Budgeting and Financial Management for National Defense (research in public management).

Budgeting and Financial Management for National Defense (Research in Public Management)

by Jerry L. McCaffery and L. R. Jones

Drs. Larry Jones and Jerry McCaffery have released their newest book in a series of graduate-level texts on government financial management, this one titled Budgeting and Financial Management for National Defense. This 462-page book follows closely on the heels on their first in the series, Budgeting and Financial Management in the Federal Government, which we excerpted and reviewed in the Fall 2002 issue of the Armed Forces Comptroller.

Using the same clear, unstilted writing style evidenced in their prior work, the authors begin with the hypothesis that budgeting for national defense is indeed different than budgeting for social programs and that very little has been written formally on the subject. They then offer a detailed explanation, citing both the systems used to accomplish this very different and difficult task, as well as the political ramifications of the Defense budget at the state, national and international levels; the cyclical nature of Defense budgeting; and the management processes involved. The history and evolution of the Defense budget process is explained as well as the strategies used by participants at various levels as the budget is built and executed. The work contains many graphics and tables enabling readers to obtain a good grasp of the huge amounts of manpower and dollar resources employed in national defense and processes used to manage them.

This book is a must-read for Defense budget professionals, students, and those preparing for certification in Defense Financial Management. It is available from Information Age Publishing, 80 Mason Street, Greenwich, Conn. 06830 (www.infoage.pub) for $39.95 (paperback) and $73.25 (hardback).

The following is an excerpt, reprinted by permission, from Budgeting and Financial Management for National Defense.

Recent Defense Program and Budget Reform

PPBS [Planning, Programming and Budgeting System] has provided DoD a roughly rational mechanism for coordinating a number of semiautonomous and individually complex decision processes related to meeting war preparedness, fighting, and support resource requirements. PPBS has applied relatively neutral expertise from the civilian and military parts of the organization within a decision process that is inevitably political on its own and also is driven by politics. PPBS has embraced a variety of political agendas across a number of Presidential administrations to project and enable resource management over an extended planning and budgeting horizon. A relevant question presently is the extent to which the recently revised PPBE [Planning, Programming, Budgeting and Execution] System will assist in meeting the resource decision demands of a world changed by the events of 11 September 2001 and thereafter.

The Reformed PPBES Cycle

DoD Management Initiative Decision [MID] 913 set out a two-year budget and planning cycle within the framework of the four years in a Presidential administration (Secretary of Defense, 2003a: 3-4).

Year One: Review and Refinement

Year One requires "review and refinement" of the previous President's strategy and plans, including only limited changes in programs and budgets, an early national security strategy, and an "off-year DPG [Defense Planning Guidance]." As stated in MID-913, "The off-year DPG will be issued at the discretion of the Secretary of Defense.... The off-year DPG will not introduce major changes to the defense program, except as specifically directed by the Secretary or Deputy Secretary of Defense.... However, a small and discrete number of programming changes will be required to reflect real world changes and as part of the continuing need to align the defense program with the defense strategy," (Secretary of Defense, 2003a: 5). A major objective of the off-year guidance will be to provide the planning and analysis necessary to identify major program issues for the next DPG. One of the benefits of the new four-year cycle is that it fits the PPB process into the electoral cycle. Incoming administrations usually struggle to get their people on board in the first year, and significant defense policy changes usually do not come until later. The new cycle recognizes this reality. Significant events do happen in Year One. The National Security Strategy is issued at about mid-year, and the Quadrennial Defense Review begins shortly thereafter (June) and is issued early in Year Two (February). These are significant guidances for defense strategy and resource allocation. Also in Year One, the new administration may take steps to insert its defense policy priorities in the budget submitted to Congress and to make changes caused by fact-of-life events in acquisition programs. Congress may also make changes in this year that have consequences for the following years.

Year Two: Full PPBE Cycle--Formalizing the Agenda

Year Two in the new four-year framework is more intense in that the military departments and services and OSD [Office of the Secretary of Defense] will conduct full-program, planning, budget, and execution reviews to formalize the President's defense posture and strategy, including the resource portion of the strategy. In addition to a Quadrennial Defense Review [QDR] issued early in the year, the second year will include a full, "on-year" Defense Planning Guidance, issued in May and designed to implement the QDR results. Previously, the QDR had been issued on 30 September in the first year of a Presidential administration. However, in the FY 2003 Defense Authorization Act, Congress changed the QDR reporting requirement to the second year to provide new DoD leadership more time for analysis and preparation. Senior defense officials had argued to Congress that the requirement to submit a QDR in the first year was too much to ask of a new administration barely through the rigorous congressional process for confirmation of presidential appointees to head the DoD and military departments. Year Two will see then a full POM [Program Objective Memorandum] and a full budget build. These will result in a full FYDP build. a full execution review is also scheduled for years Two and Four. Giving this the same emphasis as the POM/ Budget build is new.

