Authorization and Appropriations for FY2003: Defense
Released: 2002-12-06T00:00:00

Most Recent Developments

On November 12, the House, and on November 13, the Senate, approved a conferenceagreement on the FY2003 defense authorization bill ( H.R. 4546 ), and the Presidentsigned the bill into law on December 2 ( P.L. 107-314 ). Earlier, on October 10, the House, and onOctober 16, the Senate, approved a conference agreement on the FY2003 defense appropriationsbill ( H.R. 5010 ), and the President signed it into law on October 23 ( P.L. 107-248 ). The conference agreement on the defense appropriations bill provides $355.1 billion for programsit covers. This is $11.7 billion below the Administration's request. The bill does not include $10billion that the Administration requested as a contingency fund for costs of counter-terrorismoperations in FY2003.

Status of Legislation

FY2003 Defense Authorization Bills. On May1, the House Armed Services Committee marked up its version of the FY2003 defense authorizationbill, H.R. 4546 . The committee also considered, but did not report, a companionmeasure, H.R. 4547 , to provide funds for the war on terrorism. The House passed H.R. 4546 early on the morning of May 10. On May 9, the Senate Armed ServicesCommittee completed marking up its version of the FY2003 defense authorization, S. 2514 , and a report was issued on May 15. On June 13, the committee approved an amendment tobe offered on the floor regarding the Crusader artillery system. On June 18, the full Senate beganconsidering the bill, and the Senate passed the bill on June 27. On July 18, the House ArmedServices Committee reported H.R. 4547 , entitled the Cost of War Against TerrorismAuthorization Act (COWATAA), and the full House approved the bill under suspension of the ruleson July 24. On November 12, a conference report on the bill was filed. The conference agreementwas approved in the House under suspension of the rules on November 12. The Senate approvedthe conference report on November 13 by voice vote. The President signed by bill on December 2.

FY2003 Defense Appropriations Bill. On June 19, the House Defense Appropriations Subcommittee marked up its version of the FY2003 defenseappropriations bill, and on June 24, the full committee marked up the bill ( H.R. 5010 )and ordered it to be reported. The House passed the bill on June 27. On July 18, the SenateAppropriations Committee reported its version of the bill (also H.R. 5010 ). The Senatepassed the bill on August 1. On October 9, conferees announced agreement on a compromiseversion of the bill. The House approved the conference report on October 10 and the Senate onOctober 16. The President signed the bill into law on October 23.

FY2003 Congressional Budget Resolution. On March 20, the House passed its version of the annual congressional budget resolution, H.Con.Res. 353 , and the Senate reported its version, S.Con.Res. 100 , onMarch 22. Both versions recommended funding levels for defense in FY2003 very close to what theAdministration requested. The full Senate never considered the resolution on the floor, however,and it the two chambers were not able to agree on a common budget. On May 22, as part of the rulegoverning debate on supplemental appropriations, the House approved a measure deeming thebudget resolution, as approved in the House, to have been passed for purposes of guiding later actionon funding legislation.

FY2002 Supplemental Appropriations. On March 21, the Administration submitted a request for $27.1 billion in supplemental FY2002 appropriationsfor activities in response to last year's terrorist attacks, of which $14 billion was for defenseprograms. On May 24, the House approved its version of the bill, H.R. 4775 , providing$28.8 billion using Office of Management and Budget (OMB) scoring of a key provision (asassumed by the appropriations committee) and $30.1 billion using Congressional Budget Office(CBO) scoring. The Senate approved its version of the bill on June 7, providing $31.4 billion. OnJuly 18, conferees announced agreement on a compromise bill that provides $28.9 billion, including$14.5 billion for defense. The House approved the conference report on July 23 and the Senate onJuly 24, and the President signed the bill on August 2 ( P.L. 107-206 ). Of the total in the bill, $5.1billion was provided in contingent emergency appropriations, and on August 13, the White Houseannounced that the President would not designate those amounts as emergency funding. Withoutthose amounts, the total available for defense in the bill is $13.983 billion offset by $613 million inrescissions.

Table 1a. Status of FY2003 Defense Appropriations

Table 1b. Status of FY2003 DefenseAuthorization

The FY2003 Defense Budget Debate

On February 4, 2002, the Administration submitted its formal FY2003 budgetrequest to Congress. The Administration proposed $396.8 billion for the nationaldefense budget function, about $46 billion above the estimated FY2002 level (for anoverview of the request, see Appendix B ). Of the total requested, $3.4 billion wasfor full accrual accounting of civilian personnel retirement benefits, which Congressultimately did not approve. Without the accrual accounting change, the request was$393.4 billion. Of this amount, $366.7 billion was requested for programs coveredby the defense appropriations bill, $9.7 billion by the military constructionappropriations bill, $16.5 billion for Department of Energy defense-related activitiesfunded in the energy and water appropriations bill, and the remainder in otherappropriations bills.

