Authorization and Appropriations for FY2004: Defense
Released: 2003-12-09T00:00:00

Most Recent Developments

On November 7, 2003, the House passed the conference report on H.R. 1588 ,the FY2004 DOD authorization, by a vote of 362 to 40, after the conference report was filed earlyThursday morning. The Senate passed the bill by 95 to 3 on November 12. On November 24, thePresident signed the bill ( P.L. 108-136 ). Compromises were reached on the main issues that had heldup the conference for several months: Buy American provisions, the Air Force lease of BoeingKC767 aircraft, a new National Security Personnel System, concurrent receipt, and TRICARE fornon-deployed reservists.

The conference version ( H.Rept. 108-283 ) of H.R. 2658 , the FY2004Department of Defense (DOD) appropriations bill, provided $368.7 billion in funding. It passed theHouse on September 23, 2003, and the Senate on the following day, in both cases quickly and withlittle debate. On September 30, 2003, the President signed the bill into law ( P.L. 108-87 ).

The FY2004 DOD Authorization Act included several contentious issues, which were settledonly after long negotiations. On domestic preference restrictions in the Buy American Act and theBerry Amendment, the DOD authorization added provisions to assess the U.S. defense industrialbase and the extent of U.S. reliance on foreign suppliers but dropped proposals to require DOD topurchase certain items only from American suppliers. In the case of the tanker lease, DOD agreedto a proposal by Senator Warner to lease 20 and buy 80 Boeing KC767 tankers rather than lease 100aircraft, a proposal less costly than the original lease but more costly than a straight multiyear buy. The fate of the deal remains uncertain in light of Boeing's recent firing of high-level officials forimproprieties and an ongoing investigation by the DOD Inspector General.

Compromises were also brokered on other contentious issues on which the Administrationhad threatened a veto. The Administration agreed to a new benefit that provides concurrent receiptof military retirement and disability payments to all military retirees with disability ratings of 50%or higher as well as an expansion of those eligible under the "Purple Hearts Plus" program enactedlast year that provides benefits to military retirees with combat or combat-related disabilities. TheAdministration also agreed to a 15-month pilot program to offer access to TRICARE tonon-deployed reservists who are unemployed or do not qualify for health benefits offered by theiremployer.

H.R. 1588 also authorizes the Secretary of Defense to develop a new NationalSecurity Personnel System for DOD's civilian employees, gives DOD special exemptions to certainenvironmental statutes, and lifts the current ban on development of low-yield nuclear weapons.

Both the House and Senate versions of H.R. 1588 , the authorization bill, provide$400.5 billion for national defense programs, about $1.5 billion above the request of $399.7 billionthat the Administration submitted in February. The authorization covers not only defense programsfunded in the defense appropriations bill but also programs funded in the military construction,energy and water, and some other appropriations measures.

The FY2004 DOD appropriations bill provides a total of $368.7 billion for the defenseprograms it covers, $500 million less than the $369.2 billion that was included in both the House andSenate versions. The total in the conference agreement is slightly below the amounts provided fordefense by the budget committees under Section 302(b) allocations of the Congressional Budget Actand $3.1 billion below the request. This decrease freed up the same amount for other appropriationsbills while staying within the cap on discretionary spending established by the FY2004 budgetresolution ( H.Con.Res. 95 ). Final funding for DOD could also be affected by a $1.8billion rescission included in the conference version of the FY2004 Omnibus Appropriations bill( H.R. 2673 ) that was passed by the House on December 8 but is unlikely to beconsidered by the Senate until January 2004.

The final version of DOD's FY2004 appropriations cushioned the programmatic impact ofthe $3.5 billion cut to the request by making an offsetting rescission of $3.6 billion from the $62.6billion in FY2003 supplemental appropriations that Congress approved in April. Under budgetscoring rules, rescissions are counted as a credit in the year when they are enacted, even though prioryear monies -- in this case, FY2003 -- are cut. This allowed the appropriators to meet their FY2004targets without reducing funding for FY2004 programs by $3.5 billion.

Major Issues in the FY2004 DOD Authorization Act

After a conference that spanned over five months, the conferees reached agreement and fileda report on November 7, 2003, on H.R. 1588 , the FY2004 DOD Authorization Act( H.Rept. 108-354 ). The bill was passed by the House by a vote of 362 to 40 on that same day andby the Senate by a vote of 95 to 3 on November 12, the following week. The President signed thebill on November 24, 2003 ( P.L. 108-136 ).

On May 22, the House and the Senate passed their respective versions of the FY2004 DODAuthorization bills after several days of floor debate. The House version, H.R. 1588 ,passed by 361 to 68. Although the Senate passed its version, S. 1050 , by 98 to 1 on thesame date, the Senate adopted a unanimous consent agreement on the next day providing forconsideration of several specific amendments. On June 4 after the Memorial Day recess, the Senateadopted amendments on concurrent receipt and expedited immigration approval for selectedreservists and their families during wartime and rejected an amendment to cancel the 2005 round ofbase closures before passing the bill again by voice vote and appointing its conferees (see Table1A ). (1) Debate in the Housetook place on May 20 and May 21, and in the Senate on May 19, 20, 21, 22, and June 4, 2003.

On May 13, the Senate Armed Services Committee (SASC) reported S. 1050 , after completing markup on May 9 ( S.Rept. 108-46 ). The bill as reported did not include the DODproposal to redesign its civilian personnel system. The House Armed Services Committee (HASC)reported its bill on May 16 after completing markup on May 14 ( H.Rept. 108-106 ). On May 21, theHouse adopted a rule ( H.Res. 245 ) that limited general debate to two hours andamendments to those specified in the rule. The Senate rule required that all amendments beconsidered relevant by the Parliamentarian. The House bill included much of DOD's legislativeproposal for a new civilian personnel system as initially marked up by the House GovernmentReform Committee ( H.R. 1836 ). (2)

Table 1A. Status of FY2004 Defense Authorization: H.R.1588 and S. 1050

a. The Senate initially passed S. 1050 by 98 to 1 on May 22, 2003, but then adopteda unanimous consent agreement on May 23, 2003, to continue debate on selectedamendments after the recess; see Congressional Record , p. S7115. Those amendments wereconsidered on June 4, and the bill was then passed by voice vote.

The conference report reached compromises on seven major issues that held up the authorization bill for several months:

Buy American restrictions proposed by the House and opposed by the Senateand the Administration;

proposals to provide costly concurrent receipt of military retirement andVeterans Administration (VA) disability benefits;

proposals to allow the Air Force to initiate acquisition of a $29 billion programto lease and buy 100 Boeing KC767 tanker airplanes;

fashioning of the new National Security Personnel System requested byDOD;

expanding access to DOD's TRICARE health system to non-deployedreservists;

exempting DOD from certain environmental statutes;and

changing current restrictions on research on low-yield nuclearweapons.

The compromises reached are described below. Details on other conference action, includingRDT&E and weapon system funding, will be included in a later update.

Buy American Restrictions(3)

In its request, the Administration proposed a series of changes to long-standing domesticpreference restrictions codified in the Buy American Act and the Berry Amendment in order to giveDOD additional flexibility to buy from foreign sources. Since 1933, the federal government hasbeen required in the Buy American Act to purchase from American producers unless the head of theagency finds that it is in the "public interest" to waive the restriction and purchase items from foreignsources. (4)

For specific types of items -- food, clothing, tents, textiles, specialty metals and measuringtools -- the Berry Amendment requires that DOD buy from U.S. sources unless the purchases are insupport of combat operations outside the United States. (5) In the case of other items such as machine tools and ball bearings,DOD can buy from foreign sources if the foreign country is part of the U.S. national technology andindustrial base (defined as the United States and Canada), if it is in the "national security interestsof the United States," or if DOD would face unreasonable costs or delays. The Secretary of Defensehas waived these various domestic preference restrictions in certain circumstances. (6)

This year's debate focused on the extent of DOD's waiver authorities in terms of both thecriteria and the items that could be covered. The Administration sought to widen circumstancespermitting waivers, whereas the House would have either required domestic purchase of additionalitems (such as machine tools) or made it more difficult for the Secretary of Defense to waive currentrestrictions. (7) Forexample, the House bill required DOD to identify and then buy from U.S. sources items consideredto be "critical" to the U.S. defense industrial base as well as assess the extent of U.S. dependence onforeign suppliers. The House version also would have prohibited DOD from purchasing fromforeign countries who had restricted sales of military goods or services because of U.S. operationsin Iraq, a provision that could have affected both France and Germany.

