Amid $52 billion plus-up, DoD looks to trim spending on service contracts, health care

As expected, the final 2018 Defense budget the Trump administration submitted to Congress Tuesday calls for $640 billion in military spending, $52 billion more than the current year and breaking the current budget caps by the same amount.

But even amid a healthy plus-up in the top-line amount, the Pentagon says it’s found some modest ways to produce “efficiency” savings in 2018. Officials billed the budget as a fulfillment of two commitments Defense Secretary James Mattis made when he took office in January: rebuilding the military’s readiness and reforming its business operations.

“There are a number of ongoing activities that we continue to pursue,” said John Roth, the career senior executive who’s currently performing the duties of DoD comptroller. “We’re continuing to look at the major headquarters and to reduce them by 25 percent. We continue with acquisition reform, particularly with Better Buying Power 3.0. We continue to take a hard look at our service support contracts and make sure that they’re appropriate.”

The department said the largest chunk of the savings — $1.2 billion — will come from changes to business processes in the headquarters of the military services and the Office of the Secretary of Defense.

Its budget document does not identify all of the ways in which DoD expects to reach that total, but offers a few examples:

  •  From now on, the Pentagon’s deputy chief management officer will have to sign off on any new business IT investments that cost more than $1 million over five years. DoD expects that change to save $77 million in 2018 alone.
  • The department says it will save $120 million with a change to travel policy, using the “lowest acceptable” airfare in GSA’s City Pair program as the default option for domestic flights.
  • DoD expects to save $382 million by eliminating “redundant” service contracts. That process will be led by the department’s Service Requirement Review Boards, a process DoD set up last year to begin forcing Defense organizations to justify their use of support contractors.
  • The budget proposes modest increases in staffing levels at the Defense Contract Audit Agency, the Defense Contract Management Agency and the DoD Inspector General’s office to increase oversight over contracts.

The Pentagon also hopes to glean some savings from military compensation.

The 2018 budget proposes a 1.9 percent pay raise for civilians and 2.1 percent raise for military members, lower than the 2.4 percent increase federal employees would otherwise receive based on the Employment Cost Index. The department projects the lower raise would save about $200 million in 2018.

DoD Reporter Jared Serbu discusses this story on Federal Drive with Tom Temin

The spending plan would also require some of DoD’s health care beneficiaries to pay more for their own treatment. While active-duty service members would continue to be cared for at no charge, the budget would introduce new enrollment fees and deductibles for retirees; family members would be subject to annual copays as well.

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Congress already allowed for those fees in the 2017 Defense authorization bill, but only applied them prospectively — to service members who join the military after January 2018.

“What that did, in effect, is pretty much wipe out any to near-term savings and created what we think is an awkward two-tier system. Some people will be under one system and some people will be under another for the next 50 years,” Roth said. “We’re going to ask the Congress if they would consider eliminating the grandfathering. We’d like to exempt the medically retired and family members of those who die on active duty. We think that’s just a tweak in a law that perhaps the Hill has overlooked. And we continue to look at efforts to rely on telehealth, nurse advice lines, those kinds of things to try to improve the beneficiary’s experience with the process.”

The cost-share changes would be most impactful for retirees and their families. Within that group, the department estimates an average family of three’s out-of-pocket medical costs would rise from about $1,500 a year to $2,000 if the proposal is approved.

Another new element: beneficiaries would have to take active steps to take part in the health system during an annual open enrollment period, similar to what’s required for civilian employees in the Federal Employee Health Benefits Program. As of now, under TRICARE Standard, beneficiaries need only show their DoD ID card at a health care provider’s office to get TRICARE coverage.

Apart from the $2 billion in efficiency savings in 2018, the Trump administration believes DoD could save another $2 billion per year in perpetuity if Congress allows it to conduct another round of Base Realignment and Closure (BRAC), a request DoD has made in every budget proposal since 2012, but which Congress has rejected each year.

The latest proposal would initiate a BRAC round in 2021, making it the first since 2005. The Pentagon’s rough calculations show it’s currently paying to maintain 22 percent more base capacity than what’s militarily useful.

“The sum-total of the five rounds we’ve had since the 1990s has resulted in approximately $12 billion a year in savings. It’s a gift that keeps on giving,” Roth said. “All we’re asking for at this stage is the authority: we can’t even do the detailed analysis under current law. What we have is a parametric estimate. If that number is anywhere near correct, we are forgoing a very significant opportunity to get some savings. [BRAC] is a very structured, systematic, rigorous process that ultimately, Congress has the final say on. We think we’re getting some signals from at least a couple of committees that are more amenable to it and so we will be pushing that pretty hard.”

At the same time, the budget proposes to spend more on improvements to existing infrastructure than DoD has put forward in the last several years.

A multi-year maintenance backlog has led to one out of every five Defense facilities falling into “failing” condition; the 2017 budget provided only enough funding to conduct 74 percent of the military’s needed facility upkeep. The 2018 version would add several billion dollars to preventative maintenance and military construction accounts — about 25 percent more than last year.

“This is an area where when you get constrained budgets and you have lower top-lines, you tend to take risk and you tend to defer. You’re going to wait to fix that window until the next year as long as the roof’s not leaking,” Roth said. “We’ve had pretty anemic military construction facilities budgets over the last four-or-five years, but there’s a readiness nexus with this. So we’re investing in operational and training facilities and maintenance and production facilities in particular.”

Roth said getting the Defense Department in a position to pass a financial statement audit is also one of Secretary Mattis’ top reform priorities.

Per a congressional mandate, DoD is supposed to declare itself “audit-ready” by September. Roth said that means the department will continue with its previous plan to begin subjecting itself to full-scale audits in 2018, but that no one should expect a passing score in the first year.

“One of the reasons we are where we are is for about 20 years, no one really cared. That’s why we didn’t move the ball,” Roth said. “In the last six or seven years, it became a high priority for the entire department. This isn’t something that only a comptroller and financial manager can do, it needs a buy-in from the entire enterprise. We’ve made an enormous amount of progress getting, quote ‘ready,’ but we’re not going to get to a clean audit in one year. But we won’t know until we start the audit. We’ll get some good audit opinions and frankly, we’ll get some bad audit opinions. Those will lead to remediation efforts in terms of either changing business processes or changing accounting processes and the like. But we have to start, and that’s the importance of 2018.”