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February 11, 2020
Navigating the Billions
A Beginner’s Guide to the Defense Budget
If you have never interacted with the defense budget it can be daunting. The process is made up of dozens of acronyms and the data is spread over thousands of pages on various websites. However, with a bit of basic knowledge, the novice budget analyst can navigate the billions of dollars within the defense budget request. This piece intends to serve as a very basic overview of how the defense budget is made, how you can read it, what tools are provided to analyze it, and what happens next.
How It’s Made
The defense budget is one product that comes out of Department of Defense’s (DoD) three primary decision-making processes: the requirements system; the programming, planning, budgeting, and execution (PPBE) system; and the acquisition system. As you can probably guess, the budget comes from the PPBE system. Properly resourcing DoD is not an easy task, as it is allocated the largest percentage of the federal budget. Here’s how it works.
First, the secretary of defense delivers the Defense Planning Guidance (DPG) to the military services. This planning guidance is put together based on national strategic documents such as the National Security Strategy or the National Defense Strategy and also the secretary’s personal goals for the department. It tells the military services where and why the secretary wants them to invest more, where he wants them to make cuts, and where he wants to maintain the same plan. Once the services have the DPG in hand, they start writing their Program Objective Memorandums (POMs). The POMs are documents that include each service’s plans for all of its specific programs (e.g., M1 Abrams tanks), how it plans to allocate funding to that program, and how the plan follows the DPG. Alongside the POMs, the services also write their Budget Estimation Submissions (BESs), which are the cost estimates of the POMs.
The military services submit their POMs and BESs to the Office of the Secretary of Defense (OSD), Cost Assessment and Program Evaluation office (CAPE), and the Office of Management and Budget (OMB) for review and, later with some modification, approval. Once approved, OSD and OMB release a joint document called the Resource Management Decision (RMD). This document reflects what should be included in the annual defense budget request and is then included in the President’s Budget Request for the whole government. The president is required by law to release a budget request annually.
Good to Know: Future Year’s Defense Program (FYDP)
The Future Year’s Defense Program (FYDP) is the framework with which the Department of Defense plans for the near-term (five years in total). The Department of Defense creates, reviews, and updates the FYDP throughout each PPBE process. The numbers and information released with the defense budget request are a product of the FYDP. The FYDP plans funding, manpower, and the composition of the force. Given the complexity of defense human capital, procurement, and sustainment, it makes sense to plan for costs not only in the upcoming year but also in the years thereafter.
How to Read It
The Budget Brief
When the president submits his final budget request to Congress, the DoD’s Comptroller Office releases its budget request materials. These materials include a budget brief presentation, an overview book, the “dash-1s” (explained below), and other relevant budget materials. The DoD Comptroller’s website also includes links to each military service’s respective comptroller website where you can find service-specific budget briefs, overview books, plans, and the very important budget justification books (explained below).
One of the first documents put out by the department is the overall budget brief presentation. Staff from the Comptroller’s office will use this brief to present the reasoning and structure of the budget. If the brief doesn’t provide you with enough detail, you can go to the budget overview, or “highlights” book, which provides more detail and explanation behind the budget structure. The budget brief is complementary to the budget overview book; charts and information found in the budget brief can also be found in the budget overview book. Additionally, each service has its own budget brief and budget overview book on its website that is specific to its roles and missions.
Types of Defense Funding: Base Budget vs. OCO
The Department of Defense generally uses two “buckets” to categorize its funding: base funding and Overseas Contingency Operations (OCO) funding. Base funding is money the department has planned for throughout the budgeting process—think FYDP, or long-term, known costs. Overseas Contingency Operations funding acts as a supplemental emergency fund. The current OCO account has been funding operations overseas in places such as Afghanistan, Iraq, Iran, and Syria.
The Department of Defense has used supplemental spending throughout history to fund its wars, so it’s not unusual to see this type of funding in the budget. Before 9/11, however, contingency funding that lasted longer than a year was incorporated back into the base budget. For example, in the first year of the Korean War supplemental spending accounted for more than two-thirds of the DoD budget. By the time the Korean war was in its last year the Department of Defense did not use supplemental funding to fund war efforts, but instead included it in base funding.
OCO funding has remained a constant in the Department of Defense’s budget for over 20 years. To make matters more complicated, regular rule-changes and political deals have incentivized including costs only tenuously associated with overseas operations in the OCO budget.
