A Decade's Bills Are Coming Due

he latest federal budget estimates are both encouraging and impressive. In June, the Office of Management and Budget released its latest 10-year forecast, predicting the overall federal budget surplus between 2001 and 2010 to be $4.2 trillion, up from the $2.9 trillion OMB estimated in February. A few days later, the Congressional Budget Office offered an even rosier forecast, predicting the surplus would be closer to $4.5 trillion.

The vibrant economy has completely changed the budget outlook that existed two years ago. While budget policy and the budget process itself were built on the presumption of troublesome deficits far into the future, we now face the much happier situation of surpluses. But unless a new political dynamic surfaces shortly, the Defense Department will not claim much of this newfound federal wealth.

During the past decade, Defense paid a major portion of the bill that helped bring the budget into balance and, ultimately, surplus. While force structure was cut by more than one-third, the defense budget itself was slashed nearly 40 percent. Weapons procurement was cut more than 70 percent, delaying modernization programs while the nation worked to get its fiscal house in order. Despite these reductions and a historic increase in the rate of deployments, the military succeeded in keeping readiness relatively high and the seeds of modernization planted in fertile soil. At some point, however, it became clear that there would be a price for maintaining a volunteer force of 1.4 million service members in an increasingly tight labor market and for operating aging equipment.

In 1998, the military service chiefs successfully argued for a $112 billion increase across their five-year budget plan. But even as this increase was provided, other studies surfaced suggesting that many military accounts, particularly procurement, were significantly underfunded. Although procurement increased and reached the long-sought $60 billion goal with the submission of the 2001 budget, one prominent public policy group declared this to be only half the level required. Others, taking their cue from the military services, suggested $90 billion might be more appropriate. Despite disagreement on the precise level, there was growing consensus that something had to be done to boost modernization.

The projected budget surplus makes this an appropriate time to address several defense budget concerns. Regrettably, this does not seem likely. Although a few members of Congress have called for greater defense spending, there is little pressure for an increase. The public does not perceive a major threat to national security, and despite readiness concerns, the military continues to meet its numerous missions. Opinion polls rarely uncover any concern about defense. A Gallup Poll conducted in May showed that two-thirds of Americans feel defense spending is either "about right" or "too much."

The most recent OMB forecast reflects this attitude. Although between 2001 and 2010 it projects a $1.9 trillion "on-budget surplus"-that portion of the total surplus that is not committed to the Social Security Trust fund-it does not allocate any additional funds for Defense in its projected surplus allocation. Moreover, it proposes taking $403 billion needed for Medicare "off-budget," thereby reducing the surplus by 22 percent.

This is unfortunate. Serious issues must be addressed soon if we are to maintain the current force and begin transforming to the future force many believe is necessary. Consider three conditions existing in the defense budget:

First, current Pentagon projections, in constant dollars, assume no real growth in the military personnel appropriation. Essentially, the present projection assumes that personnel expenses will remain at $76 billion for the next 10 years. This is unrealistic unless the Pentagon plans to reduce its manpower levels-which it does not. If only the active-duty pay portion of the military personnel account experiences 2 percent real growth to 2005 followed by 1.5 percent real growth to 2010-both of which represent lower growth than recent pay raises-the personnel account grows to $85 billion. This equals a compound annual growth rate of 1.3 percent. Since this approach does not include corresponding pay raises for the reserves, nor any other expense covered by military personnel, it is almost certainly understated.

Second, no one in either the Defense Department or Congress seems to have a plan for controlling operations and maintenance (O&M) spending. As a percentage of the Defense budget, O&M currently is at a historic high and growing. As older equipment is kept in the inventory longer-the Air Force plans to continue operating B-52 bombers for eighty years, according to current plans-maintenance becomes more expensive. This is compounded by the increased rate of operations, which places additional stress on already complex systems. Furthermore, there are growing expenses in non-operational functions that are funded with O&M dollars. The $17 billion Defense Health Program, for example, is experiencing cost growth similar to that of civilian medical service programs and is currently funded below annual requirements by at least $1 billion. Other initiatives in defense health, such as expanding benefits for retirees and those over age 65, will add significant additional costs. Trends suggest that without major force structure and infrastructure changes, over the next 10 years O&M will have to grow in real terms by at least $15 billion, or 1.3 percent, annually.

Finally, there is procurement, which for fiscal year 2001 is budgeted at $60.3 billion. The budget projection shows procurement growing in constant dollars to $65 billion by 2005. But in 2006, several major modernization programs either enter production or reach peak production. If procurement increases by a modest 0.5 percent real growth between 2005 and 2010, which is below expected requirements, it will reach $68 billion in constant dollars. That figure reflects annual growth of 1.3 percent.

Holding the reminder of the defense budget constant-assuming no growth in military construction and base housing, among other important spending areas-means that in real terms, spending for active-duty pay, O&M and procurement will require the annual defense budget to increase in real terms from $293 billion in 2001 to $325 billion in 2010. The cumulative yearly increases during this ten-year period will total $217 billion above what is currently projected, an amount equal to 11 percent of OMB's projected surplus, or 14 percent if Medicare were moved "off-budget." It equals 10 percent of the CBO surplus estimate.

To date, neither presidential candidate has endorsed increases in defense spending of this magnitude. Vice President Al Gore declared during the primaries that he believed an increased investment in defense was needed, but he has not suggested a specific level. Governor George W. Bush, while favoring certain programs, has not suggested increasing the defense budget top line. But the math is compelling. No matter who wins in November, there is a defense bill to be paid.

Can the bill for increased defense spending be avoided? Only if the pace of operations is reduced, reflecting a less ambitious foreign policy, or if manpower or infrastructure are cut. None of those seem likely.

It has been said, "to govern is to choose." Funding the defense budget during the next decade is certainly going to require major choices.

M. Thomas Davis is a retired Army colonel. He is conducting a federal budget analysis for the annual Government Electronics and Information Technology Association conference in October.