose moving and designating $38 billion in funds requested in the base budget as for OCO so as to avoid a sequester. To be exempt from BCA caps, funds must be designated as OCO in both appropriations act language and by the President after enactment.⁵

The President has signaled that his advisors would recommend a veto of either H.R. 1375 or S. 1376 in part because of this reliance on transferring base funds to OCO, which is characterized as "undermining a mechanism meant to fund incremental costs of overseas conflicts and fails to provide a stable, multi-year budget on which defense planning is based. . . [and] ignores the long-term connection between national security and economic security and fails to account for vital national security functions carried out at non-defense agencies."⁶

This report uses the terms "BCA revised limits" or "BCA caps" to refer to the BCA caps as amended by the American Taxpayer Relief Act (ATRA, P.L. 112-240) and the Bipartisan Budget Act (BBA, P.L. 113-67) that Congress must meet to avoid a sequester.⁷ Unless indicated otherwise, all figures are budget authority (BA) for the defense base budget, which excludes funds designated as emergency or for OCO that are not subject to BCA caps.

In testimony by defense spokesmen, these BCA spending limits or revised caps are often used to refer to two different dilemmas faced by Congress:

• reducing defense spending to ensure compliance with BCA caps to avoid an across-the-board reductions; or
• facing the potential effects of a sequester itself on the defense programs and activities if Congress does not meet the limits.

Congress could respond to the current, statutory FY2016 defense spending caps with various approaches, including:

• transferring funds from DOD's base budget to OCO-designated accounts that are not subject to caps, as proposed in the conference version of S.Con.Res. 11, the FY2016 budget resolution;
• reducing the President's request by $38 billion or 5.6% through targeted cuts in order to comply with BCA limits;
• enacting some targeted cuts and relying on a small (1-2%, for example), sequester to comply with BCA caps;
• enacting the request and relying entirely on an across-the-board sequester to meet BCA spending limits; or
• raising current defense and nondefense caps by some amount and complying with those caps.

To help frame these choices about how to respond to the BCA revised or "sequester" caps on defense spending, this report

• explains congressional adjustments of the caps and Administration reactions;
• describes the Administration's position and DOD concerns;
• analyzes defense spending levels in the FY2016 annual budget resolution;
• places BCA caps in historical perspective;
• outlines different types of savings that could help comply with the caps;
• analyzes DOD's current plan for compliance, and
• describes budget uncertainties faced by DOD in responding to spending limits.

BCA caps are set in terms of National Defense (budget function 050), of which DOD constitutes about 95%.⁸ The story for DOD (budget function 051) follows the same lines as for National defense. The discussion below focuses on National Defense; later sections focus on DOD, which is the center of the defense spending debate.

Between FY2012 and FY2015, the gap between the Administration's defense spending plans and the BCA spending limits narrowed. Based on CBO's estimate, the original BCA limits required a reduction to National Defense spending for the decade by about 14% or $860 billion compared to continuing the FY2011 enacted level in real terms (steady-state spending with an adjustment for inflation).⁹ CBO and OMB generally compare budget requests to a "current services" baseline that reflects the prior year's enacted level plus an adjustment for inflation.¹⁰

Compared to the President's FY2012 budget plan submitted before passage of the BCA, BCA caps would reduce defense spending for the base budget by $1.0 trillion or about 16%. This gap is greater because the Administration's FY2012 ten-year plan incorporated an annual average of just below 1% growth for defense that was to be concentrated in the first three years.¹¹

By the FY2016 request, the savings gap—compared to the Administration's ten-year plan—had shrunk from 16% to 5%. This change resulted from a combination of raising caps in the American Taxpayer Relief Act (ATRA, P.L. 112-240) and the Bipartisan Budget Act (BBA, P.L. 113-67) and Administration decisions to submit lower defense budget plans. These actions

• raised the spending limits for FY2013, FY2014, and FY2015 easing the year-to-year cuts required; and
• reducing the savings needed by lowering defense spending plans in successive budgets between FY2012 and FY2015.

While the adjustments in ATRA and BBA were significant in the near term, the reductions themselves were modest for the decade, requiring $54 billion, or 1% less savings. The original $1.0 trillion in defense savings needed compared to the FY2012 President's budget plan became $963 billion with these adjustments.¹²

Although ATRA retained the requirement for a sequester in FY2013, it reduced the amount from $54.5 billion for defense to $42.5 billion. At the same time, ATRA softened the scheduled $62 billion cut between FY2012 and FY2013, splitting the reduction over two years rather than one. Instead, ATRA mandated decreases of $36 billion in FY2013 and $20 billion the following year. Congress left later years intact.

Signed by the President on December 26, 2013, the BBA raised the ATRA National Defense caps for FY2014 from $498 billion to $520 billion, a $22 billion increase. For the following year, the BBA raised the earlier ATRA limit from $512 billion to $521 billion, a $9 billion increase. BCA caps remained the same for FY2016 through FY2021.¹³

Together these changes set defense spending at a nominal freeze (without adjustments for inflation) between FY2013 and FY2016. (For more details, see Appendix B.)

While changing BCA caps reduced the gap between the pre-BCA Administration plans by a relatively small amount, the lower defense budget plans submitted by the President narrowed the gap by some $780 billion. These reductions reflect Administration and DOD decisions to reduce force structure, slow modernization plans, propose compensation restraints, delay readiness improvement plans, and adopt various efficiencies (see "DOD's Plan for Complying with BCA Limits").