The Secretary of Defense had signaled that the Administration would veto the bill if theHouse provisions were included. Concerned about the effects of these provisions on U.S. traderelations, Senator Warner requested the State Department, the U.S. Trade Representative, and OMBto address the potential effects of the legislation on trade relationships and cooperative defenserelationships. (8)

Reflecting a compromise between the House's desire to expand protections for the defenseindustrial base and Senate's concerns about potential effects on U.S. trade relations, the conferenceversion dropped the new restrictions on certain items but required DOD to assess potential U.S.vulnerabilities. To meet Senate and Administration concerns about potential effects on U.S. traderelations, the conference bill stated that none of the provisions in this industrial base section wouldapply if the Secretary of Defense and Secretary of State determine that U.S. international agreementswould be violated. (9)

To get a better understanding of the extent of DOD dependence on foreign sources or singledomestic sources for critical items or components of military systems, the Defense Department isto develop a "Military System Essential Item Breakout List" and identify where these items orcomponents are produced. DOD is to contract for a study that will define the criteria for "critical"and recommend items to be included on the list.

To give additional support to domestic producers of critical items, the conference agreementestablishes a new Defense Industrial Base Capabilities Fund that DOD can use to provide incentivepayments to domestic contractors. No funds are specifically authorized (or appropriated) for thisfund in FY2004, however. Another new industrial base tool for DOD is authority to give preferencein source selection to domestic producers of machine tools or other capital assets used to makedefense goods. The bill also requires a study of the adequacy of U.S. producers in meeting defenseneeds for beryllium industrial base. (10)

To protect U.S. trade relationships, the conference agreement also softened the House'sproposed prohibition on buying from countries who opposed U.S. actions in Iraq. Instead, theSecretary of Defense, in coordination with the Secretary of State, is to identify foreign countries whonow restrict military sales to the United States because of U.S. counterterrorism or militaryoperations; that list can be revised periodically. Even for those countries, DOD can purchase goodsif the department has a "compelling and urgent" need for the item. (11) Congress agreed tobroaden waivers to Berry Amendment restrictions on purchases of food, clothing, and similar itemsfrom combat operations only to include contingency operations as well.

This issue is likely to resurface in the next year or two. By February 2005, DOD is requiredto complete an interim report that assesses which items are deemed essential and the extent of U.S.dependence on foreign sources for those items. At that point, the debate could revolve aroundwhether additional protections or incentives should be provided to domestic producers of thoseitems. (12)

Concurrent Receipt Adopted

Until recently, the Administration threatened to veto congressional proposals to provideconcurrent receipt of military retirement and VA disability benefits to military retirees because ofconcerns about the cost and the precedents for other benefit programs. Military retirees now mustreduce their military retirement on a dollar-for-dollar basis if they wish to receive tax-exemptdisability payments, a type of offset that is required in many benefit programs.

The conference bill provides new benefits to military retirees with twenty or more years ofservice and disability ratings of 50% or higher. The conference bill also expands those who wouldbe eligible for special compensation under the "Purple Hearts Plus" program enacted last year forthose whose disabilities are due to combat or combat-related activities. The conference version wasreached when the Senate dropped its proposal for full concurrent receipt and the Administrationdropped its veto threat. In response to Administration concerns, the House had not included aconcurrent receipt in its version of the bill even though support among members was widespread.

Eligibility Criteria and Phase-In of Benefit. Over200,000 military retirees are likely to qualify for the new concurrent receipt including militaryretirees with 20 years of service if they

have disability ratings of 50% or above;

have any disability ratings as long as they meet the criteria for a combat-relateddisability, popularly known as "Purple Hearts Plus;"

are Guard and Reserve retirees who meet the criteria under "Purple HeartsPlus" if they have 20 or more years of "creditable" service, defined as 50 points for performing theirannual reserve duties; and

are disability retirees whose payments exceed their retirement benefits had theyretired under regular retirement.

The first phase of the new benefits are slated to go into effect on January 1, 2004, with fullconcurrent receipt for those eligible by December 31, 2013. (13)

In the first year, monthly benefits for those eligible will be:

$100 for those with a 50% disability rating;

$125 for those with a 60% disability rating;

$250 for those with a 70% disability rating;

$350 for those with an 80% disability rating;

$500 for those with a 90% disability rating; and

$750 for those with an 100% disability rating.

In the following year, those eligible would receive 10% of the difference between the benefit for theprevious year and the lesser of their monthly retirement benefit or their monthly disability payment. In each succeeding year, retirees will receive an additional 10% of that difference until the retireereceives the full amount of both disability payments and retirement benefits.

Cost of New Benefit. CBO estimates that the newbenefit would cost $800 million in FY2004 and $22.1 billion over ten years in outlays for currentbeneficiaries. The annual cost would increase steadily to $2 billion by FY2008 and $3.5 billion by2013. (14) Although DOD does not need to include funds in its budget to cover the costs because the legislation createsa new entitlement program, the deficit would increase by annual outlays for current beneficiaries.

Unlike current military retirement, H.R. 1588 does not require that DODprovide funds to cover the accrual cost of the new benefit for today's military personnel, a practicedesigned to capture fully the cost of military personnel. This means that general revenues wouldcover this cost rather than the Defense Department because DOD would not need to budget for thiscost. (15)

New Commission on VA Benefits. H.R. 1588 also sets up a 13-member Veterans Disability Benefits Commission toevaluate and make recommendations about VA benefits for combat-related disabilities or deaths. The Commission is to report by February 2005, 15 months after enactment. (16)

Prospect for Next Year. The concurrent receiptissue could well be revisited next year because of pressures from those not covered by the newbenefit -- i.e. those with disability ratings below 50% whose disability is not due to combat orcombat-related circumstances. Budget impacts would continue to be a concern. Those concernedwith the loss of DOD visibility of the full cost of military personnel that is part of the currentprovision could also press to require DOD to budget for the accrual cost of the benefit for its currentmilitary personnel.

Tanker Lease Compromise

Another controversial provision included in the FY2004 DOD Authorization conference islanguage that would allow the Air Force to proceed with a plan to lease 20 KC767 Boeing tankeraircraft and subsequently buy an additional 80 aircraft as proposed by the Senate Armed ServicesCommittee Chairman Warner in early September. (17) Signing of the contract has been held up because of questions ofimpropriety by two Boeing officials, Darlene Druyan, formerly in charge of Air Force acquisition,and Michael Sears, the Chief Financial Officer; Ms. Druyan is alleged to have discussed employmentopportunities with Boeing at a time when she was also negotiating the tanker deal. (18) In the past week, DeputySecretary of Defense Wolfowitz asked the DOD Inspector General to review this matter, and SenateArmed Services Committee Chairman Warner called for a broader review. (19)

Although the conference bill authorizes the lease 20, buy 80 proposal, there continues to becontroversy between the House and Senate interpretation of what the language requires: a Housecolloquy between members says that the Air Force can use options included in the current contractand a Senate colloquy suggests that the Air Force must negotiate two new contracts, one for the leaseand one for the buy. (20) One contract could be implemented more quickly but could mean that the Air Force would payunnecessary costs associated with the lease. (21)

The lease 20, buy 80 alternative differs from the Air Force's original unprecedented proposalto contract with Boeing to lease and then buy100 aircraft for a cost of $29 billion over a 15-yearperiod, including support costs. The Air Force finds leasing attractive because major funding wouldnot be required until 2006, and the bulk of the funding would not be needed until 2010-2017. TheAir Force argues that this approach would cause less disruption to current Air Force programs thanwould a traditional buy. In later years when the program would cost $2 billion to $3.7 billionannually, however, competition with other Air Force programs could be substantial. (22)

It is not clear, however, whether the Air Force will be able to delay paying for the planes untildelivery as proposed by Under Secretary Wolfowitz in a letter to Senator Warner on November 5,2003. (23) In hisconfirmation hearing to be Deputy Under Secretary of Defense for Acquisition, Technology andLogistics, Michael Wynne suggested that the conference language may require that the Air Force payfor the aircraft when ordered rather than delaying payment by three years when the aircraft aredelivered. The Air Force has not identified how to fund the tanker within its current budget plans,which did not anticipate the tanker lease.

