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Top brass claims personnel costs are swamping DoD, but budget figures say otherwise

Nov. 24, 2013 - 06:00AM   |  
From left, service chiefs Army Gen. Ray Odierno, Adm. Jon Greenert, Marine Commandant Gen. Jim Amos and Air Force Gen. Mark Welsh testify Nov. 7 before the House Armed Services Committee. Some experts say recent assumptions cited by some of the chiefs about continued growth in personnel costs may be exaggerated.
From left, service chiefs Army Gen. Ray Odierno, Adm. Jon Greenert, Marine Commandant Gen. Jim Amos and Air Force Gen. Mark Welsh testify Nov. 7 before the House Armed Services Committee. Some experts say recent assumptions cited by some of the chiefs about continued growth in personnel costs may be exaggerated. (MCC (SW/EXW) Peter D. Lawlor / Navy)
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From left, service chiefs Army Gen. Ray Odierno, Adm. Jon Greenert, Marine Commandant Gen. Jim Amos and Air Force Gen. Mark Welsh testify Nov. 7 before the House Armed Services Committee. Some experts say recent assumptions cited by some of the chiefs about continued growth in personnel costs may be exaggerated. (MCC (SW/EXW) Peter D. Lawlor / Navy)

To hear the top brass talk sometimes, you might think the biggest threat to national security is your paycheck.

It’s become a common refrain: Military personnel costs are soaring, changes are needed. And, oh by the way, that will probably mean less money going to the men and women in uniform.

Defense Secretary Chuck Hagel sounded the alarm about military compensation and personnel costs as a major problem during a recent speech to an influential Washington think tank.

“Without serious attempts to achieve significant savings in this area — which consumes roughly half of the DoD budget and is increasing every year — we risk becoming an unbalanced force ... one that is well-compensated, but poorly trained and equipped, with limited readiness and capability,” Hagel said Nov. 4.

He urged Congress to “make tough choices to bend the cost curve on personnel.”

Hagel is right; according to the comptroller’s office, military and civilian personnel costs have grown by 78 percent between 2001 and 2012, the most recent year for which finalized budget numbers are available.

Yet the overall defense budget has been growing even faster.

The base budget is up 85 percent since 2001, and when funding for overseas contingency operations are factored into the mix, total military spending is up more than 104 percent.

From that perspective, personnel costs are actually shrinking as a share of the entire defense budget.

'Not sustainable'?

Decrying the nominal rise in personnel costs without that important bit of context and comparison has been common for years. Just before he retired two years ago, Adm. Mike Mullen, then-chairman of the Joint Chiefs, spoke to the Naval Academy and declared the rise in compensation costs “not sustainable.”

“It’s pay, it’s housing allowances, it’s bonuses, it’s retirement pay, it’s health care. … There’s going to have to be some changes,” Mullen told the midshipmen in September 2011.

But at that time in 2011, the part of the defense budget labeled “military personnel” was smaller as a share of Pentagon spending than it was a decade before in 2001, according to data from the White House’s Office of Management and Budget.

The bottom line: There is no question that personnel costs have grown — but so has the cost of everything else, including costs related to operations, maintenance and new weapon systems.

And some of those things have actually grown more.

Costs per troop are up. But so are costs per flight hour and steaming hour. So are the costs of maintaining a huge fleet of ground vehicles.

The cost of health care is up. But so are the costs of protecting computer networks, building fighter jets and buying rounds of ammunition.

In fact, the total defense budget more than doubled in the decade following 2001.

But a detailed look at military budget documents from the past 12 years reveals spending trends that are left unspoken in the public debate and are often at odds with statements from top Pentagon officials.

Documents available to the public via the Defense Department and White House websites show:

■ The portion of the defense budget titled “Military Personnel” was 24.16 percent of the Pentagon’s total budget in 2012, showing essentially no increase over 2001, when it was 24.13 percent, according to documents from the White House’s Office of Management and Budget.

■ The “Military Personnel” share of the budget today is far below its recent historic high of 30.5 percent back in 1991, the Operation Desert Storm era, according to the same documents.

■ Health care costs are often lumped into “personnel costs,” although a significant portion of those medical expenses are logged outside the personnel budget accounts under “Defense Health Systems” within the budget’s “Operations and Maintenance” account.

That Defense Health Systems budget line has risen significantly, from about $12 billion in 2001 to more than $32 billion in 2012. Yet White House and DoD budget documents show that as a share of the total defense budget, those costs — which former Defense Secretary Robert Gates famously described as “eating us alive” — have increased only from 4.07 percent to 5.02 percent over that time.