With a global war against terrorism underway, Congress was not inclined to make substantial changes in the Administration's request for a defense increase. Early in the year, however, there was some skirmishing, particularly between thedefense committees and the budget committees, over two issues:

first, how to treat the Administration's request for $10 billion in FY2003 in an unallocated contingency fund for the war against terrorism and,

second, how to treat the Administration's request for full accrual accounting of civilian retirement benefits, which, across the wholegovernment, would increase discretionary spending by about $9 billion and reducemandatory spending by an equal amount (see Appendix B for a discussion of accrualaccounting).

National Defense Funding in the FY2003 Budget Resolution

For their part, the congressional defense committees would have preferred to be able to allocate the entire amount the Administration requested for national defenseas they saw fit. The House Budget Committee, however, set aside the $10 billionrequested for war costs in a reserve fund available only for that purpose. The Housealso set aside funds for civilian accrual accounting in a reserve fund, while the SenateBudget Committee rejected the shift to full accrual accounting altogether. Table 2 shows amounts recommended for national defense in the House and Senate versionsof the budget resolution, compared to the Administration request.

The House approved its version of the FY2003 budget resolution, H.Con.Res. 353 , on March 20 by a vote of 221-209. In all, the measurerecommended $393.8 billion for the national defense budget function in FY2003, but$10 billion of that amount was in the reserve fund available only for costs of theglobal war against terrorism. An additional $3.4 billion, not shown in the nationaldefense total, was available for defense in the reserve fund to cover costs of accrualaccounting, if Congress approved it.

The Senate Budget Committee version of the resolution, S.Con.Res. 100 , was reported on March 22 but was never brought up onthe Senate floor. The committee recommended $393.4 billion for national defensein FY2003 and explicitly rejected a shift to full accrual accounting for civilianemployees. The committee also recommended lower levels of defense spending afterFY2004 than either the House or the Administration, though the committee set asidefuture funds in a reserve to be available either for defense or deficit reduction. Recommended national defense funding levels in the budget resolution are notbinding on the appropriations committees, however, which are free to allocate fundsfor discretionary programs as they decide.

Table 2. Congressional Budget Resolution, Recommended Amounts for National Defense, FY2003-FY2007 (billions of dollars)

Sources: H.Con.Res. 353 ; S.Con.Res. 100 .

Treatment of Full Civilian Accrual Accounting

The $9 billion requested for full civilian accrual accounting was at the center of debate over the total amount available for appropriations bills. The House-passedbudget resolution provided $759 billion in total discretionary funding to theappropriations committee, which is equal to the Administration request without the$9 billion government-wide cost of shifting civilian accrual payments from themandatory to the discretionary side of the budget. The Senate reported version of thebudget resolution, however, provided $768 billion in discretionary funds, though itdid not assume that Congress would approve the shift of accrual funding. As a result,without the $9 billion for accrual accounting, the House ended up marking upappropriations bills with $9 billion less than the Senate. Eventually, this contributedto a deadlock, and none of the appropriations bills, except for defense and militaryconstruction, have been enacted.

Treatment of $10 Billion Contingency Fund for Global Counter-Terrorism

How to treat the $10 billion that the Administration requested as an unallocated contingency for war costs was a matter of ongoing discussion. On May 22, theHouse approved H.Res. 428 , the rule governing debate on the FY2002supplemental appropriations bill ( H.R. 4775 ), which includes aprovision "deeming" the budget resolution, as passed by the House, to be in effectfor purposes of subsequent House action on appropriations and other funding bills. Appropriators wanted the "deeming" language amended to allow the appropriationscommittee to remove the reserve fund designation for the contingency funding, thusletting the committee use the $10 billion as it decided. In the face of objections fromsome conservatives, however, the House leadership did not agree, and the deeminglanguage refers to the measure as passed by the House on March 20.

The debate over treatment of the $10 billion contingency fund for war costs played out further in congressional action on the defense authorization bill. TheHouse Armed Services Committee approved the $10 billion in a separate bill, H.R. 4547 , the Cost of War Against Terrorism Authorization Act, andused part of the money in that bill to finance programs that otherwise would havebeen included in the regular authorization bill - see below for a full discussion. Inthe end, however, the conference agreement on the defense authorization billapproved the $10 billion as requested as an unallocated contingency fund for costsof the war against terrorism. That amount was not appropriated, however. Theappropriations committees did not act on the $10 billion contingency request at all,though funding for counter-terrorism activities may be addressed next year in asupplemental appropriations measure.

