Readiness versus Modernization
Quadrennial Defense Review (QDR)
The Administration’s FY 1998 Plan
Deeper Cuts in Defense Spending Seem Likely
The Plans/Funding Mismatch
Bringing Plans Into Line With Budgets

Are We Buying the Right Military?
Bipartisan Problem
Near-Term Readiness
Operations and Maintenance (O&M)
Contingency Operations
Military Personnel
Future Readiness Levels
III. Outsourcing and Other Reforms
Research and Development (R&D)
Procurement
Ballistic Missile Defenses
Major Acquisition Programs
IV. Other Programs of Interest
Military Construction and Family Housing
Department of Energy Defense Activities

Not Available.

Analysis Of The FY1998 Defense Budget Request

The Clinton Administration's request for $265.3 billion in budget authority (BA) for national defense in fiscal year (FY) 1998, includes $250.7 billion for the Department of Defense (DoD), $13.6 billion for Department of Energy (DoE) defense activities, and $1 billion for other defense-related activities. This request represents a 1.4 percent real (inflation-adjusted) reduction from the level provided for FY 1997¹ (assuming Congress agrees to the administration’s proposal for a $2 billion supplemental appropriation and $4.8 billion in rescissions in FY 1997).² The FY 1998 budget request marks a 38 percent decline from FY 1985, the height of the Reagan buildup, but is only about 16 percent below the average defense budget of the Cold War.

Assuming the administration’s new inflation estimates are accurate, its new plan would provide about $6.5 billion more in real purchasing power in FY 1998 than last year’s plan envisioned, and a total of $22 billion more over the FY 1998-FY 2002 period. This includes about $10.5 billion more for DoE, $9.5 billion more for DoD, and $2 billion more for other defense-related activities.³ There is, however, some concern that the administration’s inflation estimates may be overly optimistic, since they are lower than the new “chain-weighted” inflation estimates used by the Congressional Budget Office (CBO).⁴ Moreover, notwithstanding the fact that the administration's latest plan would provide more for defense than last year's plan, under the new plan, funding for defense is still projected to decline slightly over the next three years, before rising modestly in FY 2001 and FY 2002 (when it will still be two percent below the FY 1997 level).

As in past three years, it appears likely that Congress will add funding to the administration’s FY 1998 request. However, the level of funding added is likely to be significantly less than in FY 1996 and FY 1997, when Congress added, respectively, $7 billion and $10 billion. This year’s request is only about $3 billion less than the level of BA projected for defense for FY 1998 in last year’s congressional budget resolution (CBR). Indeed, even adding this much BA will be difficult unless this year’s CBR includes a higher outlay level⁵ for defense in FY 1998 than did last year’s resolution.⁶

Readiness versus Modernization
The FY 1998 defense budget request marks the third straight year that the administration has failed to “turn the corner” on weapons modernization. Each year since 1995 the administration has projected that funding for procurement, which declined by 67 percent between FY 1985 and FY 1997, will begin growing in the following year. Instead, each successive budget has included further cuts in funding for procurement (the FY 1998 request would provide about 6 percent less for procurement than the FY 1997 defense budget). Each year, operations and maintenance (O&M) costs have proven to be higher than anticipated, and the administration has compensated by shifting funding out of procurement to help cover these costs. The administration’s FY 1998 request includes $2.9 billion less for procurement programs and $5.2 billion more for O&M than was projected for FY 1998 in last year’s plan. The fact that this increase in O&M funding is $3 billion more than would be required simply to cover the projected costs of FY 1998 contingency operations ($2.2 billion) also suggests that DoD is continuing to fall short in its efforts to reduce overhead and infrastructure costs.

Over the longer term, the administration’s new plan may reflect a somewhat brighter picture for modernization. Overall, the administration’s new FY 1998-FY 2002 defense plan would actually provide $4 billion more for procurement than last year’s plan for these same five years. This is in marked contrast to the long-term defense plans released by the administration in 1995 and 1996, both of which included substantially less for procurement than was projected in the previous plans. The new plan also would provide $7 billion more for R&D than would last year’s plan for the same period. Unless DoD can get a better handle on O&M costs, however, the upturn in procurement funding which the administration now projects will begin in FY 1999, may once again have to be deferred further into the future.

Whether or not the rate of modernization envisioned in the administration’s current plan is necessary–given the relatively slow rate at which potential adversaries appear to be modernizing and the existence of a great deal of relatively new equipment in the U.S. inventory–is, of course, another, and perhaps more important, question. An even more critical question may be whether DoD's current plan calls for buying the right types of new systems, given the very different kinds of capabilities and threats likely to emerge in the coming years.

Quadrennial Defense Review (QDR)
In many ways, the FY 1998 defense budget request represents a “placeholder” budget. DoD is currently in the midst of a major review of its long-term plans. The goal of the QDR is to provide a comprehensive review of U.S. defense strategy, force structure, modernization plans, budget plans, infrastructure, and other related policies, programs and activities. The QDR represents an opportunity to revisit and possibly make major changes to the strategy and plans generated through the Clinton Administration’s 1993 Bottom-Up Review (BUR). Reflecting the importance it attaches to this new strategic review, in the FY 1997 defense authorization act Congress also established the requirement for a nine-member National Defense Panel (NDP), which will conduct “an independent assessment of a variety of possible force structures of the armed forces through the year 2010 and beyond.” The QDR is scheduled for completion in May 1997, while the NDP is supposed to wrap up its work by December 1997. To the extent the two reviews draw different conclusions and present competing recommendations, the stage will be set for a potentially contentious strategic debate early in 1998, when the new defense program and budget are to be submitted to Congress.

The Administration’s FY 1998 Plan
The administration claims that its FY 1998 budget request provides "strong support . . . for training, maintenance, supplies and other essentials needed to keep U.S. forces ready to fight and win decisively."⁷ Overall, it appears that the request does provide sufficient resources to sustain the near-term readiness of U.S. forces. It is less clear whether the administration's plan can realistically be expected to achieve its longer-term modernization goals. In November 1995, Gen. John Shalikashvili, chairman of the Joint Chiefs of Staff (JCS), recommended that DoD's procurement budget be increased to $60 billion by FY 1998, rather than by FY 2000 as called for in the then-current administration plan.⁸ Since then, the chairman and the other Service chiefs have continually referred to the $60 billion target as the level of funding necessary to sustain U.S. modernization plans over the long term. Under the administration's new plan, funding for procurement would breach this threshold in FY 2002, when the procurement budget would rise to $62.6 billion (FY 1998 dollars).⁹

However, it is likely that, as in the past, over the long run the cost of maintaining U.S. forces at high levels of readiness and purchasing new weapons will turn out to be considerably higher than currently projected. As a result, absent a significant increase in the level of funding projected for defense, the administration's FY 1998-FY 2003 Future Years Defense Program (FYDP) will almost certainly have to be scaled back.¹⁰ Although Congress appears likely to add funding to the administration's FY 1998 request for defense, as it did in each of the past two years, over the longer term, a major preoccupation of the administration and Congress is likely to be deciding how to best scale back DoD's plans. In addition to the pressures caused by cost growth in O&M and modernization programs, the need to scale back DoD's plans may also be driven by further reductions in funding for defense.

Deeper Cuts in Defense Spending Seem Likely
There is good reason to believe that–assuming the administration and Congress remain committed to the goal of balancing the federal budget by FY 2002 and keeping it in balance thereafter–funding for defense will end up being cut more deeply than projected under the administration's current plan. If CBO’s somewhat less optimistic economic assumptions turn out to be more accurate than the administration's over the next five years, balancing the budget will require making deeper cuts in federal spending than currently envisioned in the administration's balanced budget plan.¹¹ Indeed, this year's administration plan, like last year's, includes a mechanism by which additional cuts in defense (and other portions of the federal budget) would automatically be made if the administration's economic assumptions turn out to be overly optimistic, and the administration and Congress cannot agree on other measures to balance the budget by FY 2002.

