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Opinion: Defense Budget’s Resilience Rests On Shaky Foundation
Byron Callan
Some of the main talking points on the fiscal 2021 defense budget request and the plan that accompanies it through 2025 are that it aligns resources with the National Defense Strategy and that this year's budget theme is about all-domain operations. The Pentagon called out priorities to sustain readiness and prepare for future challenges with investment in hypersonics, autonomous systems and artificial intelligence. Given a flat top line, the Defense Department had to make tough choices by making program cuts that have been well-documented and are well-covered by this publication.
The outlines of structural changes in how the Pentagon is preparing for the future are indeed visible in the budget request and plan, but it is unrealistic to expect this budget to have completely framed out all that will be done. Increases in research, development, test and evaluation (RDT&E) spending both in absolute terms and compared to last year's plan for 2021-24 underscore shifts that are underway. It may take at least 2-3 more years to see how some of these RDT&E efforts translate into new programs and will inform how the U.S. will fight in future conflicts.
Much as defense contractor management, analysts and planners will focus on the details in the defense budget, it is important also to factor in some of the assumptions that underpin the budget—the foundation upon which it rests. Here there are questions worth considering.
The first is the real GDP forecast for 2021-29. The Office of Management and Budget (OMB) forecast depends on stable 3% annual real growth every year, which is well above consensus estimates. The U.S. is now in its longest economic expansion ever. Can this be extended into 2021 or beyond? Possibly. Has the U.S. somehow eliminated the risk of recession from a rapid increase in interest rates, another energy shock, a pandemic or a severe economic crisis in other parts of the world? Very likely not.
Another questionable factor is the new budget and plan's interest-rate assumptions, as there was a big change from prior projections. The OMB and Congressional Budget Office (CBO) do not disclose how they expect the composition of federal debt by debt maturity to change over forecast periods. They usually provide projections only on three-month Treasury bill interest rates and on the 10-year Treasury note. The U.S. Treasury shows that as of Jan. 31, of the $17.2 trillion in federal debt held by the public, 14% was in Treasury bills with an average interest rate of 1.7%, and 58% was in notes with maturities of 2-10 years at an average rate of 2.1%.
Net interest outlays are a mix of the interest the federal government pays to public holders of that debt and the interest it pays to itself on debt held in federal trust funds. One way to think about the debt burden and the interest expense associated with it is to take the net interest outlay projections and divide them by the total debt the OMB or CBO estimates.
One of the changes the OMB made in its budget projections was to lower interest rate estimates. In recent years, these projections were too high compared to prevailing market levels, as the OMB and CBO both projected rates would return to “normal” levels. In the OMB's mid-session review from this past summer, the implied interest rate (net interest outlays divided by total debt) was 2.3% in 2019 and rose to 3.0% by 2022 and 3.3% by 2025. In the latest budget and plan, the implied rate is flat—at 2.1% in 2020, creeping up to 2.3% by 2025.
This is another questionable factor that could weigh on the foundation of the defense spending plans. If rates do move to higher levels, then outlays will compete with other forms of federal spending. If rates fall further than projected, it may be due to a far weaker economy, which in turn weighs on federal deficits.
A final questionable factor is the deficit projections themselves. The Trump administration again plans reductions in non-defense discretionary spending, which Congress has not supported in the last three budget requests. The share of non-defense discretionary outlays as a percent of total outlays drops to 12% in 2024 from 15% in 2019.
For defense contractor management, planners, analysts and investors, foundations on which the budget plans are based imply that the structural and programmatic changes in the 2021 budget could be accelerated if deficits and interest rates are higher than the plan presumes. Like a high-rise building built to code in an earthquake zone, the Pentagon's structural and spending changes may make defense better able to withstand future macroeconomic tremors and shifts.