■ Among the three service branches, the Army is the only one to show an increase in the proportional size of its Military Personnel budget account, which rose from 38 percent of the Army’s base budget in 2001 to 45 percent in 2012. But that was due largely to the fact that the Army ballooned over that time from about 480,000 active-duty soldiers to about 555,000, a trend that is swinging hard the other way. Today, the active-duty Army stands at 531,000 soldiers, with plans underway to drop that to 490,000 over the next three years.

Defining 'personnel costs'

Many top officials cite “personnel” cost figures that do not match up with the “military personnel” line on budget documents. For example, when Hagel said personnel consumes “roughly half” of the Defense Department budget, his figure included the salaries for about 800,000 civilian employees, which the Pentagon accounts for in the “Operations and Maintenance” side of its budget.

Other similar costs that are sometimes unofficially added onto the definition of “military personnel” to help dramatize the problem include subsidized commissaries, family programs and barracks construction.

“You hear people say personnel costs are 70 percent of the budget, and you have to say to yourself, ‘This is crazy,’” said Bill Hatch, a manpower expert and retired Navy officer who teaches at the Naval Postgraduate School in California.

“It doesn’t always jibe. ... They always state that it is more than the actual [military personnel account] number,” Hatch said. “We’ve changed the way we attribute personnel costs. It used to be just salary and bonuses, but now it includes a lot more.”

Other experts say some statements from the top brass are flat-out overblown.

“I think they are probably digging deeply with their rhetoric shovels,” said Gordon Adams, a former national security budget director for the White House.

Why the spin?

Adams suggested that focusing attention on military personnel costs is being done in an effort to shape the political debate in Washington.

Congress, for example, is deeply resistant to cutting troops’ pay and benefits. So the Pentagon leadership’s rhetorical focus on soaring personnel costs may help reduce pressure on the broader military budget.

“If you focus on the least doable thing, what you gain is leverage to bring the whole budget up,” Adams said. “By pointing to the hardest thing to change, they hope that the whole budget will continue to be high.”

Other experts say it’s more about the top brass aiming to protect other parts of the budget.

The budget accounts for hardware — tanks, ships, planes, vehicles, other weapons — are known in the DoD budget documents as “procurement.” Although Pentagon officials hardly ever mention it, that part of the budget also has soared in recent years, up about 88 percent from $62 billion in 2001 to $118 billion in 2012, according to total spending figures provided by the OMB.

“There’s a bias ... to blame personnel for the cost growth across the DoD budget,” said Winslow Wheeler, a defense budget expert with the Project on Government Oversight in Washington. “They’re saying ‘Oh, these personnel costs are eating us alive; we’ve really got to control personnel costs.’ But they button their lips about hardware costs. The subtext is, ‘Well, we obviously have to cut the people costs to save the hardware.’ ”

Many who back spending on new weapons systems and cutting-edge technology argue that those investments promise war-fighting capabilities that will save lives by requiring fewer troops, and ultimately will be the most cost-effective way to defend national interests.

Nevertheless, as with Hagel’s definition of personnel costs, procurement costs as a percentage of the entire defense budget actually has slipped a bit, from 19.65 percent in 2001 down to 18.05 percent in 2012.

The largest increase in spending since 2001 is seen in the “Operations and Maintenance” budget account, known as O&M, which ticked up from 39.29 percent of the total defense budget in 2001 to 43.7 percent in 2012. That budget account is a pillar of support for funding for overseas contingency missions, such as the wars in Iraq and Afghanistan.

Per-troop costs rise

The increase in personnel costs is driven by the rise in per-troop spending, because the overall size of the force has changed little, and in fact is due to shrink in the next few years.

That’s far different than previous wartime eras, when the draft helped fuel a massive increase in the total number of troops, and the cost driver was the sheer number of people in uniform.

“This buildup was very unusual because you added almost no people,” said Cindy Williams, a former Pentagon budget official who teaches at the Massachusetts Institute of Technology.

She noted the Army and Marine Corps added some troops, but the Navy and Air Force shed some, resulting in no major change.

“What you had was huge growth in the cost per person, and that growth in the cost per person was enough to keep personnel spending rising at the same pace as spending for other things,” Williams said.

Estimated active duty per-troop costs have jumped more than 90 percent in then-year dollars, not adjusted for inflation, from $47,580 in 2001 to almost $92,000 in 2012, according to Pentagon budget documents.

Until now, those per-troop cost increases have had little effect on the budget allocation because the entire Defense Department topline budget increased sharply during the past decade.