Moreover, at least judged by last year's CBR, over the long run Congress appears to be far more likely to make further cuts in defense, than to add funding. Last year's CBR called for providing more for defense than the administration's plan over the next few years, but actually projected lower budgets for defense by FY 2001 and FY 2002. Compared to the administration's new plan, last year's CBR projects about $3 billion more for defense in FY 1998, but $10 billion less for defense in FY 2002. It is possible that this year's CBR will include somewhat higher funding levels for defense than last year's.¹² However, because of Congress' interest in cutting taxes and the need to reach agreement with the administration on funding for discretionary domestic programs and entitlements, it seems far more likely that further cuts in defense will be forthcoming.

Fortunately, a strong case can be made that the administration and Congress could develop a defense plan that would be both affordable within these lower budget levels, and capable of meeting the most vital U.S. security requirements. Doing so would, however, require making at least moderate additional reductions in the size the force structure, some additional cuts in the planned rate of modernization, reductions in near-term readiness, or a combination of these three approaches.

The Plans/Funding Mismatch
The notion that defense plans will probably have to be scaled back somewhat to fit within projected funding levels is nothing new. Nor should it, by itself, be a cause for great concern. Historically, the existence of a mismatch between plans and projected funding levels has been very much the norm for DoD, rather than the exception. In July 1994, the General Accounting Office (GAO) estimated that administration’s FY 1995-FY 1999 defense plan suffered from a plans/funding mismatch of some $150 billion or 12 percent of total planned funding,¹³ while a January 1995 estimate by CBO placed the gap at about $47 billion or 4 percent of total planned funding.¹⁴ By historical standards, these estimates are not especially large. In 1984, the GAO estimated that the actual cost of the Reagan Administration’s FY 1984-FY 1988 defense plan was likely to exceed projected funding levels by between $173 and $324 billion.¹⁵ Similarly, in 1989 the GAO estimated that the Bush Administration’s FY 1990-FY 1994 defense plan suffered from a $150 billion gap.¹⁶

The administration has taken a number of actions since the GAO and CBO reports were completed that may have substantially reduced the size of DoD’s plans/funding mismatch. In December 1994, for example, the administration announced it was adding about $25 billion to the FY 1996-FY 2001 defense plan, while lower inflation projections would yield another $12 billion in savings over this period. The administration also announced at that time that it was cancelling or deferring a number of major weapons acquisition programs, yielding savings of a further $8 billion. And, in March 1996, the administration announced that because of the effect of new, lower inflation projections, the purchasing power of DoD's budget was effectively being increased by some $19.5 billion over the FY 1997-FY 2001 period. In addition, DoD has modestly reduced its active duty end strength goals over the years. Finally, as noted earlier (again primarily because of lower inflation estimates), the administration's latest plan is projected to provide about $22 billion more for defense over the next five years than last year's defense plan.

A reasonable estimate of the size of the current plans/funding mismatch might be $30-60 billion over the next five years (roughly 2 to 5 percent of total planned funding).¹⁷ This estimate is consistent with data recently provided by CBO which suggests that the administration's defense plan might suffer from a plans/funding mismatch of as much as $55 billion over roughly this same period.¹⁸ This estimate may overstate the size of the gap. However, if history is any guide, it is probably more likely that this estimate understates the size of the current plans/funding mismatch.

The administration’s current defense plan is likely to prove even less affordable over the longer term. A reasonable estimate of the plans/funding mismatch suffered by the administration's current plan in the years beyond FY 2002 is $10-15 billion annually,¹⁹ assuming that during these years funding for defense remains flat, in real terms, at its projected FY 2002 level of $263.7 billion (FY 1998 dollars). Again, it is possible that this estimate overstates the size of the mismatch, but it is more likely that, if anything, it understates the size of the gap. Last year, data prepared by CBO suggested that the mismatch might amount to more than $20 billion a year over the long run if the cost of acquiring new weapon systems continues to grow at historical rates.²⁰

Existing defense plans would, of course, have to be scaled back far more over the long run if, as part of a balanced budget plan, the administration and Congress were to decide to make deeper cuts in the defense budget. If funding for defense were reduced to the level projected for FY 2002 in last year’s CBR, about $254 billion (FY 1998 dollars), the gap would expand from perhaps $10-15 billion a year to $20-25 billion a year.

Bringing Plans Into Line With Budgets
There are several approaches that could be taken to bring plans into line with future funding levels for defense. One approach would be to hold onto the currently planned force structure, and take the necessary cuts primarily out of modernization and, perhaps, near-term readiness. This approach may well prove feasible if the mismatch turns out to be in the low-end of the range discussed above (e.g., $10 billion a year after FY 2002). Another approach would be to take the necessary cuts entirely out of force structure, while sticking with current modernization plans and maintaining today's high readiness levels. In this case, it might be possible to achieve the necessary savings (again, assuming the funding gap is on the order of $10 billion a year) by reducing the size of the planned force structure from 1.422 million troops to roughly 1.35 million.

If it becomes necessary to achieve substantially larger savings, either because of greater program cost growth or a decision to make deeper cuts in funding for defense, more significant changes would have to be made. One approach to achieving savings on the order of $25 billion a year would be to, again, maintain the planned force structure–or perhaps make only relatively modest cuts in force structure (e.g., reducing the number of troops from 1.422 million to 1.35 million)–and take all or most of the necessary cuts out of modernization and near-term readiness. On the other hand, if it were decided to protect current modernization plans and keep near-term readiness at today's levels, achieving $25 billion in annual savings could require cutting the size of the force structure to some 1.2 million troops.

As in the case of the two examples described in the preceding paragraph, the relative appropriateness of these two approaches depends largely on one’s assumptions about such factors as when the dangers to U.S. security are likely to be greatest (e.g., in the near-term or the relatively distant future), how much warning time is likely to be available in the event a future conflict does arise (e.g., days, weeks, months or years), and how much new technologies are likely to add to the effectiveness of U.S. forces. DoD claims that any significant reduction in its planned force structure would leave it incapable of waging, and quickly and decisively winning, two major regional conflicts (MRCs) nearly simultaneously–the central strategic requirement set out in the BUR. However, other analysts have expressed the view that the DoD could maintain a “two-MRC” capability even with smaller and somewhat less modern forces than are currently planned.²¹ Even if this is not possible, it should be possible for such a force to carry out a somewhat less ambitious strategy (e.g., “win-hold-win” or “one MRC-plus”) that would still meet the most critical U.S. security requirements.

Trading Off Force Structure for Modernization

The purpose of the above discussion is not to predict how the administration and Congress will eventually decided to scale back existing defense plans, or to prescribe how that might best be done. Providing such a description or prescription is far beyond the scope of this analysis. Instead, this discussion is intended simply to provide some very rough idea of the magnitude of changes that might ultimately be required to make DoD's plans fit within future funding levels. However, the level of debate would be improved if more attention were paid to considering explicitly the potential for trading off force structure for modernization–that is, accepting a smaller force structure in return for maintaining (or possibly even accelerating) existing modernization plans.

New weapon systems generally cost far more to develop and procure than the weapon systems they are replacing. The F-22 cost some two-and-one-half times more to develop than the F-15 aircraft it is replacing and is projected to cost at least twice as much per plane to procure. Similarly, the Navy's new F/A-18E/F fighter is projected to cost about 40 percent more per copy to procure than the existing version of the F/A-18; the Army's new Comanche helicopter is expected to cost two-to-three times more than some of the helicopters it is scheduled to replace; and the New Attack Submarine (NSSN) is projected to cost 25-50 percent more to construct than the latest Los Angeles-class attack submarines. The fact that new weapon systems typically cost much more to acquire than the systems they are replacing or supplementing does not, of course, mean that they should not be produced. It does, however, mean that they should be procured only if they are significantly better than existing ("current-generation") weapon systems. And if they are significantly better than current-generation weapon systems, DoD should be willing to consider making additional cuts in the size of its force structure in return for acquiring these new weapon systems.

