The Pentagon Squeeze

The Pentagon Squeeze

G

en. Merrill McPeak, chief of staff of the Air Force, does not minimize the downsizing tasks that await him as he arrives in his E-Ring office each morning.

"The drawdown is an extremely difficult management problem," he says. "And it's not like I can walk into my office, hit a switch, and solve it. Rather, I have to solve a set of complex, linear equations simultaneously. It's like a Rubik's Cube."

The analogy McPeak drew, in a recent interview with Government Executive, seems on the mark. For each surface on the multi-faceted Rubik's Cube is connected to the others in ways both obvious and obscure. Similarly, with the Defense Department's current cutback, a change in force structure will influence weapons acquisition decisions, in turn affecting base realignments and closures, with corresponding ripple effects on personnel needs, which drive training requirements, and so on.

The solution to the puzzle would be a smaller force, rationally constructed, efficiently deployed and capable of winning future conflicts.

In the interim, much change and not a little pain await. Already, the Pentagon has announced major personnel reductions, huge changes in procurement plans, closure of dozens of domestic and foreign military bases and consolidation of many large management systems. Almost lost in this sea of change are other, not-so-visible changes, such as the planned quadrupling, to $12 billion, of the Pentagon's environmental clean-up budget, and the quiet institution of long-debated capital budgeting techniques.

With the collapse of the Soviet Union and the onset of an election year, more change is surely in the offing for defense managers like McPeak. But in the pause before Congress and the White House twist the Rubik's Cube again, it's useful to see where the game stands today for the Pentagon and its workforce.

The Budget Downdraft

Dramatic changes in American defense policy have their roots in the ending of the Cold War and the breakup of the Warsaw Pact. These important global trends -- interrupted briefly by the Gulf War -- have made the world a safer place for U.S. interests and consequently allowed the nation to reduce its military force. Defense spending, adjusted for inflation, had been dropping since the mid-1980s, but the pace accelerated after November 1990, when President Bush and Congress agreed upon the Budget Enforcement Act, establishing what were supposed to be firm budget-authority ceilings for DoD for fiscal 1991-93 and general spending targets through 1995.

As compared to the defense budgets Bush had requested less than 10 months earlier, the cuts were dramatic. Bush's original budget for fiscal 1991 included $ 295 billion in budget authority for the Pentagon. The November agreement cut that figure by 6.2 percent, to $ 277 billion. And subsequent appropriations legislation, along with executive recissions, cut the total further, to approximately $ 275.6 billion.

These actions froze the fiscal 1992-96 Pentagon budget at about $ 280 billion, translating into sizeable cuts in purchasing power, especially since the capital goods accounts that make up a large share of the DoD budget are particularly inflation-prone. Assuming 4 percent annual inflation, DoD purchasing power was to shrink by more than 20 percent between 1991 and 1996.

The first year under the new budget agreement gave a taste of things to come. The Pentagon cut military personnel by 78,600, with 50,000 of these troops withdrawn from Europe; reduced the civilian personnel budget by $ 803 million ($ 263 million of which came from a civilian hiring freeze instituted in November 1989); cut $ 800 million in real-property maintenance for overseas military bases; reduced operations and maintenance by $ 4.4 billion; slashed $ 10.4 billion from procurement accounts; and reduced research development, test and evaluation by $ 2 billion.

Major capital investment programs suffered. The Strategic Defense Initiative sank to $ 2.9 billion, far below the $ 5 billion to $ 6 billion proposed at the end of the Reagan Administration. All advanced procurement funding for the Air Force's B-2 bomber was eliminated, and all procurement funds for the Marine Corps V-22 aircraft were cut, though Congress appropriated $ 238 million in R&D funding to keep the V-22 on life-support. And other weapons programs were stretched out or targeted for elimination in the following years.

Although the Gulf War further complicated Pentagon planning, it did give DoD a partial reprieve on the budget cuts. Congress waived the military personnel reduction targets for 1991, permitting DoD to downsize its force more smoothly after withdrawal from the Persian Gulf.

Despite much war-related budget work, the Pentagon was able to deliver major revisions in long-range planning in time for the President's budget presentation to Congress in late January 1991. The new plan, covering the fiscal 1992-97 period, envisioned a significantly smaller force structure, reflecting the reduced threat of war with the Soviet Union, German reunification and rapid change in Eastern Europe. Underlying assumptions, agreed to by the President and his national security advisers after three years of debate, included the following:

War with the Soviet Union or its successors is unlikely in the next decade. Warning times for conflict in Europe, and to some extent in Asia, have lengthened substantially.

