Washington Watch

Aug. 1, 2006

Pay and Benefits, Civilian-Style

Sweeping reforms to the military compensation system may be in store if the Pentagon acts on recommendations that would abolish many decades-old benefits—such as extra allowances for having a family—and replace them with ones more like those used in industry, such as 401K plans.

The changes would, for example, make it less financially punitive for people not seeking a long military career to leave after a decade in service, while at the same time allowing careers longer than 35 years in certain specialties. They would also require bigger payments from under-65 retirees in the Tricare system.

The reforms were proposed in late spring by the Defense Advisory Committee on Military Compensation. The blue-ribbon commission was empaneled by President Bush to look at how to make military pay and benefits more effective at attracting and keeping high-quality people—and also to make it easier to part with people who either don’t want to continue a military career or who aren’t good performers.

The group concluded that the government should adopt many common industry practices to better manage military personnel.

The seven-member panel of former flag officers and other military experts spent more than a year studying the elements of military compensation. They titled their 150-page report “Completing the Transition to an All-Volunteer Force.” Such reviews are required every four years by law. At the time the commission was empaneled, new ideas were considered essential because the Army was failing to meet its recruiting quotas.

The military pay system “can be improved,” the group said, because the system in place, largely unchanged since the inception of the all-volunteer military in 1973, is hampered by “lack of choice and … inflexibility.”

The group wants to provide bigger rewards for those who excel and are quickly promoted by making pay based on time in grade rather than on years of service. Under the current system, an early promotion only provides a year or two of extra pay; afterward, pay is normalized to that of others at one’s rank. Changing the pay tables such that they’re based on time in grade would create greater incentives to get promoted “below the zone” for regular promotion, and pay tens of thousands of dollars more to high achievers over time. (See “Action in Congress: Time-in-Grade Pay Table,” p. 25.)

The current system pays “an immediate lifetime annuity” or pension to anyone who leaves after 20 years of service, and this benefit is “generous by civilian sector standards,” the group said. Members tend to “lock in” to a military career after eight to 12 years of service because there is no pension benefit at all for leaving short of 20 years. As a result, some people stay longer than they want to—or should.

By contrast, the benefits of staying past 20 years aren’t that great, causing many talented people to leave who could offer many more years of good service, the panel said. “Careers beyond 20 years [are] unusual and careers beyond 30 years rare,” it noted.

Moreover, the system is tough on those in combat forces—what the panel called “youth and vigor occupations”—because the services don’t want to induce people in those fields to stay if they can’t be offered a 20-year career.

The system doesn’t offer “a graceful way for large numbers in the combat arms to stay beyond six or eight years of service and exit prior to 20 years.”

To correct this, the commission suggested that, for the short term, buyouts should be offered to members with more than 10 years’ service. This would pay off, especially in those fields where “changed circumstances have resulted in an excess supply” of people. Taking a buyout would be voluntary.

For the long term, the panel suggested that 401K-style portable retirement savings plans should be offered to members, with contributions by both the member and government.

More significantly, the panel urged that no military retirement plan start paying out until age 60. This measure alone would go a long way toward paying for the other, richer incentives suggested by the panel.

Anyone who served at least 10 years would be vested, and anyone who stayed 40 years would retire at full pay based on the high-three average of basic pay.

Tricare for … Later Life

When it comes to military health care, the advisory panel argued for keeping the system as it is for active duty personnel—that is, providing full coverage. Retirement health benefits, however, would still only be offered for those who serve at least 20 years. The commission found that the military health benefit is better than that offered by civilian employers and is an effective recruitment and retention tool.

The Tricare retiree health plan has problems, the group said. For one thing, the benefit doesn’t mean much to junior and mid-career members, so it’s not a big recruiting tool. Meanwhile, it’s an expensive benefit for the Defense Department.

Increasingly, those who retire before age 65 are switching to the Tricare system because the cost of premiums hasn’t been raised for 11 years, and some companies are actually paying their ex-military employees cash bonuses if they decline the company health plan and switch to Tricare. (See “Action in Congress: … And Ways to Curb Them,” December 2005, p. 24.) The panel sees this as an indirect subsidy to civilian employers of ex-military retirees.

As a solution, the panel wants Tricare premiums for under-65 retirees raised so they are more comparable with that charged by civilian health care insurers, and they should grow at a rate comparable to that experienced in the civilian sector.

The practice of paying more benefits or allowances to members who have families is “a remnant of paternalism carried over from an earlier era,” the panel found. Some military people with families get 25 percent more compensation than single members with no dependents. Mostly this has to do with housing allowances, but there are many other family perks: People without families, for instance, don’t get a family separation allowance when serving overseas.