Since the level of threat facing U.S. forces may well increase over the coming years and decades, it is not surprising that the Services would generally prefer not to make cuts in the size of the force structure even as new, and presumably (given their much higher costs) far more effective, weapon systems are fielded. However, at a time when defense budgets appear likely to continue to decline (perhaps substantially), or at best stay relatively flat, and there is little interest in reducing near-term readiness,²² it is simply not possible to move ahead with the full range of current modernization plans without making some offsetting cuts in the size of the force structure. Moreover, it should be noted that this is essentially the tradeoff DoD made during most of the Cold War. Although U.S. funding for defense remained relatively flat throughout most of the Cold War and grew significantly during its last decade, the overall trend in the size of the U.S. military was decidedly downward during most of this period. Between FY 1955 and FY 1990, while DoD's budget grew from about $245 billion (FY 1998 dollars) to $359 billion, the number of active duty troops in the U.S. military fell from about 2.9 million to under 2.1 million. Likewise, the number of Air Force aircraft (all types) dropped from 28,000 to some 9,000 over this period, while the number of ships in the Navy declined from about 800 in 1967 to 546 in 1990. Nevertheless, the U.S. military of 1990 was obviously far more capable than the U.S. military of 1955 or 1967. DoD should be willing to make similar kinds of tradeoffs in the future.

In choosing between the relative benefits of cutting force structure and slowing modernization, DoD also needs to consider the relative merits of buying next-generation weapon systems versus upgrading or continuing to produce current-generation systems. Many existing weapon systems could have their service lives extended well beyond currently projected retirement ages through modifications and upgrades that would cost substantially less that developing and procuring next-generation weapon systems. It may still make more sense to move ahead with these new systems if they represent significant enough improvements. However, given the relatively slow rate at which most potential U.S. adversaries are now modernizing their forces, and the potential to extend the lives of and incorporate improved capabilities into existing systems (especially by inserting improved avionics and other electronic components), in justifying the acquisition of a new weapon system DoD should be required to do far more than simply point to the age of the system it is intended to replace.

Are We Buying the Right Military?
The discussion above suggests several conclusions. First, the administration's current defense plan probably suffers from a significant plans funding/mismatch. Second, an agreement to balance the federal budget is likely to result in lower levels of funding for defense than projected in the administration's current plan. Third, responding to the combination of higher than anticipated costs and lower defense budgets will probably require significantly scaling back current plans. Fourth, strong consideration should be given to cutting force structure in order to protect modernization. However, the most difficult challenge may be to ensure that we are buying the right kind of military for the future.

With the end of the Cold War and the collapse of the Soviet Union, the world has undergone a geopolitical revolution. Moreover, we are currently in the midst of a technological revolution, related especially to the dramatic advances being made in such areas as miniaturization, stealth and information technologies. The combination of the changed geopolitical environment and the ongoing technological revolution may have profound implications for the way wars are fought in the future, and for the kinds of forces and weapon systems that will dominate future battlefields.²³

These changes may increase the potential value of some new weapon systems, such as unmanned aerial vehicles (UAVs), long-range precision-guided munitions (PGMs), and various sensor technologies–which could allow commanders to gain a far more complete "real-time" picture of the battlefield than is possible today. Conversely, these changes may decrease the value and increase the vulnerability of some existing weapon systems, such as aircraft carriers, tanks and land-based tactical aircraft. The prospect that new technologies, combined with new operational concepts, could radically change the ways in which wars are fought in the future does not, of course, mean that DoD should suddenly discard its current generation of weapon systems and begin a massive investment in these new technologies. It does, however, suggest at least two things.

First, the very real possibility that new technologies and new operational concepts will dominate the future battlefield suggests that DoD should think twice about committing to the acquisition of costly new weapons programs that represent essentially "linear" improvements of existing technologies, even if those improvements appear to be significant. Second, DoD should work to ensure that it is devoting sufficient resources to the development and operational testing of at least the most promising new technologies and operational concepts. Conversely, given the relatively low level of threats facing the U.S. military today and the rapid pace at which technology is advancing, it might be a mistake to commit to full-scale development and serial production of even some of the most promising emerging new technologies in the near-term. In other words, there is no reason why these new technologies and operational concepts cannot be pursued within the confines of lower defense budgets–assuming these efforts are given adequate priority.

Unfortunately, it is unclear whether DoD fully appreciates these two implications of what may be an emerging "revolution in military affairs" (RMA). DoD has recently or is planning soon to begin procurement of a range of very costly new weapon systems that appear to very much represent linear improvements of existing systems. DoD's heavy investment in traditional technologies is perhaps most evident in its tactical fighter modernization plans. Under current plans the Air Force, Navy and Marine Corps are projected to spend some $350 billion (FY 1997 dollars) over the next several decades, buying three different types of new fighters (approximately 4,400 aircraft in all).²⁴ By comparison, DoD’s funding of a number of promising alternative technologies remains extremely modest. For example, DoD is projected to provide a total of only about $1.7 billion for the development and procurement of UAVs over the next six years (versus $51 billion for the F/A-18E/F, F-22, and JSF programs). Similarly, support for other potentially revolutionary weapon systems, such as the arsenal ship, appears to be somewhat shaky.

Bipartisan Problem
Just as the quality of the current defense debate would improve if more discussion were devoted to explicitly considering the potential for trading off force structure for modernization, it would also improve if more attention were paid to the question of whether DoD's current modernization and force structure plans take the potential impact of new technologies and operational concepts sufficiently into account. Unfortunately, the current defense debate continues to focus far more energy and attention to the question of how big the plans/funding mismatch is and whether the administration's plan is affordable over the long run. The administration and Congress currently differ very little in terms of the level of funding they appear to be willing to devote to defense over at least the next five years (the administration’s new defense plan would provide one-half percent more for defense than last year’s CBR over the FY 1998-FY 2002 period). Both the administration and Congress support further reductions in funding for defense. As such, both the administration and Congress should recognize and acknowledge the central implication of lower funding levels (combined with continued program cost growth): DoD's existing plans clearly will have to be scaled back.

As noted earlier, the magnitude of these reductions need not necessarily be dramatic. Indeed, there is good reason to believe that the administration’s plan could be made affordable within lower funding levels if prudent, moderate additional reductions were made in the size of the force structure and the planned rates of modernization, and that such a military could adequately meet the most vital U.S. security requirements. Moreover, the sooner the administration and Congress own up to the need to further scale back DoD’s plans, the less painful those cuts will be. Plans/funding mismatches are the norm historically, and tell us nothing about how wisely we are investing, or whether the problem is one of overprogramming or underfunding. However, the existence of such mismatches can contribute to inefficient planning. For example, it can lead to spending on R&D programs which ultimately must be cancelled when it turns out that sufficient funding is not available to push the planned system into production. Avoiding these unnecessary costs requires that DoD act sooner rather than later to bring its plans into line with projected lower defense funding levels.

Perhaps more importantly, recognition of the relatively high degree of consensus that exists in terms of future funding levels for defense would allow both the administration and Congress, as well as DoD and the Services, to focus greater attention on areas where there is currently much less consensus, and where decisionmaking could profit from a more thorough and rigorous discussion. These areas include both the two questions noted above concerning tradeoffs between force structure and modernization, and how best to respond to and exploit what appears to be an emerging RMA, as well as broader questions about the appropriate role for the U.S. military in the post-Cold War world.

Near-Term Readiness
In terms of troop quality, training and the condition of their equipment, U.S. forces are today far closer to those that participated in Desert Storm in 1991 than those used in Desert One (the unsuccessful attempt to rescue U.S. hostages held in Iran) in 1980. And the administration’s budget request seems likely to keep U.S. forces at this same high level of readiness in FY 1998. The request includes $93.7 billion for operations and maintenance (O&M) funding and $69.5 billion for military personnel. It is difficult to estimate precisely the levels of funding required to sustain high levels of readiness, especially during periods of force structure downsizing. However, judged by recent experience and historical cost trends, the administration's FY 1998 requests for O&M and military personnel funding appear to represent reasonable estimates of likely funding requirements.

