RL31805 -- Authorization and Appropriations for FY2004: Defense

---

CONTENTS

• Summary
• Most Recent Developments
• Major Issues in the FY2004 DOD Authorization Act
• Buy American Restrictions
• Concurrent Receipt Adopted
• Eligibility Criteria and Phase-In of Benefit
• Cost of New Benefit
• New Commission on VA Benefits
• Prospect for Next Year
• Tanker Lease Compromise
• New Personnel System for DOD Civilians
• Phase-In Period, Collaboration, and Criteria for the New Personnel System
• New Appeals Process and Labor Management Relations Systems
• Funding Levels and Separation Incentive Authorities
• Other Civilian Personnel Changes
• Environmental Exemptions for DOD
• Congressional Action on Endangered Species Act
• Congressional Action on the Marine Mammal Protection Act
• New Exemption Authority
• New Definition of Harassment
• Other Changes and Future Actions
• TRICARE For Non-Deployed Reservists
• Lifting the Ban on Research on Low-Yield Nuclear Weapons
• Maintaining Current Levels of Imminent Danger Pay and Family Separation Allowance
• Major Action On FY2004 DOD Appropriations Bills
• Major Funding In FY2004 DOD Appropriations Act
• Funding Prohibition And Restrictions On Total Information Awareness (Terrorist Information Awareness) R&D Program
• Military Construction Appropriations Bills
• Overview of Administration Request and Budget Trends
• Annual Growth for DOD Slows In Later Years in FY2004 Budget Resolution
• House and Senate Differences about Defense Spending
• Scoring Differences Between Congress and the Administration
• DOD's Appropriations Allocation
• Trends in DOD Spending Plans
• DOD Receives $103.1 Billion in Supplemental Appropriations Since September 11 Attacks
• Major Themes in the Administration's FY2004 Request
• Investment and Other Issues
• Proposed Acquisition and Organizational Changes
• Other Organizational And Financial Proposals To Increase Flexibility
• Authority To Spend $200 million To Support Foreign Militaries
• Affordability and Mix of DOD's FY2004 Investment Programs
• Army Transformation
• Congressional Action
• Navy Programs
• Congressional Action: Senate and House Markup
• Aircraft Programs
• Congressional Action
• Missile Defense
• Nuclear Weapons Programs
• Congressional Action: Modify Restrictions on R&D for Low-Yield Nuclear Weapons
• Personnel Pay and Benefits Issues and Readiness Issues
• Proposals to Change Selection of Senior Military Leadership
• Pay and Benefit Levels
• Congressional Action on Pay and Benefits for Active-Duty and Reservists
• Senate Adds New Health Care Benefit For Non-Active Duty Reservists
• Operation and Maintenance Funding
• Basing Structure, Role of the Reserves, and Force Mix Issues
• Congressional Action
• Number of Active and Reserve Duty Personnel
• Congressional Action: End-Strength
• Congressional Action: Defense Personnel for Border Security
• Legislation
• Congressional Budget Resolution
• Defense Authorization
• Defense Appropriations
• Footnotes

<font size="+1">List of Tables</font>

• Table 1A. Status of FY2004 Defense Authorization: H.R. 1588 and S. 1050
• Table 1B. Status of FY2004 Defense Appropriations: H.R. 2658 and S. 1382
• Table 2. FY2004 DOD Appropriations: Congressional Action
• Table 3. National Defense Budget Function and DOD Budget, FY1999-FY2008, Administration Projections
• Table 4. Status of FY2004 Budget Resolution (H.Con.Res. 95, S.Con.Res. 23)
• Table 5. FY2004 Budget Resolution: National Defense Request and Congressional Action
• Table 6. Administration Request: National Defense Budget Function by Title, FY2001-FY2008
• Table 7. Flexibility in DOD's Supplemental Funding Since September 11 Attacks
• Table 8A. House and Senate Action on Major Army Acquisition Programs: Authorization
• Table 8B. House and Senate Action on Major Army Acquisition Programs: Appropriations
• Table 9A. House and Senate Action on Major Navy Acquisition Programs: Authorization
• Table 9B. House and Senate Action on Major Navy Acquisition Programs: Appropriations
• Table 10A. House and Senate Action on Major Aircraft Programs: Authorization
• Table 10B. House and Senate Action on Major Aircraft Programs: Appropriations
• Table 11: House and Senate Action on Missile Defense Funding
• Table 12. Estimates of the Cost of Concurrent Receipt and TRICARE for Reservists

---

Summary

With passage of the FY2004 DOD Authorization Act by the House on November 7 and by the Senate on November 12, 2003, Congress completed action on this year's defense authorization (H.R. 1588/H.Rept. 108-384). The President signed the bill on November 24, 2003 (P.L. 108-384). On September 30, just in time for the new fiscal year, the President signed H.R. 2658, the FY2004 DOD Appropriations Act (P.L. 108-87), completing action on FY2004 defense appropriations.

The recently enacted FY2004 DOD authorization bill provides a total of $401.3 billion for defense programs, including funds in the DOD and military construction appropriations as well as several other defense-related programs funded in other appropriations measures. The total authorized for these defense and defense-related programs that make up the national defense function is $1.5 billion above the Administration's request and $9.3 billion above the FY2003 enacted level.

The conference version of the FY2004 DOD authorization is the culmination of months of negotiation about several contentious issues: Buy American provisions, the Air Force's controversial tanker lease proposal, a new concurrent receipt benefit for military retirees, a new National Security Personnel System, a new health benefit for reservists, and special exemptions for DOD to certain environmental regulations. Substantial differences about these issues between the houses and with the Administration had stymied completion of the authorization bill.

In conference, Buy American restrictions mandating that DOD rely exclusively on U.S. suppliers for certain items were dropped in favor of provisions that require DOD to assess the U.S. industrial base and possibly provide incentives to certain U.S. producers. In the case of the Boeing 767 tanker aircraft, DOD accepted a Senate-proposed compromise allowing them to lease 20 and buy 80 rather than lease100 aircraft.

After the Administration dropped its veto threat, Congress passed a new concurrent receipt benefit that is expected to provide about 200,000 military retirees with both their military retirement and disability benefits, reversing a prohibition in effect for over 100 years. DOD also received new authority to design and implement its own civilian personnel system and new exemptions to certain environmental rules. The bill also provides access to DOD's TRICARE health care to unemployed, non-deployed reservists and maintains current higher levels of imminent danger pay and family separation allowance for eligible military personnel through December 2004.

The FY2004 DOD Appropriations Act provides appropriations totaling $368.7 billion for the defense programs it covers. That total is $3.5 billion below the Administration's request and $4.0 billion above last year's enacted level. The programmatic impact of the cut is cushioned, however, because the bill receives credit for $3.5 billion rescinded from funds provided in the $62.6 billion FY2003 supplemental appropriations bill that Congress approved in April 2003.

---

Most Recent Developments

On November 7, 2003, the House passed the conference report on H.R. 1588, the FY2004 DOD authorization, by a vote of 362 to 40, after the conference report was filed early Thursday morning. The Senate passed the bill by 95 to 3 on November 12. On November 24, the President signed the bill (P.L. 108-136). Compromises were reached on the main issues that had held up the conference for several months: Buy American provisions, the Air Force lease of Boeing KC767 aircraft, a new National Security Personnel System, concurrent receipt, and TRICARE for non-deployed reservists.

The conference version (H.Rept. 108-283) of H.R. 2658, the FY2004 Department of Defense (DOD) appropriations bill, provided $368.7 billion in funding. It passed the House on September 23, 2003, and the Senate on the following day, in both cases quickly and with little debate. On September 30, 2003, the President signed the bill into law (P.L. 108-87).

The FY2004 DOD Authorization Act included several contentious issues, which were settled only after long negotiations. On domestic preference restrictions in the Buy American Act and the Berry Amendment, the DOD authorization added provisions to assess the U.S. defense industrial base and the extent of U.S. reliance on foreign suppliers but dropped proposals to require DOD to purchase certain items only from American suppliers. In the case of the tanker lease, DOD agreed to a proposal by Senator Warner to lease 20 and buy 80 Boeing KC767 tankers rather than lease 100 aircraft, a proposal less costly than the original lease but more costly than a straight multiyear buy. The fate of the deal remains uncertain in light of Boeing's recent firing of high-level officials for improprieties and an ongoing investigation by the DOD Inspector General.

Compromises were also brokered on other contentious issues on which the Administration had threatened a veto. The Administration agreed to a new benefit that provides concurrent receipt of military retirement and disability payments to all military retirees with disability ratings of 50% or higher as well as an expansion of those eligible under the "Purple Hearts Plus" program enacted last year that provides benefits to military retirees with combat or combat-related disabilities. The Administration also agreed to a 15-month pilot program to offer access to TRICARE to non-deployed reservists who are unemployed or do not qualify for health benefits offered by their employer.

H.R. 1588 also authorizes the Secretary of Defense to develop a new National Security Personnel System for DOD's civilian employees, gives DOD special exemptions to certain environmental statutes, and lifts the current ban on development of low-yield nuclear weapons.