However, continued growth in per-troop costs may spell trouble for the future because of the spending caps known as sequestration that took effect early this year. That federal law essentially capped spending at about the 2012 level, and it is forcing Pentagon leaders to make across-the-board cuts until they recalibrate their official budget within the new limits.

“You can’t take back the pay raises that you’ve already granted. If the budget is held steady, the concern is that those [personnel] things are going to gobble more and more and more,” Williams said.

The Defense Department is legally prohibited from making big changes to military compensation without congressional approval, so those costs may continue to rise with cost-of-living adjustments.

For now, President Obama has granted military personnel accounts an exemption from the sequestration to ensure that troops’ paychecks are not affected. The result is that other budget accounts — including training and procurement — are being disproportionately affected.

Those caps have prompted the Pentagon this year to furlough civilian employees, abruptly halt training for many aviation squadrons and curtail many routine maintenance operations.

Worst-case assumptions

The logic that personnel costs will continue to rise inexorably under immovable spending caps on the overall budget has led the Pentagon’s top brass to make speculative public statements about the future of personnel and compensation costs.

Gen. Ray Odierno, Army chief of staff, has repeatedly said that Army personnel costs are projected to reach “80 percent” of that service’s total budget by the end of the decade.

Adm. Jon Greenert, the chief of naval operations, told Congress on Nov. 7 that personnel costs currently consume about 50 percent of the defense budget, “and if we keep going this way, it will be at 60 and then it’ll be at 70 in a decade-plus.”

Army Gen. Martin Dempsey, chairman of the Joint Chiefs, told The Wall Street Journal in November that compensation costs could soon reach 60 percent of the total defense budget.

Several Pentagon officials said these estimates are based on an assumption that personnel costs will continue to grow at the same rate as over the past 12 years.

Yet critics say that’s a flawed assumption because of a number of anomalies since 9/11 that fueled the growth in personnel budgets, but are unlikely to continue or be repeated.

For example, in the aftermath of 9/11 and the growth of the combat missions in Iraq and Afghanistan, Congress lavished hefty pay raises and new benefits programs on an all-volunteer force that was seeing its first protracted period of combat since its inception in 1973.

Among the changes:

■ Congress granted generous pay increases for active-duty troops from 2002 through 2010 in recognition of wartime stress.

■ In 2001, the Defense Department launched Tricare For Life, which extended significant health care benefits to more than 1 million Medicare-eligible military retirees age 65 and over, and forced Pentagon accountants to begin setting aside more than $10 billion annually to cover accrual costs.

■ Congress ordered the Basic Allowance for Housing rates to increase over the first five years of the previous decade to a level that covers 100 percent of average off-base rental housing costs for all troops. Previously, BAH was designed to cover only about 80 percent of costs, with troops expected to pay the other 20 percent out of pocket.

■ In the 1990s, troops using tuition assistance were expected to pay 25 percent of their school costs out of pocket; shortly after 2001, that benefit was expanded to cover 100 percent of tuition costs up to certain caps.

■ The Pentagon has spent billions on combat-related special pays and allowances in reflection of a historically high operational tempo.

■ To help ease the wartime demands on the active-duty force, DoD mobilized more than 200,000 reservists in 2003, and for years kept more than 100,000 part-time troops on the active-duty rolls. Today, that number has fallen below 50,000 and is likely to continue shrinking.

Looking ahead, some “personnel costs” will ease or vanish completely as the U.S. combat mission in Afghanistan winds down. Pentagon leaders have suggested that significant troop reductions are on the table. And it appears unlikely that Congress will create any costly new benefits for service members.

With that in mind, some troop advocates say the past decade has been an aberration, and it is unlikely, even unrealistic, to project future costs based on that time period.

“It is a flawed assumption to use the growth over the past decade and use that as your forecast for the next two,” said retired Air Force Col. Mike Hayden, director of government relations for the Military Officers Association of America, which is staunchly opposed to any changes in benefits. “You’re not going to have those pay raises, you’re not going to have another Tricare for Life, you’re not going to continue to plus-up the housing allowance.”

Hayden said absent those factors, the standard inflation rate is a good estimate for future rises in personnel costs.

“They just need to do truth in advertising,” Hayden said of the Pentagon leadership.

What about the hardware?

The growth in costs for weapons development has been nearly equal to the cost growth for military personnel.

A portion of that growth stems from multibillion-dollar programs that run over budget and cost the department far more than initially planned.

About one-third of all Pentagon acquisition programs run over budget to a degree that requires DoD to formally notify Congress under the so-called Nunn-McCurdy Amendment, named for the sponsors of a 1982 law designed to flag hardware projects that run more than 25 percent above initial cost estimates.