Operations and Maintenance (O&M)
O&M programs and activities represent the portion of the defense budget most closely related to near-term readiness. The O&M budget covers the costs of purchasing fuel, spare parts, and many other items associated with carrying out training activities, as well as "real world" operations. It also includes the salaries of most civilian DoD personnel, who perform many of DoD's support functions.

At $93.7 billion, the FY 1998 O&M budget request works out to about $65,000 per active duty troop. This is some 25 percent more in real terms than DoD provided per troop in FY 1990, the year the United States began to send forces to the Persian Gulf in preparation for Operation Desert Storm. It also appears to be considerably more than DoD provided per troop in FY 1990 even subtracting out that portion of the O&M budget allocated to tasks which some observers have argued are not closely related to traditional military missions, such as environmental clean up at military bases, drug interdiction and weapons dismantlement aid to the states of former Soviet Union, and funding needed to cover the costs of ongoing contingency operations. In addition, the proposed funding level is roughly what would be projected for FY 1998 assuming that annual O&M costs per troop were to continue to increase at the same rate experienced during the Cold War.

None of this evidence proves that the administration's proposed funding level for O&M is adequate to sustain high readiness levels in FY 1998. It does, however, strongly suggest that the administration's request represents at least a reasonable estimate of likely funding requirements. Thus, there is good reason to believe that the proposed level of O&M funding will in fact be sufficient to achieve the readiness goals (e.g., flying hours for aircraft crews and steaming days per quarter for fleets) set out by the administration for FY 1998.

Contingency Operations
The FY 1998 budget request includes $2.2 billion to cover the costs of anticipated contingency operations, including $1.5 million for operations in Bosnia and $700 million for operations in Southwest Asia (i.e., in and around Iraq). This will be the second year that DoD has budgeted in advance for ongoing contingency operations. In prior years, DoD requested funding to cover the incremental costs²⁵ of contingency operations only after the fiscal year had already begun –a practice which required DoD to shift funding out of other portions of its budget to pay for these operations, occasionally causing disruptions to those other programs and activities. Among other things, budgeting for contingency operations in advance should reduce the likelihood that readiness funding, and thus readiness levels, will be negatively affected by contingency operations.

In addition to these FY 1998 funds, the administration is requesting a supplemental appropriation of $2 billion to cover FY 1997 costs associated with operations in Bosnia and Southwest Asia. This $2 billion is in addition to the $1.3 billion Congress approved for these two operations as part of the FY 1997 defense appropriations bill enacted last year. The extra funding for Bosnia ($1.9 billion) is needed because of the administration's decision (made in November 1997, after passage of the FY 1997 defense appropriations bill) to extend the U.S. military presence in Bosnia beyond the original December 1996 deadline, to June 1998. The extra funding for Southwest Asia ($124 million) is needed because DoD's FY 1997 operations there have turned out to be more intense than originally anticipated. The administration has proposed that this supplemental be offset by $2 billion in rescissions from an unspecified package of other FY 1997 DoD programs and activities.²⁶ The administration has also proposed that an additional $2.8 billion in FY 1997 DoD funding be rescinded to help the administration reach its outlay targets for overall discretionary spending.²⁷

Military Personnel
In terms of numbers of troops, the drawdown called for in the administration's 1993 Bottom-Up Review (BUR) is now nearly complete. The administration's plan would cut active duty military personnel levels from 1.452 million at the end of FY 1997 to 1.431 million at the end of FY 1998, and to 1.422 million by the end of FY 2002. (See Table A-11.) Between FY 1990 and FY 1995, DoD cut an average of over 100,000 active duty military personnel per year. By comparison, in FY 1996 it cut only 47,000 troops, in FY 1997 it cut only 20,000 troops, and between the end of FY 1998 and the end of FY 2002 DoD is projected to cut only an additional 9,000 troops. In terms of major force structure changes (e.g., numbers of Navy ships, Army divisions, and Air Force fighter wings) the drawdown called for in BUR was in fact already largely completed by the end of FY 1996. (See Table A-12.)

The FY 1998 request includes $69.5 billion to cover military personnel costs. During its first two years, the administration attempted to limit annual military pay raises to below the rate provided under current law.²⁸ Concerned that doing so would make it more difficult for DoD to recruit and retain quality personnel, however, in both FY 1994 and FY 1995 Congress added funding to provide full by-law military pay raises. Since then, the administration has consistently requested the full pay raises mandated by law. Consistent with this approach, the administration's FY 1998 request includes a 2.8 percent pay raise for military personnel.

The quality of personnel in the U.S. military–a critical element in the near-term readiness of U.S. forces–remains very high today. One indication of this is DoD's continued success at recruitment and retention. For example, during FY 1996, 96 percent of the Services’ new recruits had high school diplomas, and 70 percent of these recruits scored in the top three categories of the mental aptitude test. Likewise, DoD’s overall retention rate increased last year, to the highest level in seven years. The Army and Marine Corps maintained reenlistment rates of 83 percent, while Navy and Air Force reenlistment rates increased, respectively, to 85 percent and 89 percent.²⁹ Although the ability to recruit and retain quality military personnel depends on more than just pay levels (e.g., the amount of time troops are separated from their families during overseas deployments and the health of the civilian economy), the administration's inclusion of full by-law military pay raises will certainly strengthen the prospects for maintaining a high quality force in the future.³⁰

Future Readiness Levels
While the administration's FY 1998 budget request appears to include sufficient funding to maintain near-term readiness, it is less clear whether the funding levels projected for the latter years of its FY 1998-FY 2002 defense plan will be adequate to maintain high readiness levels. During the Cold War, operations and support (O&S) costs (which include funding for O&M, military personnel, military construction, and family housing) per troop increased at an average rate of about 1.8 percent annually.³¹ Moreover, this trend has continued essentially unabated since FY 1989. By comparison, under the administration's plan O&S funding per troop is projected to decrease by a total of 8 percent between FY 1998 and FY 2002,³² reducing overall O&S funding from $172.2 billion to $159.1 billion (FY 1998 dollars) over this period.

Notwithstanding the historical trend of increasing O&S costs, there is some reason to believe that O&S costs per troop may actually decline somewhat over the next six years, or at least stay relatively flat, resulting in a decline in DoD's overall O&S budget. Much of the increase in O&S costs per troop since the end of the Cold War can be traced to increased spending on contingency operations, base closure activities, and various non-traditional defense programs such as drug interdiction, weapons dismantlement aid to the former Soviet Union, and environmental cleanup and compliance activities. It appears unlikely that spending on these activities will continue to grow over the next six years, and in some areas, such as base closure activities, it may well decline. Moreover, excluding these areas, the growth in O&S costs per troop has been relatively modest since the end of the Cold War.

Nevertheless, the administration's projection that it will be able to reduce annual O&S funding by about $13 billion (FY 1998 dollars) between FY 1998 and FY 2002 appears to be overly optimistic. Under the administration's plan, DoD is projected to cut an additional 9,000 active duty troops and 54,000 civilian personnel between FY 1998 and FY 2002. Based on recent experience, these reductions would appear likely to result in annual savings of about $5 billion by FY 2002. Assuming funds will no longer be required for base closure activities ($2.1 billion in FY 1998) and U.S. forces will no longer be present in Bosnia ($1.5 billion in FY 1998), this suggests that annual savings totalling $9 billion might be possible by FY 2002. In other words, this analysis suggests that the administration's plan may underfund O&S costs by some $4 billion by FY 2002. Further support for this conclusion is provided by the fact that this year's defense plan would provide about $5 billion less to cover FY 2002 O&S costs than was projected for FY 2002 in last year's plan.