This proposal has been controversial because leases are substantially more expensive thanbuying: the Air Force, CBO, CRS, and GAO all found that the lease would cost $5 billion to morethan $6 billion more than a multiyear buy of the aircraft, because the Air Force planned to rely ona special purpose entity to finance the deal and because congressional agencies and others havesuggested that the proposed lease did not meet the criteria for an operating lease. (24)

Under the conference agreement that would allow the Air Force to lease 20 Boeing KC767aircraft and incrementally buy the remaining 80 aircraft, the Air Force still plans to delay the leasefunding until 2006 and the buy funding until 2008. (25) Although leasing 20 rather than 100 aircraft would be less costlythan the original proposal, the extent of the savings depends on how the Air Force implements theproposal. According to press reports, the Air Force now plans to use two contracts -- one for thelease and one for the buy -- costing a total of $18.3 billion in acquisition costs. That total would be$3.2 billion less than the previous $21.5 billion contract to lease and buy 100 aircraft but still $3.5billion more than CBO estimates a straight multiyear contract would cost. (26)

In its scoring of the FY2004 DOD Authorization Act, CBO considers the new proposal tolease and then buy 20 aircraft to be a lease/purchase that would require that the Air Force provide$3.6 billion in budgetary authority in FY2004, although none is provided in the Act. Becausemembers did not raise a point of order under budget rules, however, the funding implied by the bill'slanguage was not challenged. (27)

Although the conference reports includes language permitting incremental funding of themultiyear contract -- which would allow the Air Force to spread out the payments rather thanproviding the full amount for each year's buy as is required under standard acquisition rules -- it isnot clear whether the new language permits that. The Air Force has voiced concerns that thecompromise could jeopardize ongoing defense programs.

New Personnel System for DOD Civilians

As part of its April 10, 2003, bill proposal, the Defense Transformation for the 21st Century,the Defense Department requested broad authority to set up a new National Security PersonnelSystem (NSPS) governing its 735,000 civilian employees. DOD requested authority to develop anew personnel system that was "flexible" and "contemporary," allowing the Secretary of Defense todefine positions, set pay scales, establish hiring and firing rules, bargain with employees at thenational level, and set separate scales for rewarding senior level employees. Although DOD'sproposal did not include specifics, Under Secretary of Defense for Personnel and Readiness DavidChu stated that it intended to follow "best practices" for current personnel projects, including paybanding and the use of numerical ratings to link pay with job performance. (28)

The chief issues raised about the DOD proposal were

the nature of the proposed new system;

the difficulties in designing an equitable performance rating system that wouldbe linked to pay;

the appeals system for employees in case of disputes;and

the level of bargaining between employees and DOD.

DOD's proposal was debated within both the armed services and the governmental affairscommittees with concerns raised by both Members of Congress and government employee unionsabout the breadth of authority requested and the potential effects on government workers. Indefending new authority, others cited long-standing calls for reform of the civil service, the broadpersonnel management authorities granted to new Department of Homeland Security, and DOD'stwenty years of experience with alternative "pay for performance" systems for the 30,000 employeesin the national labs.

The conference version of the FY2004 DOD authorization modified many of theAdministration provisions that were included in the House version of H.R. 1588 . TheSenate version of the FY2004 DOD Authorization bill did not include any provisions dealing with a new personnel system, but many of the provisions proposed by the Senate Governmental AffairsCommittee in S. 1166 , a bill to establish a National Security Personnel System, wereultimately adopted in the final version (see CRS Report RL31954 , Civil Service Reform: Analysisof the National Defense Authorization Act for FY2004 coordinated by Barbara Schwemle). (29)

Phase-In Period, Collaboration, and Criteria for the New PersonnelSystem. Although H.R 1588 gives the Secretary of Defense broad discretion to setup the new system, DOD is required to develop its regulations jointly with the Director of the Officeof Personnel Management and to conform those regulations with criteria included in the law. Inaddition, any disputed parts of the new system could not go into effect until 90 days after theproposed system is presented for comment to labor organizations representing DOD's civilianemployees.

During that period, labor organizations would have 30 days to review the proposal, DODwould have 30 days to resolve disputes, and Congress would be notified of remaining disputes 30days before implementation. (30) After this 90-day period, the new system could be put into placefor up to 300,000 DOD civilian employees but could not be expanded to the remaining employeesuntil DOD has a performance management system in place that meets criteria in the law. (31)

In addition to being consistent with merit system principles and anti-discrimination laws,this new system to hire, assign, transfer, evaluate, and fire employees is required meet the followingcriteria:

to be "fair, credible, and transparent;"

to link employee performance to agency plans and include safeguards toensure fairness;

to involve employees, supervisors and managers in the design, evaluation,and training for the new system;

to include an "equitable method for appraising and compensatingemployees" in the pay-for-performance evaluation system. (32)

In report language, the conferees calls on DOD to set up a pay-for-performance evaluationsystem that:

groups employees into pay bands with upper and lower bounds based onposition responsibilities and types of work;

sets up a performance rating system with rating periods and a feedbackprocess;

includes a scoring system that is tied to salary changes and a review processthat addresses those failing to meet performance goals; and

links individual performance factors to agency's goals and ensures scoringcomparability.

Although this conference report language is not binding, it signals legislative intent. (33) In hearings, DOD policymakers stated that it intended to design a system like the pay banding system used by DOD'slaboratories for the past twenty years; the labs are, however, exempt from the new system until 2008and beyond that unless the new system gives them greater flexibility. (34) Details about the newpersonnel system are likely to emerge in the next year. (35)

New Appeals Process and Labor Management RelationsSystems. As long as it complies with employment anti-discrimination laws, meritprinciples, and due process, DOD can set up a new, internal appeals process for handling disputesabout personnel actions. In designing this system, DOD is to consult with the Merit SystemProtection Board, the current government-wide appeals board. Although employees may appeal thedecisions of DOD's new internal board to the Merit System Protection Board (MSPB), thegovernment-wide board would only hear cases involving "arbitrary or capricious" actions, violationof due process, or those not supported by evidence. Decisions by that Board can be reviewed by acourt. (36)

Jointly with the Director of the Office of Personnel Management and in collaboration withthe unions, DOD will also be able to develop its own labor management system under the newlaw. (37) This"collaborative issue-based approach to labor management relations" would go into effect 90 daysafter DOD provides a written description to unions. During that period, unions have 30 days toreview the proposed system, 30 days to discuss recommended changes, and 30 days of notificationto Congress of disputed areas. To resolve differences, either DOD or employee representatives canrequest help from the Federal Mediation and Conciliation Service.

The new law provides for review of the proposed new system by an unspecified independentthird party. The authority of this new labor-management process appears to be broad because itsdecisions can " supercede all other collective bargaining agreements " in the department if theSecretary of Defense desires [italics added]. (38) Unless renewed, however, this new process would only be ineffect for a six-year period. This new system would also not be subject to the collective bargainingprocedures and deadlines that apply to other federal agencies. (39)

DOD could also continue to bargain with employee unions and follow the statutoryprocedures and deadlines for collective bargaining affecting all other government agencies. (40) In another major change, H.R. 1588 gives DOD new authority to bargain at the national rather than the local leveland makes those decisions binding on all levels. Some critics have raised concerns about how localcircumstances will be taken into account in national decisions. These decisions could also bereviewed by an unspecified third party.

H.R. 1588 appears to endorse two parallel systems of labor-managementrelations: one, a new "collaborative" system, and the other, a traditional collective bargaining systemas defined in current statute. The legislation does not specify what types of issues would be coveredor how responsibilities will be divided between these two systems. To the extent that the twosystems overlap, the law gives precedence to the new system. The new law appears to adopt asimilar approach in the case of appeals process for employee grievances, allowing DOD to set up itsown board but also permitting a review of those decisions by the Merit System Protection Board incertain circumstances.

Funding Levels and Separation IncentiveAuthorities. Although increases for individual employees would be likely to varyfrom the current system, the new law calls on DOD to "the maximum extent practicable" to budgetthe same amount for civilian employees under the National Security Personnel System as would bethe case under the current system so that overall, employees are not "disadvantaged." (41) At the same time, the lawcalls on DOD to give civilian employees the same pay raises as are received by military personnel. As an additional workforce management tool, the law allows DOD to give separation incentives of$25,000 to up to 25,000 civilian employees annually for early retirement. (42)

The budgetary implications of the new system are not obvious. It is also not clear whetherthese provisions would significantly limit DOD's current plans to transfer substantial numbers ofmilitary jobs to civilian personnel or contract employees.

Other Civilian Personnel Changes. The new lawalso provides several new authorities that would be available to all federal agencies includingauthorizing

pay for performance pilot projects;

higher pay caps for Senior Executive Service employees;and

$500 million for a new Human Capital Fund to reward exceptionalperformance. (43)

The appropriators have only provided $1 million for this new fund in the final version of the FY2004Omnibus Appropriations Act currently awaiting final congressional action.

