Last week, the Pentagon unveiled its $582.7 billion budget request for fiscal 2017. This marked the second time Mike McCord has overseen the preparation of the DoD’s budget since he became comptroller in June 2014. He previously served five years as the comptroller’s principal deputy and more than two decades with the Senate Armed Services Committee as a staffer for former Sens. Sam Nunn and Carl Levin. While the 2015 Bipartisan Budget Act provided an assured top line figure, McCord and his staff still found themselves scrambling to cut more than $20 billion from the budget in just six weeks. Here, he explains how the DoD’s “portfolios” are adjusted.
Some critics on Capitol Hill and elsewhere view this as an irrelevant budget: It just comes in on the costs, DoD won’t get everything it wants, and the next relevant budget will be in May 2017, after a new administration submits its budget. How would you make the case that this is relevant? Does it contain, in your view, major muscle movements or initiatives that you think will outlast this administration?
I think it does. If I would list the major move, I think it’s with respect to Russia, and that’s within the secretary’s framework of trying to really have us reorient a little bit so that we’re thinking across the spectrum from now to 20 years from now. Here and now is the fight against ISIL, of course, and the Taliban in Afghanistan. But he’s really trying to focus us as well on the higher end, peer and near-peer competitors, that’s Russia and China, as well as Iran and North Korea. I think that what we’re doing in Europe, in particular, on this so-called European Reassurance Initiative, is probably the biggest muscle move in my mind in this budget. But it’s also the mental framing to think about the high-end competitors as well as the here and now. But to think ahead is really where I think Secretary Carter is trying to push us, and to think across the spectrum of time, geography and all the domains now: air, sea, land, to think about space as a contested environment, to think about cyberspace as a contested environment. He’s really challenging the military to be, as we know that they are, versatile and agile across every imaginable dimension.
For many observers, the biggest loser was acquisition programs, with a 7 percent decrease between ’16 and ’17. There is a concern that by continually cutting and deferring programs, the administration is causing a bow wave, a crest of programs that will come due around 2020, 2025, when the nation may not have the money because of debt reduction and demographic trends. Are you potentially dangerously delaying modernization, but also creating a bow wave that may simply be too big to address in the future?
There was a pre-existing nuclear modernization bow wave that is coming throughout the decade of the '20s and the first half of the '30s as we buy the replacement for the Trident submarine, one at a time over a period of a dozen years or so, as well as the other two legs [of the nuclear triad]. That challenge is before us, it’s something that we’ve been working hard, the deputy secretary in particular has been working very hard trying to make sure people understand it and start exploring different ways that we can solve it. More resources, of course, would be our top solution to solve it, because we look back at what was done historically in what he calls the first and second waves, of the early 1960s and mid-80s when the triad was recapitalized to some extent, it didn’t come at the expense of the conventional force. That’s what our ideal is, that we’d be able to achieve that again, but the fiscal situation in the '20s and '30s with the baby boomers in full retirement mode is going to be a challenge for sure.
In the near term, though, balance is something that’s almost inherent in budgeting. On the Air Force side, we rebalance slightly toward the capacity side, on the Navy side, slightly toward the capability side. Historically when there are budget gyrations up or down, acquisition accounts, procurement in particular, are the most volatile. The budget deal that we got was a deal for fiscal ‘16 and fiscal '17. That deal gave us zero guidance about what’s going to happen after this, in ’18, ’19, ’20, ’21 and then on into the future. We know that the Budget Control Act caps are still the law in '18, '19, '20, '21. This department has been very consistent that we can’t live with those caps, we don’t support living with those caps. Looking at our ’15 budget, our ’16 budget, our ’17 budget, where we say we need to go for the next five years has been remarkable, we’re talking maybe a billion difference or two out of 500 in any given year. Over those three years our position has been consistent.
Then you get a short-term signal in the budget deal that you’re going to get less money, you’re going to get much of what you want but not all. How do you react to that? Compensation is really not a good short-term lever. You certainly wouldn’t give people a pay cut.
In fact you have a pay increase in the budget.
Yes, we have a pay raise. So that lever is really not available to us to reduce compensation unless we were going to reduce the size of the force. Size of the force is really the biggest lever that there is. If you have a smaller force, then you need less facilities, you have less people to pay, you need less health care, you need less rifles and ammunition and aircraft. But when you have a short-term signal that your budget is going to be adjusted 3 percent down, as it was in this deal in '17, with no information about where the future is going, that’s not a propitious time to make the force smaller permanently. Making the force smaller is a big muscle move, it’s a hard muscle move, it’s a slow one, it involves getting people out of the force either voluntarily or involuntarily. I wouldn’t say it’s a step of last resort, but it’s a very difficult step to do. So where that tends to leave you is you go to the acquisition accounts. They are more adjustable in a short-term, one- or two-year change in supply of money, not so much a change in demand for military force but a change in supply of resources. It’s not unusual if you look at history to say that procurement is my short-term shock absorber.
How did you decide how much to take from each of the services to make up for an almost $22 billion shortfall?
The primary way we look at our program and how to adjust it is what we call portfolios, so things like space, ISR, ground forces, tactical air forces, not so much that each service is going to get a bill, although that is one of the tools that we use. But it’s primarily, where do we think that we have too much risk or that we have an investment in what sort of fields of endeavor could an investment really make a difference. It’s kind of looking at the margin of where we think we have a little too much or that we really think progress could be made.
Some in the department have referred to the F-35 as the “piggy bank,” with reductions to annual buys freeing funds for other uses. But volume is vital to the program. Is there a danger that the department is destabilizing its largest program by keeping planes around like the A-10, continuing to buy F-18s instead of moving to this new-generation airplane?
I wouldn’t say there’s no risk. I don’t personally worry that this is going to end up like the B-2 did where the quantity drops to such a small number that the unit price spikes up and people aren’t willing to buy it anymore. I do think there’s some risk of that, and obviously in this program what we do is a key driver. What our partners do is also relevant. The analysis that our acquisitions folks did was that the quantity changes in this budget were not going to materially affect the unit cost. So we didn’t see ourselves as kicking off a bad spiral in terms of unit price, but it’s not where we wanted it to be.
Can you give us a rough sense of how much of the department’s total resources are going to things that could be characterized as either major innovation initiatives or third offset initiatives?
The amount of resources that we’re talking about in the FY17 budget is on the order of $3.5 billion, so kind of in the 1 percent of our budget range. It’s not enormous in terms of funding. One of the points that the secretary has tried to make to us is innovation, in his mind, is not just about money. It’s also about the way you think. What he likes about the Strategic Capabilities Office is they imagine ways to take a weapon you already have and use it differently. It doesn’t necessarily take a lot of money to do that if you have some clever adaptations of things you already have. So third offset, and innovation writ large, the primary yardstick is not necessarily money. The import is a combination of the money but also the mindset.
Overseas contingency operations (OCO) has evolved into something that is not really supplemental, but is actually a core part of the way the department runs things. If it isn’t going away, isn’t it time to establish more firm criteria about what goes into it and what does not?
We’ve had pretty firm criteria between ourselves and the Office of Management and Budget over the course of this administration. We wrote them early on, and we’ve largely left them in place. The signals on OCO have been very confused. What we’ve done in this budget deal was really unprecedented, writing OCO numbers in advance of any particular requirement level being established of here’s what it should add up to. That really was moving pretty much 180 degrees opposite of what the desire had been in many quarters to tighten OCO and get it back in the base. Getting OCO back in the base is a good thing but it can’t be done with the Budget Control Act caps. We just don’t see how it’s possible to move that back in there unless you’re going to revisit the whole Budget Control Act structure.