Appropriations Action

The House version of the defense appropriations bill, H.R. 5010 , approved on June 27, provided $354.7 billion for defense activities it covers(excluding military construction programs, Department of Energy defense-relatedactivities, and defense-related activities of some other agencies). This was $12.1billion below the amount requested, of which $10 billion was the counter-terrorismcontingency amount. The additional $2.1 billion reduction in defense was thenavailable for other appropriations bills, including the military construction bill, whichwas $541 million above the request, and the energy and water bill, which includesdefense-related programs. The Senate version of H.R. 5010 , approvedon August 1, provided $355.4 billion, $11.4 billion below the request. Theconference agreement on the defense appropriations bill provides $255.1 billion,$11.6 billion below the request. (See Table C2 in the Appendices for details).

Key Issues in Congress

Along with negotiations about the overall level of defense spending, there wasconsiderable debate in Congress about priorities within the budget and about anumber of specific programs. The most contentious issue was whether to permitconcurrent receipt of military retired pay and veterans disability benefits. The Houseauthorization bill included a provision to phase in partial concurrent receipt. TheSenate bill included a measure approved on the floor to provide immediate, fullconcurrent receipt. The White House Statement of Administration Policy on theSenate bill threatened to veto any bill that includes either partial or full concurrentreceipt. The conference agreement on the defense authorization bill provides abenefit payment only to military retirees with a disability determined to be caused bya combat or combat-related injury.

Another major issue emerged at the beginning of May, on the eve of the House Armed Services Committee markup of the defense authorization bill, when thecommittee received word that the Office of the Secretary of Defense (OSD) haddecided to terminate the Army Crusader self-propelled artillery program. Thecommittee did not agree to end the program, however, and it included full fundingfor the Crusader in the bill that passed the full House. Subsequently, however, aswork on defense funding bills proceeded, Congress agreed to terminate the program,though it added money for a new artillery system that the Administration had notrequested.

A major issue in the Senate debate over the authorization bill was the level of funding for missile defense. The Senate Armed Services Committee reducedrequested missile defense R&D funds by more than $800 million, freeing up fundsfor, among other things, increased shipbuilding. Eight Republicans on theCommittee voted against reporting the bill, several citing the missile defense cut asthe reason. In floor action, however, the Senate voted to allocate $814.3 million inanticipated inflation savings either to missile defense or to counter-terrorism.

Other major issues over the course of the year included provisions concerning environmental limitations on military training, missile defense funding andmanagement, and nuclear weapons development and testing.

The following discussion provides an overview of major elements of the Administration's request and of congressional action to date, with particularlycontroversial items highlighted.

Counter-Terrorism Funding

The Administration requested a total of $19.4 billion in the FY2003 defense budget for costs of the global campaign against terrorism. Of the total, $10 billionwas requested as an unallocated reserve for future, as yet unplanned militaryoperations, and the remaining $9.4 billion was requested for specified activities. Allof the money, and an additional $700 million to support programs identified in theAdministration's Nuclear Posture Review, was requested to be appropriated to theDefense Emergency Response Fund (DERF), a transfer account from which moneywould then be allocated to operating accounts of the services. This would allow theDefense Department considerable flexibility in using the money, since funds can beshifted to different activities without going through normal reprogrammingprocedures.

The counter-terrorism amounts requested for FY2003 are to carry on activities that were financed in FY2001 and FY2002 mainly through emergency supplementalappropriations. Last autumn, Congress appropriated $40 billion for responding to theterrorist attacks of September 11, of which $17.1 billion was devoted to defenseprograms. On March 21, 2002, the Administration sent Congress a request for anadditional $27.1 billion in FY2002 supplemental appropriations for responding to theterrorist attacks, of which $14.0 billion was for defense. On July 23, the House, andon July 24, the Senate, approved a conference agreement on a bill providing $28.8billion in supplemental appropriations for FY2002, of which$14.5 billion is fordefense. Of the total in the bill, $5.1 billion was appropriated as contingentemergency funding, which requires the President to designate the funds as anemergency before it is made available. The White House has announced that it doesnot intend to designate the funds as an emergency, however. Of the $5.1 billion thatwill not, therefore, be available, $983 million is for defense. (For a full discussion,see CRS Report RL31406 , Supplemental Appropriations for FY2002: CombatingTerrorism and Other Issues, by [author name scrubbed] and [author name scrubbed].)