There is “no evidence” that this difference in benefits produces a better or more effective service member, the group found. The disparity “weakens the linkage between pay and performance.” It also may encourage members to marry and have children earlier than they might, putting a heavier burden on the military support system.

The group said the distinction should be abolished and everyone should be paid at the “with dependents” rates. It also said that all members should get a basic allowance for housing and pay fair market rental rates to the government if they live in government-furnished housing. This would equalize to the lower ranks—that often have no dependents and live in barracks or dormitories—the advantages enjoyed by more senior members who choose to live off base.

Special and incentive pay—bonuses and the like—only represent about three percent of total compensation, yet the various categories are numerous, complex, and inefficient, the panel said. It wants the Secretary of Defense to have the authority to target these benefits as needed, without special approval from Congress on each one. Also, the incentives should be grouped into a smaller number of categories to simplify who gets them and provide better visibility into where the money is going and whether it is yielding the desired results.

The commission said that reservists on active duty should get the same pay and benefits as their active duty counterparts, period. If they don’t want to participate in Tricare, they should get a stipend or cash payment to offset their personal health insurance.

Because reserves are locally organized, incentives may be offered to keep units adequately staffed in under-represented areas.

The panel also wants quality-of-life programs to undergo rigorous periodic evaluations to see if they “represent the best use of resources in meeting the demands” of families and the services. Benefits such as golf courses and base exchanges should only be offered where there is no reasonable alternative outside the gate. The commission said the Defense Department shouldn’t “crowd out” local businesses by undercutting them on base.

Air Force, Army Shake Hands Over JCA

The Air Force and Army have signed a deal that will guide their joint acquisition of a new, small aircraft to supply far-flung troops and special operations forces and provide emergency airlift in disaster response. It wasn’t an easy deal to cut, and there may still be some heavy turbulence ahead for the project.

The memorandum of agreement on the Joint Cargo Aircraft program was signed in June by the two services’ vice chiefs of staff: Gen. John D.W. Corley for the Air Force and Gen. Richard A. Cody for the Army. They agreed to use the same airplane for their two missions: respectively, intratheater lift and urgent, short-haul supply missions.

The two services were directed to pursue a joint program last fall by Defense Department leadership, which saw an opportunity to save money by killing two requirements with one stone. Training, parts, and maintenance could be consolidated. The services agreed.

There are rough spots, though. The Army wanted a replacement for its small Sherpa and Huron fixed-wing aircraft almost right away; it needed something in service by 2008, but agreed to delay initial capability until 2010, which is when the Air Force wants to have its first versions.

Noting the joint program—and the Air Force’s later in-service need—Congressional authorizers zeroed the Army’s Fiscal 2007 request for the program. (See “Aerospace World: Panel Cuts Army’s JCA Budget,” July, p. 20.) The Army has said the cut could slow the program two years. In early July, the two services were working to try to get the $109 million request restored.

The deal makes the Army the lead service on the project, and the Air Force agreed to the requirements spelled out by the Army before the two programs merged. Under that plan, the Army will buy 75 of the airplanes and the Air Force 70.

However, special USAF needs will be analyzed in a joint analysis of alternatives which is to be done in about a year. That analysis could conceivably call for something larger to meet USAF’s unique requirements. Later buys—not specified—could be a different or upgraded airplane.

The agreement says that the services agree to buy an aircraft that is now available, not requiring much development.

The two branches also differed on acquisition philosophy. While the Army wanted to get a contractor to provide the whole capability—the airplanes, as well as their maintenance and upgrades—the Air Force wants to develop an organic logistics capability for the aircraft.

Gen. Bruce Carlson, head of Air Force Materiel Command, told reporters in late June that USAF doesn’t want to “find ourselves behind the eight ball” in the future, unable to provide depot maintenance on the airplane because it lacks the knowledge needed to order parts or replace wiring. Without an organic logistics capability, the service would be at the mercy of a supplier who could charge whatever he wanted. Carlson also said the Air Force would probably keep the airplane for decades.

In his job, he has to “deliver and sustain warfighting capability,” and the JCA structure as it stood in June didn’t allow him to fulfill that mission, he said.

Providing the tech data is costly and goes beyond mere manuals, but involves rights, patents, and licenses.

Still, Carlson said he believed the issue would be resolved.