Both the House and Senate versions of H.R. 1588, the authorization bill, provide $400.5 billion for national defense programs, about $1.5 billion above the request of $399.7 billion that the Administration submitted in February. The authorization covers not only defense programs funded in the defense appropriations bill but also programs funded in the military construction, energy and water, and some other appropriations measures.

The FY2004 DOD appropriations bill provides a total of $368.7 billion for the defense programs it covers, $500 million less than the $369.2 billion that was included in both the House and Senate versions. The total in the conference agreement is slightly below the amounts provided for defense by the budget committees under Section 302(b) allocations of the Congressional Budget Act and $3.1 billion below the request. This decrease freed up the same amount for other appropriations bills while staying within the cap on discretionary spending established by the FY2004 budget resolution (H.Con.Res. 95). Final funding for DOD could also be affected by a $1.8 billion rescission included in the conference version of the FY2004 Omnibus Appropriations bill (H.R. 2673) that was passed by the House on December 8 but is unlikely to be considered by the Senate until January 2004.

The final version of DOD's FY2004 appropriations cushioned the programmatic impact of the $3.5 billion cut to the request by making an offsetting rescission of $3.6 billion from the $62.6 billion in FY2003 supplemental appropriations that Congress approved in April. Under budget scoring rules, rescissions are counted as a credit in the year when they are enacted, even though prior year monies -- in this case, FY2003 -- are cut. This allowed the appropriators to meet their FY2004 targets without reducing funding for FY2004 programs by $3.5 billion.

Major Issues in the FY2004 DOD Authorization Act

After a conference that spanned over five months, the conferees reached agreement and filed a report on November 7, 2003, on H.R. 1588, the FY2004 DOD Authorization Act (H.Rept. 108-354). The bill was passed by the House by a vote of 362 to 40 on that same day and by the Senate by a vote of 95 to 3 on November 12, the following week. The President signed the bill on November 24, 2003 (P.L. 108-136).

On May 22, the House and the Senate passed their respective versions of the FY2004 DOD Authorization bills after several days of floor debate. The House version, H.R. 1588, passed by 361 to 68. Although the Senate passed its version, S. 1050, by 98 to 1 on the same date, the Senate adopted a unanimous consent agreement on the next day providing for consideration of several specific amendments. On June 4 after the Memorial Day recess, the Senate adopted amendments on concurrent receipt and expedited immigration approval for selected reservists and their families during wartime and rejected an amendment to cancel the 2005 round of base closures before passing the bill again by voice vote and appointing its conferees (see Table 1A).(1) Debate in the House took place on May 20 and May 21, and in the Senate on May 19, 20, 21, 22, and June 4, 2003.

On May 13, the Senate Armed Services Committee (SASC) reported S. 1050, after completing markup on May 9 (S.Rept. 108-46). The bill as reported did not include the DOD proposal to redesign its civilian personnel system. The House Armed Services Committee (HASC) reported its bill on May 16 after completing markup on May 14 (H.Rept. 108-106). On May 21, the House adopted a rule (H.Res. 245) that limited general debate to two hours and amendments to those specified in the rule. The Senate rule required that all amendments be considered relevant by the Parliamentarian. The House bill included much of DOD's legislative proposal for a new civilian personnel system as initially marked up by the House Government Reform Committee (H.R. 1836).(2)

Table 1A. Status of FY2004 Defense Authorization: H.R. 1588 and S. 1050

a. The Senate initially passed S. 1050 by 98 to 1 on May 22, 2003, but then adopted a unanimous consent agreement on May 23, 2003, to continue debate on selected amendments after the recess; see Congressional Record, p. S7115. Those amendments were considered on June 4, and the bill was then passed by voice vote.

The conference report reached compromises on seven major issues that held up the authorization bill for several months:

• Buy American restrictions proposed by the House and opposed by the Senate and the Administration;

• proposals to provide costly concurrent receipt of military retirement and Veterans Administration (VA) disability benefits;

• proposals to allow the Air Force to initiate acquisition of a $29 billion program to lease and buy 100 Boeing KC767 tanker airplanes;

• fashioning of the new National Security Personnel System requested by DOD;

• expanding access to DOD's TRICARE health system to non-deployed reservists;

• exempting DOD from certain environmental statutes; and

• changing current restrictions on research on low-yield nuclear weapons.

The compromises reached are described below. Details on other conference action, including RDT&E and weapon system funding, will be included in a later update.

Buy American Restrictions(3)

In its request, the Administration proposed a series of changes to long-standing domestic preference restrictions codified in the Buy American Act and the Berry Amendment in order to give DOD additional flexibility to buy from foreign sources. Since 1933, the federal government has been required in the Buy American Act to purchase from American producers unless the head of the agency finds that it is in the "public interest" to waive the restriction and purchase items from foreign sources.(4)

For specific types of items -- food, clothing, tents, textiles, specialty metals and measuring tools -- the Berry Amendment requires that DOD buy from U.S. sources unless the purchases are in support of combat operations outside the United States.(5) In the case of other items such as machine tools and ball bearings, DOD can buy from foreign sources if the foreign country is part of the U.S. national technology and industrial base (defined as the United States and Canada), if it is in the "national security interests of the United States," or if DOD would face unreasonable costs or delays. The Secretary of Defense has waived these various domestic preference restrictions in certain circumstances.(6)

This year's debate focused on the extent of DOD's waiver authorities in terms of both the criteria and the items that could be covered. The Administration sought to widen circumstances permitting waivers, whereas the House would have either required domestic purchase of additional items (such as machine tools) or made it more difficult for the Secretary of Defense to waive current restrictions.(7) For example, the House bill required DOD to identify and then buy from U.S. sources items considered to be "critical" to the U.S. defense industrial base as well as assess the extent of U.S. dependence on foreign suppliers. The House version also would have prohibited DOD from purchasing from foreign countries who had restricted sales of military goods or services because of U.S. operations in Iraq, a provision that could have affected both France and Germany.

The Secretary of Defense had signaled that the Administration would veto the bill if the House provisions were included. Concerned about the effects of these provisions on U.S. trade relations, Senator Warner requested the State Department, the U.S. Trade Representative, and OMB to address the potential effects of the legislation on trade relationships and cooperative defense relationships.(8)

Reflecting a compromise between the House's desire to expand protections for the defense industrial base and Senate's concerns about potential effects on U.S. trade relations, the conference version dropped the new restrictions on certain items but required DOD to assess potential U.S. vulnerabilities. To meet Senate and Administration concerns about potential effects on U.S. trade relations, the conference bill stated that none of the provisions in this industrial base section would apply if the Secretary of Defense and Secretary of State determine that U.S. international agreements would be violated.(9)

To get a better understanding of the extent of DOD dependence on foreign sources or single domestic sources for critical items or components of military systems, the Defense Department is to develop a "Military System Essential Item Breakout List" and identify where these items or components are produced. DOD is to contract for a study that will define the criteria for "critical" and recommend items to be included on the list.

To give additional support to domestic producers of critical items, the conference agreement establishes a new Defense Industrial Base Capabilities Fund that DOD can use to provide incentive payments to domestic contractors. No funds are specifically authorized (or appropriated) for this fund in FY2004, however. Another new industrial base tool for DOD is authority to give preference in source selection to domestic producers of machine tools or other capital assets used to make defense goods. The bill also requires a study of the adequacy of U.S. producers in meeting defense needs for beryllium industrial base.(10)

To protect U.S. trade relationships, the conference agreement also softened the House's proposed prohibition on buying from countries who opposed U.S. actions in Iraq. Instead, the Secretary of Defense, in coordination with the Secretary of State, is to identify foreign countries who now restrict military sales to the United States because of U.S. counterterrorism or military operations; that list can be revised periodically. Even for those countries, DOD can purchase goods if the department has a "compelling and urgent" need for the item.(11) Congress agreed to broaden waivers to Berry Amendment restrictions on purchases of food, clothing, and similar items from combat operations only to include contingency operations as well.

This issue is likely to resurface in the next year or two. By February 2005, DOD is required to complete an interim report that assesses which items are deemed essential and the extent of U.S. dependence on foreign sources for those items. At that point, the debate could revolve around whether additional protections or incentives should be provided to domestic producers of those items.(12)

Concurrent Receipt Adopted

Until recently, the Administration threatened to veto congressional proposals to provide concurrent receipt of military retirement and VA disability benefits to military retirees because of concerns about the cost and the precedents for other benefit programs. Military retirees now must reduce their military retirement on a dollar-for-dollar basis if they wish to receive tax-exempt disability payments, a type of offset that is required in many benefit programs.

The conference bill provides new benefits to military retirees with twenty or more years of service and disability ratings of 50% or higher. The conference bill also expands those who would be eligible for special compensation under the "Purple Hearts Plus" program enacted last year for those whose disabilities are due to combat or combat-related activities. The conference version was reached when the Senate dropped its proposal for full concurrent receipt and the Administration dropped its veto threat. In response to Administration concerns, the House had not included a concurrent receipt in its version of the bill even though support among members was widespread.