Outsourcing and Other Reforms

The administration's latest budget projections apparently assume that O&S costs, and O&M costs in particular, can be reduced through further reductions in infrastructure-related activities and the adoption by DoD of a variety of improved business practices. To date, cuts in infrastructure (e.g., base and logistics operations) have lagged behind reductions in force structure (e.g., numbers of fighter wings, carrier battle groups and other combat units). The extent to which this lag has occured is suggested by the fact that between the end of FY 1990 and FY 1996 the number of active duty military personnel fell by 29 percent, while over this same period, the number of DoD’s civilian employees–which are used primarily to perform support functions–declined by only 24 percent. Assuming that over the next few years DoD infrastructure reductions catch up with the (already essentially completed) cuts in force structure, it is possible that O&S costs per troop will indeed significantly decline. It is unclear what level of savings DoD currently projects to achieve through various reductions in infrastructure. However, DoD estimates that base closures alone will yield net savings of $14 billion through FY 2001, and annual recurring savings of about $5.6 billion in FY 2002 and beyond. The administration's plan also reportedly assumes that $5-9 billion will be saved over the FY 1998-FY 2002 period by "outsourcing" various support functions (i.e., transferring certain support functions currently performed by military and civilian DoD personnel to private contractors).³³

Ultimately, DoD may be able to achieve significant, perhaps even dramatic, savings through infrastructure reductions, and the adoption of outsourcing and other reforms. According to a 1996 study by a panel of DoD's Defense Science Board (DSB), through outsourcing DoD might eventually be able to achieve annual recurring savings of as much as $30 billion, and annual savings of at least $7-12 billion by FY 2002.³⁴ Certainly, the administration and Congress should encourage DoD to make further cuts in infrastructure and greatly expand its outsourcing of various support functions. It is, however, probably wiser for DoD to look to these initiatives as providing some protection against the prospect that future O&S costs will turn out to be higher than might be expected based on recent experience, than to assume that such changes will cause future O&S costs to decline below the levels suggested by recent experience.

The findings of a recent GAO report suggest that DoD has, to date, been unable to significantly reduce its infrastructure support costs. Nor, according to the GAO report, is DoD projected to substantially reduce those costs over the next five years.³⁵ Likewise, it may be difficult to achieve substantial savings through outsourcing, among other things, because of congressional concerns that doing so will lead to reduced workloads for, and possibly the closure of, various DoD support facilities located in members' states and districts. Some indication of the magnitude of the obstacle Congress might pose to implementing both additional infrastructure reductions and greater outsourcing is suggested by Congress' refusal to change the law that currently guarantees that public facilities will perform at least 60 percent of all DoD depot maintenance work, and the lack of enthusiasm among many members of Congress for another round of base closures. At the same time, there is a significant risk that, in a number of areas, O&S costs will be higher than currently anticipated, or that cost growth will occur in other areas of the defense budget. The DSB panel itself identified a number of potential sources of cost growth, including additional base closure costs, higher expenditures on contingency operations (e.g., if U.S. forces remain heavily involved in Bosnia), increases in depot maintenance and real property maintenance costs, and higher than anticipated acquisition costs for new weapon systems.³⁶

Research and Development (R&D)
The administration's request includes $35.9 billion for R&D in FY 1998. Since funding for defense began declining 11 years ago, R&D has been protected more than any other major DoD budget title. While overall funding for defense fell by 37 percent between FY 1985 and FY 1997, funding for R&D was reduced by only 17 percent over this same period. Over the next six years, however, R&D funding is projected to be cut relatively deeply. While the administration's plan calls for reducing the overall defense budget by 2 percent between FY 1997 and FY 2002, DoD's R&D budget is projected to be cut by 16 percent.

Notwithstanding the importance of R&D programs to the maintenance of U.S. technological superiority over the long term, it is unclear whether these proposed reductions should be cause for concern. It is possible that due to the proliferation of weapons of mass destruction (e.g., chemical and biological weapons, ballistic missiles and, especially, nuclear weapons) and high-tech conventional weapons, 10 or 15 years from now the United States will face far more potent adversaries in the developing world than it does today. Similarly, a new great power rival could emerge.³⁷ The best protection against either of these eventualities might be a robust military R&D effort.

On the other hand, the level of R&D funding proposed by the administration may be sufficiently robust to provide this kind of hedge. The FY 1998 request is still slightly above the average level of funding provided for defense R&D during the last part of the Cold War (FY 1974 through FY 1990), when it averaged $34.5 billion (FY 1998 dollars). Moreover, even the level of funding projected for FY 2002 may be sufficient for the U.S. military to retain a substantial technological edge over potential adversaries for many years to come. During the Cold War, the U.S. military was attempting to maintain technological superiority over another superpower which was also expending enormous resources on military R&D. By contrast, the United States faces no such adversary today. Russian spending on military R&D has dropped dramatically since the end of the Cold War, and no other country in the world spends anything close to what the United States spends on military R&D.

If history is any guide, R&D programs are likely to end up costing more than currently anticipated. It will thus almost certainly become necessary to cancel, defer or pare down some of DoD's planned weapons development efforts to fit within the $31.5 billion (FY 1998 dollars) R&D budget projected by the administration for FY 2002. Nevertheless, such a funding level might well prove adequate to preserve the U.S. military's technological edge over the long term, given the current lack of an R&D competitor comparable to the Soviet Union of Cold War years.

The level of defense R&D funding required to keep U.S. forces adequately modernized will also depend in part on whether the U.S. military, as well as potential adversaries, are able to make effective use of civilian commercial technologies. The civilian sector is making rapid advances in many technologies (e.g., computers and electronics) with important military applications. If DoD is able to tap into advances in civilian technologies, the level of funding provided in the defense budget for R&D may be less critical than it was in the past. On the other hand, to the extent that potential adversaries may also be able to draw on advances in the civilian sector, the apparent U.S. edge in defense R&D funding levels might be less reassuring than Cold War era comparisons suggest.

Procurement
The FY 1998 budget request provides $42.6 billion for procurement, a real decline of some six percent from FY 1997. This means that, altogether, funding for procurement will have dropped a total of 69 percent between its peak in FY 1985 and FY 1998. Under the administration's new plan, funding for procurement would begin to increase modestly in FY 1999 and would reach $62.6 billion (FY 1998 dollars) in FY 2002, a 47 percent real increase from FY 1998. It is unclear whether the administration's proposed force structure of 1.422 million active duty military personnel and 889,000 reserve personnel could be adequately modernized over the long term within procurement budgets of this size. Historically, each generation of weaponry has cost significantly more to procure than the weapon system it is replacing–typically two or three times more. This fact has led some to argue that procurement funding per troop must continuously be increased by as much as 4-5 percent per year if U.S. forces are to be kept adequately modernized over the long term.³⁸

This argument suffers from at least two serious flaws. First, it ignores the fact that, while unit procurement costs have increased over time, so too have the effective service lives of equipment. As a result of this and other factors, even during the Cold War, DoD procurement spending per troop increased at an average rate of only about 1.5 percent per year,³⁹ not 4-5 percent. Secondly, the rate of growth in U.S spending for procurement during the Cold War was closely linked to the rapid modernization taking place in the Soviet military. In other words, the United States consistently tended to increase spending on procurement during the Cold War, at least in part, because it faced a Soviet challenger that appeared to be doing the same thing. In addition, during much of the Cold War, many Third World countries were also rapidly increasing their spending on weapons modernization. Between 1975 and 1984, for example, the value of arms imports to the developing world nearly doubled in real terms.⁴⁰

By contrast, today spending on weapons procurement has decreased significantly in both Russia and the developing world. By 1993, Russian spending on weapons procurement was less than 35 percent of the 1991 Soviet level.⁴¹ By the beginning of 1996, weapons production in Russia was reportedly only one-fourth the level of 1991.⁴² Likewise, arms sales to the Third World have declined steeply over the past few years. In 1994, the most recent year for which data are available, the value of arms deliveries to the Third World was down to perhaps 30 percent of its 1974-1989 average. Some other factors, such as the growth in indigenous arms production in some developing countries, have probably offset this reduction in arms imports to some extent. Moreover, it is possible that these current trends in Russian and Third World weapons procurement will be reversed in coming years. Nevertheless, these trends suggest that the administration's current plan, under which funding levels for procurement would rise to about $44,000 (FY 1998 dollars) per active duty troop in FY 2002–slightly above the level provided on average during the FY 1974-FY 1990 period–might well be sufficient to keep U.S. forces adequately modernized over the long term.