“I think we have an agreement that we’re going to add the requirement for tech data” in industry proposals, he said. Competitors would have to submit revised proposals, but on this issue, USAF is “putting our foot down,” Carlson said. He added that getting the tech data up front will be easier than trying to buy it “three years from now.”

The agreement between the services said their aircraft could be part of a “common user pool” in theater, with either service able to use an aircraft if the other didn’t need it at that time. This would reduce the number of airframes required.

Both services want an airplane able to take off and land in less than 2,000 feet. Former USAF Chief of Staff Gen. John P. Jumper likened the requirement to that of the C-7 Caribou used to supply Special Forces in remote areas during the Vietnam War.

Both services also see a role for the aircraft in disaster relief such as last year’s hurricane Katrina, when they could have used a small airplane able to use short airstrips.

There are three industry teams readying proposals for the JCA contract, and in June, Lockheed Martin said it would offer a smaller version of the C-130J for the mission. While the Air Force would benefit from having an aircraft able to use parts and training common to its C-130 fleet, Army officials said such an airplane would be too large for their needs.

Despite the bumps, USAF is committed to going ahead with the project.

Corley, at a June Capitol Hill seminar, said he and Cody have complete understanding of each other’s service needs for the JCA and will do whatever’s necessary to work out the differences.

“There’s no daylight between us,” Corley said.

Second Thoughts on C-130J Data

Data that saved the C-130J from termination last year were the best available at the time and weren’t contrived to keep the program going, service officials said in June.

When Defense Secretary Donald H. Rumsfeld pulled the C-130J back from termination in May 2005, he did so because data on the project offered by the Air Force showed that it would actually cost more to cancel the program—and get no more airplanes—than to simply finish out the multiyear contract and get about 60 of the new airlifters. (See “Washington Watch: Rumsfeld Retreats From C-130J Termination Plan,” July 2005, p. 12.)

However, a Pentagon inspector general report issued in June asserted that the “termination cost estimate was unsupported” by Air Force data and that Rumsfeld wasn’t given enough information to make a good call on the issue.

The IG said that, while the Air Force claimed it would cost $1.78 billion to kill the C-130J, the service couldn’t substantiate about $1.1 billion of that figure—in effect, overstating the termination costs.

Gen. Bruce Carlson, head of Air Force Materiel Command, addressed the issue with reporters in late June. He said circumstances had changed between the time the estimate was made and the time the IG reviewed the issue, and that what was initially offered by USAF was a good faith estimate.

“The implication … that somebody lied to Secretary Rumsfeld is just not true,” Carlson said. “We gave the best data we had at the time. And the Secretary knew that; he knew that there was a chance that things would change.”

The C-130J, Carlson noted, was bought as a commercial, off-the-shelf item and not as a government-developed item. As a result, Lockheed Martin was able to streamline its subcontracting system by buying parts from the most efficient vendors. Some of those vendors were very small, Carlson said, sometimes “literally in a garage someplace.”

Going back and rounding up data from such contractors—there were “hundreds” of them, Carlson pointed out—was difficult. In making the deadline for Rumsfeld’s decision, not everything could be nailed down. Moreover, the C-130’s cost was linked to other programs such as the F-22, and overhead costs that the two programs shared, complicating estimates.

“Between the time the data was handed over and the decision was made, and the DODIG looked at the program, there were a lot of changes,” Carlson asserted. “A lot of things were in flux. How many airplanes were we going to buy, would the Australians buy, were the Canadians going to rent, all those things were in flux.

“This was a very, very fluid program, and everyone knew that there was risk associated with that decision. I think the Secretary went into it with his eyes wide open,” he added.

The profusion of small contractors on the program has also slowed the process of converting the C-130J to a more typical military contract, as was decided shortly after Rumsfeld decided to keep it. (See “Aerospace World: C-130Js Put on Military Contract,” April, p. 16.)

“There’s really no motivation for them to produce all this data, which, in a competitive market, they would never do,” he explained. “They just bid on price and they won the contract, so why should they do the specs and provide all this costing data? They only made maybe $100 a part or something, and so it’s just a very difficult and time-consuming process for them to go back [and] gather all the cost data that they probably threw in the garbage.”

To accomplish that “and make sure it’s rational and supportable and not just made up, is really a hard thing to do,” he explained.

Carlson said that changes have been made in the acquisition system, but not as a result of the C-130J issue.

“We’ve made changes in our program offices, but it’s not because we think somebody’s lying. It’s changes in how we process data, how fast can we get data, how can we be more responsive.”

He added, “If we had to make that study again, and had to advise the Secretary, I don’t know what the recommendation would be, but we would do our very best to get the best data.”