Eligibility Criteria and Phase-In of Benefit. Over 200,000 military retirees are likely to qualify for the new concurrent receipt including military retirees with 20 years of service if they

• have disability ratings of 50% or above;

• have any disability ratings as long as they meet the criteria for a combat-related disability, popularly known as "Purple Hearts Plus;"

• are Guard and Reserve retirees who meet the criteria under "Purple Hearts Plus" if they have 20 or more years of "creditable" service, defined as 50 points for performing their annual reserve duties; and

• are disability retirees whose payments exceed their retirement benefits had they retired under regular retirement.

The first phase of the new benefits are slated to go into effect on January 1, 2004, with full concurrent receipt for those eligible by December 31, 2013.(13)

In the first year, monthly benefits for those eligible will be:

• $100 for those with a 50% disability rating;

• $125 for those with a 60% disability rating;

• $250 for those with a 70% disability rating;

• $350 for those with an 80% disability rating;

• $500 for those with a 90% disability rating; and

• $750 for those with an 100% disability rating.

In the following year, those eligible would receive 10% of the difference between the benefit for the previous year and the lesser of their monthly retirement benefit or their monthly disability payment. In each succeeding year, retirees will receive an additional 10% of that difference until the retiree receives the full amount of both disability payments and retirement benefits.

Cost of New Benefit. CBO estimates that the new benefit would cost $800 million in FY2004 and $22.1 billion over ten years in outlays for current beneficiaries. The annual cost would increase steadily to $2 billion by FY2008 and $3.5 billion by 2013.(14) Although DOD does not need to include funds in its budget to cover the costs because the legislation creates a new entitlement program, the deficit would increase by annual outlays for current beneficiaries.

Unlike current military retirement, H.R. 1588 does not require that DOD provide funds to cover the accrual cost of the new benefit for today's military personnel, a practice designed to capture fully the cost of military personnel. This means that general revenues would cover this cost rather than the Defense Department because DOD would not need to budget for this cost.(15)

New Commission on VA Benefits. H.R. 1588 also sets up a 13-member Veterans Disability Benefits Commission to evaluate and make recommendations about VA benefits for combat-related disabilities or deaths. The Commission is to report by February 2005, 15 months after enactment.(16)

Prospect for Next Year. The concurrent receipt issue could well be revisited next year because of pressures from those not covered by the new benefit -- i.e. those with disability ratings below 50% whose disability is not due to combat or combat-related circumstances. Budget impacts would continue to be a concern. Those concerned with the loss of DOD visibility of the full cost of military personnel that is part of the current provision could also press to require DOD to budget for the accrual cost of the benefit for its current military personnel.

Tanker Lease Compromise

Another controversial provision included in the FY2004 DOD Authorization conference is language that would allow the Air Force to proceed with a plan to lease 20 KC767 Boeing tanker aircraft and subsequently buy an additional 80 aircraft as proposed by the Senate Armed Services Committee Chairman Warner in early September.(17) Signing of the contract has been held up because of questions of impropriety by two Boeing officials, Darlene Druyan, formerly in charge of Air Force acquisition, and Michael Sears, the Chief Financial Officer; Ms. Druyan is alleged to have discussed employment opportunities with Boeing at a time when she was also negotiating the tanker deal.(18) In the past week, Deputy Secretary of Defense Wolfowitz asked the DOD Inspector General to review this matter, and Senate Armed Services Committee Chairman Warner called for a broader review.(19)

Although the conference bill authorizes the lease 20, buy 80 proposal, there continues to be controversy between the House and Senate interpretation of what the language requires: a House colloquy between members says that the Air Force can use options included in the current contract and a Senate colloquy suggests that the Air Force must negotiate two new contracts, one for the lease and one for the buy.(20) One contract could be implemented more quickly but could mean that the Air Force would pay unnecessary costs associated with the lease.(21)

The lease 20, buy 80 alternative differs from the Air Force's original unprecedented proposal to contract with Boeing to lease and then buy100 aircraft for a cost of $29 billion over a 15-year period, including support costs. The Air Force finds leasing attractive because major funding would not be required until 2006, and the bulk of the funding would not be needed until 2010-2017. The Air Force argues that this approach would cause less disruption to current Air Force programs than would a traditional buy. In later years when the program would cost $2 billion to $3.7 billion annually, however, competition with other Air Force programs could be substantial.(22)

It is not clear, however, whether the Air Force will be able to delay paying for the planes until delivery as proposed by Under Secretary Wolfowitz in a letter to Senator Warner on November 5, 2003.(23) In his confirmation hearing to be Deputy Under Secretary of Defense for Acquisition, Technology and Logistics, Michael Wynne suggested that the conference language may require that the Air Force pay for the aircraft when ordered rather than delaying payment by three years when the aircraft are delivered. The Air Force has not identified how to fund the tanker within its current budget plans, which did not anticipate the tanker lease.

This proposal has been controversial because leases are substantially more expensive than buying: the Air Force, CBO, CRS, and GAO all found that the lease would cost $5 billion to more than $6 billion more than a multiyear buy of the aircraft, because the Air Force planned to rely on a special purpose entity to finance the deal and because congressional agencies and others have suggested that the proposed lease did not meet the criteria for an operating lease.(24)

Under the conference agreement that would allow the Air Force to lease 20 Boeing KC767 aircraft and incrementally buy the remaining 80 aircraft, the Air Force still plans to delay the lease funding until 2006 and the buy funding until 2008.(25) Although leasing 20 rather than 100 aircraft would be less costly than the original proposal, the extent of the savings depends on how the Air Force implements the proposal. According to press reports, the Air Force now plans to use two contracts -- one for the lease and one for the buy -- costing a total of $18.3 billion in acquisition costs. That total would be $3.2 billion less than the previous $21.5 billion contract to lease and buy 100 aircraft but still $3.5 billion more than CBO estimates a straight multiyear contract would cost.(26)

In its scoring of the FY2004 DOD Authorization Act, CBO considers the new proposal to lease and then buy 20 aircraft to be a lease/purchase that would require that the Air Force provide $3.6 billion in budgetary authority in FY2004, although none is provided in the Act. Because members did not raise a point of order under budget rules, however, the funding implied by the bill's language was not challenged.(27)

Although the conference reports includes language permitting incremental funding of the multiyear contract -- which would allow the Air Force to spread out the payments rather than providing the full amount for each year's buy as is required under standard acquisition rules -- it is not clear whether the new language permits that. The Air Force has voiced concerns that the compromise could jeopardize ongoing defense programs.

New Personnel System for DOD Civilians

As part of its April 10, 2003, bill proposal, the Defense Transformation for the 21st Century, the Defense Department requested broad authority to set up a new National Security Personnel System (NSPS) governing its 735,000 civilian employees. DOD requested authority to develop a new personnel system that was "flexible" and "contemporary," allowing the Secretary of Defense to define positions, set pay scales, establish hiring and firing rules, bargain with employees at the national level, and set separate scales for rewarding senior level employees. Although DOD's proposal did not include specifics, Under Secretary of Defense for Personnel and Readiness David Chu stated that it intended to follow "best practices" for current personnel projects, including pay banding and the use of numerical ratings to link pay with job performance.(28)

The chief issues raised about the DOD proposal were

• the nature of the proposed new system;

• the difficulties in designing an equitable performance rating system that would be linked to pay;

• the appeals system for employees in case of disputes; and

• the level of bargaining between employees and DOD.

DOD's proposal was debated within both the armed services and the governmental affairs committees with concerns raised by both Members of Congress and government employee unions about the breadth of authority requested and the potential effects on government workers. In defending new authority, others cited long-standing calls for reform of the civil service, the broad personnel management authorities granted to new Department of Homeland Security, and DOD's twenty years of experience with alternative "pay for performance" systems for the 30,000 employees in the national labs.

The conference version of the FY2004 DOD authorization modified many of the Administration provisions that were included in the House version of H.R. 1588. The Senate version of the FY2004 DOD Authorization bill did not include any provisions dealing with a new personnel system, but many of the provisions proposed by the Senate Governmental Affairs Committee in S. 1166, a bill to establish a National Security Personnel System, were ultimately adopted in the final version (see CRS Report RL31954, Civil Service Reform: Analysis of the National Defense Authorization Act for FY2004 coordinated by Barbara Schwemle).(29)

Phase-In Period, Collaboration, and Criteria for the New Personnel System. Although H.R 1588 gives the Secretary of Defense broad discretion to set up the new system, DOD is required to develop its regulations jointly with the Director of the Office of Personnel Management and to conform those regulations with criteria included in the law. In addition, any disputed parts of the new system could not go into effect until 90 days after the proposed system is presented for comment to labor organizations representing DOD's civilian employees.