Environmental Exemptions for DOD

As it did last year, DOD requested that military readiness-related activities be exempted fromcertain provisions of five federal environmental laws, including the Clean Air Act, the EndangeredSpecies Act, the Marine Mammal Protection Act, the Solid Waste Disposal Act, and the "Superfund"law that governs cleanup of hazardous waste. This year, Congress proved to be receptive toproposals to modify DOD's responsibilities to protect endangered species and marine mammals, bothvery controversial provisions. H.R. 1588 also gives DOD new authority to usewetlands mitigation banks and modifies regulations governing Restoration Advisory Boards thatinform citizens about environmental cleanup.

DOD has argued that compliance with environmental requirements significantly affectmilitary training, and hence readiness, while critics have questioned the extent of the impact andDOD's limited use of current waiver authorities. A recent GAO report found that environmentalrestrictions are only one of several factors, including urban growth and pollution, that affect DOD'sability to carry out training activities and that DOD continues to be unable to measure the impact ofenvironmental laws. (44) The debate centers on whether or to what extent DOD should be exempt from current environmentalstatutes. (45)

Congressional Action on Endangered SpeciesAct. (46) Both the Senate and the House agreed that DOD needed additional authority to consider militarytraining requirements as well as wildlife protection in managing land on DOD installations. For thatreason, the new law permits DOD to substitute an Integrated Natural Resources Management Plan(INRMP), required under the Sikes Act, for a designation of lands as "Critical Habitat" under theEndangered Species Act, as a way to protect endangered species. (47) The authority to substitutea resource management plan for a critical habitat designation has been under dispute. Environmentalgroups are concerned that protection for endangered species may be weakened with this change.

Under the Sikes Act, the INRMP, which guides the conservation, protection, andmanagement of fish and wildlife resources, is prepared by the Secretary of the military departmentin cooperation with the U.S. fish and Wildlife Service. The "use of military installations to ensurethe preparedness of the Armed Forces," or military readiness, however, takes precedence. (48) Under the EndangeredSpecies Act, once land has been designated as "critical habitat," federal agencies must "consult"regarding actions that would destroy or adversely affect those habitats or face penalties.

The substitution is permitted only if the Secretary of the Interior determines in writing thatDOD's plan provides a "benefit for the species." (49) Critics have questioned, however, whether the criterion of"benefit to the species" is likely to be adequate and whether implementation of the plans can beenforced since the Sikes Act does not provide for suits by individuals or citizen groups. The finalversion also amends the Endangered Species Act rather than Title 10 of the U.S. Code which governsDOD activities, a choice that created concern among environmental groups because of the potentialprecedent for other exemptions. Other environmental interests opposed amending Title 10 becausedoing so may give the Secretary of Defense rather than the Secretary of Interior the primary role indetermining whether integrated management plans provide adequate protection.

According to the Senate Armed Services Committee, portions of about 150 DOD bases couldbe designated as critical habitat were this exception not permitted. (50) The conference reportsuggests that the new language will "provide a balance between military training requirements andprotection of endangered or threatened species." (51)

Congressional Action on the Marine Mammal ProtectionAct. The conference agreement adopts two of the Administration's proposedchanges to the Marine Mammal Protection Act, including new two-year exemption authority and anew definition of "harassment." Debate about the implications of both of these changes was heated.

New Exemption Authority. Under a new provision,the Secretary of Defense, after consulting with the Secretary of Commerce and the Secretary of theInterior, could "exempt any action or category of actions" from compliance with the MarineMammal Protection Act for two years if the Secretary determines "it is necessary for nationaldefense." (52) At hisdiscretion and after consultation with the Commerce and Interior Departments, the Secretary ofDefense could renew such exemptions for additional two-year periods.

The conference report suggested that this national security exemption parallels that includedin other environmental laws, while environmental interests argued that a "national defense"exemption is broader than that provided in other statutes. (53) DOD has not, in fact, used existing exemption authorities,arguing that the threshold was too high for most activities. Exemptions under the new law must bereported to the armed services committees. (54)

New Definition of Harassment. The conferenceagreement also adopted the Administration proposal to use narrower definitions of harassment ofmarine mammals for DOD's military readiness and scientific activities of federal agencies than areapplied to other agencies. Under current law, the standard requires that activities be prohibited ifthey would have a "potential to injure or disturb" marine mammals. (55) The new language definesDOD's activities as "harassment" only if an act "injures or has the significant potential to injure" ordisturbs the activities of marine mammals by disrupting "natural behavior patterns"to a point wherethose patterns are "abandoned or significantly altered." [italics added] (56) To limit the applicationof the exemption, the Act defines readiness as training, combat operations, and testing, the definitionthat was included in the FY2003 DOD authorization. DOD had asked to broaden the application toinclude support activities. (57)

In reaction to a recent court case that limited DOD's deployment of the low-frequencySURTASS sonar because of the potential impact on marine mammals, the FY2004 DODauthorization exempts DOD from complying with current standards for evaluating the impact onmarine mammals based on "specified geographical regions," or the "small numbers." DODcontended that these standards were inappropriate for marine mammals that migrate over broadexpanses of the ocean and that using a "negligible impact" standard would be a more scientific wayto make decisions rather than on the basis of the number of mammals affected. (58)

Other Changes and Future Actions. Congressalso made other changes requested by the Administration, including allowing DOD purchase creditsfrom a mitigation bank to offset those lost on DOD installations, and exempting DOD's RestorationAdvisory Boards from issuing financial disclosure statements and from providing notice of theiractivities in the Federal Register. (59) These boards are the primary avenue through which localcommunities learn about cleanup decisions on military lands.

The issue of when and where to carve out exemptions from environmental statutes for DODcan be expected to re-surface next year as the Administration continues its efforts to provide specialtreatment for the department to protect DOD's readiness activities. While Congress did not approveDOD's requested exemptions from other environmental laws, it did require DOD to report byJanuary 31, 2004, on how environmental statutes and residential development surrounding militarybases affect readiness activities. (60)

TRICARE For Non-Deployed Reservists

Because of the large number of reservists who have been in Afghanistan, Iraq, and the UnitedStates, Congress considered a number of ways to expand current benefits and decided to approve ademonstration project to provide access to DOD's TRICARE health care system to certainnon-deployed reservists. Under current law and DOD policy, reservists become eligible forTRICARE once they are on active duty. The FY2004 DOD Authorization Act offers access toTRICARE to non-deployed reservists who receive unemployment compensation or who are noteligible for coverage offered by an employer. Reservists would be required to pay a premium set at28% of the value of the actuarial cost of the plan as is currently required for civilian employees inthe government's Federal Employees Health Benefits (FEHB) insurance plan. (61) The conference versionof the FY2004 DOD authorization bill provides access to this targeted version of the new benefitthrough December 31, 2004, three months longer than is provided in the FY2004 supplemental. (62)

According to the report, CBO estimates that this demonstration project would cost about$200 million annually compared to the $2 billion annual cost of providing access to all non-deployedreservists that was proposed in the Senate version of the bill. Dropped in conference, the Senateproposal had triggered a veto threat from the Administration. The conferees set a ceiling of $400million on the cost of the demonstration project. (63)

To help Congress assess the health care needs of reservists and their families, the conferencereport requires that GAO conduct an evaluation by May 1, 2004. (64) With significant numbersof reservists likely to be needed in the next few years for the occupation of Afghanistan and Iraq,proposals to expand benefits for reservists are likely to be revisited next year.

Lifting the Ban on Research on Low-Yield Nuclear Weapons

The conferees adopted the Senate version of this change to a ban on R&D of low-yieldnuclear weapons that was enacted in 1989. Rather than modifying the ban to apply only to R&D atthe engineering and development stage, H.R. 1588 repeals the ban on R&D but requiresspecific congressional authorization for the Department of Energy (which funds this program) toproceed to engineering development of low-yield nuclear weapons or a nuclear earth penetratingweapon (see discussion in section on nuclear weapons for more detail).

In the conference version of the Energy and Water appropriations bill, funding for the RobustNuclear Earth Penetrator was reduced from the $15 million request to $7.5 million; funding for theAdvanced Concepts Initiative, which would fund concept studies on low-yield nuclear weapons, wasset at $6 million. (65)

Maintaining Current Levels of Imminent Danger Pay and Family Separation Allowance

One less controversial provision was included in H.R. 1588 : maintaining thehigher levels of imminent danger pay and family separation allowance adopted in last year'ssupplemental. The DOD Authorization Act adopts the higher levels for all eligible service membersthrough December 31, 2004. The FY2004 Emergency Supplemental continues the higher ratesthrough September 30, 2003. At one point, the Administration had proposed alternative ways tomaintain the higher levels, but these proposals were not adopted.