• The FY2013 budget fell by $519 billion from $6.4 trillion to $5.9 trillion; an additional $497 billion in savings would be needed to comply with caps.
• The FY2014 plan declined by another $93 billion to $5.8 trillion; requiring $372 billion more savings to comply.
• The FY2015 plan decreased by another $188 billion to $5.6 trillion; requiring $185 billion more in savings; and
• The FY2016 budget remained at $5.6 trillion, requiring $185 billion more in savings.¹⁴

By reducing the Administration's request and with the FY2013 sequester required by the BCA, National Defense spending (050) met BCA caps from FY2012 through FY2015, totaling

This year, as in the past three years, President Obama proposed to raise caps for both defense and nondefense and substitute "spending cuts, tax loophole closers, and program integrity measures included in the Budget."¹⁵ Thus far, Congress has shown little interest in such a trade-off.

It is not uncommon for Congress to appropriate 5% less funding than requested by DOD. In the 63 years between FY1950 and FY2012, Congress provided DOD with 5% less than requested in about one-quarter of the years. Smaller reductions of 3% to 5% occurred in 11 years, or another 18%. So over 40% of the time, DOD received appropriations of 3% to 5% below its request.¹⁶

Much of this year's debate on the FY2016 budget resolution focused on how to respond to BCA caps for DOD. This debate about the appropriate level of defense spending in FY2016 and in later years has continued this summer and is likely to continue this fall as Congress considers the National Defense Authorization Act (NDAA), and annual Department of Defense (DOD) and Military Construction/Veterans Affairs appropriations acts.

Both the FY2016 House-passed Defense Appropriations bill (H.R. 2685, H.Rept. 114-139), passed on June 11, 2015, and the Senate-reported bill (S. 1558, S.Rept. 114-63) would move $37.5 billion from the base request to OCO-designated accounts in Title IX to avoid breaching the cap since OCO-designated funds do not count against BCA caps. The House version spreads the transfers of the five titles – military personnel, Operation & Maintenance (O&M), RDT&E and procurement, while the Senate version concentrates transfers among military personnel, O&M and procurement programs.¹⁷

In statements of Administration Policy on both H.R. 2685 and S. 1558, OMB Director, Shaun Donovan, states that the President's senior advisors would recommend a veto of these bills for the transfer as well as other reasons, as well as recommending a veto of "any other legislation that implements the current Republican budget framework, which blocks the investments needed for our economy to compete in the future." This presents the possibility that all appropriations bills could face a veto prospect. The Senate was unable to bring up its DOD appropriations bill earlier in July, and there is discussion of the need for a budget deal that would potentially raise BCA caps in order to avoid a continuing resolution or a possible government shutdown in October when the fiscal year begins if Congress and the President do not reach agreement on spending limits.

The rest of this report analyzes BCA limits for DOD (051), which makes up the bulk of National Defense and is the chief focus of congressional concerns. This report does not address nondefense spending, which is subject to similar spending limits.¹⁸

With the additional $90 billion savings incorporated in the FY2014 DOD plan, the gap between the plan and the BCA as amended shrank to $331 billion over the next eight years of the BCA decade. The savings gap fell from 9.4% to 7.3%. DOD now warned that this change "led to significant ongoing and planned reductions in military modernization, force structure, personnel costs, and overhead expenditures," but that it still complied with the President's strategic guidance.²⁰

In its FY2016 Budget Overview, DOD argued that only the Administration's plan would be adequate to respond to recent geopolitical developments, including the Islamic State offensive, the Ebola virus outbreak, and Russian actions in the Ukraine, and to execute the updated defense strategy - but with somewhat increased levels of risk for some missions. . . [concluding that the] QDR [Quadrennial Defense Review] strategy cannot be executed at sequester-levels of funding.²³ (For more detail, see Appendix C.)

Although Secretary of Defense Ashton Carter recently testified that DOD's planned budget has met over three-quarters of the savings needed to comply with the BCA, DOD now argues that making the remaining reductions would have serious consequences.²⁴ In testimony about potential effects of meeting BCA caps that would require a $36 billion decrease to DOD's request, and further reductions from their plan in later years, DOD witnesses contended that complying with BCA caps would

• jeopardize the military's ability to carry out the national military strategy because of cuts in force structure, and other changes;²⁵
• delay reaching "full-spectrum" readiness, the broader training that prepares troops for large-scale combat operations;
• slow modernization efforts; and
• exacerbate these problems if Congress rejects DOD proposals for compensation and health care reform and other proposals that are incorporated in budget plans.²⁶

During a hearing on the impact of sequestration, Chair of the Senate Armed Services John McCain asked the Service Chiefs whether they would be able to execute the current 2014 Defense Strategic Guidance under "sequestration" or revised BCA caps. Each Service Chief responded "no." The service chiefs did not provide a list of those programs and activities that would be cut as requested by the Chair.²⁷

Each of the witnesses provided some examples of the impact of potential cuts that would be necessary, in their view, to reach BCA caps in FY2016 and later years. In 2014, DOD sent Congress a report about how and where spending would be reduced to comply with caps but did not explain how particular cuts would prevent the military from responding to potential military crises envisioned in the national strategy (see "DOD's Plan for Complying with BCA Limits").

Connecting defense funding levels and the national strategy is complex and depends on how and where reductions are taken. There is a wide range of views on ways to reduce defense spending to meet BCA spending limits and what the impact of those decreases would be (see Appendix D).

This spring's debate about the spending levels for defense in FY2016 and the next decade pitted defense hawks, worried about the effect on defense of reductions necessary to comply with BCA caps, against deficit hawks, concerned about increasing the deficit if BCA constraints are lifted.

