Congressional Budget Office

Trends in Operation and Maintenance Spending by the Department of Defense

91st Annual Conference of the Western Economic Association International

Portland, Oregon

July 1, 2016

Derek Trunkey National Security Division The research and analysis for this presentation was conducted in collaboration with Adebayo Adedeji (of CBO) and Dan Frisk (formerly of CBO).

The information in this presentation is preliminary and is being circulated to stimulate discussion and critical comment as developmental work for analysis for the Congress.

1 CO N GR ES S IO N A L B UDGE T O F F IC E

The Department of Defense’s (DoD’s) operation and maintenance (O&M) account, the largest single appropriation category, funds DoD’s day-to-day operations, from equipment maintenance to health care.

2 CO N GR ES S IO N A L B UDGE T O F F IC E

Over the past few decades, funding for O&M has increased significantly, accounting for a growing share of DoD’s budget.

O&M funding for defensewide agencies and programs has grown the most.

3 CO N GR ES S IO N A L B UDGE T O F F IC E

0

50

100

150

200

250

300

350

1980 1985 1990 1995 2000 2005 2010 2015

Trends in O&M Funding

Billions of 2015 Dollars

Annual Real Growth (Percent)

1980–2000

2001–2015

Total DoD 1 2

Navy -1 1

Marine Corps 3 4

Air Force 0 1

Army 1 1

Defensewide 7 5

Desert Storm

Overseas Contingency Operations

4 CO N GR ES S IO N A L B UDGE T O F F IC E

O&M funding has been increasing as measures of force size have been decreasing.

5 CO N GR ES S IO N A L B UDGE T O F F IC E

Trends in O&M Funding and Number of Active Duty Service Members

0

500

1,000

1,500

2,000

2,500

0

50

100

150

200

250

1980 1985 1990 1995 2000 2005 2010 2015

O&M Spending (Left axis) Number of Active-Duty

Service Members (Right axis)

Billions of 2015 Dollars Thousands

6 CO N GR ES S IO N A L B UDGE T O F F IC E

O&M funding is used to purchase thousands of different goods and services that are often purchased at relatively low cost per unit.

7 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO used the subactivity groups (SAGs) in DoD’s budget and their associated object class codes to group O&M funding into four categories.

The categories represent the activities supported, goods and services purchased, and source of those goods and services.

8 CO N GR ES S IO N A L B UDGE T O F F IC E

Categories CBO Used to Organize O&M Data

Category Description Examples

Activity or Function The relation of the activity to combat forces

Combat forces, training, health care, administration

Commodity Class The type of purchase Goods, services, property-related management

Commodity A more detailed description of the type of purchase

Maintenance, equipment, transportation, professional services

Provider The source of the goods or services

Private sector, DoD working capital funds, nondefense government agencies and organizations, DoD's civilian employees

9 CO N GR ES S IO N A L B UDGE T O F F IC E

In the activity category, a relatively small portion of the $198 billion in O&M funding in 2012 was for what CBO defined as forces (combat units)—$24 billion, or 12 percent.

10 CO N GR ES S IO N A L B UDGE T O F F IC E

Nearly half of O&M funding in 2012 ($91 billion) was for services.

Those services include maintenance, medical services, technical and research services, and transportation.

Maintenance accounted for one-third of funding for services ($32.4 billion).

11 CO N GR ES S IO N A L B UDGE T O F F IC E

Base Budget O&M Purchases, 2012 Billions of 2012 Dollars Total base budget O&M: $198 billon

Activity

Forces (24.3)

Support and Individual Training (74.1)

Administration (33.5)

Infrastructure (34.7)

Health Care (31.4)

Property (4.3)

Civilian Compensation,

Non-WCF (53.6)

Services (90.6)

Goods (33.3)

Commodity Class

Domestic Civilians

Foreign National Civilians

Provider

Other Government

Agencies (5.2)

Working Capital Fund

(37.6)

Private Sector (87.7)

DoD Civilians (53.6)

Classified (14.8)

12 CO N GR ES S IO N A L B UDGE T O F F IC E

Forces (24.3)

Property (4.3)

Support and Individual Training (74.1)

Administration (33.5)

Transportation (10.0)

Fuel

Equipment (8.8)

Civilian Compensation,

Non-WCF (53.6)

Services (90.6)

Goods (33.3)

Other and Uncategorized

(12.2)

Infrastructure (34.7)

Domestic Civilians

Foreign National Civilians

Technical and Research Services

(11.9)

Professional and Other Services

(7.9)

Supplies and Materials

(20.8)

Medical (19.2)

Installation Support

(4.9)