Major Action On FY2004 DOD Appropriations Bills

The FY2004 DOD Appropriations Act was signed into law ( P.L. 108-87 ) on September 30,2003, at the end of the fiscal year. Conferees resolved their issues, and the bill was passed onSeptember 23 by the House and September 24 by the Senate after the two-day hiatus in businesscaused by Hurricane Isabel. Differences in funding levels were resolved.

Table 1B. Status of FY2004 Defense Appropriations: H.R.2658 and S. 1382

a. Full committee markup was completed on June 26, 2003; the report was filed on July 2, 2003.

b. Full committee markup was completed on July 9, 2003; the report was filed on July 10, 2003.

Major Funding In FY2004 DOD Appropriations Act

The major changes to the Administration's request are shown in Table 2. Further details onthe appropriation conference will be provided in a later update.

Table 2. FY2004 DOD Appropriations: CongressionalAction

(in billions of dollars)

Sources : H.Rept. 108-187 ; S.Rept. 108-87 , H.Rept. 108-283 .

Notes: CRS adjusted title totals for both FY2003 and FY2004 to allocate funding in generalprovisions. [ ] Square brackets indicate the total amount of funding for general provisions that isallocated by title in the table and is not added into the total. For FY2004, see H.R. 2658 and S. 1382 . For FY2003, see P.L. 107-248 .

a. Of the $4.0 billion decrease for general provisions in the House version of the FY2004 DODappropriations act, H.R. 2658 allocates $2.0 billion to O&M appropriations, and$2 billion is a rescission to the $15.7 billion provided in the Iraq Freedom Fund for latercosts of the war and occupation in the FY2003 supplemental. According to scoring rules, thatdecrease counts as a reduction to FY2004 appropriations. Of the $3.4 billion in reductionsfrom general provisions in S. 1382 , $3.2 billion is from a rescission to the IraqFreedom Fund. About $1.8 billion of the deceases in FY2003 that were made in generalprovisions affected O&M appropriations. CRS will allocate these general provisions in alater update.

b. The Iraq Freedom Fund is a flexible account set up to cover later costs of the war, which couldnot be allocated to specific appropriation accounts.

c. Difference is rounding: total funding is $369.193 billion in the House bill and $3.143 billion inthe Senate bill.

Funding Prohibition And Restrictions On Total InformationAwareness (Terrorist Information Awareness) R&D Program. In the FY2004 DODAppropriations Act, the conferees dealt with the controversial Total Information Awareness(renamed Terrorism Information Awareness) or TIA program, which was, until recently, run byretired Admiral Poindexter in the Defense Advanced Research Projects Agency (DARPA). Conferees transferred unspecified components of the program's classified venues where research cancontinue but would be subject to safeguards in the National Foreign Intelligence Program that restrictthe sharing of information on U.S. citizens. Less controversial components of the program, such asmachine translation of languages, remain in DARPA. The components that were transferred and theamount of funding remaining cannot be determined because details are in a classified annex. (66)

This agreement was a compromise between Senate action that prohibited funding for R&Dfor the controversial Total Information Awareness R&D program and the Administration's objectionsto cutoff of funding. The TIA program is designed to develop a system to collect and analyze a wideassortment of information to detect potential terrorists, and included various restrictions onimplementation or deployment of TIA programs similar to those included in the House version ofthe FY2004 DOD Appropriations Act, H.R. 2658 . The Administration objected to theSenate cutoff of funding. (67)

Similar restrictions on deployment were originally included in the ConsolidatedAppropriations Resolution of FY2003 ( P.L. 108-7 ). (68) On May 20, 2003, the Defense Advanced Research ProjectsAgency (DARPA) avoided a cutoff in funding for TIA by submitting the report required by P.L.108-7 . On August 29, 2003, retired Admiral Poindexter, the head of the program, resigned, partlyin response to recent controversy about another TIA component, FutureMAP, which was designedto set up a "market" to collect predictions about potential terrorist or terrorist-related events. (69) That program wascancelled in response to public and congressional concerns.

Military Construction Appropriations Bills

Several months elapsed between the summer passage of H.R. 2559 , the FY2004military construction appropriations bill, and final conference action on November 22, 2003, anuncharacteristic delay for this bill ( P.L. 108-132 ). The conference bill provides $9.3 billion, about$100 million more than the request.

The long hiatus between House and Senate action and the final conference reflectedcontroversy about funding for overseas bases in Europe and Korea, which was opposed by theSenate because of uncertainties about their future. This issue was finally resolved by theestablishment of an eight-member congressional commission to review overseas base structure andreport back to Congress by December 31, 2004. (70) The Administration had signaled earlier that it plans to proposesubstantial changes in overseas bases as part of efforts to "reduce the footprint" of the U.S. militaryoverseas. (71) With initialaction on the domestic base closure process kicking off next year, debate about the future of overseasbases can be expected next year, perhaps even before the new report.

Overview of Administration Request and Budget Trends

On February 3, 2003, the Administration submitted its FY2004 budget request to Congress. The Administration proposed $399.7 billion for the national defense budget function, about $7billion above the estimated FY2003 level. (Note: This includes in the FY2003 total $10 billion thatCongress appropriated for DOD in the FY2003 Consolidated Appropriations Act; most OMB andDOD tables prepared for the February budget release do not include these additional funds. (72) This does not include inthe FY2003 level, however, $62.6 billion in supplemental defense appropriations that Congressapproved in April for the Iraq war and other costs. (73)

The FY2004 increase is in addition to substantial increases in FY2002 and FY2003. The newrequest is more than $100 billion above the FY1999 level for defense spending, and it represents anincrease over five years of 20% in inflation-adjusted constant FY2004 dollars. The FY2004 defenserequest is almost 25% higher in real terms than the budget in FY1996 when DOD's drawdown inspending and military personnel after the end of the Cold War was completed.

The Administration is proposing continued increases of about $20 billion annually in thedefense budget for the next five years, which would increase national defense budget authority to$480 billion by FY2008. Table 3 shows the ten-year FY1999-FY2008 trend in defense spendingunder the Administration's plan both for the national defense budget function and for the Departmentof Defense budget. (74)

Of the $399.7 billion requested for national defense in FY2004, $370.6 billion is forprograms covered by the defense appropriations bill, $9.0 billion by the military constructionappropriations bill, $17.3 billion for Department of Energy defense-related activities funded in theenergy and water appropriations bill, and the remaining $2.8 billion in other appropriations bills.

Table 3. National Defense Budget Function and DOD Budget, FY1999-FY2008, AdministrationProjections

(current and constant FY2004 dollars in billions)

Source: Office of Management and Budget, F2004 Historical Tables, and FY2003 Consolidated Appropriations Resolution ( P.L. 108-11 ).

a. Includes $10 billion in budget authority appropriated to DOD in the FY2003 Consolidated Appropriations Resolution (see P.L. 108-11 ) but not theoutlay effects of that addition because OMB has not re-estimated outlays. Does not include $62.6 billion in FY2003 supplemental appropriationsfor defense provided in H.R. 1559 , P.L. 108-11 .

Annual Growth for DOD Slows In Later Years in FY2004 Budget Resolution

The conference agreement on the FY2004 congressional budget resolution( H.Con.Res. 95 , H.Rept. 108-71 ), which was passed by both houses onApril 11, just before the April recess, endorses the Administration's proposed growthof $20 billion annually for defense over the next five years (see Table 4 ). Over thefollowing five years, however, defense would grow by about $10 billion annually;the Administration does not project beyond FY2008. The chief issue in this year'sbudget resolution was the amount to be provided for tax cuts.

Table 4. Status of FY2004 Budget Resolution(H.Con.Res. 95, S.Con.Res. 23)

Note: Senate substituted S.Con.Res. 23 into H.Con.Res. 95 afterpassage.

a. Budget resolutions are only marked up in full committee.

b. Budget resolutions guide the action of the authorizing and appropriatingcommittees but are not signed into law by the President.