As in the case of R&D programs, procurement programs are likely to end up costing more than currently anticipated. Thus, it will likely become necessary to cancel, defer or scale back the production of some planned weapon systems to fit within the $62.6 billion (FY 1998 dollars) procurement budget projected by the administration for FY 2002. Nevertheless, such a funding level might well prove adequate given the reduced rates of modernization taking place in many other countries.

Ballistic Missile Defenses
The administration's FY 1998 defense budget request includes $2.589 billion for the Ballistic Missile Defense Organization (BMDO), and some $900 million more for ballistic missile defense programs funded through the Services' budgets. Upon assuming office in 1993, the administration decided to reorient U.S. ballistic missile defense efforts away from the provision of a national defense against intercontinental-range ballistic missiles, and toward the development and deployment of theater ballistic missile defense systems capable of countering shorter-range missiles (such as the Iraqi Scud missiles faced by U.S. troops during the Gulf War). The FY 1998 budget request retains this focus. The proposed budget for BMDO would provide about $1.8 billion for various theater missile defense (TMD) programs, $504 million for national missile defense (NMD) programs, and $250 million for the development of various support technologies.

Of the $900 million requested in FY 1998 for BMD-related programs in the Services’ budgets, $385 million is for the procurement of systems previously funded through BMDO’s budget (starting with FY 1998, the administration plans to transfer programs from BMDO to the Services’ budgets once they enter the procurement phase). The remainder of the $900 million for BMD-related programs in the Services’ budgets includes $157 million for development of the Air Force’s airborne laser program and $219 million for development of the Air Force’s Space Missile and Tracking System (SMTS). The airborne (aircraft-mounted) laser is intend to shoot down theater-range missiles during their boost phase, immediately after launch, while SMTS (formerly, "Brilliant Eyes") is a sensor designed to perform missile early warning and tracking functions.

Even after taking into account the transfer of BMD-related procurement programs from BMDO to the Services, this year's funding request for BMDO represents a cut of about $664 million from the level approved for FY 1997. However, the FY 1998 request is about $175 million higher than the administration's request for FY 1997 (Congress added some $854 million to the FY 1997 request for BMDO). Overall, including both BMDO and Service programs, the administration's new plan would provide $21.4 billion for BMD-related programs over the next six years, $2.4 billion more than was projected for these programs in last year's plan. Nevertheless, under this plan, total BMD-related funding would decline by about 24 percent in real terms between FY 1997 and FY 2001, before increasing in FY 2002 and FY 2003 (when it would still remain two percent below this year's level).

The administration’s latest plan would add funding to several theater missile defense programs that received congressional plus-ups in FY 1997. Specifically, compared to last year’s plan, the new plan would provide $710 million more for the (land-based) Theater High Altitude Area Defense (THAAD) program and $260 million more for the (shipborne) Navy Theater Wide system over the FY 1998-FY 2003 period. It would also provide $600 million more for the SMTS program. However, the administration’s request includes no plus-up for NMD programs. This is likely to be a source of conflict with Congress, which added $325 million to the administration’s NMD request in FY 1997, and where Senate Majority Leader Trent Lott has introduced a bill (the National Missile Defense Act) that would mandate deployment of a limited NMD system by 2003. By comparison, the administration's plan calls for a technology development program that would place the administration in a position, in 2000, to decide, if deemed necessary at that time, to deploy a limited NMD system that could be fielded within three years (i.e., by 2003).

Major Acquisition Programs
Air Force. The Air Force's FY 1998 budget request includes $14.5 billion for procurement and $15.3 billion for R&D.

• C-17: The administration is requesting $2.414 billion for the C-17 program in FY 1998, including $2.202 billion for the procurement of nine of the new cargo aircraft, $89 million for initial spares, and $114 million for further R&D. To date the Air Force has procured 48 C-17s. Under current plans, in addition to the nine in FY 1998, the Air Force will buy another 63 C-17s between FY 1999 and FY 2003. In 1996, Congress agreed to the Air Force’s proposal to procure the last 80 C-17s through a multiyear procurement contract projected to save a total of $1.025 billion.

• F-22: The budget request provides $2.071 billion for continued development of the Air Force's new F-22 fighter, plus $81 million in initial procurement funding. The F-22 is intended eventually to replace much of the Air Force's existing fleet of F-15 fighters. Air Force plans call for procuring 438 of these aircraft, with production scheduled to begin with the first two aircraft in FY 1999. Recently, increased concerns have been raised about the affordability of the F-22. A draft study conducted by the Pentagon’s Cost Analysis Improvement Group reportedly found that the Air Force’s current estimate of F-22 acquisition costs (about $70 billion) could understate likely costs by as much as $15 billion.⁴³ In its most recent acquisition plan, DoD has substantially reduced the speed with which it plans to buy the F-22, at least between FY 1999 and FY 2003. Last year’s plan envisioned the procurement of 124 F-22s over this period, while this year’s plan calls for the procurement of only 70 aircraft through FY 2003.

• B-2: The administration is requesting $625 million for the B-2 strategic bomber program in FY 1998. The last four of 20 B-2 bombers called for under the administration's plan were authorized in FY 1993. The FY 1998 request includes $356 million to complete development of the bomber and $174 million to cover various production support costs, $68 million for initial spares, and $27 million for military construction. In early 1996, the president announced that the Air Force would use the $493 million added to the program by Congress in FY 1996 to convert an existing test model of the B-2 into an operational aircraft, increasing the fleet to 21 bombers. DoD is currently conducting the Deep Attack Weapons Mix Study (DAWMS), which is to evaluate both the optimal mix of munitions and tradeoffs between different platform and munition combinations. It is possible that this study (which was originally scheduled for completion this Spring, but has fallen far behind schedule) could support a decision to purchase additional B-2 bombers. However, the administration has consistently opposed the production of more B-2s in the past.

• Joint Strike Fighter (JSF): The proposed FY 1998 budget would provide $931 million for the JSF, up from $571 million in FY 1997. This R&D program is intended to lead eventually to the fielding of a family of affordable fighter aircraft to be used by the Air Force, Navy and Marine Corps. Under current plans, the three Services plan to buy a total of nearly 2,026 JSF over a period of several decades. DoD projects total acquisition costs for the JSF program of about $165 billion (FY 1997 dollars), while CBO has estimated that the cost is likely to be some $219 billion. After reviewing bids submitted by three competing aircraft producers (or teams), in November 1996, DoD announced that Lockheed Martin Corporation and the Boeing Company had been selected to build prototypes of the JSF (the losing bid was submitted by a team composed of McDonnell Douglas, Northrop Grumann and British Aerospace). The winner of this "flyoff" will be selected to produce the JSF, with engineering and manufacturing development scheduled to being in FY 2001, and initial production projected to begin around FY 2005. This year's request includes $449 million in Air Force funding, $458 million in Navy funding, and $24 million in Defense Advanced Research Projects Agency (DARPA) funding for the JSF.

• Joint Surveillance Target Attack Radar Systems (JSTARS): The budget request includes $371 million for the procurement of one E-8C JSTARS aircraft and $120 million for continued R&D. The JSTARS is a new system designed to locate enemy forces operating behind the forward edge of the battle area.

• MILSTAR: The FY 1998 budget request includes $690 million for development of the MILSTAR satellite, a new communications satellite designed to be highly survivable and resistant to jamming.

• F/A-18E/F: The administration is requesting $2.529 billion for the F/A-18E/F aircraft program in FY 1998, including $268 million for continued development and $2.2 billion to procure 20 aircraft (the first 12 F/A-18E/Fs were procured in FY 1997). The F/A-18E/F is a substantially changed derivative of the current C/D version of the F/A-18, featuring, among other things, a longer fuselage and larger wings. Under current plans, the Navy plans to buy a total of 1,000 of these aircraft at a total acquisition cost of $81 billion. The F/A-18E/F is intended to replace earlier models of the F/A-18, as well as A-6E and F-14 aircraft, aboard U.S. aircraft carriers.

