October 1, 2008  

Investing in readiness

The current U.S. housing crisis — with suddenly skyrocketing interest rates and unexpectedly large payments for homeowners coming due — holds some lessons for defense budget planners.

The Defense Department finds itself in a similar situation, with balloon payments coming due just when it needs all the cash it can scrape up to pay for equipment modernization needs. Operations and maintenance costs, together with personnel expenditures, are spiking and taking up more of the Pentagon’s budget. At the same time, there is a need to reset equipment now in use and recapitalize for future needs.

The increasing age and overuse of equipment affects all of our military services and represents a real threat to future U.S. military readiness. Aerospace weapons have been particularly affected.

The need to modernize our defense assets is most obvious to anyone who has scanned the list of aircraft lately. We have been flying some version of the B-52 since 1952 and KC-135 since 1956. They are wearing out and costing more and more to fix — when they are fixable at all. These are two well-known examples, but there are others up and down the inventory.

This isn’t a question of future conflicts vs. the present war. No matter what one believes the next war will look like, capabilities such as air mobility, space-based communications systems and rotorcraft will be relevant and needed. Modernizing these systems isn’t a “nice-to-have” — not when missions are already being affected by forced system retirements and some platforms are being run to exhaustion.

For many years, the ability to demonstrate military superiority has been a cornerstone of America’s global strategy. Through the Cold War and the fall of communism; conflicts in Panama, the Middle East and the Balkans; and the current struggle against terrorists all over the world, our strength has been largely a product of our sustained military and technological advantage. That has come not only from the superiority of our people in uniform but because we have had the world’s most advanced aerospace systems.

Budget history

Our nation has a long history of robustly funding defense programs, especially when they are needed most. Using the standard barometer of percentage of gross domestic product (GDP), the defense budget has been as high as 37.5 percent during World War II, 14.2 percent during the Korean War and 9.4 percent during Vietnam.

At the other end of the cycle, usually coming in peacetime, are budgets as low as 3.5 percent in 1948 and 3 percent between 1999 and 2001. Since the terrorist attacks of 2001, defense spending has ramped up considerably to the largest dollar level in history. But, at 4.4 percent of GDP, we are nowhere near the historic highs of wartime or even the Reagan buildup of the 1980s, which checked in at 6.2 percent.

And those overall numbers don’t reflect America’s inconsistent record of investing in the systems needed to carry that strategic edge. While peaks and valleys in defense investment have mirrored overall defense spending, their effects are magnified when entire procurement programs are delayed — or even canceled. The list of advanced weapons programs cast by the budgetary wayside is lengthy and significant. Even with recent increases, base procurement budgets are still running well below the historic averages post-World War II. The increases have come against a smaller investment base that has not kept up with long-term recapitalization needs. Right now, procurement is about 20 percent of the defense budget — well shy of what is needed to execute the current program of record, much less to move ahead.

So why are the Aerospace Industries Association (AIA) and many others making this issue a priority right now? Today, three major challenges are putting extraordinary demands on the defense budget. Even if the next administration were to increase defense spending, it would still have to shuffle money internally to deal with these expanding demands. And we suspect that if nothing is done to address them, officials will be forced to rob the Peter of investment accounts to pay the Paul of cost growth in other budget areas.

The challenges are:

å Growth in operations and maintenance. For four decades, operations and maintenance costs have continued to climb faster than inflation, defying many efforts to rein them in. We don’t see this trend reversing itself anytime soon. The Defense Department will see even more budget pressure from rising health care costs, growth in noncapital purchases such as fuel, installation needs, civilian pay increases and other factors.

å Rising personnel expenditures. With ongoing combat operations in Iraq and Afghanistan, officials recently made the prudent decision to increase the strength of the Army and Marine Corps. The cost is estimated to be $108 billion more than previously planned budget levels. With the vast majority of those costs outside the investment portfolio, officials adjusted the fiscal 2008-2013 Future Years Defense Program to accommodate the change. Personnel costs are not discretionary and are substantial in a volunteer military system as we have today. But the numbers they drive underscore the difficulty of keeping investment accounts as robust as they need to be.

å Simultaneous needs for reset and recapitalization. While predicting the future actions of Congress is a fool’s game, it’s safe to say the appetite to continue passing supplemental budgets to cover war costs will not last forever. Up to this point, costs to reset equipment worn out because of wartime activities have been covered in supplementals. This has protected important investment accounts within the defense budget. If war costs — which have been from $170 billion to $190 billion per year — are folded into the base defense budget, there will be huge pressure to cut back on recapitalization and modernization — essentially, to sacrifice the ability to fight the next war in order to pay for this one.

So what does all this mean in specific terms? We see several capability areas needing modernization that are directly impacted by this looming crisis.

One is tactical aircraft. Since the late 1980s, the Defense Department has not procured sufficient numbers of fighters to replenish Navy, Marine Corps and Air Force aircraft. Over the next 10 to 15 years, we will need to replace more than half of the fighter fleet. Even as the F-22 enters service, the total number of aircraft to be produced and delivered has been decreasing because of budget pressures. America’s fighter fleets will have to be restocked in the coming years to keep our edge in this critical technology.

Another area of concern is long-range strike, a vital asset in light of the global threats facing America today. A total of 82 B-52s form the backbone of our bomber inventory, and the youngest is 45 years old. Age isn’t a bad thing in a wine or a mentor, but it is no friend to airframes, engines or maintenance costs. While B-1s and B-2s are very capable platforms, we don’t have many of them, and they do not have the attributes required to operate in tomorrow’s air-defense environments. A small amount of unclassified funding is budgeted for a new platform over the next five years, but now is the time for a full-fledged effort to build America’s next great bomber.

The last product category that requires mention is rotorcraft. This is perhaps the most pressing of any single need. U.S. industry will soon be unable to supply relevant military helicopters. No new rotorcraft designs are included in the current budget, and no helicopters — at all — are programmed beyond 2018. As we have seen in Iraq and Afghanistan, helicopter technologies are vital to giving us advantages against all types of enemies. If development of new rotorcraft does not start soon, we will have huge production gaps as well as an absence of advanced military-specific helicopter technologies.

AIA has made five broad recommendations that the next administration should use as a planning approach when crafting policies on defense modernization:

å Develop a national consensus to adequately fund defense capability and readiness.

å Acknowledge that defense modernization is long overdue and increase annual defense procurement funding to a steady state range of $120 billion to $150 billion in constant dollars.

å Establish a floor for defense spending at 4 percent of GDP.

å Address the bow wave of modernization requirements by providing stability in procurement and research accounts.

å Foster innovation and stability in defense budget planning by establishing a Stable Program Funding Account, like that proposed by the Defense Acquisition Performance Assessment Panel. This would ease program management through capital budgeting.

We have also made more specific recommendations in 11 capability areas, and detailed the costs of failing to modernize.

It is clear that stabilizing defense spending in general, and the Pentagon’s investment portfolio in particular, will be a priority for the next president. Allowing modernization and recapitalization to be cannibalized by other pressing budget needs would be disastrous. Taking this important step will require a generation-long national-security investment strategy based on sufficient funding levels. Too much is at stake to do otherwise.

Marion C. Blakey is president and CEO of the Aerospace Industries Association. AIA has released a two-part analysis of today’s modernization requirements. “U.S. Defense Modernization: Readiness Now and for the Future” and “U.S. Defense Modernization: Today’s Choices for Tomorrow’s Readiness” are available at http://www.aia-aerospace.org.