Although there has been considerable congressional support for increases in defense, some observers have questioned whether increases can be sustained in thefuture because of high federal budget deficits and the dramatic increases in costsassociated with the retirement of the baby boom generation. (75) TheFY2004 budget resolution projects a 40% increase spending on entitlement programsby FY2008 and an 80% increase by FY2013. (76)

Table 5. FY2004 Budget Resolution: National Defense Request and Congressional Action

(billions of dollars)

Source: CRS calculations based on OMB, FY2004 Historical Tables, and DOD, Office of the Secretary of Defense, Comptroller, Briefing, FY2004Defense Budget (February 6, 2003); Conference Report on FY2004 Budget Resolution, H.Rept. 108-71 , and House report on H. Con. Res. 95, H.Rept.108-71 , p. 6.

a. Administration request does not reflect outlays from the $10 billion enacted in the FY2003 Consolidated Appropriations Resolution.

b. OMB does not project budget authority or outlays beyond five years.

House and Senate Differences about DefenseSpending. The final version of the FY2004 budget resolutionprojects a five-year total for defense spending of $2.2 trillion, a level comparable tothe Administration projection and matching levels approved in both houses. In lateryears, however, the House projected higher funding for defense than the Senate, andthe conference compromised at $4.758 trillion through FY2013, about the midpointbetween the two houses. (77)

The conference version of the budget resolution also deleted two provisionsproposed by the Senate:

a measure to set aside $100 billion over the next ten years in areserve fund to pay for costs associated with the war in Iraq;and

a measure to include $182 million in FY2004 and $12.8 billionin FY2004-FY2013 to cover the cost of phasing in concurrent receipt benefits formilitary retirees with disability levels of 60% or higher.

The Senate bill had included a defense reserve fund that decreased by $100billion the funds set aside for a tax cut in order to provide $10 billion annually tocover continued costs of military action or reconstruction in Iraq. (78) Fundingfor Iraq in FY2003 was provided in the FY2003 supplemental, but there is no fundingfor occupation costs in the FY2004 budget, which was submitted before the initiationof hostilities. Nor is there funding in the FY2004 budget to cover the costs of thecontinued U.S. presence in Afghanistan.

The Senate version of the resolution also would have allowed all militaryretirees whose disabilities are 60% or higher to receive both military retired pay andVeterans Administration disability benefits, a proposal considered but rejected in thefinal version of the FY2003 DOD Authorization Act. Instead, last year, Congressprovided special compensation for military retirees whose disabilities are a result ofcombat or combat-related activities in the FY2003 Authorization Act. (79) Theconference version of the resolution deleted both provisions. Without an allocationin the budget resolution, it appears less likely that benefits for military retirees withdisabilities will be expanded.

Scoring Differences Between Congress and theAdministration. CBO scored the cost of DOD's request as$400.5 billion, $800 million higher than the Administration's estimate (see Table 4and Table 5 ). The difference between the two estimates reflects primarily CBO'sassessment that a DOD legislative proposal to set up a new account, the RefinedPetroleum Products transfer account, would cost about $675 million compared tozero expenditures assumed by DOD. According to DOD, the rationale for setting upthis new account with an "indefinite appropriation" is to allow DOD to cover thedifference between the amount budgeted for fuel costs and actual market prices. (80) SinceDOD assumes that its estimate is correct, the Administration provided no funds forthe account. CBO, however, believes that fuel prices in FY2004 are likely to beabout $5 higher per barrel than DOD assumes -- $27 a barrel compared to $22 barrel-- and scores the likely cost of the new account at $675 million based on the level ofDOD's annual fuel purchases.

Although the FY2004 congressional budget resolution adopted CBO's higherscoring, it appears that Congress is unlikely to agree to set up the new account. Neither the House nor the Senate version of the FY2004 DOD Authorization Actincludes funds for the account. (81) Instead, both houses transfer that $675 millionin the CBO estimate for that account to other programs. The House and Senateappropriators also rejected DOD's proposal for this new fund and eliminated the $675million for the account.

DOD's Appropriations Allocation. A sign of potential pressure on DOD's budget top line in the future is the outcome ofdecisions about the distribution of funds to the various appropriations subcommitteesto guide their markup, a process known as setting 302(b) allocations. (82) The annualcongressional budget resolution sets the total amount of discretionary spendingavailable to the appropriations committees and recommends spending allocations foreach budget function. The appropriations committees, however, have discretion toset allocations for each subcommittee.

The conference agreement on the budget resolution allocates $784.7 billionin discretionary budget authority to the appropriations committees. For severalweeks after the budget resolution was agreed to, committee leaders debated how toallocate funds among the subcommittees and, especially, how to absorb what theyidentified as a $5 to $7 billion gap in spending requirements and amounts available.Departing from traditional practices where House and Senate Committees workseparately on subcommittee allocations, committee leaders negotiated across bothhouses with their leadership and with the White House to establish a commonframework within which to base their initial allocations.

On June 11, House and Senate Appropriations Committee Chairmenannounced an agreed package that would free up sufficient resources to address thefunding gap and remain within the overall FY2004 discretionary budget cap of$784.7 billion. As approved by all parties, including the President, the appropriationscommittees reduced defense spending by $3.1 billion and moved $2.2 billion inFY2004 advance appropriations to FY2003.

Trends in DOD Spending Plans

Assessing long-term trends in the defense budget is difficult because of theeffect of the large amount of supplemental funding received since September 11,2001, in the Emergency Terrorism Response supplemental of 2001 and the FY2002supplemental. That funding, which is included in figures in Table 6 , makescomparisons difficult, particularly for operation and maintenance spending thatreceived the bulk of supplemental funding (see below).

Table 6. Administration Request: NationalDefense Budget Function by Title, FY2001-FY2008

(in billions of dollars)

Source: Office of Management and Budget, Budget of the U.S. Government,FY2004: Historical Tables and Budget of the U.S. Government, FY2004: AnalyticalPerspectives (February 2003), and H.Rept. 108-10 , conference report on FY2003Consolidated Appropriations Resolution for final enacted levels, and HouseAppropriations Committee. OMB figures include DOD's supplementalappropriations of $17.3 billion in the FY2001 Emergency Terrorism Responsesupplemental and $14.0 billion in the FY2002 supplemental.

*Note: Does not include $62.6 billion received by DOD in FY2003 supplementalappropriations.

Figures for FY2003 also include an additional $10 billion provided for DOD in the FY2003 Consolidated Appropriations Resolution for classified intelligenceprograms and for costs associated with the U.S. presence in Afghanistan and theglobal war on terrorism. The $62.6 billion provided to DOD in the FY2003supplemental, however, is not included. DOD's procurement funding shows littleincrease in FY2004. Much of the increase in RDT&E reflects an increase from $7.6billion to $9.1 billion in DOD's missile defense program, reflecting DOD's plan tobegin deployment of 10 land-based interceptors as well as to continue the ramp-upin R&D. By FY2008, however, DOD plans to increase funding for procurement byabout 40% and RDT&E by over 15% compared to FY2003.

DOD Receives $103.1 Billion in Supplemental Appropriations Since September 11 Attacks

Since the September 11 attacks, DOD has received $103.3 billion insupplemental or regular appropriations for the war in Afghanistan, the war in Iraq,enhanced security at DOD installations, and the global war on terrorism (see Table7 ). The most recent supplemental for the Iraq war provides funding for the U.S.presence in Afghanistan and continued operations in Iraq through FY2003.

The Administration did not include any funding for these costs in its FY2004budget, however, which suggests that the Administration will propose either asupplemental or a budget amendment for FY2004. In addition to funding insupplementals, DOD received $10 billion in the FY2003 ConsolidatedAppropriations Resolution to fund the occupation of Afghanistan andclassified/intelligence programs.

In its post-September 11 requests for supplemental funding, DOD hasrequested substantial flexibility in its use of funds, citing the uncertainty ofestimating the cost of war and the global war on terrorism. The Administration hasreiterated that theme in its FY2004 request as well, calling for transformation of notonly weapon systems to meet new threats but also transformation of DOD's businesspractices and personnel management systems (see discussion of MajorAdministration Themes below).

Although Congress has generally provided the amounts requested by DODin its supplemental requests, it has been reluctant to provide the amount of flexibilityrequested by DOD. In fact, with each supplemental request, Congress has been lesswilling to accept the flexibility proposed by DOD. Congress rejected DOD's requestthat about 95% of the funding be provided in a flexible account, choosing instead toallocate 45% of the funds in flexible accounts (see below).

Of the $40 billion appropriated in the Emergency Terrorism Responsesupplemental (ETR) passed on September 14, 2001, DOD received $17.3 billion,almost entirely within the Defense Emergency Response Fund, a flexible account. Of that total, DOD had discretion to allocate funds as long as Congress wasinformed. For the remainder, Congress set levels within ten broad categories forDOD spending. Congress also permitted DOD to move funding into variousappropriation accounts at its discretion in the FY2002 supplemental for the bulk ofthe funding requested.