• V-22: The proposed budget would provide $530 million in R&D funding for the V-22 tilt-rotor, vertical take-off and landing aircraft plus $571 million in procurement funding to buy five of these aircraft (the first five V-22s were procured in FY 1997). The V-22 is intended to replace the Marine Corps' CH-46 and CH-53 helicopters. Under current plans, DoD is projected to buy a total of 79 V-22s for the Marine Corps through FY 2003 and another 346 aircraft in later years plus, eventually, 48 Navy and 50 Air Force variants. Total acquisition costs for the program are projected to be about $47 billion.

• AV-8B: The administration's request would provide $321 million in procurement funding to remanufacture 11 Marine Corps AV-8B Harriers to an upgraded design. Altogether, current plans project the procurement of 44 remanufactured AV-8Bs over the next four years.

• DDG-51: The administration is requesting $2.872 billion for the procurement of three DDG-51 Arleigh Burke-class guided missile destroyers in FY 1998, as well as $88 million for R&D. The FY 1998 request supports the initial year of a multiyear procurement plan to construct 12 ships (three each year) between FY 1998 and FY 2001.

• Surface Combatant-21 (SC-21): The FY 1998 request includes $55 million to begin contract design work on the future SC-21. Production of the lead ship of this new class is scheduled to begin in FY 2003, when procurement of the DDG-51 class destroyer will be nearing completion.

• New Attack Submarine (NSSN): The administration’s FY 1998 request includes $2.6 billion for procurement of the first New Attack Submarine (NSSN) plus $397 million for R&D. In the FY 1996 defense authorization act, Congress directed the Navy to procure one submarine a year over the FY 1998-FY 2001 period, with two of the first four boats to be built by Electric Boat of Groton, CT, and two built by Newport News Shipbuilding (NNS) of Newport News, VA. Each of these first four boats was to be built as essentially a one-of-a-kind prototype, with serial production of a new class of submarine to begin as early as FY 2002. The administration’s latest plan calls for procuring one NSSN each in FY 1998, FY 1999, FY 2001, FY 2002, and FY 2004, and two NSSNs in FY 2005 (it will buy no NSSNs in FY 2000 or FY 2003). The new plan assumes that Electric Boat and NNS will build at least the first four boats jointly (the two companies reached an agreement on joint production several weeks after the administration released its budget request) and that the ships will be purchased through a multiyear procurement contract. The Navy’s new plan may raise concerns about the affordability of the NSSN program, and the prospect of ever reaching the Navy’s goal of constructing two submarines a year. The Navy’s 1996 plan envisioned buying 10 NSSNs between FY 1998 and FY 2005, and reaching a production rate of two per year in FY 2002. By comparison, the new plan calls for buying seven NSSNs over this period, and reaching a production rate of two boats per year in FY 2005.⁴⁴

• Aircraft Carriers: Under current plans, the Navy intends to request advance procurement funding (to cover the costs of long-lead items) for CVN-77 in FY 2000 and request full funding for the ship in FY 2002. Total acquisition costs for the CVN-77, which is to be the last Nimitz-class aircraft carrier constructed, are projected to be about $6.5 billion. The Navy plans to begin constuction of the first of a new class of aircraft carrier (CVX) around FY 2006.

• Arsenal Ship: The administration is requesting $103 million for the arsenal ship program in the Navy’s FY 1998 budget, plus $47 million in DARPA’s budget. The arsenal ship is a new type of ship that would be equipped with as many as 500 long-range land-attack missiles, like the Tomahawk cruise missile, and would feature a small crew (as few as 50) and possibly a new hull design. In December 1996, the Navy down-selected to three contractor teams which are vying for the construction contract (to be awarded at the beginning of 1998) to build the lead ship and five follow-on ships. The Navy estimates that the initial arsenal ship “demonstrator” will cost about $540 million to develop and construct (excluding the costs of the missiles it would carry and the cost of converting the demonstrator into a fully operational ship), with each follow-on ship costing between $450 million and $550 million.⁴⁵ Last year, preliminary Navy plans indicated that follow-on ships would be procured in FY 2001 or FY 2002. However, the current Navy shipbuilding plan does not project the procurement of any follow-on ships through FY 2003.

• Longbow Apache: The FY 1998 budget request would provide $525 million for the Longbow Apache upgrade program. Under the Longbow Apache program, a portion of the Apache fleet will be equipped with a mast-mounted fire control radar, and all of the existing Apaches will be upgraded to carry the radar-frequency fire-and-forget version of the Hellfire missile. The FY 1998 request also includes $265 million for the procurement of 1,465 of these Longbow Hellfire missiles.

• UH-60: The FY 1998 budget includes $211 million for the procurement of 18 Blackhawk UH-60 utility helicopters. Under the latest Army plan, procurement of the Blackhawk will end with the final 12 helicopters in FY 1999. By comparison, under last year’s plan, the Army projected that it would buy 28 Blackhawks in FY 1998 and 36 more each year through FY 2001.

• Comanche: The administration is requesting $282 million for continued development of the RAH-66 Comanche armed reconnaissance helicopter. The RAH-66 is intended to eventually replace the Army's existing fleet of OH-58 and AH-1 scout and attack helicopters. The RAH-66 is currently limited to a long-term prototype development program. Ultimately, however, the Army hopes to procure as many as 1,300 of these helicopters, with production to begin after FY 2002.

• M-1 Tank: The budget request provides $655 million to upgrade older M-1 Abrams tanks to the M-1A2 model, including $622 million in procurement funding to upgrade 120 tanks and $33 million for R&D. The modifications include improved armor, a 120 mm gun, and digitized communications.

• Bradley Fighting Vehicle (BFV): The FY 1998 budget request includes $126 million to fund upgrades to existing BFVs plus $75 million for continued R&D. The upgrades include modifying first-generation BFVs to the current M2A2 configuration, as well as an M2A3 upgrade program. M2A3 upgrades include digitized communications and target acquisition improvements.

• Crusader: The administration is requesting $322 million in FY 1998 for development of the Crusader artillery system (formerly known as the Advanced Field Artillery System) and the Future Armored Resupply Vehicle-Ammunition (FARV-A) program. Production of this new mobile artillery system and resupply vehicle is projected to begin sometime after the turn of the century.

Other Programs of Interest

The FY 1998 defense budget request includes funding for a number of programs of special interest. The request would provide a total of $4.771 billion for DoD environmental cleanup and compliance activities. The FY 1998 budget request also includes $382 million in Cooperative Threat Reduction (CTR) aid to the states of the former Soviet Union (FSU). CTR programs include assistance to former Soviet republics engaged in destroying nuclear and chemical weapons, and support for various measures aimed at preventing the smuggling of such weapons across the FSU's borders to would-be proliferators. In addition, the request would provide nearly $600 million for the development of various capabilities to locate, neutralize and defend against weapons of mass destruction, and $80 million for DoD participation in overseas humanitarian, disaster and civic aid activities.

Military Construction and Family Housing
The administration is requesting $4.715 billion for military construction and $3.668 billion for family housing in FY 1998. The military construction request includes $2.1 billion for various base closure activities, and $173 million for construction of National Guard and Reserve facilities. Among other things, the administration’s FY 1998 request for family housing would finance the construction, replacement or refurbishment of about 5,000 family housing units.

Department of Energy Defense Activities
The administration’s FY 1998 request includes $13.6 billion for Department of Energy (DoE) defense activities, nearly $2.3 billion more than in FY 1997. This increase is primarily a result of a change in the way DoE finances construction projects. To date, DoE has budgeted funds for construction projects incrementally, year-by-year as the work progresses. Starting in FY 1998, DoE will adopt the procedure used by DoD (and most other federal agencies) of providing full funding for construction projects up-front, when they are begun. The FY 1998 budget request includes $2.167 billion for seven new and 44 on-going projects. The FY 1998 request also includes $3.576 billion for weapons activities, $5.052 billion for environmental restoration and waste management, and $1.606 billion for other

1. Unless otherwise noted, all changes in funding referred to in this analysis are expressed in real terms.

2. By comparison, the FY 1998 defense budget request represents a 2.5 percent real decline from the FY 1997 level of funding approved by Congress last year (which will remain the effective level if Congress does not approve the proposed supplemental and rescissions).