During that period, labor organizations would have 30 days to review the proposal, DOD would have 30 days to resolve disputes, and Congress would be notified of remaining disputes 30 days before implementation.(30) After this 90-day period, the new system could be put into place for up to 300,000 DOD civilian employees but could not be expanded to the remaining employees until DOD has a performance management system in place that meets criteria in the law.(31)

In addition to being consistent with merit system principles and anti-discrimination laws, this new system to hire, assign, transfer, evaluate, and fire employees is required meet the following criteria:

• to be "fair, credible, and transparent;"

• to link employee performance to agency plans and include safeguards to ensure fairness;

• to involve employees, supervisors and managers in the design, evaluation, and training for the new system;

• to include an "equitable method for appraising and compensating employees" in the pay-for-performance evaluation system.(32)

In report language, the conferees calls on DOD to set up a pay-for-performance evaluation system that:

• groups employees into pay bands with upper and lower bounds based on position responsibilities and types of work;

• sets up a performance rating system with rating periods and a feedback process;

• includes a scoring system that is tied to salary changes and a review process that addresses those failing to meet performance goals; and

• links individual performance factors to agency's goals and ensures scoring comparability.

Although this conference report language is not binding, it signals legislative intent.(33) In hearings, DOD policy makers stated that it intended to design a system like the pay banding system used by DOD's laboratories for the past twenty years; the labs are, however, exempt from the new system until 2008 and beyond that unless the new system gives them greater flexibility.(34) Details about the new personnel system are likely to emerge in the next year.(35)

New Appeals Process and Labor Management Relations Systems. As long as it complies with employment anti-discrimination laws, merit principles, and due process, DOD can set up a new, internal appeals process for handling disputes about personnel actions. In designing this system, DOD is to consult with the Merit System Protection Board, the current government-wide appeals board. Although employees may appeal the decisions of DOD's new internal board to the Merit System Protection Board (MSPB), the government-wide board would only hear cases involving "arbitrary or capricious" actions, violation of due process, or those not supported by evidence. Decisions by that Board can be reviewed by a court.(36)

Jointly with the Director of the Office of Personnel Management and in collaboration with the unions, DOD will also be able to develop its own labor management system under the new law.(37) This "collaborative issue-based approach to labor management relations" would go into effect 90 days after DOD provides a written description to unions. During that period, unions have 30 days to review the proposed system, 30 days to discuss recommended changes, and 30 days of notification to Congress of disputed areas. To resolve differences, either DOD or employee representatives can request help from the Federal Mediation and Conciliation Service.

The new law provides for review of the proposed new system by an unspecified independent third party. The authority of this new labor-management process appears to be broad because its decisions can "supercede all other collective bargaining agreements" in the department if the Secretary of Defense desires [italics added].(38) Unless renewed, however, this new process would only be in effect for a six-year period. This new system would also not be subject to the collective bargaining procedures and deadlines that apply to other federal agencies.(39)

DOD could also continue to bargain with employee unions and follow the statutory procedures and deadlines for collective bargaining affecting all other government agencies.(40) In another major change, H.R. 1588 gives DOD new authority to bargain at the national rather than the local level and makes those decisions binding on all levels. Some critics have raised concerns about how local circumstances will be taken into account in national decisions. These decisions could also be reviewed by an unspecified third party.

H.R. 1588 appears to endorse two parallel systems of labor-management relations: one, a new "collaborative" system, and the other, a traditional collective bargaining system as defined in current statute. The legislation does not specify what types of issues would be covered or how responsibilities will be divided between these two systems. To the extent that the two systems overlap, the law gives precedence to the new system. The new law appears to adopt a similar approach in the case of appeals process for employee grievances, allowing DOD to set up its own board but also permitting a review of those decisions by the Merit System Protection Board in certain circumstances.

Funding Levels and Separation Incentive Authorities. Although increases for individual employees would be likely to vary from the current system, the new law calls on DOD to "the maximum extent practicable" to budget the same amount for civilian employees under the National Security Personnel System as would be the case under the current system so that overall, employees are not "disadvantaged."(41) At the same time, the law calls on DOD to give civilian employees the same pay raises as are received by military personnel. As an additional workforce management tool, the law allows DOD to give separation incentives of $25,000 to up to 25,000 civilian employees annually for early retirement.(42)

The budgetary implications of the new system are not obvious. It is also not clear whether these provisions would significantly limit DOD's current plans to transfer substantial numbers of military jobs to civilian personnel or contract employees.

Other Civilian Personnel Changes. The new law also provides several new authorities that would be available to all federal agencies including authorizing

• pay for performance pilot projects;

• higher pay caps for Senior Executive Service employees; and

• $500 million for a new Human Capital Fund to reward exceptional performance.(43)

The appropriators have only provided $1 million for this new fund in the final version of the FY2004 Omnibus Appropriations Act currently awaiting final congressional action.

Environmental Exemptions for DOD

As it did last year, DOD requested that military readiness-related activities be exempted from certain provisions of five federal environmental laws, including the Clean Air Act, the Endangered Species Act, the Marine Mammal Protection Act, the Solid Waste Disposal Act, and the "Superfund" law that governs cleanup of hazardous waste. This year, Congress proved to be receptive to proposals to modify DOD's responsibilities to protect endangered species and marine mammals, both very controversial provisions. H.R. 1588 also gives DOD new authority to use wetlands mitigation banks and modifies regulations governing Restoration Advisory Boards that inform citizens about environmental cleanup.

DOD has argued that compliance with environmental requirements significantly affect military training, and hence readiness, while critics have questioned the extent of the impact and DOD's limited use of current waiver authorities. A recent GAO report found that environmental restrictions are only one of several factors, including urban growth and pollution, that affect DOD's ability to carry out training activities and that DOD continues to be unable to measure the impact of environmental laws.(44) The debate centers on whether or to what extent DOD should be exempt from current environmental statutes.(45)

Congressional Action on Endangered Species Act.(46) Both the Senate and the House agreed that DOD needed additional authority to consider military training requirements as well as wildlife protection in managing land on DOD installations. For that reason, the new law permits DOD to substitute an Integrated Natural Resources Management Plan (INRMP), required under the Sikes Act, for a designation of lands as "Critical Habitat" under the Endangered Species Act, as a way to protect endangered species.(47) The authority to substitute a resource management plan for a critical habitat designation has been under dispute. Environmental groups are concerned that protection for endangered species may be weakened with this change.

Under the Sikes Act, the INRMP, which guides the conservation, protection, and management of fish and wildlife resources, is prepared by the Secretary of the military department in cooperation with the U.S. fish and Wildlife Service. The "use of military installations to ensure the preparedness of the Armed Forces," or military readiness, however, takes precedence.(48) Under the Endangered Species Act, once land has been designated as "critical habitat," federal agencies must "consult" regarding actions that would destroy or adversely affect those habitats or face penalties.

The substitution is permitted only if the Secretary of the Interior determines in writing that DOD's plan provides a "benefit for the species."(49) Critics have questioned, however, whether the criterion of "benefit to the species" is likely to be adequate and whether implementation of the plans can be enforced since the Sikes Act does not provide for suits by individuals or citizen groups. The final version also amends the Endangered Species Act rather than Title 10 of the U.S. Code which governs DOD activities, a choice that created concern among environmental groups because of the potential precedent for other exemptions. Other environmental interests opposed amending Title 10 because doing so may give the Secretary of Defense rather than the Secretary of Interior the primary role in determining whether integrated management plans provide adequate protection.

According to the Senate Armed Services Committee, portions of about 150 DOD bases could be designated as critical habitat were this exception not permitted.(50) The conference report suggests that the new language will "provide a balance between military training requirements and protection of endangered or threatened species."(51)

Congressional Action on the Marine Mammal Protection Act. The conference agreement adopts two of the Administration's proposed changes to the Marine Mammal Protection Act, including new two-year exemption authority and a new definition of "harassment." Debate about the implications of both of these changes was heated.

New Exemption Authority. Under a new provision, the Secretary of Defense, after consulting with the Secretary of Commerce and the Secretary of the Interior, could "exempt any action or category of actions" from compliance with the Marine Mammal Protection Act for two years if the Secretary determines "it is necessary for national defense."(52) At his discretion and after consultation with the Commerce and Interior Departments, the Secretary of Defense could renew such exemptions for additional two-year periods.

The conference report suggested that this national security exemption parallels that included in other environmental laws, while environmental interests argued that a "national defense" exemption is broader than that provided in other statutes.(53) DOD has not, in fact, used existing exemption authorities, arguing that the threshold was too high for most activities. Exemptions under the new law must be reported to the armed services committees.(54)

New Definition of Harassment. The conference agreement also adopted the Administration proposal to use narrower definitions of harassment of marine mammals for DOD's military readiness and scientific activities of federal agencies than are applied to other agencies. Under current law, the standard requires that activities be prohibited if they would have a "potential to injure or disturb" marine mammals.(55) The new language defines DOD's activities as "harassment" only if an act "injures or has the significant potential to injure" or disturbs the activities of marine mammals by disrupting "natural behavior patterns"to a point where those patterns are "abandoned or significantly altered."[italics added](56) To limit the application of the exemption, the Act defines readiness as training, combat operations, and testing, the definition that was included in the FY2003 DOD authorization. DOD had asked to broaden the application to include support activities.(57)

In reaction to a recent court case that limited DOD's deployment of the low-frequency SURTASS sonar because of the potential impact on marine mammals, the FY2004 DOD authorization exempts DOD from complying with current standards for evaluating the impact on marine mammals based on "specified geographical regions," or the "small numbers." DOD contended that these standards were inappropriate for marine mammals that migrate over broad expanses of the ocean and that using a "negligible impact" standard would be a more scientific way to make decisions rather than on the basis of the number of mammals affected.(58)

Other Changes and Future Actions. Congress also made other changes requested by the Administration, including allowing DOD purchase credits from a mitigation bank to offset those lost on DOD installations, and exempting DOD's Restoration Advisory Boards from issuing financial disclosure statements and from providing notice of their activities in the Federal Register.(59) These boards are the primary avenue through which local communities learn about cleanup decisions on military lands.