As a result of concern over the effect on defense as well as preventing a sequester, the House and Senate budget resolutions (H.Con.Res. 27 and S.Con.Res. 11) both recommended adding a total of $96 billion for Overseas Contingency Operations (OCO), including $89 billion for DOD and $7 billion for State Department/USAID programs.²⁸

This would add $38 billion to DOD's $51 billion war request by designating funds requested in its base budget as being for OCO. Since these additional OCO-designated funds would not count against BCA caps, defense spending would be raised to the level requested without triggering a sequester.²⁹

The conference version of the FY2016 budget resolution on S.Con.Res. 11 adopted this approach, providing $523 billion for the National Defense base budget, complying with BCA caps, and another $96 billion in OCO-designated funding for DOD and the State Department.³⁰ The total for defense was $1 billion above the President's request.

While amounts in the budget resolutions are not binding, the House Appropriations Committees adopted these figures in its 302(b) allocations that govern the markup of individual bills by their subcommittees. The Senate Appropriations Committees has not yet published its 302(b) allocations.³¹

Secretary of Defense Ashton Carter, DOD Comptroller Michael McCord, and the service chiefs all expressed concerns about providing DOD with a one-year increase using OCO-designated funds, saying this approach was not a "sustainable" path, and therefore would not alleviate their concerns.³² A one-time spike, without assurances of longer-term increases, could complicate defense planning. OMB Director Shaun Donovan signaled the President's opposition to this approach, stating that the FY2016 budget resolution would

Damage national security by funding national defense with gimmicks in the near term, short-changing it altogether in the long term, and singling out key non-defense national security programs for deep cuts relative to the President's budget. . . [and] As the Secretary of Defense and the Chairman of the Joint Chiefs have explained, this is both bad budgeting and harmful to military planning.³³

Under budget law, spending is classified as for an "emergency" or OCO if

• Congress includes statutory language designating funds as emergency or OCO in individual accounts; and
• the President subsequently designates the funds, generally in a letter to Congress.³⁴

If Congress and the President designate funds as "emergency" or "OCO" appropriations, then OMB raises BCA limits to accommodate that funding.³⁵ This effectively exempts war funding from the caps. Determining which funds are OCO-related is not necessarily based on particular criteria but rather on whether both the congressional and executive branches have designated the funding that way.

Both OMB and DOD issue budget guidance and regulations with criteria for what qualifies as war-funding that are to be followed by DOD in developing their budgets. Once funding is appropriated with an emergency or OCO-designation by both Congress and the President, the funds are available to be spent regardless of their purpose.

Since the 9/11 attacks, both Congress and the President have designated as emergency or OCO funding items that may not be consistent with guidance, for purposes ranging from childcare centers to reorganizing the Army to funds transferred from DOD's base budget request.³⁶ Amounts designated in defense appropriations acts as "emergency" or "OCO" have ranged from about $2 billion to $12 billion, typically falling in the $6 billion to $8 billion range each year. In FY2014, for example, Congress moved $9.2 billion in O&M funding requested in DOD's base budget to Title IX war funding where it was designated as OCO.³⁷

At the same time as DOD and Congress have been using OCO designations as a "safety valve" for the base budget, some Members have raised concerns that war funding may be a "slush fund" and have proposed stricter controls.³⁸ One sign of a desire to place some constraints on use of the OCO-designation was Section 409 included in the Senate-passed budget resolution (S.Con.Res. 11). Under that section, any Senator could raise a point of order on a provision in a bill, joint resolution, amendment or conference report if the amount for OCO-designated spending exceeded $58.0 billion in FY2016 (the President's request level) or $59.5 billion in FY2017. This provision was dropped in the conference version of the resolution.³⁹

The House-reported version of the FY2016 budget resolution (H.Con.Res. 27), Section 513 also appeared to reflect concerns about broad use of the OCO designation. It set up a "Deficit Neutral Reserve Fund" for OCO and provided that any OCO-designated funds above $73.5 billion and up to $94 billion could be provided only if offsets other than additional revenues were provided. In other words, OCO-designated funding would be capped at $73.5 billion–below the $94 billion in the reported version—unless the additional amounts were offset by reductions in other spending. During floor consideration, the House dropped this provision and added $2 billion to its OCO allocation in order to match the $96 billion included by the Senate.⁴⁰

An alternate approach would be to raise the BCA caps themselves. The conference version of S.Con.Res. 11 included a Senate-proposed provision that would set up a "Deficit Neutral Reserve Funds to Strengthen America's Priorities" that would permit "enhanced funding for national security or domestic discretionary programs provided such funding would not increase the deficit over the period of the total of fiscal years 2016 through 2025."⁴¹ Such increases would have to be "paid for" or offset by higher revenues or decreases in mandatory spending.

Another important role of the FY2016 budget resolution is to set a ten-year path for defense spending for FY2016-FY2025. Compared to the BCA caps applying to the National Defense base budget for FY2016-FY2021,

In the conference version of S.Con.Res. 11, Congress proposes to increase the amount that would be OCO-designated from $231 billion to $380 billion by including annual amounts from FY2016-FY2021, $187 billion above the President's request. OCO-designated funds would exceed the request by

• $38 billion in FY2016 and FY2017,
• $36 billion in FY2018 and $31 billion in FY2018, and
• $23 billion in FY2020 and $21 billion in FY2021.⁴²

While the President recently modified the drawdown of U.S. troops in Afghanistan this year, the goal to reduce to reduce U.S. troops in Afghanistan to an embassy presence of 1,000 by the beginning of 2017 did not change.⁴³ For this reason, war funding is likely to decline in FY2017.

The House-passed version of the FY2016 National Defense Authorization Act (H.R. 1735) also moved $38 billion from the base budget request to funds to be designated as OCO.