Congressional Action. None of the congressional defense committees agreed to provide the $9.4 billion requested forspecific counter-terrorism programs in the DERF. Instead, all the committeesallocated funding to regular operating and acquisition accounts in the authorizationand appropriations bills. All the committees also reduced funding for combat airpatrols and for some other programs requested in the DERF.

In the end, Congress did not provide the $10 billion requested as an unallocated contingency fund, though it may provide part or all of the amount requested next yearin a supplemental appropriations measure. The House Armed Services Committeeconsidered the $10 billion in a separate bill, H.R. 4547 . In preliminarymarkup of the bill on May 1, the committee allocated $3.6 billion to specificprograms - later, that amount was reduced to $3.1 billion. All but about $200million of that amount is for programs the Administration requested as part of the$9.4 billion in specifically allocated counter-terrorism money. In effect, thecommittee freed up about $3 billion of funds for other programs in the regularauthorization bill by using some of the $10 billion in the unallocated contingencyfund for counter-terrorism projects that otherwise would have been financed in theregular authorization.

The Senate Armed Services Committee authorized the full $10 billion in a general provision (Section 1003) of its version of the authorization bill. Theprovision authorized the full $10 billion for continuation of the war on terrorism,subject to a specific request for the funds and to subsequent appropriations.

On July 3, after considerable prodding from Congress, the Administration submitted a formal budget amendment revising its request for the $10 billion. TheAdministration did not provide significantly more detail on the allocation of thefunds, however. Instead, the revised request would authorize the Secretary ofDefense to transfer the $10 billion to various DOD appropriations accounts 15 daysafter notifying Congress of the transfer. The letter accompanying the requestestimated that up to $2.55 billion would be for military personnel accounts, up to$5.57 billion for operation and maintenance accounts (including the Defense HealthProgram and Overseas Humanitarian, Disaster, and Civic Aid), military constructionor working capital funds; and up to $1.88 billion for appropriations for procurementor research development. (The full text of the request is available electronically at: http://w3.access.gpo.gov/usbudget/fy2003/pdf/15dod_amend.pdf .)

On July 18, the House Armed Services Committee marked up and reported a revised version of H.R. 4547 . It provided $3.1 billion allocated tospecific programs, with another $6.9 billion in very broad categories. The Housetook up the bill under suspension of the rules late in the evening of July 23, and thebill was passed on July 24. Taken together, the regular defense authorization bill, H.R. 4546 , and the Cost of War Against Terrorism Authorization, H.R. 4547 , as passed by the House, authorized $392.8 billion fornational defense.

In the end, however, Congress did not approve the House Armed Services Committee's effort to use part of the contingency fund for war costs to finance anincrease in other defense programs. The conference report on the defenseauthorization bill provides $10 billion as an unallocated reserve for war costs, asrequested, and as in the Senate version of the bill.

More importantly, the disposition of the $10 billion requested for counter-terrorism ultimately depended on what happened in appropriations bills. Theconference report on the defense appropriations bill does not provide any of themoney, and the appropriations committees did not take up separate legislation toprovide additional funding for the war on terrorism.

Personnel Pay and Benefits

The Administration request included a 4.1% pay raise for military personnel; additional selective pay increases for mid-grade personnel that could increase theirpay raise to 6.5%; the extension of special pays and bonuses to bolster retention ofpersonnel with critical skills; and continued incremental increases in the basicallowance for housing intended to eliminate out-of-pocket off-base housing costs byFY2005.

Congressional Action. Pay raises and benefits for uniformed military personnel and authorized military end-strengthare under the jurisdiction of the Armed Services Committees and are addressed in theannual defense authorization bill. The defense appropriations bill formally providesfunding for military personnel, but it does not authorize the pay raise or benefits,though it sometimes makes changes in some personnel-related activities.

Both the House and the Senate Armed Services Committees approved the Administration's proposed pay and benefits increases, and the authorizationconference report provides the full 4.1% pay raise and other targeted pay increasesas requested. A number of significant personnel related issues emerged, however. The major issue concerned concurrent receipt of retirement and disability benefits. Other issues included House cuts in funding for health benefits accrual and a Houseand Senate increase in authorized active duty military end-strength.

Concurrent Receipt of Retirement and Disability Benefits. Under current law, military retirees - who leaveafter 20 years or more of service - are eligible for payments from the VeteransAdministration (VA) for service-connected disabilities, but their military retirementpensions are reduced by the amount of disability benefits received. Individuals whoqualify often accept the disability benefits, however, because VA disability paymentsare not taxed, while pensions are.