The issue of when and where to carve out exemptions from environmental statutes for DOD can be expected to re-surface next year as the Administration continues its efforts to provide special treatment for the department to protect DOD's readiness activities. While Congress did not approve DOD's requested exemptions from other environmental laws, it did require DOD to report by January 31, 2004, on how environmental statutes and residential development surrounding military bases affect readiness activities.(60)

TRICARE For Non-Deployed Reservists

Because of the large number of reservists who have been in Afghanistan, Iraq, and the United States, Congress considered a number of ways to expand current benefits and decided to approve a demonstration project to provide access to DOD's TRICARE health care system to certain non-deployed reservists. Under current law and DOD policy, reservists become eligible for TRICARE once they are on active duty. The FY2004 DOD Authorization Act offers access to TRICARE to non-deployed reservists who receive unemployment compensation or who are not eligible for coverage offered by an employer. Reservists would be required to pay a premium set at 28% of the value of the actuarial cost of the plan as is currently required for civilian employees in the government's Federal Employees Health Benefits (FEHB) insurance plan.(61) The conference version of the FY2004 DOD authorization bill provides access to this targeted version of the new benefit through December 31, 2004, three months longer than is provided in the FY2004 supplemental.(62)

According to the report, CBO estimates that this demonstration project would cost about $200 million annually compared to the $2 billion annual cost of providing access to all non-deployed reservists that was proposed in the Senate version of the bill. Dropped in conference, the Senate proposal had triggered a veto threat from the Administration. The conferees set a ceiling of $400 million on the cost of the demonstration project.(63)

To help Congress assess the health care needs of reservists and their families, the conference report requires that GAO conduct an evaluation by May 1, 2004.(64) With significant numbers of reservists likely to be needed in the next few years for the occupation of Afghanistan and Iraq, proposals to expand benefits for reservists are likely to be revisited next year.

Lifting the Ban on Research on Low-Yield Nuclear Weapons

The conferees adopted the Senate version of this change to a ban on R&D of low-yield nuclear weapons that was enacted in 1989. Rather than modifying the ban to apply only to R&D at the engineering and development stage, H.R. 1588 repeals the ban on R&D but requires specific congressional authorization for the Department of Energy (which funds this program) to proceed to engineering development of low-yield nuclear weapons or a nuclear earth penetrating weapon (see discussion in section on nuclear weapons for more detail).

In the conference version of the Energy and Water appropriations bill, funding for the Robust Nuclear Earth Penetrator was reduced from the $15 million request to $7.5 million; funding for the Advanced Concepts Initiative, which would fund concept studies on low-yield nuclear weapons, was set at $6 million.(65)

Maintaining Current Levels of Imminent Danger Pay and Family Separation Allowance

One less controversial provision was included in H.R. 1588: maintaining the higher levels of imminent danger pay and family separation allowance adopted in last year's supplemental. The DOD Authorization Act adopts the higher levels for all eligible service members through December 31, 2004. The FY2004 Emergency Supplemental continues the higher rates through September 30, 2003. At one point, the Administration had proposed alternative ways to maintain the higher levels, but these proposals were not adopted.

Major Action On FY2004 DOD Appropriations Bills

The FY2004 DOD Appropriations Act was signed into law (P.L. 108-87) on September 30, 2003, at the end of the fiscal year. Conferees resolved their issues, and the bill was passed on September 23 by the House and September 24 by the Senate after the two-day hiatus in business caused by Hurricane Isabel. Differences in funding levels were resolved.

Table 1B. Status of FY2004 Defense Appropriations: H.R. 2658 and S. 1382

a. Full committee markup was completed on June 26, 2003; the report was filed on July 2, 2003.

b. Full committee markup was completed on July 9, 2003; the report was filed on July 10, 2003.

Major Funding In FY2004 DOD Appropriations Act

The major changes to the Administration's request are shown in Table 2. Further details on the appropriation conference will be provided in a later update.

Table 2. FY2004 DOD Appropriations: Congressional Action

Sources: H.Rept. 108-187; S.Rept. 108-87, H.Rept. 108-283.

Notes: CRS adjusted title totals for both FY2003 and FY2004 to allocate funding in general provisions. [ ] Square brackets indicate the total amount of funding for general provisions that is allocated by title in the table and is not added into the total. For FY2004, see H.R. 2658 and S. 1382. For FY2003, see P.L. 107-248.

a. Of the $4.0 billion decrease for general provisions in the House version of the FY2004 DOD appropriations act, H.R. 2658 allocates $2.0 billion to O&M appropriations, and $2 billion is a rescission to the $15.7 billion provided in the Iraq Freedom Fund for later costs of the war and occupation in the FY2003 supplemental. According to scoring rules, that decrease counts as a reduction to FY2004 appropriations. Of the $3.4 billion in reductions from general provisions in S. 1382, $3.2 billion is from a rescission to the Iraq Freedom Fund. About $1.8 billion of the deceases in FY2003 that were made in general provisions affected O&M appropriations. CRS will allocate these general provisions in a later update.

b. The Iraq Freedom Fund is a flexible account set up to cover later costs of the war, which could not be allocated to specific appropriation accounts.

c. Difference is rounding: total funding is $369.193 billion in the House bill and $3.143 billion in the Senate bill.

Funding Prohibition And Restrictions On Total Information Awareness (Terrorist Information Awareness) R&D Program. In the FY2004 DOD Appropriations Act, the conferees dealt with the controversial Total Information Awareness (renamed Terrorism Information Awareness) or TIA program, which was, until recently, run by retired Admiral Poindexter in the Defense Advanced Research Projects Agency (DARPA). Conferees transferred unspecified components of the program's classified venues where research can continue but would be subject to safeguards in the National Foreign Intelligence Program that restrict the sharing of information on U.S. citizens. Less controversial components of the program, such as machine translation of languages, remain in DARPA. The components that were transferred and the amount of funding remaining cannot be determined because details are in a classified annex.(66)

This agreement was a compromise between Senate action that prohibited funding for R&D for the controversial Total Information Awareness R&D program and the Administration's objections to cutoff of funding. The TIA program is designed to develop a system to collect and analyze a wide assortment of information to detect potential terrorists, and included various restrictions on implementation or deployment of TIA programs similar to those included in the House version of the FY2004 DOD Appropriations Act, H.R. 2658. The Administration objected to the Senate cutoff of funding.(67)

Similar restrictions on deployment were originally included in the Consolidated Appropriations Resolution of FY2003 (P.L. 108-7).(68) On May 20, 2003, the Defense Advanced Research Projects Agency (DARPA) avoided a cutoff in funding for TIA by submitting the report required by P.L. 108-7. On August 29, 2003, retired Admiral Poindexter, the head of the program, resigned, partly in response to recent controversy about another TIA component, FutureMAP, which was designed to set up a "market" to collect predictions about potential terrorist or terrorist-related events.(69) That program was cancelled in response to public and congressional concerns.

Military Construction Appropriations Bills

Several months elapsed between the summer passage of H.R. 2559, the FY2004 military construction appropriations bill, and final conference action on November 22, 2003, an uncharacteristic delay for this bill (P.L. 108-132). The conference bill provides $9.3 billion, about $100 million more than the request.

The long hiatus between House and Senate action and the final conference reflected controversy about funding for overseas bases in Europe and Korea, which was opposed by the Senate because of uncertainties about their future. This issue was finally resolved by the establishment of an eight-member congressional commission to review overseas base structure and report back to Congress by December 31, 2004.(70) The Administration had signaled earlier that it plans to propose substantial changes in overseas bases as part of efforts to "reduce the footprint" of the U.S. military overseas.(71) With initial action on the domestic base closure process kicking off next year, debate about the future of overseas bases can be expected next year, perhaps even before the new report.

Overview of Administration Request and Budget Trends

On February 3, 2003, the Administration submitted its FY2004 budget request to Congress. The Administration proposed $399.7 billion for the national defense budget function, about $7 billion above the estimated FY2003 level. (Note: This includes in the FY2003 total $10 billion that Congress appropriated for DOD in the FY2003 Consolidated Appropriations Act; most OMB and DOD tables prepared for the February budget release do not include these additional funds.(72) This does not include in the FY2003 level, however, $62.6 billion in supplemental defense appropriations that Congress approved in April for the Iraq war and other costs.(73)

The FY2004 increase is in addition to substantial increases in FY2002 and FY2003. The new request is more than $100 billion above the FY1999 level for defense spending, and it represents an increase over five years of 20% in inflation-adjusted constant FY2004 dollars. The FY2004 defense request is almost 25% higher in real terms than the budget in FY1996 when DOD's drawdown in spending and military personnel after the end of the Cold War was completed.