The Afghanistan, Iraq and new Islamic State or ISIS (Operation Inherent Resolve) wars have been exclusively funded in supplemental emergency or OCO funds, which are not subject to budget constraints. Some observers, DOD spokesmen among them, have acknowledged that some war funding would more appropriately be part of its base budget.⁴⁵

In recent years, DOD principals, as well as other policymakers, have called for distinguishing base and OCO costs in order to help ensure more realistic choices about the long-term affordability of DOD plans. One important step would be to distinguish temporary war-related costs from long-term, enduring requirements, such as maintaining large numbers of military personnel in the Central Command region that have been funded as war costs. DOD contends that this transition "will not be possible if the sequester-level discretionary spending caps remain in place."⁴⁶

Transitioning longer-term "war" expenses to the base budget may be more difficult under budget caps because it could crowd out other programs. At the same time, war funding, particularly for procurement, has contributed to meeting base budget requirements over the past 14 years, often earlier than planned. For example, the Army used war funding to modernize and upgrade almost its entire armored vehicle fleet sooner than anticipated because of the additional wear and tear of war operations.⁴⁷ For the same reason, depot maintenance of equipment has been carried out earlier than planned. For these types of expenses, DOD's OCO funding may, in fact, help reduce future requirements, reducing pressure on the defense budget.

This role may also reflect DOD's preference for delaying modernization during tight times because it can be reversed fairly easily when more funding becomes more available, rather than cutting force structure, perceived to be more difficult to restore. It may also reflect the relative persistence of funding levels for O&M support activities, perceived to be largely "fixed" costs of running military installations.

While DOD believes that reductions to meet BCA caps would jeopardize its ability to meet the national military strategy, other policymakers and observers have offered alternative perspectives. Many think tanks, CBO, GAO, and other organizations have examined and proposed a wide range of alternate ways to reduce defense spending.

Some proposals reflect different military strategies while others accept the current strategy but propose different force structures. Others propose changes to military compensation, modernization paths, and support activities. Proposals begin from different baselines, rest on different rationales, could have different effects on programs, and provide different types of savings (Appendix D).

While most studies focus on potential programmatic impacts, this report examines the timing, duration, and pros and cons of different types of savings, specifically

• temporary, short-term savings;
• recurring savings that continue and may grow over time;
• savings from delay;
• saving requiring upfront investments;
• efficiencies that reduce implementation costs; and
• across-the-board sequester cuts.

In assessing savings proposals, it's important to identify the baseline against which savings are measured. For DOD, the baseline is its Future Years Defense Program (FYDP) including the budget request plus four years, currently FY2016-FY2020. The President's budget also sets a "defense topline" or annual total for a ten-year period including the request. DOD's budget generally incorporates savings from proposed compensation or other reforms, which may require congressional approval. The section below looks at the characteristics and the advantages and disadvantages of each type of savings.

CBO's steady-state baseline generally projects a spending path that continues the most recently enacted level with an adjustment for inflation so as to provide the same level of resources. With the requirement for "automatic reductions" required by the BCA since FY2013, CBO's baseline now reflects BCA caps.⁴⁸

During the FY2013 sequester, DOD adopted several changes to produce short-term, sometimes temporary savings, with limited effects, and without necessarily changing goals or policies.

According to a GAO assessment, most DOD's sequestration cuts were temporary including:

• furloughing 650,000 civilian employees for six days in order to save $1.2 billion;⁴⁹
• cancelling or shortening unit training for those units not preparing to deploy;
• postponing planned depot maintenance of equipment or repair and non-urgent renovations of facilities;
• reducing or delaying purchases of weapon system or modifications; and
• delaying testing and development of weapon systems.⁵⁰

While some of these decisions—like cancelling training—resulted in lost training opportunities, others—like depot maintenance or repair plans or letting weapon system contracts several months later than planned—did not reflect policy decisions and had temporary effects. For longer-term savings, DOD would need to make explicit decisions about the size of the civilian workforce, the acceptable size of depot maintenance backlogs, or the size or scope of weapon system purchases or R&D programs.

Another source of savings that could prove to be temporary is the current proposal in the conference version of the FY2016 budget resolution (S.Con.Res. 11 as passed by both houses) that transfers base budget funds to OCO as a way to meet BCA spending limits and avoid a sequester. OCO funding is expected to fall because of the President's commitment to reduce U.S. troops in Afghanistan to an "embassy" presence of about 1,000 by the end of 2016.⁵¹ Although the President recently announced a delay of several months in the drawdown from 9,800 troops to 5,000 in FY2015, that change would not affect likely spending in FY2017.⁵²

Although there is no consensus about how long OCO-designated funds may continue, Defense officials have opposed this budget resolution proposal because it gives them no confidence that an increase in FY2016 would be continued in later years. A one-time spike would also be inconsistent with DOD's commitment to gradually "migrate" long-term, war-related costs to its base budget if BCA caps are raised.⁵³

In some ways, recurring savings may be the most beneficial type of savings because expenses are lowered not only initially but in later years, and sometimes build up over time with full implementation. Recurring savings would therefore reduce savings needed in later years.

Reducing annual military pay raises is a good example of recurring savings that decrease costs in the short term as well as in later years. In FY2016, for the third year in a row, DOD proposed to raise military pay by 1.3% rather than the 2.3% that would match the Economic Cost Index (ECI), a labor index that sets pay raises unless adjusted by the President or Congress. DOD estimates that this decision would save $700 million in FY2016 and $4.3 billion for FY2016-FY2020 compared to its previous baseline that assumed ECI increases.⁵⁴

DOD's larger package of compensation recommendations includes other ways to reduce current and long-term costs by

• limiting basic housing allowances;
• reducing the commissary subsidy;
• consolidating TRICARE, DOD's health care system; and
• reforming TRICARE by raising co-pays and requiring an enrollment fee from military retirees for Tricare for Life.

