Washington Watch

Dec. 1, 2004

CBO Finds Defense Program Underfunded

The Pentagon’s program over the next 18 years will require hundreds of billions of dollars more than planned to man, train, and equip the force, according to the Congressional Budget Office.

CBO projects that if greater funds are not appropriated in the future, the military would have to shrink, both in personnel and equipment.

In an update of a 2003 report, the CBO said that the Pentagon’s future years defense program (FYDP) calls for a rise in annual spending from $402 billion in 2005 to $455 billion in 2009 but that the actual cost of programs in that year would probably be about $498 billion. That would leave a cumulative, five-year deficit of more than $220 billion. (All figures were expressed in Fiscal 2005 dollars.)

In “The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal Year 2005,” CBO forecast that the annual defense bill will continue to grow during the decade that follows the FYDP. If the Pentagon manages everything brilliantly and costs don’t sharply rise, it will cost an average of $485 billion a year for the US military in the decade from 2010 to 2022. Historical trends and a profusion of programs whose costs aren’t yet nailed down, however, suggest the real figure could go as high as $553 billion a year between 2010 and 2022—without adding any more new programs.

According to CBO, the Pentagon’s estimates were low to begin with, but in the last year, new big-ticket programs have been added to the mix without commensurate increases in the budget. For example, Air Force projects such as the E-10A airborne battle command post and two new interim strike aircraft have been added to the plan, Congress has just ordered procurement of a new aerial tanker, and further purchases of C-17 airlifters beyond the 180 now under contract seem likely. Moreover, cost projections on the joint service F-35 fighter have risen $11 billion in just the last year, suggesting program costs will remain, at best, uncertain.

All of the overall figures cited count toward personnel, health care, investment in new systems, and operations and maintenance costs, but don’t include the cost of the war in Iraq and other contingencies. Both the Pentagon and CBO expect combat operations costs to be paid for by annual supplemental appropriations.

Health care and personnel costs will drive the largest portion of defense spending over the FYDP and beyond. While investment in new equipment and technology would rise during the FYDP, it would actually drop a bit by late 2022 as system modernization comes to a conclusion.

“The demand for new investment resources—mainly to develop and buy new equipment—would rise from $145 billion in 2005 to a peak of $191 billion in 2013 and then decline to $165 billion by 2022,” the CBO reported.

During the next 18 years, the Air Force would consume the largest portion of investment, owing to its need to replace a large number of aged aircraft.

The Air Force’s cycle of modernization—dedicating a decade or so of investment sequentially to bombers, then airlift, then fighters—was thrown out of whack by the “procurement holiday” of the 1990s. Aircraft of all types except trainers will have to be procured at the end of this decade and the first half of the next. USAF will have to concurrently acquire the F/A-22, the F-35, the C-17, new tankers, the E-10, and possibly one or two new “interim” long-range strike platforms, in addition to new helicopters and special operations craft.

At the same time that CBO declared the spending plan is short of actual needs, it noted that, even at higher levels of spending, defense outlays as a percentage of the Gross Domestic Product won’t increase and may decline.

The share of GDP allocated to defense spending “declined from an average of six percent in the 1980s to four percent in the 1990s,” the CBO noted.

“If current plans were carried out, defense spending would drop to 3.2 percent of GDP by 2009 and 2.8 percent by 2022, … assuming that GDP grew at the long-term rates projected by the CBO. With cost risk included, defense spending might equal 3.2 percent of GDP in 2022.”

The Druyun Fallout Continues

The Air Force is trying to decide how to proceed in a number of high-profile programs thrown into turmoil by the admission of wrongdoing by former senior service acquisition official Darleen A. Druyun.

Druyun on Oct. 1 was sentenced to a federal prison term for showing favoritism to Boeing in several contracts. (See “Washington Watch: Druyun’s Downfall,” November, p. 10.) She admitted handing to Boeing the C-130 Avionics Modernization Program contract that it might not have earned. She also admitted favoring Boeing in a proposed 767 tanker lease, a C-17 contract dispute, and a NATO E-3 Airborne Warning and Control System aircraft upgrade.

Lockheed Martin, originally favored to win the C-130 job, and BAE Systems, which also lost out on the project, filed protests with the Air Force. Lockheed asked the Air Force to declare a default action on the C-130 AMP as well as several other major programs that went to Boeing. Lockheed and BAE want USAF to reopen these programs to competition and bar Boeing from bidding on them.