Maintenance (32.4) Property

Maintenance

Equipment and Weapon Systems

Maintenance

People Transport

Materiel Transport

Health Care (31.4)

Base Budget O&M Purchases, Including Commodities, 2012 Billions of 2012 Dollars

Total Base Budget O&M: $198 Billon

Other Government

Agencies (5.2)

Working Capital Fund

(37.6)

Private Sector (87.7)

Activity Commodity

Class

Classified (14.8)

DoD Civilians (53.6)

Commodity

Provider

13 CO N GR ES S IO N A L B UDGE T O F F IC E

Working capital funds (WCFs), which DoD uses to carry out businesslike activities, provide a large amount of goods and services to DoD.

14 CO N GR ES S IO N A L B UDGE T O F F IC E

A significant portion of the revenue for WCF activities comes from O&M accounts.

In 2012, O&M accounts (including both base budget and OCO funding) provided $72.2 billion, or 66 percent, of total WCF external revenues.

15 CO N GR ES S IO N A L B UDGE T O F F IC E

Flows of Working Capital Funds for All Appropriations, in Base Budget and OCO Funding, 2012

Source of Revenue

Input Category

Military Personnel, Military Construction, Family Housing, and

Miscellaneous Accounts (11.9)

RDT&E (5.2)

Non-DoD Customers

(12.5)

Procurement (7.4)

Operation and Maintenance

(72.2)

Goods (53.1)

Civilian Pay (15.5)

Services (17.8)

Research and Development

(1.0)

All DoD Working

Capital Funds (130.0)

Other and Unknown

(22.2)

Billions of 2012 Dollars

WCF Purchases From Other WCFs

(20.4)

16 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO analyzed growth in O&M spending between 2000 and 2012.

The total growth during that period was $63 billion (47 percent), after removing the effects of inflation.

17 CO N GR ES S IO N A L B UDGE T O F F IC E

The two largest contributors to O&M growth were the Defense Health Program (DHP) and activities that support combat forces.

Among DoD’s components, defensewide activities accounted for the largest share of the growth.

18 CO N GR ES S IO N A L B UDGE T O F F IC E

Growth in Base Budget O&M from 2000 to 2012 by Service, Defensewide Organizations, and Activity

-5

0

5

10

15

20

25

30

35

Army Air Force Navy Marine Corps Defense Wide

Support

Infrastructure

Forces

DHP

Administration

Billions of 2012 Dollars

Defense Health Program

Defensewide

19 CO N GR ES S IO N A L B UDGE T O F F IC E

Identifying the causes of growth in O&M funding is complicated by the diverse nature of the programs and activities supported by that appropriation.

The O&M budget can be divided into a few large accounts and a collection of much smaller accounts that are more difficult to track.

20 CO N GR ES S IO N A L B UDGE T O F F IC E

O&M Funding in the 2012 Base Budget

Remaining O&M, $110 Billion

(56%)

DHP, Excluding Civilian

Compensation, $26 Billion

(13%)

DHP Civilian Compensation,

$6 Billion (3%)

Civilian Compensation

Excluding DHP and WCF,

$48 Billion (24%)

Fuel, $8 Billion

(4%)

Remaining O&M comprises many smaller categories. The causes of growth in those categories are difficult to track.

CBO can explain the causes of growth in these four large categories.

21 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO can explain about half of the growth in O&M funding, including funding for the DHP and civilian compensation.

CBO is working to explain the causes of growth within the remaining O&M categories. Those with significant growth include contracted facilities maintenance and contracted equipment maintenance.

22 CO N GR ES S IO N A L B UDGE T O F F IC E

Growth in Base Budget O&M for Equipment Maintenance and Property Maintenance, 2000 to 2012

Organic Depot Maintenance of

Weapon Systems

Contracted Depot Maintenance of

Weapon Systems ($9 billion)

Contracted Non-Depot Equipment

Maintenance ($8 billion)

Pentagon Reserve Maintenance

Revolving Fund

Contracted Facilities

Sustainment, Restoration, and Modernization

($11 billion)

Other Equipment and Facility

Maintenance -2

-1

0

1

2

3

4

5

6

7

8

Percentage Change in 2012 Dollars

Change in Billions of 2012 Dollars

-50 0 50 100 150 200

Areas of circles correspond to the amount of spending for each category in 2012.

23 CO N GR ES S IO N A L B UDGE T O F F IC E

CBO’s next step will be to focus on specific areas of growth such as WCFs, the cost of operating weapon systems, and training.

CBO is working with DoD to obtain better data on O&M spending for those follow-on analyses.