The Administration is proposing continued increases of about $20 billion annually in the defense budget for the next five years, which would increase national defense budget authority to $480 billion by FY2008. Table 3 shows the ten-year FY1999-FY2008 trend in defense spending under the Administration's plan both for the national defense budget function and for the Department of Defense budget.(74)

Of the $399.7 billion requested for national defense in FY2004, $370.6 billion is for programs covered by the defense appropriations bill, $9.0 billion by the military construction appropriations bill, $17.3 billion for Department of Energy defense-related activities funded in the energy and water appropriations bill, and the remaining $2.8 billion in other appropriations bills.

Table 3. National Defense Budget Function and DOD Budget, FY1999-FY2008, Administration Projections

Source: Office of Management and Budget, F2004 Historical Tables, and FY2003 Consolidated Appropriations Resolution (P.L. 108-11).

a. Includes $10 billion in budget authority appropriated to DOD in the FY2003 Consolidated Appropriations Resolution (see P.L. 108-11) but not the outlay effects of that addition because OMB has not re-estimated outlays. Does not include $62.6 billion in FY2003 supplemental appropriations for defense provided in H.R. 1559, P.L. 108-11.

Annual Growth for DOD Slows In Later Years in FY2004 Budget Resolution

The conference agreement on the FY2004 congressional budget resolution (H.Con.Res. 95, H.Rept. 108-71), which was passed by both houses on April 11, just before the April recess, endorses the Administration's proposed growth of $20 billion annually for defense over the next five years (see Table 4). Over the following five years, however, defense would grow by about $10 billion annually; the Administration does not project beyond FY2008. The chief issue in this year's budget resolution was the amount to be provided for tax cuts.

Table 4. Status of FY2004 Budget Resolution (H.Con.Res. 95, S.Con.Res. 23)

Note: Senate substituted S.Con.Res. 23 into H.Con.Res. 95 after passage.

a. Budget resolutions are only marked up in full committee.

b. Budget resolutions guide the action of the authorizing and appropriating committees but are not signed into law by the President.

Although there has been considerable congressional support for increases in defense, some observers have questioned whether increases can be sustained in the future because of high federal budget deficits and the dramatic increases in costs associated with the retirement of the baby boom generation.(75) The FY2004 budget resolution projects a 40% increase spending on entitlement programs by FY2008 and an 80% increase by FY2013.(76)

Table 5. FY2004 Budget Resolution: National Defense Request and Congressional Action

Source: CRS calculations based on OMB, FY2004 Historical Tables, and DOD, Office of the Secretary of Defense, Comptroller, Briefing, FY2004 Defense Budget (February 6, 2003); Conference Report on FY2004 Budget Resolution, H.Rept. 108-71, and House report on H. Con. Res. 95, H.Rept. 108-71, p. 6.

a. Administration request does not reflect outlays from the $10 billion enacted in the FY2003 Consolidated Appropriations Resolution.

b. OMB does not project budget authority or outlays beyond five years.

House and Senate Differences about Defense Spending. The final version of the FY2004 budget resolution projects a five-year total for defense spending of $2.2 trillion, a level comparable to the Administration projection and matching levels approved in both houses. In later years, however, the House projected higher funding for defense than the Senate, and the conference compromised at $4.758 trillion through FY2013, about the midpoint between the two houses.(77)

The conference version of the budget resolution also deleted two provisions proposed by the Senate:

• a measure to set aside $100 billion over the next ten years in a reserve fund to pay for costs associated with the war in Iraq; and

• a measure to include $182 million in FY2004 and $12.8 billion in FY2004-FY2013 to cover the cost of phasing in concurrent receipt benefits for military retirees with disability levels of 60% or higher.

The Senate bill had included a defense reserve fund that decreased by $100 billion the funds set aside for a tax cut in order to provide $10 billion annually to cover continued costs of military action or reconstruction in Iraq.(78) Funding for Iraq in FY2003 was provided in the FY2003 supplemental, but there is no funding for occupation costs in the FY2004 budget, which was submitted before the initiation of hostilities. Nor is there funding in the FY2004 budget to cover the costs of the continued U.S. presence in Afghanistan.

The Senate version of the resolution also would have allowed all military retirees whose disabilities are 60% or higher to receive both military retired pay and Veterans Administration disability benefits, a proposal considered but rejected in the final version of the FY2003 DOD Authorization Act. Instead, last year, Congress provided special compensation for military retirees whose disabilities are a result of combat or combat-related activities in the FY2003 Authorization Act.(79) The conference version of the resolution deleted both provisions. Without an allocation in the budget resolution, it appears less likely that benefits for military retirees with disabilities will be expanded.

Scoring Differences Between Congress and the Administration. CBO scored the cost of DOD's request as $400.5 billion, $800 million higher than the Administration's estimate (see Table 4 and Table 5). The difference between the two estimates reflects primarily CBO's assessment that a DOD legislative proposal to set up a new account, the Refined Petroleum Products transfer account, would cost about $675 million compared to zero expenditures assumed by DOD. According to DOD, the rationale for setting up this new account with an "indefinite appropriation" is to allow DOD to cover the difference between the amount budgeted for fuel costs and actual market prices.(80) Since DOD assumes that its estimate is correct, the Administration provided no funds for the account. CBO, however, believes that fuel prices in FY2004 are likely to be about $5 higher per barrel than DOD assumes -- $27 a barrel compared to $22 barrel -- and scores the likely cost of the new account at $675 million based on the level of DOD's annual fuel purchases.

Although the FY2004 congressional budget resolution adopted CBO's higher scoring, it appears that Congress is unlikely to agree to set up the new account. Neither the House nor the Senate version of the FY2004 DOD Authorization Act includes funds for the account.(81) Instead, both houses transfer that $675 million in the CBO estimate for that account to other programs. The House and Senate appropriators also rejected DOD's proposal for this new fund and eliminated the $675 million for the account.

DOD's Appropriations Allocation. A sign of potential pressure on DOD's budget top line in the future is the outcome of decisions about the distribution of funds to the various appropriations subcommittees to guide their markup, a process known as setting 302(b) allocations.(82) The annual congressional budget resolution sets the total amount of discretionary spending available to the appropriations committees and recommends spending allocations for each budget function. The appropriations committees, however, have discretion to set allocations for each subcommittee.

The conference agreement on the budget resolution allocates $784.7 billion in discretionary budget authority to the appropriations committees. For several weeks after the budget resolution was agreed to, committee leaders debated how to allocate funds among the subcommittees and, especially, how to absorb what they identified as a $5 to $7 billion gap in spending requirements and amounts available. Departing from traditional practices where House and Senate Committees work separately on subcommittee allocations, committee leaders negotiated across both houses with their leadership and with the White House to establish a common framework within which to base their initial allocations.

On June 11, House and Senate Appropriations Committee Chairmen announced an agreed package that would free up sufficient resources to address the funding gap and remain within the overall FY2004 discretionary budget cap of $784.7 billion. As approved by all parties, including the President, the appropriations committees reduced defense spending by $3.1 billion and moved $2.2 billion in FY2004 advance appropriations to FY2003.

Trends in DOD Spending Plans

Assessing long-term trends in the defense budget is difficult because of the effect of the large amount of supplemental funding received since September 11, 2001, in the Emergency Terrorism Response supplemental of 2001 and the FY2002 supplemental. That funding, which is included in figures in Table 6, makes comparisons difficult, particularly for operation and maintenance spending that received the bulk of supplemental funding (see below).

Table 6. Administration Request: National Defense Budget Function by Title, FY2001-FY2008

Source: Office of Management and Budget, Budget of the U.S. Government, FY2004: Historical Tables and Budget of the U.S. Government, FY2004: Analytical Perspectives (February 2003), and H.Rept. 108-10, conference report on FY2003 Consolidated Appropriations Resolution for final enacted levels, and House Appropriations Committee. OMB figures include DOD's supplemental appropriations of $17.3 billion in the FY2001 Emergency Terrorism Response supplemental and $14.0 billion in the FY2002 supplemental.

*Note: Does not include $62.6 billion received by DOD in FY2003 supplemental appropriations.

Figures for FY2003 also include an additional $10 billion provided for DOD in the FY2003 Consolidated Appropriations Resolution for classified intelligence programs and for costs associated with the U.S. presence in Afghanistan and the global war on terrorism. The $62.6 billion provided to DOD in the FY2003 supplemental, however, is not included. DOD's procurement funding shows little increase in FY2004. Much of the increase in RDT&E reflects an increase from $7.6 billion to $9.1 billion in DOD's missile defense program, reflecting DOD's plan to begin deployment of 10 land-based interceptors as well as to continue the ramp-up in R&D. By FY2008, however, DOD plans to increase funding for procurement by about 40% and RDT&E by over 15% compared to FY2003.