Besides the AMP contract, Lockheed cited several other suspect programs, including the Small Diameter Bomb and two classified intelligence projects. The AMP and the SDB are worth $4 billion and $2 billion in development work, respectively. No value was assigned to the classified projects.

The Air Force said that, “based on Ms. Druyun’s admissions,” it has asked the Pentagon inspector general to review the C-130 AMP and the C-17 matters. A USAF spokesman did not say when the service expects a resolution to those investigations.

However, the spokesman said USAF would also refer the cases directly to the Government Accountability Office, since the service is “confident” that no matter what it decides, there will be appeals. Since any appeal goes to GAO, said the spokesman, “it will expedite matters for all if GAO is involved from the beginning.” The Air Force wants to ensure there is “transparency and fairness” in its resolution of these matters, said the spokesman.

“We want no doubts as to the integrity of this process,” he said.

Boeing’s former chief financial officer, Michael M. Sears, had been charged with conspiring with Druyun to discuss her future employment with the company while she was still serving with the Air Force. Such discussions are illegal and carry conflict-of-interest penalties. His case was pending in early November.

Meanwhile, Air Force officials said the service is evaluating Boeing contracts “on a case by case basis.”

The Air Force has also asked Michael W. Wynne, the acting undersecretary of defense for acquisition, technology, and logistics, to review any contracting activity by Druyun that he believes needs further review.

With respect to the C-130 AMP, the Air Force is considering three options: canceling the program and launching a new competition; refunding the losing companies their expenses in bidding for the work, or diverting chunks of Boeing’s AMP work to them as subcontractors.

The Air Force believes that any of the alternatives is a choice of evils. It will be, at the least, a huge management headache for the Air Force and could result in spending quite a lot of money it doesn’t have to spare.

The protest rules called for the Air Force to choose a remedy and offer it to the nonselected companies by late November.

The Air Force is renegotiating the AWACS deal, based on the findings of the Pentagon inspector general. Druyun admitted that she permitted Boeing to charge a fee that was $100 million higher than it should have been.

USAF has asked the Office of the Secretary of Defense to review the changes the service made to its acquisition process since the departure of Druyun in 2002. The Air Force also asked OSD to convene a review board to determine whether changes are sufficient to prevent a similar situation in the future.

A Possible European Ingredient

Delays in decisions about recapitalizing the Air Force’s tanker fleet and confusion over Congressional language may have opened the door to the European Aeronautic Defence and Space Co. (EADS).

Boeing won the contract in 2002. If the work is to be competed, the only other available source is EADS, the parent company of the European-built Airbus. EADS would like to sell the Air Force the KC-330, a derivative of its A-330 airliner. When the tanker lease issue came up three years ago, the Air Force decided that Airbus was not qualified to compete because it couldn’t offer a USAF-style boom refueling probe. The company has since been working on a boom-style probe that it says will work with USAF aircraft.

Although Defense Secretary Donald H. Rumsfeld had planned to settle the tanker issue right after the November elections, final decisions likely won’t come until this month at the earliest. Rumsfeld wanted to look at two studies before he made a call on the tanker plan. Those studies—an Air Force analysis of alternatives and a draft of the Joint Staff’s Mobility Capability Study—were due to Rumsfeld in early November.

In addition, Congress has not made clear what it wants the Pentagon to do about tankers. The Fiscal 2005 defense authorization bill included $95 million to start procurement, but it barred the Pentagon from spending any money on leases, which Congress had previously approved. It also stripped Boeing of a $6 billion contract to maintain new tankers and ordered a competition for this work.

The bill did not clearly specify a requirement for a new competition. (See “Aerospace World: Tanker Lease Is Dead,” November, p. 14.) Key Senators insisted one should be held. House members, however, were adamant that the language specified the contract would go to Boeing.

A service spokesman acknowledged in November that the Air Force had not received definitive guidance on how to proceed.

EADS has said it might spend $600 million to set up US production facilities if it gets assurances of a deal to supply at least 100 aircraft. It has made the argument that both the A-330 and the Boeing KC-767 are “international airplanes,” with major subassemblies and parts made around the world, and that the KC-767 would not be significantly more “American made” than the EADS aircraft.