3. CSBA estimates based on DoD data.

4. CSBA estimates that applying CBO’s chain-weighted inflation projections, rather than DoD’s inflation projections, would reduce the purchasing power of DoD’s new plan by about $8 billion between FY 1998 and FY 2002.

5. BA is the amount of funding the government may obligate through hiring personnel and signing contracts for goods and services, outlays are the actual cash expenditures made to liquidate pay and contract obligations.

6. CBO estimates that under the administration’s plan FY 1998 outlays for defense will be $5.6 billion higher than projected by the administration ($4.7 billion for DoD and $900 million for DoE). This would make the FY 1998 outlay level some $2 billion higher than the level included in last year’s CBR–even before Congress adds any unrequested funding.

7. DoD News Release, “Department of Defense Budget for FY 1998,” February 6, 1997, p. 2.

8. Bradley Graham, “Pentagon Leaders Urge Accelerated 50% Boost in Procurement,” Washington Post, November 11, 1995, p. 12.

9. It is assumed here that the $60 billion target refers to FY 1998 dollars, although the chairman and other Service chiefs have not been clear on this point.

10. The current FYDP extends through FY 2003. However, in most cases, the administration has provided information on funding levels only through FY 2002. Thus, this analysis sometimes refers to the administration’s plan through FY 2002 (the next five years) and at other times its plan through FY 2003 (the next six years).

11. By CBO’s accounting, rather than bringing the budget into balance, the administration’s latest budget plan would result in a deficit of $69 billion in FY 2002.

12. Rep. Bill Young, chair of the House Appropriations Committee's National Security Subcommittee has indicated that "until the Budget Committee does something different," he plans to work toward the figure in last year's CBR for FY 1998, and to add $2-$3 billion to the administration's request. Bryan Bender, "HAC to Boost Defense By $2 Billion to $3 Billion," Defense Daily, February 27, 1997.

13. General Accounting Office (GAO), Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming, July 1994, p. 2.

14. CBO, An Analysis of the Administration's Future Years Defense Program for 1995 Through 1999, January 1995, p. 48.

15. GAO, Underestimation of Funding Requirements in Five Year Procurement Plans, March 12, 1984, p. 48.

16. Statement of Charles A. Bowsher, Comptroller General of the United States, GAO, before the Senate Armed Services Committee, May 10, 1989.

17. The lower estimate assumes that: projected reductions in DoD active duty and civilian personnel would yield roughly the same level of savings (on a per person basis) that they have since FY 1989; acquisition costs (R&D plus procurement) would be about $10 billion higher than currently anticipated; higher than projected inflation would increase costs by $8 billion; contingency costs would average about $1 billion annually; and base closure costs would be phased out over this period. The higher estimate differs only in that it assumes that projected reductions in DoD active duty and civilian personnel would yield smaller savings. In both cases, as might be expected, the projected gap is much larger at the end of the FY 1998-FY 2002 period than at the beginning.

18. Cindy Williams, Assistant Director for National Security, CBO, “Funding Risk in the Administration’s Plan for National Defense for 1997 to 2001,” January 30, 1997, p. 4.

19. This is roughly the size of the gap projected for FY 2002 using the two methodologies described in footnote 17.

20. “Long-Term Implications of the Administration’s Plan for National Defense Spending,” CBO chart, May 1996.

21. See, for example, William Kaufmann, Assessing the Base Force (Washington, DC: Brookings Institution, 1992).

22. Although interest in reducing near-term readiness has been limited, Sen. John McCain (R-AZ) and others have suggested that it might be possible to achieve significant savings through the use of tiered readiness, which would involve keeping U.S. forces at variety of different readiness levels. DoD recently released a report on the tiered readiness concept (“Report on the Military Readiness Requirements of the Armed Forces”) which Congress had directed that it prepare.

23. For a discussion of the potential impact of these revolutionary changes, see, for example, Andrew F. Krepinevich, “From Cavalry to Computers: the Pattern of Military Revolutions,” The National Interest, Fall 1994, pp. 30-42.

24. CBO, A Look at Tomorrow’s Tactical Air Forces (Washington, DC: CBO, January 1997), p. xi.

25. "Incremental" costs refer to the extra costs incurred by DoD due to U.S. involvement in contingency operations. They exclude equipment, operations and support, and other costs that units would normally incur even absent involvement in such operations.

26. To be enacted, supplemental appropriations and rescissions, like any other legislation, must be approved by both houses of Congress.

27. The 1990 Budget Enforcement Act (BEA), as extended by the 1993 Omnibus Budget Reconciliation Act (OBRA 1993), places ceilings on the overall level of budget authority and outlays that can be provided for discretionary programs (which include all those defense and non-defense programs that obtain funding through the annual appropriations process) through FY 1998.

28. Current law mandates annual military pay raises of one-half a percent below the Employment Cost Index (a measure of how much private sector employees receive for performing similar work).

29. General John M. Shalikashvili, Chairman of the Joint Chiefs of Staff, testimony before the House Committee on National Security, February 12, 1997, p. 14.

30. Notwithstanding the success of DoD’s recruitment efforts to date, there is some concern that DoD may have more difficulty meeting its recruitment goals in the future. One possible indication of this is the fact that only 88 percent of Army recruits enlisting in the first three months of FY 1997 had high school diplomas, 6 percent below last years level. Andrew Compart, “As Recruiting Goals Increase, Quality of New Soldiers Drop,” Army Times, February 24, 1997.

31. This is the average annual rate at which DoD O&S outlays increased between FY 1955 and FY 1989.

32. Although FY 2003 is the last year included in the FYDP, FY 2002 is the last year for which the administration has so far provided detailed funding projections.

33. A early draft of DoD's press release on the FY 1998 defense budget request reportedly indicated that the administration's plan assumed $5 billion in savings due to outsourcing between FY 1998 and FY 2002. “$250.7 Billion FY 98 DoD Budget Delays Modernization Hike Another Year,” Inside the Navy, January 28, 1997, p. 1. However, this estimate apparently does include $4 billion in savings due to other outsourcing initiatives being pursued by the Services.

34. Electronic Industries Association (EIA) Ten-Year Forecast, Final Report (Washington DC: EIA, October 1996), p. 239.

35. GAO, Defense Budget: Analysis of Operations and Maintenance Accounts for 1985-2001 (GAO/NSIAD-97-73, February 1997).

36. Report of the DSB 1996 Summer Study on Achieving an Innovative Support Structure for 21st Century Military Superiority, DoD, November 1996, p. 12.

37. Although possible, it is much more difficult to conceive of another "Soviet-class" global superpower rival emerging over the next 10-15 years.

38. See, for example, Dov S. Zakheim and Jeffry M. Ranney, "Matching Defense Strategies to Resources," International Security, Summer, 1993, Vol. 18, No. 1, p. 66.

39. This is the average annual rate at which DoD procurement outlays increased between FY 1955 and FY 1989.

40. Arms Control and Disarmament Agency, World Military Expenditures and Arms Transfers, 1986, April 1987, p. 101.

41. CIA, figure 2.

42. Anton Zhigulsky, “Russia Slashes Weapon Buys: Officials Call for Emergency Steps to Save Defense Industry,” Defense News, March 4-10, 1996, p. 3.

43. Tony Capaccio, “Draft Pentagon Look Suggests Huge F-22 Production Costs,” Defense Week, February 13, 1997, p. 1.

44. For a discussion of industrial base issues related to submarine construction and other shipbuilding programs, see Ronald O’Rourke, Navy Major Shipbuilding Programs and Shipbuilders: Issues and Options for Congress, Congressional Research Service (CRS), September 24, 1996.

45. Ronald O’Rourke, Statement before the House National Security Committee’s Subcommittee on Military Procurement and Research and Development, February 26, 1997, p. 18.