DOD estimates that altogether, these compensation reform proposals would save $1.7 billion in FY2016 and $25.4 billion for the FY2016-FY2020 period. These savings are incorporated in DOD's budget plan and therefore would not provide additional savings to meet the current gap between BCA caps and DOD's FY2016 request.⁵⁵

DOD's proposals are a response to the expansion of military benefits and the awarding of pay raises above the ECI over the past decade. Some observers say that restraint is appropriate at this time because military personnel are currently paid more than 90% of the average pay of civilian employees of comparable age and experience whereas the DOD goal is to match the pay of 70% of equivalent civilians. Another sign that compensation is at least adequate is DOD's success in meeting or exceeding its recruiting and retention goals.⁵⁶ Slimmer pay raises also create permanent savings by lowering the base to which later increases are applied.

The January 2015 recommendations of the Military Compensation and Retirement Modernization Commission (MCRMC) call for revamping military retirement, providing military health care for dependents and retirees through a system like that available to civilian government employees, and changing "Quality of Life" programs like commissaries and childcare.⁵⁷ Because their proposals were released after submission of DOD's budget, these recommendations were not taken into account in the FY2016 DOD request.

The commission estimates that adopting its entire package of proposals would save $4.8 billion in FY2016 and $7.1 billion annually by FY2017, with total savings of $31.8 billion for FY2016-FY2020 (in FY2016 dollars).⁵⁸ If Congress were to adopt the commission's health care proposal, some of DOD's proposals might no longer be relevant, such as changes in co-pays. Other savings, like DOD's proposed TRICARE enrollment fee, are not included in the commission's proposals. To calculate the savings, overlapping savings incorporated in DOD's current budget could be subtracted, and MCRMC savings would be substituted depending on the particular proposals adopted by Congress.

Reductions in force structure—the size of military forces—create recurring savings that build up over time and then continue indefinitely unless reversed. For example, in 2013, the Army decided to draw down its forces by reducing the number of active-duty personnel from 490,000 to 450,000. This action lowers military personnel and Operating and Maintenance (O&M) costs as fewer personnel need to be paid and supported with savings building up as personnel leave and are not replaced. (Most savings estimates do not include potential procurement savings if weapon system and support equipment buys were adjusted to reflect modernizing the equipment of the same portion of the force as originally planned).

Recent Army budgets include but do not identify savings from this 40,000 decrease in the number of active-duty strength that is to be achieved by FY2018. The rationale for the decrease is the change in the President's National Military Strategy, which calls for no longer preparing to conduct long lasting ground wars.⁵⁹

Under the Army's plan, the number of Brigade Combat Teams (BCTs) is slated to fall from 38 in FY2014 to 30 in FY2016.⁶⁰ A CBO report estimates that annual savings per BCT could range from $1.2 billion to $1.6 billion in military personnel and O&M funds, depending on the type.⁶¹

Assuming an average of $1.4 billion for the eight brigade combat teams would yield annual recurring savings of $11.2 billion after full implementation. (This estimate does not include potential procurement savings.) While this type of savings has the advantage of contributing to savings needed in later years, some would argue it has the disadvantage of not being quickly reversible. Recent experience during the Afghanistan and Iraq wars has demonstrated that the Army can, in fact, expand fairly quickly if necessary.

Smaller recurring savings would accrue as the services implement DOD's initiative to decrease headquarters costs (military and civilian personnel, contractors, facilities) by 20%, which is expected to save $5 billion over the next five years. The rationale for this type of "efficiency" initiative is that growth in headquarters staffing over the past decade was due primarily to the Afghanistan and Iraq wars, and so could be trimmed as the wars wind down.⁶²

Faced with making reductions, DOD often delays weapon system purchases by "stretching out" programs, purchasing fewer units than planned in the near-term but generally retains the original acquisition objective or total buy. What are the effects of program delays?

Critics argue that lower production rates are inefficient because per unit costs may be higher when production rates are lower. The cost penalty depends on the stage of the program, the size of the reduction, the amount of capacity established, and the potential for making adjustments. Stretch-outs are also criticized for delaying improvements in capabilities and requiring the services to rely on older systems for longer periods. Small decreases in quantity may yield significant savings and at the same time, have limited effects on unit cost or capability.

An often-cited concern, recently voiced by some observers, is that production delays may create a "bow-wave" or put pressure on overall procurement budgets in later years as peak production rates for multiple major weapon systems converge. The likelihood of a "bow-wave" depends on the plans and schedules for other major programs, as well as whether the services adjust long-term acquisition objectives in response to budgetary pressures.⁶³ Production plans often shift over the ten-to-twenty-year acquisition cycles typical of major weapon systems in response to changes in threats, technology, and budget.

A recent example of substantial savings from stretching out plans is the F-35 fighter aircraft program, the largest weapon system program in terms of total cost in DOD history. The program includes three different versions being built for the Air Force, Navy, and Marine Corps. Because of management and technical problems, as well as spending limits, Congress has reduced the size of F-35 purchases in the past four years.

Begun in FY2001, estimated procurement cost is now $338.9 billion (in FY2015$) to buy 2,457 F-35 aircraft over about 40 years—a 50% increase from the original estimate. Projected lifetime operating and sustainment costs would add over $1 trillion to the total program cost.⁶⁴

A recent GAO assessment cites "significant cost and schedule growth, as well as performance shortfalls," due to the program's concurrency where initial production occurs before developmental testing is completed. GAO continues that concurrency can

increase the risk of design changes and cost of retrofits after production has started . . . one practice that has perpetuated the unsatisfactory results that have persisted in acquisitions through the decades.⁶⁵

This assessment, along with program office concerns about software development, engine and aircraft durability, maintainability, and logistics information, has raised the issue of the affordability of the program.⁶⁶

Stretching out the F-35 program, with its multiple technical problems, could be attractive because the additional time could help ensure that problems would be resolved before production is ramped up, avoiding additional costly retrofits. The effects on future capability could be marginal since technical problems would need to be resolved in any case. For other modernization programs with high cost and technical risks, a decision to delay and stretch out production in order to meet spending limits could be perceived as an acceptable risk. The case for savings by delay could differ in cases where production is going smoothly.