Boeing disagrees.

EADS has set up a Web site (www.usatanker.com) to pitch the idea of an EADS tanker. It is looking to partner with a US prime contractor to offer the KC-330, but both Lockheed Martin and Northrop Grumman have said they’re not interested.

EADS company officials don’t think they have a shot at getting a contract to replace all of USAF’s aged KC-135s, but they do think they could get a chunk of the work. The Air Force has contemplated holding annual competitions, in which the two big companies compete for some share of tanker buys. In the “great engine war” in the 1980s and 1990s, Pratt & Whitney and General Electric battled yearly for work on fighter engines.

The plan has attracted a number of Air Force advocates. Air Mobility Command officials, for example, have said they like the idea because acquisition of two different airframes would guard against a single-type failure.

Gen. Gregory S. Martin, chief of Air Force Materiel Command, suggested such a move when he commanded US Air Forces in Europe. Under Martin’s plan, Airbus could compete for a share of any tanker purchase in exchange for NATO partners buying the C-17 airlifters instead of the European-proposed A400M. According to Martin, developing the A400M would waste scarce NATO funds, since there really aren’t enough customers for two such aircraft.

“It would be win-win,” Martin told Air Force Magazine, in that NATO would get affordable airlift, the US would get low prices on tankers, and everyone would get to build something.

New Joint Commands Need Support

While the Pentagon’s creation of new joint commands to better integrate how the services fight is a step in the right direction, the Defense Science Board believes full support for those organizations may be lacking.

In the final report of the DSB Task Force on Enabling Joint Force Capabilities, Phase II, the group said it was time for the Defense Department to provide “full support” to US Joint Forces Command, US Transportation Command, US Special Operations Command, and especially US Strategic Command. By full support, the DSB meant that the Pentagon must provide them the policy, doctrine, and resources that will give them the bureaucratic heft and authority to carry out their new missions.

In some cases that could mean taking responsibilities and authority away from other organizations.

In the case of JFCOM, task force co-chairs USAF Gen. Larry D. Welch (Ret.) and Robert Hermann urged the Pentagon to re-examine “the magnitude and scope of the portfolio of missions” assigned to the organization to see if they are “executable” within JFCOM’s capabilities. They also want to ensure that the tasks necessary to enable joint forces capabilities “receive the needed attention.”

Additional manpower for the new joint organizations is necessary if they are to succeed in knitting the services together effectively, Welch and Hermann wrote.

“Since this is among the most important needs of the department, it is not a burden to be avoided,” they wrote.

The task force said it believes that the new joint commands “can meet the formidable challenges in organization and implementation flowing from these newly assigned missions,” provided they get “a modest additional level of resources” and “adequate guidance, authority, and support.”

The task force said Operations Enduring Freedom and Iraqi Freedom provided a number of key lessons regarding joint operations. They include:

—Services need to be truly integrated, which it defined as “a step well beyond deconflicting joint forces.”

—Forces need to operate in a variety of places simultaneously or in a “distributed” manner, rather than forming a single, “contiguous” front.

—Parallel, or near simultaneous, warfare in many dimensions, rather than sequential air, land, and sea campaigns, is the wave of the future.

—Knowledge and agility improve survivability more than armor.

—Focused logistical support, without a huge forward footprint (so-called just-in-case logistics), keeps the force light on its feet and able to swing fast to new locations as the battle unfolds.

—Integrating special operations forces with conventional ground troops and fire support from all the services magnifies combat power.

—Effects-based operations, rather than “input-based” operations and relying on battle damage assessments, should be emphasized.

The task force also underlined a “need for further progress” in several areas. These are:

—The ability to rapidly seize control of a crisis and set the conditions for their resolution—what the task force called “strategic agility.”

—Faster, deeper, and more comprehensive knowledge of the battlefield, including the adversary’s “capabilities, culture, and attitudes.”

—Better management of intelligence-surveillance-reconnaissance assets, to provide improved knowledge for commanders at all levels.

—Creating the means to accomplish net-centric operations, where many players in widely separated venues can collaboratively plan and execute missions at all levels of combat.

—The ability to draw on fire support from whatever service is best placed and suited to deliver it when demanded.

—“Retail” logistics that can keep up with fast-moving forces.