In the most recent supplemental, for FY2003, DOD requested that Congressprovide 95% of the funding in the Defense Emergency Response Fund (DERF) sothat DOD could transfer funds to various accounts as needs arise. Instead Congressset up an new fund, the Iraq Freedom Fund, and allocated 25% of the funds requestedto that fund but required five-day advance notifications.

Table 7. Flexibility in DOD's SupplementalFunding Since September 11 Attacks

(Dollars in Billions)

Source: CRS calculations from CRS Report RL31829 , CRS Report RL31005 , CRS Report RL31406 , and appropriations conference reports and GAO Report, DefenseBudget: Tracking of Emergency Response Funds for the War on Terrorism , April2003.

a. In the ETR, DOD funds were appropriated into the Defense Emergency ResponseFund (DERF) except for a small amount of military construction funds,procurement funding, and Pentagon Renovation Revolving Funds. In theFY2002 Supplemental, DOD funds were appropriated to the DERF, whichwas made into a transfer account. In the FY2003 supplemental, funds wereappropriated into a new Iraq Freedom Fund, set up as a transfer account, orinto regular appropriations accounts.

Major Themes in the Administration's FY2004 Request

The overarching theme in the Administration's FY2004 request was a call forflexibility to transform not only U.S. military doctrine and technology, but alsomilitary and civilian personnel systems and defense acquisition practices. Accordingto Secretary of Defense Rumsfeld, not only do "our armed forces need to be flexible,light and agile," but also "the same is true of the men and women who support them,"in meeting the "frequent, sudden changes in our security environment," (83) includingthe global war on terrorism.

To meet this goal, the Administration delivered a broad ranging legislativeproposal, entitled the "Defense Transformation for the 21st Century Act," to Congresson April 10, 2003, shortly before Congress's two-week April recess. Among otherthings, the legislative proposal would have given the Secretary of Defense authorityto redesign the civil service system governing the 700,000 civilian employees in theDepartment of Defense, provided additional flexibility in managing senior militaryofficers, modify certain acquisition requirements, and exempted DOD from certainenvironmental statutes.

Some members of Congress expressed concern that DOD had delivered suchan ambitious proposal at a time when Congress was about to recess and shortlybefore markup of the defense authorization bill was planned. Although DODwitnesses discussed their plans to submit the proposal earlier in the year and met withcongressional staff in the preceding couple of months, the specific proposals were notavailable before April 10 (84) (as noted above, CRS compares all of theproposed new measures with current law in CRS Report RL31916 , DefenseDepartment Transformation Proposal: Side by Side with Current Law , by Robert L.Goldich, [author name scrubbed], [author name scrubbed], and [author name scrubbed]).

The Administration characterized its proposals as the logical followup toearlier efforts to transform weapons modernization and operational practices. According to DOD, the FY2004 budget was the first budget to reflect fully PresidentBush's commitment to "challenge the status quo" and balance the need to meetcurrent challenges from the global war on terrorism and near-term threats with theneed to transform DOD in the longer term. (85) DODcontended that transformation is now fully underway with new emphasis placed onunmanned vehicles, precision guided munitions, special operations forces, command,control, and communications, and missile defense (see discussion on modernizationbelow), as well as the establishment of a new command, NORTHCOM, to focus onhomeland security, and changes in training practices to emphasize joint operations.

DOD also argued that its proposals for military pay raises and other benefitsand its funding of operational training will ensure that recruitment and retentionremain high and that readiness goals continue to be met. Over the longer term, DODplans to review its current basing strategies in Europe and review the role of reserveforces but these areas are currently under study and not incorporated in the FY2004budget.

Investment and Other Issues

The major issues in this year's congressional debate -- for example, DOD'srequest for broad ranging authority to manage its civilian workforce, exemptions forDOD to certain environmental laws -- are discussed above. Other issues raisedinclude

whether DOD's investment priorities are transformational, affordable, and consistent with "lessons learned" from the war in Iraq;

revising criteria governing the FY2005 base closure round dueto be initiated next year;

various organizational and acquisition changes;and

DOD's proposed changes for management of militarypersonnel.

An update for conference action will be included in a later update.

Proposed Acquisition and Organizational Changes

In its legislative package, DOD included several provisions designed toincrease its flexibility to contract for major defense weapons systems and informationtechnology programs, receive waivers from Buy America and domestic contentrequirements, and buy standardized items. (86)

Two potentially controversial proposals would allow DOD to contract out forfirefighting and security guards at bases and would allow DOD to count workperformed by contractors at federally owned facilities as part of the 50% minimumfor in-house performance of depot work. Congress has consistently opposed allowingDOD to hire private security guards and loosening the definition of work that couldbe counted as "in-house". (87) A later update will provide the details aboutconference action.

Other Organizational And Financial Proposals ToIncrease Flexibility. Other DOD proposals would give the Secretaryof Defense broad discretion to reorganize the department, transfer personnel, and beexempt from current personnel caps. To increase financial flexibility, DODrequested that the limit on transfers between appropriation accounts be raised fromthe current level of $2.5 billion to 2.5% of total DOD spending or about $9 billion. (DOD made this same request in the FY2003 supplemental, and received a highertransfer limit but not the 2.5%.) (88)

DOD also proposed changing the standard governing awards of contracts togovernment entities versus private companies based on the A-76 competitivesourcing rules. DOD proposed using a "best value" assessment rather than thecurrent lowest cost standard. A less controversial proposal, which has been endorsedby both OPM and DOD, would transfer the DOD civilian personnel currentlyperforming security investigations to OPM. DOD also proposed eliminating 184reports to Congress that are currently required, ranging from reports on specializedtopics to more general reports on readiness levels and operation and maintenancefunding. (89) A later update will summarize conferenceaction.

Authority To Spend $200 million To SupportForeign Militaries. In its request, DOD asked Congress to give itpermanent authority to allocate up to $200 million to support "coalition forces," orforeign military forces. Although this request is similar to the request enacted in theFY2003 supplemental for $1.4 billion for coalition forces who help the U.S. tocombat terrorism, DOD's request for permanent authority included no provision forcongressional oversight. In the FY2003 supplemental, Congress required DOD toreport by July 1, 2003 on its plan to allocate funding for coalition forces. (90) Finalaction will be included in a later update.

Affordability and Mix of DOD's FY2004 Investment Programs

A perennial issue in defense policy has been whether the Defense Departmentwill be able to afford all of the major weapons modernization programs that havebeen on the drawing boards, particularly toward the end of the decade, when anumber of new programs are planned to be in full scale production. The issue hasbeen complicated by the Defense Department's growing commitment to defensetransformation, which implies an effort to accelerate selected programs and perhapsadd some entirely new ones. During the 2000 presidential election campaign,then-Governor Bush promised to "skip a generation" of weapons programs in orderto free up funds for more transformational priorities. A full update for conferenceaction will be in a later update.

Last year, and again this year, the Defense Department has tried to calculatethe amount that is being devoted to modernization programs that it regards asparticularly transformational. According to DOD Comptroller Dov Zakheim, theseprograms add up to $24.3 billion in the FY2004 budget and $239 billion over theperiod of the six-year FY2004-FY2009 future years defense plan (FYDP). UnderSecretary Zakheim said that DOD made room for these programs in part by cuttingabout $82 billion from projected service budgets over the course of the FYDP. Thecuts include termination of a number of Army programs to upgrade current weapons,early retirement of 26 Navy ships and 259 aircraft and an attendant reduction of10,000 in the Navy's personnel end-strength, and early retirement of 115 Air Forcefighter aircraft and 115 mobility/tanker aircraft, as well as efficiencies. (91) Finalconference action will be addressed in a later update.

In the FY2004 budget, the Defense Department requested $74.4 billion forweapons procurement and $61.8 billion for research, development, test, andevaluation (RDT&E). Major aspects of the Administration request, and some keyissues include the following.

Army Transformation. In recentyears, the Army has been pursuing three major initiatives simultaneously: (1)upgrades to the current "legacy" force, including improvements in M1 tanks andBradley Fighting Vehicles; (2) development and deployment of an "interim" forcemade up of six brigades equipped with Stryker wheeled armored vehicles anddesigned to be more rapidly deployable than heavy armored forces; and (3) pursuitof an "Objective Force" include the "Future Combat System," a family of newarmored vehicles and other systems designed to fundamentally change the way theArmy will fight in the future. In addition, the Army has been continuing to developthe Comanche helicopter, though late last year, the Defense Department decided tocut planned total Comanche procurement by about half.