The closing of a military installation may offer a good example where eventual savings that persist indefinitely require significant one-time, upfront costs. Shuttering a military installation requires transferring military personnel, disestablishing and moving equipment and activities, remediating environmental contamination, and possibly adjusting facilities elsewhere to receive those activities that continue. Savings result primarily from reducing the number of military and civilian personnel, as well as avoiding the need for upkeep of unnecessary infrastructure.

It may take several years before savings offset such implementation costs. Since 1988, DOD has carried out five rounds of base closures. The first four rounds—in 1988, 1991, 1993 and 1995—were designed to cut excess capacity created by the one-third drawdown in military personnel in response to the end of the Cold War. DOD argued that savings from base closures should be applied to meet other DOD modernization and readiness goals. In contrast, the 2005 round of base closures was intended to consolidate bases in support of transformation. All rounds were to be completed within six years and eventual savings were to exceed implementation costs.⁶⁸

For the fourth year in a row, DOD is pressing Congress to provide statutory authority for another round of base closures, arguing that savings from eliminating an estimated 20% excess capacity due to the ongoing downsizing of forces could be better spent to preserve critical DOD programs.⁶⁹ In its FY2015 budget plan, DOD incorporated a total of $1.67 billion for FY2015-FY2019 to support a FY2017 BRAC round, beginning with less than $10 million a year through FY2017, and then rising to $590 million in FY2018 and $1.0 billion in FY2019.⁷⁰ In its FY2016 request, DOD included $10.5 million in FY2016 for initial studies.⁷¹

Base closures are controversial because of the economic impact on communities, as well as the difficulties in estimating future savings and implementation costs. Based on assessments of experience with the first four rounds—where the rationale was savings rather than other DOD goals—there appears to be fairly firm evidence that net savings can be expected. In 1998, Congress required that DOD report the status of implementation costs and savings for the first four rounds, and that CBO and GAO evaluate that report.⁷²

In its report, DOD found that for the first four rounds, its actual implementation costs was $22 billion, compared to its initial estimate of $23 billion. Based on a new analysis, DOD estimated that savings for the first four rounds were likely to higher than originally estimated: $7.1 billion rather than $5.7 billion annually.⁷³

GAO questioned the accuracy of both DOD's costs and savings estimates. Because of "data and records weaknesses," GAO characterized DOD's estimates as

providing a rough approximation of costs and savings rather than a precise accounting. DOD's data systems do not capture all savings associated with BRAC actions, nor has DOD established a separate system to track BRAC savings.⁷⁴

GAO also questioned the methodology of DOD's new savings estimate as well as DOD's decision to apply savings in later budgets to other purposes, because this made the tracking of savings difficult. GAO was also concerned because it was unclear whether military and civilian positions were eliminated or personnel shifted to other tasks. DOD refers to such savings as "cost avoidance" where new requirements are funded with other savings.

Nevertheless, GAO concluded that

These issues do not negate the fact that DOD can expect substantial savings from BRAC, although they have had some effect on overall savings and, if included in DOD's accounting, would cause some increase in the time required for savings to fully offset costs. ⁷⁵

CBO did not attempt to verify DOD's figures but agreed with GAO that implementation costs could be somewhat higher because not all costs were included.⁷⁶ CBO voiced confidence in DOD's original savings estimate of about $5.0 billion annually (in 1999 dollars) but questioned DOD's new estimate. CBO, like GAO, noted the difficulty in segregating the effect on savings of other actions that affect costs such as changes in workload, or other budget reductions.⁷⁷

Despite weaknesses in DOD's estimates, CBO, like GAO, concluded that DOD's report provides rough but credible estimates of the total recurring savings from past BRAC rounds, the aggregate level of excess capacity in the United States, and the potential savings from future BRAC rounds.⁷⁸

Defense "efficiency" savings are defined in different ways by different organizations, policymakers, and observers. For example, a Stimson Center report counts as "efficiencies" not only cuts to "overhead" or "back-office" functions but also changes to military compensation.⁷⁹ In its Budget Overview, DOD also uses a fairly broad definition, with proposals ranging from reducing management headquarters and enhancing competition for contracts to terminating and restructuring weapon systems.⁸⁰

A CBO report defines "efficiencies" more narrowly as reducing the "cost of operations . . . without eliminating or curtailing activities if more efficient ways of conducting operations could be found."⁸¹ This definition focuses on savings from changing how an activity is carried out without reducing services or benefits provided.

DOD identifies $188.5 billion in "efficiency" savings since enactment of the BCA. According to its tally,

• the FY2013 request included $60 billion in savings through FY2017;
• the FY2014 request included another $35 billion in savings through FY2018;
• the FY2015 request included $93.5 billion in savings through FY2019; and
• the FY2016 request does not identify additional savings.⁸²

DOD's FY2012 request, pre-dating the BCA, included another $178 billion in anticipated savings, of which $100 billion were generated by the services and applied to other programs, and $78 billion was produced by defense agencies and used to meet topline decreases. Unlike later efficiency efforts, DOD identified savings in the budget year and planning period associated with individual initiatives.⁸³ Because these savings were incorporated in DOD's FY2012 budget plan, they would not contribute to meeting BCA caps.

