Asne Radm Carnevale | United States Federal Budget | United States Budget Sequestration In 2013

Department of Defense Budget Update for the ASNE Flagship Section

RDML (ret) Joe Carnevale Senior Defense Advisor Shipbuilders Council of America 5 December 2012

DoD Budget Update

• Budget Background • Sequestration • Fiscal Year 2013 Shipbuilding & Ship Depot Maintenance Budgets

DoD Budget Update

Looking for the Peace Dividend

DoD Budget Authority 1988-1996
300

290

280

Billions of dollars

270

DoD cut by $42B
260

250

240

88 19

89 19

90 19

91 19

92 19

93 19

94 19

95 19

96 19

The Peace Dividend DoD Budget Authority 1980-2010
800
1989:

700

Soviet troops withdraw from Afghanistan,
Poland & Hungary become independent, Berlin Wall falls, Governments fall in Czechoslovakia, Bulgaria, and Rumania; Soviet empire ends 1991: Warsaw Pact ends, The Soviet Union dissolves, The Cold War Ends

600 500

Billions of Dollars

400

300
Increase in Budget FY98-08 Total DoD (FY10$) 92% Defense Wide 89% Army 187% Navy 51% Air Force 56%

200 100

1990: Germany reunited

0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Billions of Dollars

1000

1500

2000

2500

3000

3500

4000

4500

500

0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
National Defense Total Federal Budget Authority

Total Federal Budget Authority 1980-2011

Total Federal Budget Authority and Receipts 1980-2011
4500 4000 3500 3000
Billions of Dollars

2500 2000 1500 1000 500 0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Total Federal Budget Authority

Total Receipts

National Defense

2011

The National Debt
Total foreign debt $5.2923 trillion as of June 2012

Asia $3T: China $1T, Japan $900B

Europe: $1T
Middle East $292B North America $253B South America $245B Rest of World $199B

Total Federal Budget Authority and Receipts 1980-2011
4500 4000
$100B per year reduction

3500 3000 2500 2000 1500 1000 500 0
Billions of Dollars

$100B per year increase in receipts

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Total Federal Budget Authority

Total Receipts

National Defense

2011

Entitlements (FY2011)
•550 Health: •551 Health care services including Medicaid ($322B) •552 Health research and training ($33B) •554 Consumer and occupational health and safety ($4.5B) •570 Medicare ($502B) •600 Income Security: •601 General retirement and disability insurance ($8.0B) •602 Federal employee retirement and disability ($123B) •603 Unemployment compensation ($119B) •604 Housing assistance ($44B) •605 Food and nutrition assistance ($105B) •609 Other income security ($184B) •650 Social Security ($732B) •700 Veterans Benefits and Services: •701 Income security for veterans ($55B) •702 Veterans education, training, and rehabilitation ($10B) •703 Hospital and medical care for veterans ($50B) •704 Veterans housing ($1.3B) •705 Other veterans benefits and services ($6.1B)

Total Federal Budget Authority Defense and Entitlements 1980-2011
4500 4000 3500 3000 2500 2000 1500 1000 500 0
Billions of Dollars

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Total Federal Budget Authority

National Defense:

Entitlements

2011

Total Federal Budget Authority Defense and Entitlements 1980-2011
4500 4000
$100B per year reduction

3500 3000 2500 2000 1500 1000 500 0
Billions of Dollars

$100B per year increase in receipts

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Total Federal Budget Authority

Total Receipts

National Defense:

Entitlements

2011

Sequestration

Budget Control Act of 2011
• Security includes: DoD, DHS, VA, National Nuclear Security Administration, and Budget Function 150 International Affairs • Implemented $917 billion in cuts over 10 years to increase debt limit by $900 billion. • Joint Select Committee on Deficit Reduction, the “Super Committee,” failed to produce debt reduction of at least $1.5 trillion over 10 years. • Sequestration of $1.2 trillion is now the law. • Goes into effect on January 2, 2013

Impact of Budget Control Act and Sequestration on National Defense Base Budget Topline
(Constant FY2012 $)

Source: House Armed Services Committee

Impact of Budget Control Act and Sequestration on National Defense Base Budget Topline
(Constant FY2012 $)

FY13 Total = $585B

Source: House Armed Services Committee

Impact of Sequestration
• Pre BCA FY 2013 budget was $585B.
– PRESBUDG cut $49B (8.4%). – Sequestration cuts another $54B (9.2%). – Total reduction of $103B (17.6%).

• Post sequestration budget would be $482B.
– – – – MILPERS exempt Funds already obligated can’t be used. Overseas Contingency Operations a factor. Unobligated prior year balances can be used.

• Approximately 9.2% of all operations, procurement, research and construction get cut from the PRESBUDG level.