https://aviationweek.com/defense-space/opinion-defense-budgets-resilience-rests-shaky-foundation
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Contract Awards by US Department of Defense - October 19, 2018
AIR FORCE Raytheon Missile Systems, Tucson, Arizona, has been awarded a $62,016,768 cost-plus-incentive-fee option (P00012) to contract FA8675-16-C-0044 for the Advanced Medium Range Air to Air Missile (AMRAAM) program. This modification provides for the exercise of options for Phase 5 activities and foreign military sales (FMS) drawings for the form, fit and function refresh of the AMRAAM guidance section. Work will be performed in Tucson, Arizona, and is expected to be completed by Dec. 21, 2020. This contract involves FMS to Norway, Turkey, Japan, Romania, and Australia. FMS funds in the amount of $6,072,542 are being obligated at the time of award. Air Force Life Cycle Management Center, Eglin Air Force Base, Florida, is the contracting activity. Ball Aerospace & Technologies Corp., Boulder, Colorado, has been awarded a ceiling $36,043,319 cost-reimbursement type contract for Solid State Laser Effects and Modeling. This contract provides for developing innovative diagnostics/test methods, increasing fidelity, realism and confidence of predictive models, measuring and consolidating laser vulnerability data, and working synergistically with tri-service for high energy laser system research. Work will be performed at Kirtland Air Force Base, New Mexico, and is expected to be completed by Oct. 24, 2022. This contract award is the result of a competitive acquisition and one offer was received. Fiscal 2018 research, development, test and evaluation funds in the amount of $100,000 will be obligated at the time of award. Air Force Research Laboratory, Kirtland AFB, New Mexico, is the contracting activity (FA9451-19-C-0001). Infinity Systems Engineering LLC, Colorado Springs, Colorado, has been awarded a $22,653,934 firm-fixed-price contract for Global Positioning Systems Engineering, Analysis & Remote Site Sustainment II. The contract provides organizational maintenance and operational support services to the operational unit that will include remote site technicians, network administrative officers and operations support. Work will be performed in Colorado Springs, Colorado, and is expected to be completed by Dec. 31, 2025. This award is the result of a competitive acquisition and three offers were received. Fiscal 2019 operations and maintenance funds in the amount of $2,565,094 are being obligated at the time of award. Space and Missile Systems Center, Peterson Air Force Base, Colorado, is the contracting activity (FA8823‐19‐C‐0001). Advanced Electronics Co., Riyadh, Kingdom of Saudi Arabia, has been awarded a $9,437,259 modification (FA8505-11-D-0002-0006-12) to contract FA8505-11-D-0002 for the Royal Saudi Air Force Electronic System Test Set. The contract modification incorporates a 15-month extension in order to allow for the completion of the Royal Saudi Air Force Electronic System Test Sets configuration upgrade. Work will be performed Huntsville, Alabama and in the Kingdom of Saudi Arabia. It is expected to be completed by Dec. 28, 2019. This modification involves foreign military sales for the Kingdom of Saudi Arabia. Foreign military sales funds in the amount of 9,437,259 are being obligated at the time of award. Total cumulative face value of the contract is $28,518,831. Air Force Life Cycle Management Center, Robins Air Force Base, Georgia, is the contracting activity. Honeywell International Inc. Aerospace, Albuquerque, New Mexico, has been awarded a $7,838,175 firm-fixed-priced order, for the repair and upgrade of the C-5M Super Galaxy's Versatile Integrated Avionics/Avionics Integrated Units (VIA/AIU). This order provides for the repair and upgrade of 85 of the existing 903 and 904 configuration VIA/AIUs to the 905 configuration. The C-5M VIA/AIU repair and upgrade effort is a key component to the overall Core Mission Computer/Weather Radar aircraft modification/installation kit. Work will be performed in Albuquerque, New Mexico, and is expected to be completed by June 14, 2020. This award is the result of a sole-source acquisition. Fiscal 2017 aircraft procurement funds in the amount of $7,146,972; and fiscal 2018 aircraft procurement funds in the amount of $691,203 are being obligated at the time of award. Air Force Life Cycle Management Center, Wright-Patterson Air Force Base, Ohio, is the contracting (FA8625-18-F-6801). DEFENSE LOGISTICS AGENCY Rocky Brands Inc., Nelsonville, Ohio, has been awarded a maximum $20,566,240 modification (P00005) exercising the second one-year-option period of one-year base contract SPE1C1-17-D-1004 with four one-year option periods for hot-weather combat boots. This is a firm-fixed-price, indefinite-delivery/indefinite-quantity contract. Locations of performance are Ohio and Puerto Rico, with an Oct. 20, 2019, performance completion date. Using military service is Army. Type of appropriation is fiscal 2019 defense working capital funds. The contracting activity is the Defense Logistics Agency Troop Support, Philadelphia, Pennsylvania. ARMY Science Applications International Corp., Reston, Virginia, was awarded a $13,567,362 firm-fixed-price contract for life cycle management of programs within multiple ammunition product lines. Bids were solicited via the internet with one received. Work locations and funding will be determined with each order, with an estimated completion date of Dec. 4, 2023. U.S. Army Contracting Command, New Jersey, is the contracting activity (W15QKN-19-D-0002). Fabritex Inc.,* Hartwell, Georgia, was awarded a $9,257,500 firm-fixed-price contract for non-corrosive 16-block wire mesh for the manufacture and assembly of articulated concrete mattress squares. Bids were solicited via the internet with one received. Work will be performed in Hartwell, Georgia, with an estimated completion date of Oct. 18, 2023. Fiscal 2019 operations and maintenance Army funds in the amount of $9,257,500 were obligated at the time of the award. U.S. Army Corps of Engineers, Memphis, Tennessee, is the contracting activity (W912EQ-19-C-0001). *Small Business https://dod.defense.gov/News/Contracts/Contract-View/Article/1667326/source/GovDelivery/