While DOD acknowledges the importance of pursuing efficiencies by "eliminating duplication, reducing management headquarters and overhead, tightening personnel costs, enhancing contract competition, terminating or restructuring weapons programs and consolidating infrastructure" to reduce the 'cost of doing business,'" it emphasizes that "The Department has learned from prior drawdowns that it is impossible to generate all the needed savings just through efficiencies."⁸⁴

Based on DOD's tally of $188 billion in efficiency savings incorporated in its FY2013-FY2016 budgets plans, about 25% of the total decreases in DOD's budget plans to meet BCA caps from FY2012-FY2021 is expected to result from efficiencies. Because DOD has not presented the savings for the budget and future years, it is difficult to identify the effects of these initiatives on budget plans.

Some observers have voiced skepticism about whether anticipated efficiency savings materialize, citing not only the difficulty in tracking savings but also the commitment of military and civilian managers, many of whom focus primarily on DOD's core defense missions.⁸⁵ Acquisition reforms, another type of efficiency savings, such as DOD's "Better Buying Power" initiative, are also notoriously difficult to track because of the multiple factors affecting weapon system costs.

Former Secretary of Defense Donald Rumsfeld testified in June 2001 that DOD, like any "organization in the public or private sector," could "by better management, operate, at least 5% more efficiently if given the freedom to do so," and so save $15 billion annually at that time.⁸⁶ Many other policymakers and think tank studies have estimated similar savings from a wide range of efficiencies (Appendix D).

In evaluating proposed efficiency savings, it would be useful for Congress to receive the following information in annual budget requests:

• estimates of year-by-year savings in both dollars and personnel (military, civilian, or contractor work-years);
• tracking of those savings in previous and later years;
• identification of those responsible for implementation;
• potential obstacles to reaching savings;
• adjustments to savings estimates as a result of experience; and
• programmatic effects.

If Congress is not able to meet BCA caps, in whole or in part, the Defense Department would face largely across-the-board sequestration cuts levied by OMB. Defense officials voiced alarm about the effects of both the funding levels—deemed inadequate—and the sequestration process itself—considered to be indiscriminate. The two issues are often conflated.⁸⁷

It is not unusual for Congress to rely on small 1% to 2% across-the-board cuts to meet budgetary limits.⁸⁸ Sequestration has raised greater concern because of the size of potential cuts. While a small reduction may not appreciably affect programs, a reduction of 5% could make contract plans more difficult to execute or force delays in planned activities. In FY2013, DOD was faced with implementing a $37.2 billion sequester cut that was applied to $527.6 billion in budgetary resources, an average cut of 7.1%. At the same time, DOD had more flexibility than expected in how to apply cuts to particular programs and accounts.

Budgetary law requires that fifteen days after the end of a congressional session OMB issues a final sequestration report based on appropriations enacted at that time, which could be individual, consolidated, or a continuing resolution appropriation act. To the extent that appropriations for defense exceed the BCA revised cap for that fiscal year, the President is required to identify for each account the amount to be sequestered.⁸⁹

Budgetary law requires that the same percentage cut be levied on individual program, projects, and activities (PPAs). For investment programs (procurement and RDT&E), a PPA is defined as an individual program (or program element) as identified in justification materials submitted to Congress. For O&M activities, Congress has defined a PPA at the account level for each active-duty and reserve component, a much broader level. In addition, the President is allowed to exempt Military Personnel accounts entirely.⁹⁰

In the case of defense spending, sequester cuts are applied to "total budgetary resources," which include

• new Budget Authority (BA) for base funding in the current fiscal year,
• new BA for funding designated as Overseas Contingency Operations/Global War on Terror (OCO/GWOT),
• unobligated balances (funds not yet under contract) from prior years for both base and OCO funds, and
• exemptions for military personnel accounts excluded by the President.⁹¹

Faced with the upcoming sequester, then-Deputy Secretary of Defense, Ashton Carter, issued guidance to the services and defense agencies in January 2013. This guidance required DOD components to begin implementing measures that will "help mitigate our budget execution risks" by

• fully protecting funding for wartime operations and Wounded Warrior programs;
• protecting "to the extent feasible" programs associated with the new strategy, readiness programs, and family programs;
• reducing the civilian workforce through a hiring freeze, releasing temporary hires, and considering a furlough with mission-related exceptions;
• protecting urgently required war-related investment and reviewing other investment to avoid penalties associated with cancellations; and
• curtailing lower priority programs such as base operations, facilities sustainment, travel and training.⁹²

This action helped DOD to begin adjusting to the likely cuts before OMB's order was issued on March 1, 2013, and implemented on March 27, 2013.⁹³

While the services followed DOD guidance, its spokesmen testified to dire effects. The Air Force predicted that one-third of its fighter and bomber force would be grounded, depot maintenance backlogs would grow, and contract plans for weapon systems would be disrupted. The Army cited drastic personnel cuts, and cancelled training exercises. DOD Comptroller Robert Hale stated that effects on readiness would be devastating.⁹⁴

A year later, in its report on the effects of sequestration, GAO concluded that DOD's guidance to the services focused cuts on lower priority areas to limit readiness impacts, and that most of DOD's actions made short-term effects. For example, GAO found that

• the Army curtailed training for units not scheduled to deploy;
• the Air Force temporarily stopped training operations for combat forces but then resumed in July 2013;
• depot maintenance was deferred by the services;
• installations deferred facility upgrades and delayed renewing contracts;
• the services reduced and delayed weapon system and RDT&E contracts; and
• civilians were furloughed for six days rather than the 22 days originally expected.⁹⁵

Overall, GAO concluded that

Generally, DOD's approach to sequestration was a short-term response focused on addressing the immediate funding reductions for fiscal year 2013. DOD was able to reduce spending levels for the remainder of fiscal year 2013 without making permanent changes, such as adjusting the size of its forces or canceling weapon systems programs.⁹⁶

DOD had more flexibility than might be apparent in implementing sequester cuts because it could

• draw on both new BA and unobligated BA from prior years;
• tap war funding as well as its base budget;
• exempt military personnel;
• allocate cuts to O&M across an entire account; and
• redirect funds to areas harmed by sequester through reprogramming.