U.S. combat demands in the near term most likely would involve relatively limited regional conflicts requiring rapid response and special forces.

The conclusions flowing from these assumptions have inspired actions now in progress. Planners concluded that there was less reason to station U.S. troops abroad, permitting gradual and selective withdrawal of land-based forces from Europe and the Pacific. They judged also that military manpower needs could increasingly be met by reservists instead of active-duty personnel, and that these forces should rely more on pre-positioned equipment. In tandem with the military drawdown, they decided that DoD should reduce civilian employment, in part through efficiency gains in departmental operations.

The planners concluded that the nation could afford to forgo or delay plans to purchase large amounts of military hardware, even if this meant significant shrinkage and restructuring of the defense industry.

They also recommended continued investment in strategic and conventional missile defense systems. Strategic forces should be maintained until nuclear arms reduction agreements with successors to the Soviet leaders are negotiated, implemented and verified, they said.

The Pentagon's budget plan for 1992-97 thus proposed substantially accelerating the cutting to which Congress and the President had agreed in 1990. As compared to President Bush's first defense budget, submitted to Congress in February 1989, the new plan would cut spending in the 1992-97 period by 25 percent, or about $ 1 trillion. In 1992, inflation-adjusted spending for defense would be 24 percent below its level at the peak of the Reagan buildup in fiscal 1985. By 1996, the Pentagon's purchasing power would be 34 percent below the 1985 level; at this point, defense spending would equal only 3.6 percent of the gross national product, the lowest level since 1939.

As a result of the budget cuts, active-duty military personnel would decline to 1.65 million by fiscal 1995, 24 percent below the post-Vietnam peak of 2.17 million in 1987. Reserve positions would decline to 906,000, or 21 percent below the 1987 level.

DoD civilian employment, which totaled 1.13 million in 1987, was to drop to 976,000 by 1993 and to 940,000 by 1995.

As large as these cuts may seem, they are just the beginning. Though the Pentagon successfully resisted several attempts in Congress last year to shave the fiscal 1992 budget well below the level agreed to in the Budget Enforcement Act, pressure will grow this year. The Pentagon recognized this reality in late November when it began a new look at force reductions reportedly designed to save an added $ 50 billion over five years. And President Bush signaled his willingness to contemplate further reductions in the defense budget in an Oval Office interview just before Christmas.

Defense Management Efficiencies

The Pentagon, of course, has been laboring to achieve the budget reductions already agreed upon, and while most are to come through large and relatively well-publicized reductions in force structure, defense management reforms are also expected to contribute a substantial share. These reforms, first outlined in the Defense Management Report (DMR) submitted to the White House in July 1989, have proceeded under the direction of deputy defense secretary Donald Atwood. In their latest iteration, they are slated to result in savings totaling $ 71 billion from fiscal 1991-97, and to eliminate 30,000 civilian and 40,000 military jobs.

The management reforms are aimed at cutting costs in logistics, administration, base operations, facilities management, automated support and information systems, finance, procurement and contract management. They also entail consolidating many of the services' support/supply and other functions under the Office of the Secretary of Defense (OSD).

In the fiscal 1992-93 DoD budget, DMR managers put special emphasis on streamlining defense acquisition by eliminating unnecessary layers of management, reducing burdensome reporting requirements and regulation, and continuing to enhance the education and quality of the acquisition workforce. In mid-1991 Atwood indicated that the second round of DMR initiatives for fiscal 1992-95 would seek added savings through efficiency measures, consolidation and program reduction.

Significant restructuring under DMR's initial phase included creation of a Corporate Information Management group to consolidate DoD information, data processing and telecommunications systems into a single systems; consolidation of the services' finance and accounting centers into a central Defense Finance and Accounting Service; consolidation of the supply functions of the individual services into the Defense Logistics Agency; and creation of a Defense Depot Maintenance Council.

The information management initiative consolidates some 30 separate DoD payroll systems and designates one existing system to provide payroll services for all of DoD. It also consolidates approximately 150 separate DoD accounting systems and restructures the defense intelligence function, resulting in elimination of redundant units in the military departments and the unified military commands.

The supply and logistics consolidation collapses 34 separate supply depots and approximately 3,500 separate parts and equipment warehouses into a handful of regional centers. Administrative efficiencies in the second phase of DMR include consolidation of DoD-wide commissary and printing operations and correctional facilities. Also targeted for reductions are the services' administrative staffs, including those involved in information systems and finance, procurement and contract management.

The second phase of DMR reforms will entail increased cooperation and consolidation in defense research and development programs and greater competition in science and technology development between the defense research laboratories. A consolidation of DoD labs is also planned.