In the FY2004 budget request, the Defense Department cut back a number ofplanned upgrades of Army legacy systems, including high-profile M1 and Bradleyupgrades. In the wake of the Army's success in the Iraq war, there was extensivediscussion in Congress about the wisdom of these planned cuts. The House ArmedServices Committee-reported version of the authorization adds $727 million to therequest to continue M1 and Bradley upgrades along with some related Army upgradeprograms.

Congressional Action. Table 8A shows action on major Army programs in the House and Senate defenseauthorization bills, and Table 8B shows action in the House and Senate versions ofthe defense appropriations bill. A few issues stand out.

Legacy force modernization: The House authorization adds$258.8 million for Bradley Fighting Vehicle upgrades and $424 million for M1 tankupgrades (offset by cuts of $140 million in other M1 projects). These are among theprograms that the Administration wants to terminate as part of the $82 billion in6-year savings that officials announced when the budget was released. The Houseappropriations bill adds the same amount for Bradley upgrades and $155 million forM1 upgrades. The House appropriators also urged DOD to budget for enough M1upgrades in the future to complete equipping the 3rd Armored Cavalry Regiment withmodernized tanks. In effect, the House rejected DOD plans to cut back on Army"legacy force" upgrades, though House appropriators also indicated that they may besatisfied once sufficient upgraded Bradleys and M1s are procured to equip 2 and 1/3divisions of what the Army calls its "counterattack" force of heavy armoredunits.

Stryker interim combat brigades: The House appropriationsalso added $35 million for long lead items for Stryker armored vehicle procurementto equip the 5th and 6th Stryker brigades. DOD has, in the past at least, consideredhalting the interim combat brigade program after four brigades are deployed. Houseappropriators sent a strong message that they expect DOD to fill out the plannedsix-brigade force. The Senate Appropriations Committee also added $35 million forlong lead items for Stryker procurement, though its report language did not specifythat it was for the 5th and 6th brigades. In addition, Senate appropriators added $100million in other Army procurement -- for communications and other equipment -- toaccelerate Stryker brigade deployment, a strong vote of support for the Armyprogram.

Helicopters: All of the committees add money for UH-60utility helicopters, largely for the National Guard, though there are some differencesin how the money is allocated. This is a perennial congressional addition to proposedbudgets. All of the committees also support continued Comanche helicopterdevelopment despite cost growth and substantial cuts in the plannedprogram.

Table 8A. House and Senate Action on Major Army Acquisition Programs: Authorization

(amounts in millions of dollars)

Sources: H.Rept. 108-106 ; S.Rept. 108-46 .

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action.

Table 8B. House and Senate Action on Major Army Acquisition Programs: Appropriations

(amounts in millions of dollars)

Sources: H.Rept. 108-187 ; S.Rept. 108-87 .

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action. Note: FutureCombat System funding includes PE 0604645A - Armored Systems Modernization (ASM)-Eng. Dev. only. NavyPrograms. (92) Key Navyship-acquisition programs for FY2004 include the Virginia (SSN-774) classsubmarine program, the Littoral Combat Ship (LCS) program, the Arleigh Burke(DDG-51) class Aegis destroyer, the DD(X) next-generation destroyer program, theSan Antonio (LPD-17) class amphibius ship program, the Lewis and Clark (TAKE-1)auxiliary ship program, the Trident cruise-missile submarine (SSGN) conversionprogram, and the Aegis cruiser (CG-47 class) conversion program. The FY2004budget also includes, among other things, continued advanced procurement fundingfor CVN-21, an aircraft carrier to be procured in FY2007.

One issue in congressional hearings on the FY2004 Navy program concernsthe planned size and structure of the Navy. The 2001 Quadrennial Defense Review(QDR) revalidated the plan for a 310-ship Navy established by the 1997 QDR, butalso stated that force-structure goals in the 2001 QDR, including the 310-ship goal,were subject to change pending the maturation of DOD's transformation efforts.

In February 2003, in submitting its proposed FY2004 defense budget, DODofficials stated that they had launched studies on future requirements for underseawarfare and future options for forcibly entering overseas military theaters. Thesestudies have the potential for changing, among other things, the planned number ofattack submarines and the planned size and structure of the amphibious fleet. Sinceattack submarines and amphibious ships are two of the four major building blocksof the Navy (the others being aircraft carriers and surface combatants), DOD, bylaunching these two studies, appears to have taken steps to back away from the310-ship plan. At the same time, the Secretary of Defense has explicitly declined toendorse a plan for a 375-ship fleet that has been put forward in recent months byNavy leaders.

As a result of these events, there is now uncertainty concerning the plannedsize and structure of the Navy: DOD may no longer support the 310-ship plan, butneither has it endorsed the 375-ship plan or any other replacement plan. Thisuncertainty over the planned size and structure of the Navy affects surfacecombatants as well as submarines and amphibious ships, because the biggest singledifference between the 310-ship and 375-ship plans is in the area of surfacecombatants. The 310-ship plan includes 116 surface combatants, all of which arecruisers, destroyers, and frigates, while the 375-ship plan includes 160 surfacecombatants, including not only cruisers, destroyers, and frigates, but as many as 60smaller Littoral Combat Ships as well.

Congressional Action: Senate and HouseMarkup. Table 9A shows action on major Navy programsin the House and Senate defense authorization bills, and Table 9B shows Houseaction in the committee-reported version of the defense appropriations bill. In actionon key issues:

Carrier replacement program: A major budget decision in theFY2004-FY2009 defense plan was to accelerate the transition to the next generationof carriers by incorporating more advanced technology into the next carrier to befully funded in FY2007 or FY2008. In all, the new carrier is projected to cost almost$12 billion for development and production, of which about $5 billion is for R&D. All of the congressional defense committees supported the Administration's revisedcarrier development program.

Virginia-Class Attack Submarines: The House AppropriationsCommittee denied funds requested to sign a multi-year procurement (MYP) contractfor new submarines, saying (1) that the schedule for delivery of the first submarineremains too uncertain and (2) that the requirement to buy two submarines each yearin FY2007 and FY2008 may be unaffordable given the $2.6 billion price of eachboat. The Senate Appropriations Committee approved multi-year procurement ofVirginia-Class submarines, but only for 5 boats over the FY2004-FY2009 planningperiod rather than the 7 boats that the Navy had requested. Subsequently, on August14, the Navy announced an agreement with contractors on a multi-year procurementdeal for 7 boats, but with an option to reduce procurement to 5 or 6 boats with someincrease in costs per ship.

Attack Submarine Refueling Overhaul: The Senate ArmedServices Committee added $248 million to refuel one Los Angeles-class attacksubmarine; the Navy did not request funding for any overhauls. The SenateAppropriations Committee added $450 million for two refueling overhauls. NeitherHouse defense committee added any funds.

Littoral Combat Ship: All of the defense committees expressedsome concern about the status of the Littoral Combat Ship (LCS) developmentprogram, though none eliminated funding. The Senate Armed Services Committeeissued the most critical report language, though it also added $35 million for moreexperimentation to determine the utility of the concept. The committee said (1) aNavy report on the program that Congress required last year did not adequatelyreview alternatives or establish priorities among Navy combat requirements, (2) thatNavy cost estimates did not include firm figures on the various modules that wouldbe installed in the common sea frame, and (3) that costs of the program couldcompete with higher priority Navy shipbuilding in a constrained budget environmentin the future. The House Armed Services Committee added $35 million for moduledesign, while the House Appropriations Committee added $25 million for moduledesign but cut $10 million from the overall program. The Senate AppropriationsCommittee added funds for module design.

LPD-17 Class Amphibious Ship: The House AppropriationsCommittee added $175 million for advance procurement for the next ship of theclass, the LPD-23, and told the Navy to provide full funding for the ship in FY2005,as had been planned, rather than in FY2006, as the Navy projected this year. TheSenate Appropriations Committee added $75 million for theLPD-23.

Table 9A. House and Senate Action on Major Navy Acquisition Programs: Authorization

(amounts in millions of dollars)

Sources: H.Rept. 108-106 ; S.Rept. 108-46 .

Note: Figures reflect committee-reported versions of the bills and not changes made in subsequent floor action.

Table 9B. House and Senate Action on Major Navy Acquisition Programs:Appropriations

(amounts in millions of dollars)