In addition, the sequester was applied to the $527.2 billion appropriated for DOD, which was $2 billion above the request. The sequester amount also turned out to be lower than originally because ATRA reduced the amount from about $53 billion to $41 billion. That amount was further reduced by $3.7 billion to $37.2 billion because of a provision in budgetary law that permits "credits" in those cases when final appropriations are below the post-sequester amount in the sequestration order.⁹⁷

At the same time, the FY2013 sequester was difficult to implement because the sequester cut of $37.2 billion required a 7.1% average cut to total budgetary resources.⁹⁸ In addition, the sequester order was issued on March 1, 2013, halfway through the fiscal year when a continuing resolution was still in effect, increasing uncertainty.

DOD had more flexibility because it could draw on three sources of funds: unobligated balances from prior years ($62.2 billion), new BA for the base budget ($392.4 billion in base budget funding excluding military personnel accounts); and funds designated as Overseas Contingency Operations ($73.0).⁹⁹ Sequester cuts were taken from all three sources for each individual procurement or RDT&E program and each O&M account, with individual cuts targeted to areas where funding was less needed.

The decision to take larger amounts from unobligated balances helped shield new BA for procurement, which was cut by 3.0%. The benefit to RDT&E account was less, presumably because the pool of unobligated balances was smaller.

How might DOD meet BCA reductions to their current plan? According to DOD, BCA reductions over the past four years were met by

• efficiencies achieved through "more disciplined use of defense dollars" (better contracting and reducing overhead),
• changes in force structure (e.g., reducing the size of the Army to reflect a reduced likelihood of long ground wars),
• slowing modernization,
• restraining military pay raises, and
• modification of health care benefits.¹⁰¹

In April 2014, DOD submitted a report that described the programs and activities that DOD would cut to meet the $115 billion decrease from the FY2015 request to comply with BCA caps from FY2015-FY2019.¹⁰² Based on this plan, DOD concluded that if

sequestration-level cuts [BCA spending limits] persist, our forces will assume substantial additional risks in certain missions and will continue to face significant readiness and modernization challenges. These impacts would leave our military unbalanced and eventually too small to meet the needs of our strategy fully.¹⁰³

DOD's report anticipates enactment of its FY2015 request, which complied with BCA caps.¹⁰⁴ To meet the spending limits, DOD programs and activities would have to be cut by 4.3% or $115 billion from FY2016 through FY2019. DOD did not address FY2020 and FY2021, the last two years of the BCA limits because they were outside their planning window.¹⁰⁵

As is often the case with changes to DOD spending levels, DOD's plan generally distributes BCA cuts in proportion to the each service's share of the budget:

• 23% for the Army,
• 30% for the Navy and Marine Corps,
• 31% for the Air Force, and
• 16% for defense-wide agencies.

Some observers might expect different shares in light of the new strategy deemphasizing ground wars and projecting a greater role of the Navy in the pivot to Asia. Others might expect a greater emphasis on cutting defense agencies, which are perceived as performing primarily "overhead" functions that would receive lower priority in tight times. DOD might argue that it had already taken efficiency cuts that could affect defense agencies, as well as proposed health care savings funded in the defense-wide accounts, some of which Congress adopted.

DOD's emphasis on meeting BCA caps primarily by slowing modernization is only one of a number of ways to achieve the BCA savings necessary to avoid sequesters. In a March 2013 report, the Congressional Budget Office outlined four different options to achieve BCA savings, each with different emphases:

• Preserve force structure and take equal cuts from acquisition (modernization) and operations (general operations and civilian pay);
• Split cuts between force structure, phased-in, and acquisition and operations;
• Cut primarily force structure; or
• Cut primarily force structure but shift timing of BCA caps.¹⁰⁷

Other scenarios—with a different mix of reductions—would, of course, be possible, with Congress ultimately making the decisions each year about where and how to change defense programs and activities to comply fully or partly with current BCA spending limits.

The main force structure cut due to BCA limits in DOD's report would be a decrease in the number of active-duty Army combat brigades from the 29 currently planned for FY2016 to 24 in FY2019. This would entail a decrease of 30,000 in the number of active-duty military personnel from 450,000 in FY2017 to 420,000 in FY2019. According to DOD's report, this reduction would be

reviewed further in subsequent budget cycles. If Congress acts to support the out year PB15 [President' Budget for FY2015] topline, the Department will maintain the Army at a force of 970-980K (440-450K Active, 335K National Guard and 195K Reserve).¹⁰⁸

The report does not identify the associated savings, which could be roughly $6 billion once fully implemented.¹⁰⁹ DOD's FY2016 request does not comply with BCA caps or include this change.

Army leadership has strongly objected to cutting active-duty personnel to 420,000 stating that 450,000 active duty is the "smallest acceptable force to implement the defense strategy" and that a 420,000 soldier active force provides "insufficient capacity; cannot implement defense strategy."¹¹⁰ Despite the high priority given by the Army to retaining its current force structure plan, DOD's report says additional Army military personnel would be cut under BCA limits.

Each of the Service Chiefs voiced considerable concerns about the effects of BCA funding limits on modernization, including both the adequacy of total investment spending and the effects on individual weapons systems.¹¹¹ DOD's plan appears to give greater priority to shielding RDT&E, particularly science and technology, than procurement from reductions. Cuts to procurement would be 9% compared to 4% for RDT&E.

For individual weapon systems, DOD's cuts range widely in terms of quantity and percentage cuts. Some programs, including the Army's Apache helicopter remanufacture, the Marine Corps' CH-53K helicopter, the Navy's DDG-51, and the Air Force's MQ-9 armed drone are cut by 25% or more.