A key element of the DMR initiative was the establishment on Oct. 1, 1990, of a DoD-wide Defense Business Operating Fund to capture the costs of most industrial support and supply services provided by the military departments and defense agencies. The $ 70 billion revolving fund, operating on a reimbursable basis, includes both operating and capital budget accounts, with capital items defined as assets costing more than $ 15,000 and with a useful life of two or more years.

DoD has operated many of its industrial and service activities on a revolving fund basis since 1951, but these funds had been decentralized among the services and defense agencies. A key component of the new fund is the use of "unit cost" methodology for determining charges to military department and defense agency customers. Prices for services bought through the fund now will reflect their full cost, not just those direct costs that were visible under the old system. That way, it is reasoned, customers will become fully aware of the costs of the services they are buying.

The capital budget portion of the initiative was implemented with little notice, despite long controversy over the feasibility and wisdom of capital budgeting in the federal government.

The new fund, obviously, is supposed to save money, and the services haven't always been pleased. As with other DMR initiatives, proposals for the savings were developed in OSD's Management Improvement Division, and then forwarded for quick review to the military departments and agencies. Atwood and his staff sometimes revised the estimates in response to agency objections. And in some instances, the services successfully argued for changes in the reform proposals.

While displaying some flexibility, Atwood and DoD Comptroller Sean O'Keefe maintained their strong commitment to change, and stressed that implementation was to be decentralized to the greatest extent possible. Service officials, however, complained that the trend toward centralization of authority in OSD was costing them power.

To support the need for radical change, OSD officials argued that restructuring would boost efficiency, thus preventing even deeper cuts in military force structure and manpower. Joint Chiefs of Staff chairman Colin Powell supported the DMR initiatives with some reservations, while the military departments at first objected to, and then moved to comply with, the reforms. They continued to protest, however, that the reforms were budget-driven and in some instances would actually promote inefficiencies. In the end, Cheney's and Atwood's unwavering commitment to implementation of the DMR initiatives gave the military departments little choice but to comply.

Cutting Weapons, Force Structure

Reductions in force structure to conform to the revised 1992-97 spending plan represent the most substantial defense cuts since the late 1940s.

In its approach to procurement, the Pentagon is emphasizing termination or reduction of programs relying on relatively old technology, while at the same time pursuing modernization through highly selective development and acquisition of more sophisticated systems.

Other budget accounts, meanwhile, are shrinking rapidly, in part to make sure that some weapons modernization can proceed. Planners decided to reduce the Army by six divisions, including two in the reserves. The Navy was directed to eliminate 81 battle force ships from the fleet, reduce its carrier fleet from the 13 programmed in 1990 to 12 (compared to a program of 15 only two years earlier), cut carrier air wings from 15 to 13 (11 active), and program the deactivation of older attack submarines and amphibious ships plus its two remaining battleships. The size of the Navy fleet was reduced to 451 ships, a significant drop from the 600-ship fleet planned during the Reagan Administration. The Air Force cut nine tactical fighter wings (eight active).

The Pentagon jealously guarded training programs, fighting to sustain previous targets for Army ground exercises, Navy steaming days, and Air Force and Army flying hours. An active training schedule is viewed within the services as key not only to maintaining readiness, but also to preserving a high quality force. The latter goal is also apparent in DoD's request for military pay increases of 4.2 percent in 1992 and 4.7 percent in 1993.

Cuts in strategic forces include retirement of the Minuteman II missile system beginning in 1992; accelerated retirement of Poseidon submarines and reduction of the Trident submarine fleet to 18; a decrease in Air Force strategic bombers from 268 in 1990 to 171 by 1993; and retirement of B-52s and transfer of FB-111 bombers to tactical use. Conventional force structure places increased emphasis on airlift and sealift capacity, maritime and amphibious forces, and special operating forces.

Perhaps the most dramatic element of the force-structure reduction plan is the termination of acquisition programs. High-profile weapons program terminations include the Trident submarine, the P-7A anti-submarine aircraft, the F-14D aircraft, the Navy's Advanced Tactical Fighter and A-12 attack fighter airplane, the Peacekeeper missile, the Mark XV aircraft identification system, the Boost Surveillance and Tracking System, and the TACIT Rainbow cruise missile. These terminations came on top of programs axed in the fiscal 1991 budget, including the V-22 vertical take-off and landing aircraft, the M-1 tank, new production of the F-14D fighter, the F-15E aircraft, the P-3A anti-submarine aircraft, the Apache helicopter, and the Army Helicopter Improvement Program. The termination of all these programs ended the wave of procurement begun under President Reagan, with many programs ending before planned purchases were completed, or even before buys had begun.