Defense Budget Breakdown
The Defense Department commonly breaks down the budget by appropriation title and by military department. There are five main appropriation titles: Operation and Maintenance (O&M); Research, Development, Test, and Evaluation (RDT&E); Procurement; Military Personnel (MILPERs); and Military Construction (MILCON).
- O&M is usually the biggest chunk of the budget. It funds the “doing things” part of the department, from training sailors to the upkeep, maintenance, and implementation activity of everything in the department including fighter jets’ flying hours, tanks maintenance, and the Combatant Commands day-to-day work, for example.
- Procurement is responsible for purchasing new capabilities. For example, the procurement funding is responsible for buying munitions or purchasing drones. It is one of two “investment” titles that are responsible for ensuring our technological military advantage.
- RDT&E is the second investment title and sometimes referred to just as Research and Development or R&D. This title allows the Department of Defense to innovate by funding research on novel technologies across multiple domains. It also includes funding to upgrade current capabilities.
- MILPERs is responsible for paying our military by providing our servicemembers with salaries, healthcare, and retirement.
- MILCON allows the department to repair existing and build new bases, offices, and other necessary sites all across the world.
How to Use It
The budget justification books, otherwise known as j-books, are one of the most important tools available to analyze the defense budget. They are sorted first by military department and then by appropriation titles. The j-books cover seven fiscal years; for example, the FY21 j-books show dollar amounts for FY2019–FY2025.
You can find the following information (and more!) in a justification book:
- quantity of capability being purchased
- costs of the program
- program element (PE) code (identifier code used to organize the FYDP)
- description of the program
- capabilities’ contractor
- program schedule
Along with the justification books, the department releases a set of Excel files and pdfs, commonly referred to as the “dash-1s.” They are called this because of the naming convention for the files; for example, the procurement file is called “P-1.” These excel files include all of the data in the j-books excluding the written description of the program. Each account title (RDT&E, O&M, Procurement, MILCON, MILPERs, etc.) usually has their own separate file. These files can be found on the DoD Comptroller’s website. There are no department specific dash-1s available to the public.
If you have a basic understanding of Microsoft Excel, it won’t take long for you to become a pro at using the dash-1s. You can use Excel’s sort function to organize the files into more manageable and readable sheets. For example, if you want to look at Navy combat aircraft, you can sort first by organization (Navy), and then by budget activity title (combat aircraft), which will show you how much the Navy is spending on combat aircrafts. If you wanted to go even further, you can sort by line item title, which will allow you to choose specific aircraft such as the F/A-18E/F Hornet or the F-35C.
The Green Book
DoD releases the National Defense Budget Estimates book a few weeks after the budget release. You may hear budget experts and analysts refer to this book as the “green book.” The cover is green, hence the nickname. Essentially, the green book is a numerical overview and breakdown of the budget request that includes a list of “deflators” that allow you to adjust cost for inflation across multiple fiscal years. In other words, it would be nearly impossible to compare budget requests year to year.
What Happens Next?
Congress plays one of the most important roles in the budget process and it begins after the request has been submitted. The President’s Budget Request is not law, as Congress holds the “power of the purse” and can make any changes it sees fit.
The House Armed Services Committee (HASC) and Senate Armed Services Committee (SASC) are the two congressional bodies that take the defense budget request and turn it into the National Defense Authorization Act (NDAA). The NDAA sets the funding limits and creates the laws by which the money appropriated to DoD can be spent. After the department’s budget request is released, both the HASC and SASC will hold congressional posture hearings where senior leadership from the Department and the military services present their budget request. These hearings help the committees shape the content of the NDAA and provide an opportunity for the DoD leadership to justify their budget requests.
After the two committees approve the NDAA, it can be moved to the floor of the House of Representatives. Once the bill passes the House, it heads to the Senate floor. If the House and Senate have differing opinions on the bill, those are typically resolved in a congressional conference. After an identical bill passes in both the Senate and the House, the president will sign the NDAA into law.
While the NDAA is the more publicly known outcome of the President’s Budget Request, it does not fund the Department of Defense. The House and Senate Appropriations Committees must pass a separate appropriations bill to provide the money authorized in the NDAA to the Department of Defense. The main difference is the NDAA creates parameters by which funding can be spent and the appropriations bill puts the funding in the Department’s pocket.
The Department of Defense’s budget materials do not have to be intimidating. By using the tools and concepts above, even a novice budget analyst can begin to meaningfully interact with and make sense of the Defense budget.
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