DOD Receives $103.1 Billion in Supplemental Appropriations Since September 11 Attacks

Since the September 11 attacks, DOD has received $103.3 billion in supplemental or regular appropriations for the war in Afghanistan, the war in Iraq, enhanced security at DOD installations, and the global war on terrorism (see Table 7). The most recent supplemental for the Iraq war provides funding for the U.S. presence in Afghanistan and continued operations in Iraq through FY2003.

The Administration did not include any funding for these costs in its FY2004 budget, however, which suggests that the Administration will propose either a supplemental or a budget amendment for FY2004. In addition to funding in supplementals, DOD received $10 billion in the FY2003 Consolidated Appropriations Resolution to fund the occupation of Afghanistan and classified/intelligence programs.

In its post-September 11 requests for supplemental funding, DOD has requested substantial flexibility in its use of funds, citing the uncertainty of estimating the cost of war and the global war on terrorism. The Administration has reiterated that theme in its FY2004 request as well, calling for transformation of not only weapon systems to meet new threats but also transformation of DOD's business practices and personnel management systems (see discussion of Major Administration Themes below).

Although Congress has generally provided the amounts requested by DOD in its supplemental requests, it has been reluctant to provide the amount of flexibility requested by DOD. In fact, with each supplemental request, Congress has been less willing to accept the flexibility proposed by DOD. Congress rejected DOD's request that about 95% of the funding be provided in a flexible account, choosing instead to allocate 45% of the funds in flexible accounts (see below).

Of the $40 billion appropriated in the Emergency Terrorism Response supplemental (ETR) passed on September 14, 2001, DOD received $17.3 billion, almost entirely within the Defense Emergency Response Fund, a flexible account. Of that total, DOD had discretion to allocate funds as long as Congress was informed. For the remainder, Congress set levels within ten broad categories for DOD spending. Congress also permitted DOD to move funding into various appropriation accounts at its discretion in the FY2002 supplemental for the bulk of the funding requested.

In the most recent supplemental, for FY2003, DOD requested that Congress provide 95% of the funding in the Defense Emergency Response Fund (DERF) so that DOD could transfer funds to various accounts as needs arise. Instead Congress set up an new fund, the Iraq Freedom Fund, and allocated 25% of the funds requested to that fund but required five-day advance notifications.

Table 7. Flexibility in DOD's Supplemental Funding Since September 11 Attacks

Source: CRS calculations from CRS Report RL31829, CRS Report RL31005, CRS Report RL31406, and appropriations conference reports and GAO Report, Defense Budget: Tracking of Emergency Response Funds for the War on Terrorism, April 2003.

a. In the ETR, DOD funds were appropriated into the Defense Emergency Response Fund (DERF) except for a small amount of military construction funds, procurement funding, and Pentagon Renovation Revolving Funds. In the FY2002 Supplemental, DOD funds were appropriated to the DERF, which was made into a transfer account. In the FY2003 supplemental, funds were appropriated into a new Iraq Freedom Fund, set up as a transfer account, or into regular appropriations accounts.

Major Themes in the Administration's FY2004 Request

The overarching theme in the Administration's FY2004 request was a call for flexibility to transform not only U.S. military doctrine and technology, but also military and civilian personnel systems and defense acquisition practices. According to Secretary of Defense Rumsfeld, not only do "our armed forces need to be flexible, light and agile," but also "the same is true of the men and women who support them," in meeting the "frequent, sudden changes in our security environment,"(83) including the global war on terrorism.

To meet this goal, the Administration delivered a broad ranging legislative proposal, entitled the "Defense Transformation for the 21st Century Act," to Congress on April 10, 2003, shortly before Congress's two-week April recess. Among other things, the legislative proposal would have given the Secretary of Defense authority to redesign the civil service system governing the 700,000 civilian employees in the Department of Defense, provided additional flexibility in managing senior military officers, modify certain acquisition requirements, and exempted DOD from certain environmental statutes.

Some members of Congress expressed concern that DOD had delivered such an ambitious proposal at a time when Congress was about to recess and shortly before markup of the defense authorization bill was planned. Although DOD witnesses discussed their plans to submit the proposal earlier in the year and met with congressional staff in the preceding couple of months, the specific proposals were not available before April 10(84) (as noted above, CRS compares all of the proposed new measures with current law in CRS Report RL31916, Defense Department Transformation Proposal: Side by Side with Current Law, by Robert L. Goldich, [author name scrubbed], [author name scrubbed], and [author name scrubbed]).

The Administration characterized its proposals as the logical followup to earlier efforts to transform weapons modernization and operational practices. According to DOD, the FY2004 budget was the first budget to reflect fully President Bush's commitment to "challenge the status quo" and balance the need to meet current challenges from the global war on terrorism and near-term threats with the need to transform DOD in the longer term.(85) DOD contended that transformation is now fully underway with new emphasis placed on unmanned vehicles, precision guided munitions, special operations forces, command, control, and communications, and missile defense (see discussion on modernization below), as well as the establishment of a new command, NORTHCOM, to focus on homeland security, and changes in training practices to emphasize joint operations.

DOD also argued that its proposals for military pay raises and other benefits and its funding of operational training will ensure that recruitment and retention remain high and that readiness goals continue to be met. Over the longer term, DOD plans to review its current basing strategies in Europe and review the role of reserve forces but these areas are currently under study and not incorporated in the FY2004 budget.

Investment and Other Issues

The major issues in this year's congressional debate -- for example, DOD's request for broad ranging authority to manage its civilian workforce, exemptions for DOD to certain environmental laws -- are discussed above. Other issues raised include

• whether DOD's investment priorities are transformational, affordable, and consistent with "lessons learned" from the war in Iraq;

• revising criteria governing the FY2005 base closure round due to be initiated next year;

• various organizational and acquisition changes; and

• DOD's proposed changes for management of military personnel.

An update for conference action will be included in a later update.

Proposed Acquisition and Organizational Changes

In its legislative package, DOD included several provisions designed to increase its flexibility to contract for major defense weapons systems and information technology programs, receive waivers from Buy America and domestic content requirements, and buy standardized items.(86)

Two potentially controversial proposals would allow DOD to contract out for firefighting and security guards at bases and would allow DOD to count work performed by contractors at federally owned facilities as part of the 50% minimum for in-house performance of depot work. Congress has consistently opposed allowing DOD to hire private security guards and loosening the definition of work that could be counted as "in-house".(87) A later update will provide the details about conference action.

Other Organizational And Financial Proposals To Increase Flexibility. Other DOD proposals would give the Secretary of Defense broad discretion to reorganize the department, transfer personnel, and be exempt from current personnel caps. To increase financial flexibility, DOD requested that the limit on transfers between appropriation accounts be raised from the current level of $2.5 billion to 2.5% of total DOD spending or about $9 billion. (DOD made this same request in the FY2003 supplemental, and received a higher transfer limit but not the 2.5%.)(88)

DOD also proposed changing the standard governing awards of contracts to government entities versus private companies based on the A-76 competitive sourcing rules. DOD proposed using a "best value" assessment rather than the current lowest cost standard. A less controversial proposal, which has been endorsed by both OPM and DOD, would transfer the DOD civilian personnel currently performing security investigations to OPM. DOD also proposed eliminating 184 reports to Congress that are currently required, ranging from reports on specialized topics to more general reports on readiness levels and operation and maintenance funding.(89) A later update will summarize conference action.

Authority To Spend $200 million To Support Foreign Militaries. In its request, DOD asked Congress to give it permanent authority to allocate up to $200 million to support "coalition forces," or foreign military forces. Although this request is similar to the request enacted in the FY2003 supplemental for $1.4 billion for coalition forces who help the U.S. to combat terrorism, DOD's request for permanent authority included no provision for congressional oversight. In the FY2003 supplemental, Congress required DOD to report by July 1, 2003 on its plan to allocate funding for coalition forces.(90) Final action will be included in a later update.

Affordability and Mix of DOD's FY2004 Investment Programs

A perennial issue in defense policy has been whether the Defense Department will be able to afford all of the major weapons modernization programs that have been on the drawing boards, particularly toward the end of the decade, when a number of new programs are planned to be in full scale production. The issue has been complicated by the Defense Department's growing commitment to defense transformation, which implies an effort to accelerate selected programs and perhaps add some entirely new ones. During the 2000 presidential election campaign, then-Governor Bush promised to "skip a generation" of weapons programs in order to free up funds for more transformational priorities. A full update for conference action will be in a later update.