Other programs were delayed, as production was slowed or buys pushed further into the future. Examples include the Anti-Satellite Defense System and the Milstar satellite program. Planned purchases of the Air Force B-2 bomber were scaled back dramatically, to just four aircraft in 1992 and seven in 1993 (though Congress cut the program further). The SDI program was restructured to place greater emphasis on theater missile defense. Procurement of the Navy's SSN-21 Seawolf attack submarine was reduced to one buy per year from the previous plan to build two per year. Similarly, Air Force C-17 purchases were scaled back.

Nevertheless, modernization efforts continue. The SDI program was reoriented to include the Global Protection Against Limited Strikes program, emphasizing state-of-the-art transportable theater missiles. The Army continues its light helicopter and armored vehicle modernization programs. The Navy is proceeding with purchase of SSN-21 attack submarines and Aegis destroyers (at reduced rates), and with buys of F/A 18 fighter aircraft and modern tactical missiles. The Navy also plans to purchase additional roll-on/roll-off ships and to increase its Ready Reserve force from 96 to 142 cargo ships, the object being a quicker response time in crises like the Desert Shield buildup.

Modernization efforts in the Air Force include continued procurement of F-16 fighter aircraft, C-130 transport aircraft and AMRAAM air-to-air missile systems. Significantly, the Air Force Advanced Tactical Fighter program continues in development. And the C-17 airlifter program is still alive. The R&D budget this year and next emphasizes high-performance computers and improved technology in electronics, gas turbine engines and airframe components.

Base Realignment and Closure

DoD's budget cutting and force restructuring have given a much-needed boost to its long-held goal of rationalizing the huge network of U.S. military bases at home and abroad. Domestic politics had long stood in the way, but in 1988 and again in 1990, Congress ceded substantial power to specially created base closure and realignment commissions. As a result, DoD has been able to proceed toward closure of 47 domestic bases and realignment of 28 others, out of a total of nearly 500 domestic bases.

Estimated costs of these steps from 1992-97 are $ 5.7 billion, while savings are put at $ 6.5 billion. The net savings of $ 850 million could be increased by revenues from sales of land that DoD says is worth $ 1.9 billion. Beginning in 1998, annual savings from the base closures and realignments are projected at $ 1.7 billion.

Revenues generated by sale of land or facilities at closed bases are now deposited in a DoD base closure account Congress authorized in 1990. Up to half the money may be used to finance the costs of sales and of cleanups at the bases. DoD must comply with federal, state and local environmental cleanup standards before closed facilities may be converted to non-military use, and the cost of these cleanups will be substantial. DoD environmental spending will grow an estimated $ 3 billion in 1991 to $ 12 billion in 1995, and the financing of the clean-up program remains at issue between Congress and DoD. Congress insists, over DoD objections, that the work be financed by transfers from other DoD accounts.

The domestic base-closure process will continue for years, as more bases will be targeted by new commissions Congress has mandated in 1993 and 1995.

At the same time, DoD has been targeting foreign bases for closure, and by mid-1991 it had made decisions to end or reduce operations at 232 foreign bases to achieve further savings. Following the Persian Gulf War, DoD also urged the establishment of small, permanent bases in the Middle East which, if combinedwith new plans for pre-positioning of weapons and supplies, would enhance U.S. capability to respond to regional conflicts.

Painting the Golden Gate

Judged against management theory on the downsizing of large organizations, DoD's long-term cutback strategy appears relatively balanced. It includes a combination of across-the-board cuts, program reductions, program terminations and restructurings, and considerable reorganization.

Yet continuing reviews by the White House and Congress will surely bring changes in the plan over the next few years. And each round of this game forces Pentagon managers to reorient their programs and budget, and to renegotiate agreements struck previously to satisfy both Congress and DoD component organizations.

The Rubik's Cube, in other words, is continually being reconfigured, with each move raising disputes that must be negotiated by OSD. At the same time, budget planners, not to mention officials responsible for ongoing programs, are left in a state of confusion. So when managers such as Air Force Chief of Staff McPeak approach their offices in the Pentagon early each morning, they can be forgiven for wondering with some anxiety what the new day will bring. "This is really a question of managing at the margins, and just trying to make a little progress each day," says McPeak. "Sometimes it feels like painting the Golden Gate bridge, though. When you finally get to the end, it's time to start all over."

L.R. Jones is a professor of financial management at the Naval Postgraduate School in Monterey, Calif..

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