That’s hardly a secret; a decades-long line of government reports has harshly criticized the way the Pentagon develops and buys weapons.

The most common cause for those cost overruns is “poor management,” according to an internal Pentagon report released in June called the “Performance of the Defense Acquisition System.”

A Government Accountability Office report issued in October noted that DoD’s 85 “major acquisition programs” in 2012 were a collective $411 billion over their initial cost estimates.

That staggering sum of money by itself could wipe out eight of the 10 years of planned budget cuts under the sequestration law.

Some acquisition programs that consume billions of dollars are never completed. For example, the Army in 2009 canceled its Future Combat Systems after spending $18 billion, mostly on research of high-tech devices that never got beyond the developmental stages.

In some cases, the military finishes building hardware but immediately decides it is no longer needed. The Air Force spent more than $1 billion buying C-27J Spartan cargo planes, only to send many of them directly to “the bone yard,” an aircraft storage facility in Arizona.

Air Force officials say the C-27J’s cost per-flight-hour is too high, and the service cannot afford to operate and maintain the aircraft.

And sometimes the services simply don’t need what they claim to need. The Marine Corps set in motion plans to buy 200 heavy-lift CH-53K helicopters, but when the DoD inspector general took a close look at the decision earlier this year, it found that the Corps had not followed the military’s own procurement rules and could not justify the last batch of 44 helicopters, estimated to cost $22 billion.

Adams said that if Pentagon leaders are serious about wanting to get their budgets under control, hardware is the easiest place to find short-term savings.

“Procurement dollars are the flexible dollars in the sense that you just don’t start programs, you just defer programs, or you just shrink the total buy,” Adams said. “The chiefs know that what’s going to come down is hardware.”

Mounting pressure

For the moment, however, it seems likely that personnel costs — and the laws and policies that drive them — will remain in the cross hairs.

Pentagon leaders have hinted that the next DoD budget request for fiscal 2015, due out in February, will include a slew of budget-cutting proposals. Preliminary reports suggest they may include:

■ Shaving money from the Basic Allowance for Housing budget by returning to a policy of making troops pay a portion of their off-base housing costs out of pocket.

■ Limiting access to Tricare health coverage for working-age retirees under 65 by requiring them to use their current employer health plans if available.

■ Capping service members’ future pay raises at a level slightly below private-sector wage growth.

Meanwhile, the congressionally-mandated Military Compensation and Retirement Modernization Commission is studying the entire universe of military pay and benefits. It is expected to make far-reaching recommendations that could vastly alter the military’s retirement system.

Proposals vary from delaying the onset of retirement pay until a traditional retirement age of, for example, 60, or transforming the system into 401(k)-style accounts managed by individual troops, who could build at least some kind of nest egg to take with them if they leave service short of the current 20-year “cliff vesting” threshold — as more than 80 percent of service members do.

Underpinning those discussions are remarkably strong recruitment and retention numbers in recent years. To many experts, that is the bottom-line definition of a successful compensation package.

And in fact, that strong recruiting and retention supports the idea that the Pentagon may be paying too much compensation to attract and retain the manpower it needs.

Before 9/11, the traditional benchmark of military compensation comparability was somewhere between the 60th and 70th percentiles. But a Pentagon study last year concluded that enlisted members now are paid better than 90 percent of their civilian peers of similar age and education levels, while officers are paid better than 83 percent of civilians with bachelor’s degrees.

“That’s a lot,” Williams said. “You’re saying that you have to pay a military person almost twice what a civilian would receive” to attract and retain them in uniform.

“At some point, you have to ask, what’s the amount that is ‘enough’? I think most personnel experts agree that the amount should be a fair recognition of the sacrifices of military life, but also should be targeted to bring in the people you want and keep them motivated to do a good job.”

Some personnel experts say today’s military compensation system is tilted too far toward costly deferred benefits that troops don’t fully appreciate. For example, the Pentagon sets aside billions in accrual for future Tricare for Life benefits and retirement payments, even though the vast majority of troops will never qualify for either.

Some surveys suggest those legions of troops would be happier to just receive a cash bonus in lieu of those benefits — which also would likely be far more cost-effective for the Pentagon in the long run.

The current penchant of Pentagon leaders to emphasize the impact of personnel costs for political reasons should not detract from the underlying fact that the Defense Department would benefit from some changes to the military compensation system, expert said.

“There is no question that on the merits itself, regardless of politics, we ought to have military compensation and benefits reform,” Adams said. “It’s a game — but it’s not a game without merit.”

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