Last year, and again this year, the Defense Department has tried to calculate the amount that is being devoted to modernization programs that it regards as particularly transformational. According to DOD Comptroller Dov Zakheim, these programs add up to $24.3 billion in the FY2004 budget and $239 billion over the period of the six-year FY2004-FY2009 future years defense plan (FYDP). Under Secretary Zakheim said that DOD made room for these programs in part by cutting about $82 billion from projected service budgets over the course of the FYDP. The cuts include termination of a number of Army programs to upgrade current weapons, early retirement of 26 Navy ships and 259 aircraft and an attendant reduction of 10,000 in the Navy's personnel end-strength, and early retirement of 115 Air Force fighter aircraft and 115 mobility/tanker aircraft, as well as efficiencies.(91) Final conference action will be addressed in a later update.

In the FY2004 budget, the Defense Department requested $74.4 billion for weapons procurement and $61.8 billion for research, development, test, and evaluation (RDT&E). Major aspects of the Administration request, and some key issues include the following.

Army Transformation. In recent years, the Army has been pursuing three major initiatives simultaneously: (1) upgrades to the current "legacy" force, including improvements in M1 tanks and Bradley Fighting Vehicles; (2) development and deployment of an "interim" force made up of six brigades equipped with Stryker wheeled armored vehicles and designed to be more rapidly deployable than heavy armored forces; and (3) pursuit of an "Objective Force" include the "Future Combat System," a family of new armored vehicles and other systems designed to fundamentally change the way the Army will fight in the future. In addition, the Army has been continuing to develop the Comanche helicopter, though late last year, the Defense Department decided to cut planned total Comanche procurement by about half.

In the FY2004 budget request, the Defense Department cut back a number of planned upgrades of Army legacy systems, including high-profile M1 and Bradley upgrades. In the wake of the Army's success in the Iraq war, there was extensive discussion in Congress about the wisdom of these planned cuts. The House Armed Services Committee-reported version of the authorization adds $727 million to the request to continue M1 and Bradley upgrades along with some related Army upgrade programs.

Congressional Action. Table 8A shows action on major Army programs in the House and Senate defense authorization bills, and Table 8B shows action in the House and Senate versions of the defense appropriations bill. A few issues stand out.

• Legacy force modernization: The House authorization adds $258.8 million for Bradley Fighting Vehicle upgrades and $424 million for M1 tank upgrades (offset by cuts of $140 million in other M1 projects). These are among the programs that the Administration wants to terminate as part of the $82 billion in 6-year savings that officials announced when the budget was released. The House appropriations bill adds the same amount for Bradley upgrades and $155 million for M1 upgrades. The House appropriators also urged DOD to budget for enough M1 upgrades in the future to complete equipping the 3rd Armored Cavalry Regiment with modernized tanks. In effect, the House rejected DOD plans to cut back on Army "legacy force" upgrades, though House appropriators also indicated that they may be satisfied once sufficient upgraded Bradleys and M1s are procured to equip 2 and 1/3 divisions of what the Army calls its "counterattack" force of heavy armored units.

• Stryker interim combat brigades: The House appropriations also added $35 million for long lead items for Stryker armored vehicle procurement to equip the 5th and 6th Stryker brigades. DOD has, in the past at least, considered halting the interim combat brigade program after four brigades are deployed. House appropriators sent a strong message that they expect DOD to fill out the planned six-brigade force. The Senate Appropriations Committee also added $35 million for long lead items for Stryker procurement, though its report language did not specify that it was for the 5th and 6th brigades. In addition, Senate appropriators added $100 million in other Army procurement -- for communications and other equipment -- to accelerate Stryker brigade deployment, a strong vote of support for the Army program.

• Helicopters: All of the committees add money for UH-60 utility helicopters, largely for the National Guard, though there are some differences in how the money is allocated. This is a perennial congressional addition to proposed budgets. All of the committees also support continued Comanche helicopter development despite cost growth and substantial cuts in the planned program.

Table 8A. House and Senate Action on Major Army Acquisition Programs: Authorization

Sources: H.Rept. 108-106; S.Rept. 108-46.

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action.

Table 8B. House and Senate Action on Major Army Acquisition Programs: Appropriations

Sources: H.Rept. 108-187; S.Rept. 108-87.

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action. Note: Future Combat System funding includes PE 0604645A - Armored Systems Modernization (ASM)-Eng. Dev. only. Navy Programs. (92) Key Navy ship-acquisition programs for FY2004 include the Virginia (SSN-774) class submarine program, the Littoral Combat Ship (LCS) program, the Arleigh Burke (DDG-51) class Aegis destroyer, the DD(X) next-generation destroyer program, the San Antonio (LPD-17) class amphibius ship program, the Lewis and Clark (TAKE-1) auxiliary ship program, the Trident cruise-missile submarine (SSGN) conversion program, and the Aegis cruiser (CG-47 class) conversion program. The FY2004 budget also includes, among other things, continued advanced procurement funding for CVN-21, an aircraft carrier to be procured in FY2007.

One issue in congressional hearings on the FY2004 Navy program concerns the planned size and structure of the Navy. The 2001 Quadrennial Defense Review (QDR) revalidated the plan for a 310-ship Navy established by the 1997 QDR, but also stated that force-structure goals in the 2001 QDR, including the 310-ship goal, were subject to change pending the maturation of DOD's transformation efforts.

In February 2003, in submitting its proposed FY2004 defense budget, DOD officials stated that they had launched studies on future requirements for undersea warfare and future options for forcibly entering overseas military theaters. These studies have the potential for changing, among other things, the planned number of attack submarines and the planned size and structure of the amphibious fleet. Since attack submarines and amphibious ships are two of the four major building blocks of the Navy (the others being aircraft carriers and surface combatants), DOD, by launching these two studies, appears to have taken steps to back away from the 310-ship plan. At the same time, the Secretary of Defense has explicitly declined to endorse a plan for a 375-ship fleet that has been put forward in recent months by Navy leaders.

As a result of these events, there is now uncertainty concerning the planned size and structure of the Navy: DOD may no longer support the 310-ship plan, but neither has it endorsed the 375-ship plan or any other replacement plan. This uncertainty over the planned size and structure of the Navy affects surface combatants as well as submarines and amphibious ships, because the biggest single difference between the 310-ship and 375-ship plans is in the area of surface combatants. The 310-ship plan includes 116 surface combatants, all of which are cruisers, destroyers, and frigates, while the 375-ship plan includes 160 surface combatants, including not only cruisers, destroyers, and frigates, but as many as 60 smaller Littoral Combat Ships as well.

Congressional Action: Senate and House Markup. Table 9A shows action on major Navy programs in the House and Senate defense authorization bills, and Table 9B shows House action in the committee-reported version of the defense appropriations bill. In action on key issues:

• Carrier replacement program: A major budget decision in the FY2004-FY2009 defense plan was to accelerate the transition to the next generation of carriers by incorporating more advanced technology into the next carrier to be fully funded in FY2007 or FY2008. In all, the new carrier is projected to cost almost $12 billion for development and production, of which about $5 billion is for R&D. All of the congressional defense committees supported the Administration's revised carrier development program.

• Virginia-Class Attack Submarines: The House Appropriations Committee denied funds requested to sign a multi-year procurement (MYP) contract for new submarines, saying (1) that the schedule for delivery of the first submarine remains too uncertain and (2) that the requirement to buy two submarines each year in FY2007 and FY2008 may be unaffordable given the $2.6 billion price of each boat. The Senate Appropriations Committee approved multi-year procurement of Virginia-Class submarines, but only for 5 boats over the FY2004-FY2009 planning period rather than the 7 boats that the Navy had requested. Subsequently, on August 14, the Navy announced an agreement with contractors on a multi-year procurement deal for 7 boats, but with an option to reduce procurement to 5 or 6 boats with some increase in costs per ship.

• Attack Submarine Refueling Overhaul: The Senate Armed Services Committee added $248 million to refuel one Los Angeles-class attack submarine; the Navy did not request funding for any overhauls. The Senate Appropriations Committee added $450 million for two refueling overhauls. Neither House defense committee added any funds.

• Littoral Combat Ship: All of the defense committees expressed some concern about the status of the Littoral Combat Ship (LCS) development program, though none eliminated funding. The Senate Armed Services Committee issued the most critical report language, though it also added $35 million for more experimentation to determine the utility of the concept. The committee said (1) a Navy report on the program that Congress required last year did not adequately review alternatives or establish priorities among Navy combat requirements, (2) that Navy cost estimates did not include firm figures on the various modules that would be installed in the common sea frame, and (3) that costs of the program could compete with higher priority Navy shipbuilding in a constrained budget environment in the future. The House Armed Services Committee added $35 million for module design, while the House Appropriations Committee added $25 million for module design but cut $10 million from the overall program. The Senate Appropriations Committee added funds for module design.

• LPD-17 Class Amphibious Ship: The House Appropriations Committee added $175 million for advance procurement for the next ship of the class, the LPD-23, and told the Navy to provide full funding for the ship in FY2005, as had been planned, rather than in FY2006, as the Navy projected this year. The Senate Appropriations Committee added $75 million for the LPD-23.

Table 9A. House and Senate Action on Major Navy Acquisition Programs: Authorization

Sources: H.Rept. 108-106; S.Rept. 108-46.

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action.

Table 9B. House and Senate Action on Major Navy Acquisition Programs: Appropriations