The passage of the Bipartisan Budget Act of 2018 represented a substantial increase for the defense budget in both 2018 and 2019.REF Providing critically needed funding to rebuild the military, the legislation sets a new cap for 2019 that is unlikely to change during congressional deliberations. This means that there will be less deliberation about the topline defense budget, allowing lawmakers in the 2nd Session of the 115th Congress to focus on more complex issues below the surface.

This influx of resources will help the Department of Defense (DOD) rebuild the military’s capability, capacity, and readiness. The military’s problems in these areas have been well documented over the years in The Heritage Foundation’s Index of U.S. Military Strength.REF The military did not end up in this situation in one year, and getting out of this state will also take more than one year.

Nonetheless, the future of defense budgets is neither guaranteed nor well-defined by either the DOD or the White House.REF The projections for future defense spending are consistently unclear and heavily dependent on changing the caps set by the Budget Control Act of 2011.REF

The budget increases should be a chance to reflect and to re-assess efficiencies and reforms that require up-front investments to be executed. The DOD needs to be a good steward of taxpayers’ dollars, regardless of future levels of the defense budget. Good stewardship includes being able to extract the maximum amount of value from every dollar spent, independent of the department’s budget.

Heritage Foundation analysts have made multiple proposals for how Congress and the DOD can pursue reforms and improvements to defense systems. As such, there are multiple reforms that Congress and the DOD can work on together. Many of these reforms are have been featured in previous Heritage Foundation research.REF

Reform Management Groups (RMGs)

When James Mattis took over as Secretary of Defense, one of his three lines of emphasis was to bring business reform to the Pentagon.REF This effort is currently being conducted under nine RMGs, one for each of nine areas of reform, established by Deputy Secretary of Defense Patrick Shanahan. According the 2019 budget request, “The RMGs’ central goal is to leverage best practices, centers of excellence, and private sector sources to benchmark and best align business operations.”REF

The nine identified areas of reform are (1) information and technology, (2) health care, (3) real property, (4) human resources, (5) financial management, (6) contracted services and goods, (7) logistics and supply chain, (8) military community services, and (9) testing and evaluation. Each of these areas represents a great opportunity for the DOD to improve and rationalize the way it conducts its business operations. Many of them are back-office functions that have the potential to save resources. The first step, and often the most difficult, is to establish what the DOD spends on these various functions. This is harder than it appears. The Services have different definitions and methods of capturing costs. Labor costs are attributed in different manners among the Services. Therefore Congress should expect the Pentagon over time to be able to describe the burdened costs in each category.

Congress and the DOD should be partners in this endeavor. Undoubtedly many of the likely proposals in each of these areas will require changes in the law in order to be effective. The department should be transparent with Congress and the American public about how these groups are organized and what their goals are. Neither should there be any illusions about the source of the cost savings: Efficiencies in “back-office” functions come from labor savings—that is, fewer people, usually government civilians.

Because there will always be incumbent forces unwilling to change, business-processes transformation could be more challenging than expected. The dispersed nature of the benefits created by business reform make it necessary to engage with congressional stakeholders early and often to guarantee that they will not prevent or slow down necessary changes.

A New Round of Base Realignment and Closures (BRAC)

For the first time in the past six years, the DOD did not request Congress to authorize a new round of BRAC. The need has not gone away; if anything, the need has become more pronounced. The Infrastructure Capacity study indicating a 19 percent in excess infrastructure is still the most current assessment of the Pentagon’s real estate usage.REF

A new round of BRAC could save over $2 billion annually in reduced fixed costs.REF Additionally, the new National Defense Strategy clearly states that the “Department will also work to reduce excess property and infrastructure, providing Congress with options for a Base Realignment and Closure.”REF

Delivering options to Congress on BRAC is a fairly modest responsibility established by the National Defense Strategy, but the DOD failed to fulfill it. While the RMG on real property develops its proposals, Congress should start empowering the DOD to conduct robust infrastructure assessments by loosening the current reporting requirements that exist whenever there is any proposed real estate change.REF

These measures are short of authorizing a new round of BRAC, but would represent a step forward in the DOD’s current real estate management. Congress needs to take the lead in changing how the Pentagon manages domestic military bases.

Auditing the Pentagon

There is a widespread belief in Congress that the DOD financial audit will identify large areas of waste or fraud, yet the audit experiences of other federal agencies and private corporations largely do not support that expectation. In the private sector, financial audits are primarily used to fulfill legal requirements and to increase investor confidence in financial statements, leading to a reduced cost to raise capital. There is no corresponding need for the DOD audit.

Audit results that lead to actual reduced waste or inefficiency are rare, and many companies that can legally escape undergoing financial audit choose to do so.REF Pentagon Comptroller David Norquist estimates that the 2018 audit of the DOD will require at least $870 million to complete, which includes remediation actions.REF That is the equivalent of at least eight F-35A fighter aircraft, which U.S. forces desperately need.

Certainly some aspects of the DOD audit are necessary. Reconciliation of DOD accounts with the Treasury is one area that needs attention. Other areas do not require similar attention, whether because there are other systems that check for accuracy or because there is no potential for savings or efficiency. For instance, verification of real property accounts or equipment is not an area that needs to be examined in the financial audit, yet consumes a vast amount of time.

In general, there are better methods for reducing waste or inefficiency, such as “waste audits” or zero-based budgeting techniques. Costs may go down slightly in subsequent years, but Congress should nevertheless take the examination of the 2019 budget as an opportunity to push for ways to accomplish the most essential aspects of an audit at a lower cost in future years.

