Shutdown Ends, But Defense Budgets Still Squeezed

The Pentagon from above

With the government shutdown ended, Reserve and National Guard members can resume weekend drills.  Hundreds of thousands of federal civilians have returned to work.

Disabled veterans, VA pensioners and eligible survivors will get November benefit payments.  Promotion boards are operating again and active duty folks who had transfer orders in limbo can firm up moving plans.

But military personnel and defense civilians still work under the cloud of budget sequestration.  The stopgap-funding bill President Obama signed Wednesday night allows the Department of Defense to operate through Jan 15 at budget levels in effect Sept. 30.  So first-year sequestration cuts continue to crimp military training and to freeze civilian hiring.  And pressure is building on the services to curb military personnel costs.

Favored methods for doing so, if Congress can be persuaded to partner on the task, include:

-- Caps on annual military pay raises, penciled into future budgets at .5 percent in fiscal 2015, one percent in 2016 and 1.5 percent in 2017.

-- Higher TRICARE fees for military retirees, particularly those under age 65 who still work in second careers.  Defense officials contend out-of-pocket costs for retirees under TRICARE are a small fraction of health cost paid by private sector workers with employer-provided health plans.

[Advocates for military retirees counter that the cost of generous health benefits was paid "up front" through 20 or more years of service, often under arduous or dangerous conditions and far from home.]

-- Deepening cuts to active and reserve component forces.

-- Adopting a new method of adjusting federal entitlements for inflation.  Called the "chain" Consumer Price Index, it would reduce cost-of-living adjustments by a fraction of a percentage point every year, and over time produce significant savings on military and federal civilian retirement, veterans' benefits, survivor payments and social security.

These familiar initiatives for holding down personnel costs are likely to be discussed with greater urgency on Capitol Hill and at the Pentagon over the next several months, for two reasons.  One, Democrats and Republicans will be focusing anew on negotiating a major debt reduction deal to replace the across-the-board cuts of sequestration. That's when higher TRICARE fees and smaller pay raises can get tossed into a stew of ideas to curb spending.

Two, if such talks fail, sequestration will hit defense budgets so hard that the armed services committees might have no choice but to accept new curbs on pays and benefits.  Military leaders revealed last summer they might try to protect readiness and modernization dollars by changing the formula for setting stateside housing allowances, or by modifying TRICARE so younger retirees encouraged to use their employers' health insurance.

The legislation to reopen the federal government until Jan. 15 includes language to establish a conference committee of House and Senate budget committee members to negotiate a fiscal 2014 budget compromise by mid-December.  Conferees also are encouraged to produce a larger, multi-year debt reduction deal, like the one a House-Senate "super committee" tried but failed to achieve in 2011.

That failure triggered a provision of the Budget Control Act (BCA) to begin automatic cuts through budget sequestration, with half of a trillion dollars to be taken out of defense budgets over the next decade.

Defense officials and the armed services committees hope budget committee conferees can reach a debt reduction deal big enough to sideline year two of sequestration cuts.  If not, in January, the defense budget is to fall to $475 billion, 10 percent below the administration's request of $527 billion for fiscal 2014, and an eight percent below current spending.

Defense Secretary Chuck Hagel warned in July that such a cut is "too steep and abrupt" and will leave the military at greater risk, and with fewer options, in the event of "major new national security contingency."

Obama is using his authority under the BCA to exempt military personnel accounts for a second year from automatic cuts of sequestration.  Such cuts, even to force structure, just won't produce the needed savings, officials said, given separation pay obligations, travel costs and the fact that a large portion of current ground forces is funded with overseas contingency operations dollars, which are exempt from sequestration.

If personnel accounts were forced to absorb their full share of $52 billion in cuts this year, Hagel said, the effects would be "severe and unacceptable." They could include a halt to signing any new recruits, a freeze on promotions and suspension of permanent change-of-station moves.

On the other hand, by sparing personnel accounts, spending to modernize weapons and sustain readiness take bigger hits. Hagel has urged the armed services committees to avoid this by allowing closure of unneeded bases, raising retiree TRICARE fees and capping raises.

So far Congress hasn't agreed.  But a grand bargain on debt reduction could force lawmakers to make the tough choices they've avoided.

Obama first endorsed the chain CPI two years ago as part of a package of administration initiatives to address the debt crisis.  When Republicans refused to raise taxes or close some tax loopholes in return, the chain CPI concept stayed on the shelf.

Proponents argue chain CPI is a more accurate measure of inflation to set COLAs because it accounts for product substitution in shopping behavior.  Consumers, for example, will buy more chicken when beef prices are high.  Yet the current CPI for tracking prices in a market basket of goods keeps the mix and weighting of products steady from month to month.

Critics argue that a chain CPI will lower the value of COLAs and, over time, impact beneficiaries' quality of life.  But it is likely to be one of the President's most valuable bargaining chips to coax Republicans, who rail about entitlement growth, into accepting some tax hikes in budget deal.

To comment, write Military Update, P.O. Box 231111, Centreville, VA, or email milupdate@aol.com or twitter: Tom Philpott @Military_Update

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Tom Philpott has been breaking news for and about military people since 1977. After service in the Coast Guard, and 17 years as a reporter and senior editor with Army Times Publishing Company, Tom launched "Military Update," his syndicated weekly news column, in 1994. "Military Update" features timely news and analysis on issues affecting active duty members, reservists, retirees and their families.

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