As lawmakers on Capitol Hill largely laud a proposed agreement between the White House and House Democratic leaders that would eliminate the threat of sequestration and lift the debt ceiling for two years, analysts wondered if defense-related procurement funding may suffer under efforts to reach a bipartisan compromise.
H.R. 3877, the Bipartisan Budget Act of 2019, includes $738 billion under the “050” account for Defense Department and defense-related Energy Department funds in FY ’20, and $741.5 billion in FY ’21. That includes $667 billion in base funding and $72 billion for Overseas Contingency Operations (OCO) funding in 2020, and $672 billion for 2021 base funding and $69 billion for OCO.
The deal was announced and celebrated separately July 22 by President Trump, Speaker of the House Nancy Pelosi (D-Calif.), Senate Majority Leader Mitch McConnell (R-Ky.) and other stakeholders. Speaking to reporters on Tuesday on Capitol Hill, McConnell called it “the best possible deal under the circumstances” of a divided Congress that is working to avoid automatic spending cuts triggered by the 2011 Budget Control Act and the looming threat of a continuing resolution or worse sequestration cuts.
House leaders will work to pass the bill before members leave for August recess July 26, while the Senate has until Aug. 2 to pass it before its members depart for the month. Sen. Richard Shelby (R-Ala.), who chairs the Senate Appropriations Committee as well as its defense subcommittee, told reporters Tuesday that if the bill is passed in Congress before the August recess, appropriators will quickly get to work deciding on allocations for the various subcommittees.
“We hope to hit the ground running when we come back early September,” he said. Congress is scheduled to return from recess Sept. 9.
The bill provides a 3 percent increase in defense spending over FY ’19 enacted levels, and only a flat $3 billion increase in 2021 with no inflation adjustment. That equates to about a 2 percent cut to the previously projected FY ’21 funding, noted Jim McAleese of McAleese and Associates in a Tuesday email.
Lockheed Martin [LMT] President and CEO Marillyn Hewson called the proposed budget deal “an encouraging step in the process to continue to” support the modernization of national defense assets in an earnings call Tuesday. However, “We will have to see how it plays out in terms of what that means for Lockheed Martin,” she noted.
The Aerospace Industries Association’s president Eric Fanning applauded the two-year budget deal in a Tuesday statement, but warned that future agreements “should avoid the unconventional use” of OCO funds – which he considers “not a reliable way to fund enduring programs.”
Byron Callan of the Capital Alpha Partners had a more mixed reaction to the budget proposal, noting in a Tuesday email to investors that the included funding numbers “are all just a plan and all plans can be overtaken by events.”
“There are enough geopolitical pots simmering that any one of them could boil over and generate new DoD spending demands,” Callan noted.
He expressed concern about the flat topline for fiscal year 2021, and that the Defense Department’s five-year Future Years Budget Plan (FYDP) released last March put the defense topline for FY ’21 at $746 billion – nearly $5 billion more than the level set in the proposed act.
Callan estimated that the $738 billion topline would include about $245 billion for investment funds and $13 billion for military construction, assuming that operations and maintenance would be funded at the Senate version’s level. That would mean R&D would remain flat in FY ‘20 compared to FY ’19 – where investment took up $244 billion – and the FY ’21 proposed budget is likely smaller than what is listed in the FYDP due to reductions in procurement and RDT&E efforts, he added.
Analysts at the Cowen Washington Research Group also noted the potentially light procurement and R&D numbers for 2021, but considered that OCO needs may drop by that timeframe, leaving room in FY ’21 budget “to juice investment.”
What’s more, “Congress can always manufacture growth in a low-growth environment,” the analysts said.
Progressive Democrats and fiscal conservatives are expected to dislike the bill, and passage before Congress leaves Washington, D.C., during August recess remains uncertain, though leaders pledged to make it happen. However, “I make no apologies for this two-year caps deal,” McConnell asserted Tuesday, adding, “The alternatives were much worse.”
From the Senate’s perspective, “We like the defense number,” McConnell said. The Senate version of the fiscal year 2020 National Defense Authorization Act included a $750 billion topline — $12 billion less than what is included in the new agreement. That being said, the House version of the NDAA included $733 billion.
Most important to consider is “what you avoid” with the agreement. “You avoid multiple short-term CRs, potentially multiple short-term debt ceilings,” McConnell said. “I think the absence of chaos is to the advantage of both sides.”
The top GOP members of both the House Armed Services Committee (HASC) and Senate Armed Services Committee (SASC) issued statements Monday evening declaring their support for the bill, even while they lamented the fact that the topline was not $750 billion.
SASC Chairman Jim Inhofe (R-Okla.) said while he is “disappointed” in the total for defense funding, “Without this agreement, we cannot guarantee on-time funding for the training, resources and equipment our service members need.”
HASC Ranking Member Mac Thornberry (R-Texas) expressed similar sentiments in his statement, noting, “While I believe that our military needs more funding than this agreement provides… we cannot underestimate the incredible benefit of funding our troops on time for the second year in a row.”
“This agreement has my strong support and I urge all of my colleagues to vote for it,” Thornberry added.