Replacing Military Personnel in Commercial Positions with Civilian Employees

According to the Congressional Budget Office (CBO), the DOD currently employs around 340,000 active-duty military personnel to perform support functions in commercial positions.REF These commercial positions are defined by two criteria: (1) being available in the private sector and (2) not dealing with the discrete exercise of government power or obligation of government funds.REF Some of these positions can be transformed into civilian positions, without losing the possibility of allocating military to commercial positions to enable them to rotate away from combat positions. The CBO analyzed the possibility of transforming a quarter of these positions—80,000.REF

The savings vary depending on the replacement rate that the DOD achieves. In similar earlier initiatives, the DOD was able to average a ratio of 1:1.5, with two civilians replacing three military personnel. At a ratio of 1:1.5, the amount would reach $5.7 billion. Even if the DOD can only achieve a replacement ratio of 1:1, it would save $3.1 billion annually.

Military personnel are inherently more expensive than civilians due to the required training and rotations that are shorter than the time that a civilian usually spends on a job. According to the CBO, the savings would be generated because of two factors: (1) Civilians are on average 30 percent less expensive, and (2) one can use fewer civilians than the number of military personnel employed in the same positions, as the DOD was able to do in past conversions.REF

Reducing Commissary Subsidies and Combining Commissary and Exchange Systems

The DOD operates two parallel, and similar, organizations for providing Service members and their families with access to goods and groceries. The commissaries provide groceries at cost plus 5 percent, which is only sustainable through an annual subsidy. In fiscal year (FY) 2018, Congress subsidized the commissaries with $1.4 billion.REF

On the other hand, the military exchanges for non-grocery goods operate largely without subsidies by passing appropriate costs on to the consumers. Maintaining access to affordable groceries and goods is important for Service members, particularly those stationed overseas or in remote locations. In the debates for the 2018 National Defense Authorization Act (NDAA), Congress had a reporting requirement that would provide a cost-benefit analysis and aim at reducing the operational costs of commissaries and exchanges by $2 billion.

Congress should revisit the question and continue with reforms to how it provides access to groceries and goods. This is especially important at a time that the Government Accountability Office has found that the DOD does not properly measure the benefits delivered by its system of personnel benefits.REF Furthermore, the RMG reviewing military community services has started to examine the possibility of merging the different services.REF Congress should collaborate with the DOD on modernizing this benefit.

Lifting the Moratorium on Private–Public Competitions

Under pressure from federal employee unions since 2008, Congress has prohibited competition between public and private organizations to determine which could provide more cost-effective services for the U.S. government. This moratorium leads to situations wherein the local organizations near a base are not allowed to offer its services to that base. DOD-specific competitions remain prohibited per section 325 of the 2010 NDAA.REF Yet even critics will admit that “competition is the greatest single driver of performance and cost improvement.”REF

The RAND Corporation has estimated that opening support services for the military to private competition could result in savings of between 30 percent and 60 percent.REF The common criticism levied against such competition is that the process has not been updated and has created problems for both government and the private sector.REF This is more reason for Congress to revisit the guidance that enables private–public competitions, and lift its moratorium.

Increasing Use of Performance-Based Logistics

Congress should incentivize and enable the broader use of performance-based logistics (PBL) throughout the acquisition enterprise at a system level. PBL is an arrangement in which the contractor is responsible for a larger portion of the support throughout the life cycle of the product. Thus, instead of a contract that is associated with the delivery of a platform, the contract is associated with the proper functioning of said platform.REF Along these lines, “PBL has been implemented to deliver needed reliability and availability, reduce total cost, and encourage and reward innovative cost reduction initiatives.”REF

PBL serves to align the contractors’ interests with the DOD in maintaining the readiness of platforms. PBL is both DOD policy and a priority for product support solutions, and it saves an estimated 5 percent to 20 percent of contract costs.REF It is an arrangement that is not universal, and depends on the system being assessed. In October 2014, PBL accounted for between 5 percent and 10 percent of all Pentagon maintenance contracts.REF Nonetheless, it is a great method for aligning the interests of government and contractors. Congress needs to push the DOD to increase the use of PBL in weapon-systems sustainment, especially at the system level.

The Path Forward

As the Secretary of the Army Mark Esper stated at The Heritage Foundation, “[Y]ou fix a roof when it is sunny out.”REF In that same vein, the DOD needs to take advantage to its budget increase to enact reforms that will yield future savings. Congress needs to be a partner in that task. As such, the DOD should:

• Engage with Congress on reform. Congress has been a willing partner when it comes to funding the military and is also willing to adopt reforms. Nonetheless, there are more areas in which the DOD needs to work together with Congress.
• Embrace the opportunity to reform. From now until the end of FY 2019, the DOD will experience relative calm in the topline. It is a great period to start reforming business processes in the department.

Congress, on the other hand, should:

• Push the DOD to find business reform opportunities. The DOD is developing options and concepts on business reform, but Congress plays a pivotal role in that task.
• Take the initiative on business reform. There are business reform opportunities to which the DOD is resistant, and which require congressional action to be implemented. Congress needs to use its power of the purse to push for these necessary reforms.

Conclusion

In times of budget increases, reforms and efficiencies tend to fall by the wayside. It should not be the case. The Pentagon should take advantage of its increased budget to make sure that there is room to invest in creating efficiencies and reforming outdated systems. From changing its installations to re-assessing how the commissaries benefit its population, there are many opportunities available for both Congress and the DOD.

—Frederico Bartels is Policy Analyst for Defense Budgeting in the Center for National Defense, of the Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.