Mechanics of Sequestration
Required Defense Cut Percentage Cut =

$54.7B

= 9.2%

$525.4B + $88.5B + $105.7B + 25.1B - $149.4B
Base DOD Budget OCO Budget Unobligated Balances Non-DOD Defense MilPers Exemption

Approximate 9.2% Reduction Across Investment and O&M Accounts

Reduction of roughly 12.3% in final 9 months of FY13 would be needed to achieve a 9.2% reduction in FY13 budget authority
* Function 050

Peace Dividend 1988-1996
300

DoD cut by $42B
290

280

Billions of dollars

270

260

From 1990 to 1994:

250

458,000 leave military service 166 ships retired SCN cut by $7.4B

240

14.2% reduction over four years vs 17.6% reduction in one year.

88 19

89 19

90 19

91 19

92 19

93 19

94 19

95 19

96 19

The Fiscal Cliff
The term “fiscal cliff” describes several big fiscal events set to occur at the end of this year and in early 2013:
1. Expiration of the 2001 & 2003 tax cuts and the 2009 stimulus tax cuts

2. Expiration of the alternative minimum tax patch
3. Expiration of the payroll tax holiday 4. Expiration of the extenders

5. Scheduled tax increases under the Affordable Care Act
6. Sequestration 7. Expiration of expanded unemployment compensation

8. Expiration of the "doc fix"
9. Debt limit

The impact of all these actions taken together would be a fiscal shock on the order of $300 billion to $600 billion in just one year

Calendar – Key Dates
Continuing Resolution Lame Duck Congress Treasury Reaches $16.4T Debt Ceiling Tax Cuts Expire

Oct

Nov
Election Day Nov 6

Dec

Jan
Sequestration Jan 2 Inauguration Jan 20 113th Congress Jan 3

Feb

Mar

FY13 Begins

FY13 CR Expires March 27

FY14 Budget Submitted to Congress

Fiscal Year 2013 Shipbuilding & Ship Depot Maintenance Budgets

FY 2013 Shipbuilding Plan

-1 -1

+1 -1

+1 -1 -2 -1 -2 -1 -1

-2 -1

FY 2012 Maintenance & Modernization Budget

O&MN Ship Depot Maintenance Ship Depot Maintenance Base Ship Depot Maintenance OCO Ship Depot Maintenance Reserve

FY11 FY12 FY13 Base & OCO PRESBUDG PRESBUDG $ 7,173,659 $ 6,026,107 $ 6,399,991 $ 4,532,935 $ 5,089,981 $ 1,493,172 $ 1,310,010 $ 88,590 $ 53,916 $ 49,522

OPN DDG Modernization CG Modernization Small Boats

$ $ $

288,118 $ 348,934 $ 72,665 $

117,522 $ 573,349 $ 33,653 $

452,371 101,000 30,131

25

Maintenance Funding History

$8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0
FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Total

Base Budget

Adjustments

26

Congressional Action
• HASC retains 6 CGs and 2 LSDs
– Allows CG 73 to retire – Adds $84M to CG Modernization ++ – Adds $68M to Ship Depot Maintenance

• HAC retains 3 CGs
– Adds $507M to CG Modernization – Adds $68M to Ship Depot Maintenance

• SAC retains 7 CGs and 2 LSDs
– Puts $2.4B into the “Ship Modernization, Operations and Sustainment Fund”. – Adds $150M to Ship Depot Maintenance for MIAMI
Navy announced it will retain four of the cruisers as a result of Congress’s actions.

The Continuing Resolution Applied to Ship Depot Maintenance
• CR funds Agencies at FY12 levels + .6% – $4.56B CR level vs $5.09B in base budget. – OCO funded at FY13 request of $1.31B. – Base plus OCO CR Level is $5.87B. – 8% lower then the $6.40B total in the budget. – “Operate at a minimal level …”
• Scenario 1: No sequestration. CR ends with maintenance at budget level. – $2.9B spent in 1st half of year. – $3.5B to spend in 2nd half of year. – $600M more in the last 6 months then the first 6 months. – Adds for cruiser retention not included in the $600M.

The Continuing Resolution Applied to Ship Depot Maintenance
• Factors for maintenance & modernization: – Deploying ships will get priority. – Submarines and aircraft carriers will get priority. – Naval shipyard workload is a sunk cost based on workforce. – Canceling surface ship availabilities is contractually easy.

Result 1: A disproportionate number of canceled and deferred availabilities will be of surface ships.

Result 2: The disruption of adding an additional $600M in the second half of the year will be born mostly by the private sector.

Sequestration Applied to Ship Depot Maintenance
Approximate 9.5% Reduction Across Investment and O&M Accounts Reduction of 9.5% from budget levels means $5.8B total available for maintenance. • Scenario 2: CR ends with sequestration. – Maintenance reduced by $600M. – $2.9B spent in 1st half of year. – $2.9B spent in 2nd half of year. – Adds for cruiser retention not likely.

Result: A disproportionate number of canceled and deferred availabilities will be of surface ships.

Questions?
Joe Carnevale Senior Defense Advisor Shipbuilders Council of America 655 Fifteenth Street, NW, Suite 225 Washington, DC 20005 t 202.772.5578 f 202.783.6947 jcarnevale@balljanik.com https://shipbuilders.org/

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