Year Three: Execution of Guidance

The new planning and budget process specifies that Year Three be used for "execution" of the President's defense plan and budget agenda as provided in the QDR and the previous year's DPG. Year

Three corresponds with FY 2005 in the budget cycle and could include an "off-year" DPG if so desired by the Secretary of Defense. This off-year guidance could task new studies, or incorporate fact-of-life changes in acquisition programs including increased costs or schedule delays as well as congressionally mandated changes. Year Three and Year One are not quite the same, in that an incoming administration may have changes it wishes to make to its predecessor's budget. It is possible that congressional elections prior to Year Three may convince an administration to change its course in ways it had not expected. Additionally, in any year a significant change in the threat situation may result in a full PPBE cycle. In May 2003, [Dov S.] Zakheim indicated that no 2005 DPG was to be prepared under the Bush administration and [Defense Secretary Donald] Rumsfeld. However, the Presidential elections of 2004 could change this plan. Year Three is a year of refinement of objectives and metrics, with only the most necessary program or budget change proposals considered.

Year Four: Full PPBE Cycle--Ensuring the Legacy

Year four in the budget and planning cycle is characterized in MID-913 as the point where the achievements of a four-year Presidential administration are assessed. This year will include preparation of a full DPG to refine the alignment between Presidential strategy and the DoD program and budget. As usual, the DPG will initiate and guide the cycle of military department and service POM and budget preparation, review and submission (for FY 2006). Then, the next full PPBE system cycle will encompass Fiscal Years 2006 to 2011.

Increased Emphasis on Budget Execution

Budget execution is an important part of the new PPBE system. Normally execution consists of first gaining permission to spend appropriations approved by Congress through a separate budget submission process referred to as the allotment process. In allotment review, DoD must show how it intends to spend what has been appropriated, by quarter, month, or fiscal year for multiple year appropriations. This is always somewhat different than what was proposed in the President's budget since appropriations must now be attributed to programs and allocated into the months they will be obligated (usually by quarters). After allotment approval is received from OMB [Office of Management and Budget] and the Treasury, DoD begins the process of separating and distributing shares of the DoD budget to the military departments and services and other DoD commands and agencies. After they have received their spending allotment authority, these resource claimants begin to incur obligations to spend, and then liquidate their obligations through outlay of money,

During this process, comptrollers and budget officials at all levels of DoD monitor and control execution of programs and funding. At the mid-point of the spending year, the military departments and services typically conduct a mid-year review to facilitate shifting of money to areas of highest need. At the end of the fiscal year (September), all DoD accounts must be reconciled with appropriations, and spending must be accounted for prior to closing the accounts from further obligation and outlay (for annual accounts). Financial and management audits by military department audit agencies, the DoD Inspectors Generals, the General Accounting Office (GAO) [now the Government Accountability Office] and other entities follow the conclusion of execution and reporting. Traditionally, budget execution has been left primarily to the military departments. However, the revised process provides OSD with greater opportunity to examine and critique the budget execution decisions of the military departments and services. Comptroller official Dov Zakheim reported in February 2003 a widespread agreement in DoD not to return to a comprehensive annual budget and program review; rather the intent was to use the off year to measure the "burn rate" (rate of spending) in an execution review. To this end, comptroller staff indicated the review would include asking questions such as how money is being spent, if it should be moved to other areas and accounts, and what results have been achieved.

A federal budget process change initiated by the Bush administration, announced in February 2003 and subsequently by the DoD Comptroller, is implementation of "performance-based budgeting," to focus more on the costs of achieving desired military and programmatic outcomes, rather than concentrating budget review on the details of program administration and production. The driving military concept behind performance-based budgeting (PBB) is the concept of "effects-based capabilities" for war fighting. The effects-based approach focuses on desired end results from a military action rather than the military action itself. Under this concept, military commanders specify the results, such as capture of territory, in addition to the amounts and types of forces needed to achieve the outcome.

In the revised PPBES process, military department officials and CINCs [Commanders-in-Chief] may create Program Change Proposals (PCPs) to affect the POM and Budget Change Proposals (BCPs) to speak to new budget needs. The PCPs allow for fact-of-life changes to the previous year's POM; they are meant to be few and of relatively large size. Guidance for 2003 indicated the PCPs had to exceed a set dollar threshold or have serious policy and programmatic implications. For example, in 2003 the Navy submitted only three PCPs, one worth $100 million that involved 450 line items. For all of DoD the number of PCPs numbered about 120. For the CINCs, the PCPs are a new tool; but, as for the military departments, they have to suggest offsets. For example, if a CINC wants to increase force protection in one area at a certain cost, he has to suggest weakening force protection in another area as an offset for the increase. This is meant to be a zero-sum game. Changes have to be accompanied by offsets or billpayers.

As is usual with any offset procedure, those who submit either PCPs or BCPs take the risk that the offsets they suggest will be accepted, but the accompanying change proposals the offsets were intended to fund might not be. In such cases, the offset reveals a pot of money for a lower-priority item that might be directed to another area. The budget change proposals were expected to be more numerous but smaller. They too would be largely fact-of-life changes (e.g., cost increases, schedule delays, new congressional directives) and would have to be paid for by offsets. Although the individual BCP need not be offset, the package of offsets provided by a military department has to be offset and provide a zero balance change. The FY 2006 budget request will be prepared completely anew, marking the first biennial POM and budget in the new two-year cycle. A Defense Planning Guidance will be prepared by OSD to guide the FY 2006 process.

From our view, the PPBES cycle timing changes were sensible, given that new administrations often do not have the people in place or the insights necessary to put new DoD programs in place and prepare budget initiatives in the first year. Thus, designating the first year for review of national security strategy and the work on the Quadrennial Defense Review sets the scene for a complete budget build in the second year. Designating the off-years as years of minimal change, but allowing mechanisms for changes that do need to be made separately in program change proposals and budget change proposals also seems sensible and should cut down the turmoil involved in a complete POM-Budget rebuild each year.

Conclusions

Important changes have been made in the DoD planning and budgeting process. [First,] the simultaneous execution of the POM and budget review and its consolidation into one database is an important change, in the old system, a good POM could still be lost on the way to the final budget. Doing the POM and budget simultaneously should result in fewer surprises and less reprogramming of changes to the POM in the budget process than before, and the review process should be quicker and less linear, i.e., a layered process rather than a sequential process.

Second, the outcome focus of the process is an important change. Secretary Rumsfeld has emphasized outcomes; and in one service, the Navy, the implementation approach illustrates this concern in two ways. Procurement accounts now are focused around the outcomes that each weapon system bought will provide. The performance models for steaming hours and flying hours also are outcome-focused. This covers almost 90% of the Navy budget. Nevertheless, Congress still appropriates by line item, and DoD has to be able to translate capabilities-based resource requests into budget items and make winning arguments for these translations. The fact is that appropriation line items make it easier for Congress to buy things--and what has not changed is where the power of the purse is located. In the words of one DoD budget player, "... there are a lot of changes, but what has not been changed is the Constitution. Changes will end when they bump into things that are constitutional. The appropriation process is still a+ congressional process, and changes in the Pentagon process have to be responsive to the needs of Congress. The menu of changes the Pentagon can pursue is not unlimited."

Third, the new process appears to put the Secretary of Defense and start into the process at early stages. Proposed decisions in the new PPBES are intended to reach the Secretary before they have been made, while options are still open, and while important and large-scale changes still may be made. When Secretary of Defense inputs came at the end of the stream of decisions, some alternatives that could have been pursued were preempted simply because they would cause too much breakage in other programs or because everyone had already become committed to the likely outcomes of the decision. Veteran observers see these changes as an evolving process, cautioning officers bound for the Pentagon in a couple of years not to memorize the new process until they get there, since it has changed significantly since 2001 and probably will continue to change.

Last, the new emphasis on execution seems to be an important change, but it is too early to tell how this will turn out. it seems clear that no one wants to be viewed as decreasing military effectiveness in the name of saving dollars. If the new emphasis on execution becomes a code word for efficiency and this is translated into "doing things on the cheap," then execution review will become known for what it is--a budget reduction drill with increased oversight from the DoD level.

The lag time for full and satisfactory implementation of DoD-level macro changes in planning, programming, budgeting and execution probably is two to four years, although many wrinkles will be worked out by the military departments after the first new cycle has been completed. However, it is understood by seasoned observers of such changes that the solutions and new processes developed by the military departments and services are likely to differ--this would appear to be inevitable, given the highly differentiated resource management systems and program/budget processes used by the respective military departments and services. Overall, cautious optimism about the new process has been voiced from many quarters.

The book breaks down into the following chapters:

Ch 1 National Defense Policy and Resource Decision Making: Unique Challenges

Ch 2 The Federal Government Budget Process

Ch 3 Budgeting for National Defense: Complicated But Workable

Ch 4 The Planning, Programming, Budgeting, Execution System

Ch 5 Congress and the Defense Budget: From the Cold War to the War on Terrorism 

Ch 6 Supplemental Appropriations for National Defense

Ch 7 Defense Budget Execution

Ch 8 Budget Process Participants--The Pentagon

Ch 9 Budget Process Participants--The Claimants

Ch 10 Financial Management and Defense Budgeting

Ch 11 Budgeting and Management of Defense Weapons Acquisition

Ch 12 National Defense and Federal Government Budgeting and Management Reform: History, Transformation and the Future