Veterans organizations have long argued that individuals should be able to receive both full retirement pensions and VA disability benefits without any offset. Last year, Congress approved a measure to phase in partial concurrent receipt (as inthe House plan this year), but it was contingent on the Administration taking stepsto fund the measure, and the Administration did not do so. This year, concurrentreceipt was a critical issue both in the House and in the Senate.

The House-passed authorization bill approved a plan to phase in a measure that would allow military retirees with a disability of 60% or greater to receive bothdisability benefits and retirement pensions. Allowing phased in, partial concurrentreceipt, as in the House bill, would cost an estimated $516 million in FY2003, $5.8billion over the five years from FY2003 through FY2007, and $17 billion over tenyears through FY2012. These amounts would be scored not as discretionary fundingin the defense bills, but as mandatory spending coming either from mainly from themilitary retirement trust fund.

The measure would also require an increase in contributions to the military retirement fund to cover the accrual cost of the increased benefits payable in thefuture to current military personnel. The House measure provides that the accrualpayments will be made from the general Treasury, however, rather than fromdiscretionary funds in the defense budget. Including both increased payments toretirees and payments from the general fund into the military retirement fund, theCongressional Budget Office estimates that the total budget cost of the House planwould be $1.1 billion in FY2003, $8.8 billion over the five years, FY2003-FY2007,and $22.6 billion over the next ten years through FY2012. (1)

The Senate Armed Services Committee included a similar, phased in, partial measure in its reported bill, but the committee also voted to offer an amendment onthe floor that would immediately allow full concurrent receipt of disability and retiredpay regardless of the level of disability. Senators Levin and Warner brought up thatamendment on the floor on June 19, and it was approved by a voice vote. TheSenate-passed measure did not insulate the Defense Department from the accrualcosts of the increased benefits as the House measure did. CBO estimated that theSenate version of concurrent receipt would cost $4.3 billion in FY2003, $25.8 billionover the next five years, and $61.0 billion over the next ten years. Of those amounts, the Defense Department would have to provide $1.1 billion in FY2003, $2.5 billionover the next five years and $6.4 billion over the next ten years in its budget to coveraccrual payments for its current military personnel. (For a full discussion of thebudget issues, see CRS Report RS21327, Concurrent Receipt of Military Retirementand VA Disability Benefits: Budgetary Issues , by [author name scrubbed].)

For its part, the Administration opposed permitting concurrent receipt. In its "Statement of Administration Policy" on the Senate authorization bill (available at http://www.whitehouse.gov/omb/legislative/sap/107-2/S2514-s.html ), the WhiteHouse threatened to veto the defense authorization if it provided for either partial orfull concurrent receipt. The Defense Department also threatened a veto in thepackage of appeals of provisions in the House and Senate authorization bills that itsent to the Armed Services Committees on July 24 and in a letter that Secretary ofDefense Rumsfeld sent to Senator Levin and Senator Warner on September 24.

The dispute over concurrent receipt held up a conference agreement on the defense authorization bill until after the November elections. On November 12,during the 107th Congress's lame duck session, authorizers announced a compromiseon the issue that provides a new benefit for retirees who are determined to have adisability caused by a combat or combat-related injury. Payments would be made toall retirees with a disability of 10% or greater resulting from an injury or wound forwhich the retiree was awarded a Purple Heart. Payments would also be made toretirees with a disability of 60% or more resulting from combat-related activities,which include injuries received as a direct result of armed conflict, while engaged inhazardous service, while performing duty under conditions simulating war, orthrough an instrumentality of war. As explained by the bill managers on the Housefloor on November 12 (see Congressional Record , pp. H8536-8537), injuries causedby instrumentalities of war include an injury cause by a mine, accidents duringcombat, or sickness caused by fumes, gas, or military ordnance. The amount of thepayment to each individual will be equal to the amount that would be paid as a VAdisability benefit.

Exactly how many retirees will qualify for the new benefit is not known; preliminary estimates are in the range of 30,000. The Defense Department isresponsible for administering the program, and it will have to establish criteria fordetermining eligibility. Table 3 shows a preliminary Congressional Budget Office(CBO) estimate of the costs.

Table 3: Preliminary CBO Estimate of Costs ofCombat Related Disability Benefits (by fiscal year in millionsof dollars)

Source: Congressional Budget Office.

As the provision is written, these amounts will be paid directly by the Defense Department out of its current budget rather than from the military retirement fund. These amounts, therefore, will be subject to annual appropriations. The FY2003defense appropriations bill, which was passed before the authorization bill, did notprovide funding. To cover the costs, the Defense Department may reprogram moneyor request supplemental appropriations.

Reduction in Funding for Estimated Cost of Retiree Health Care Benefits. When it submitted its budget request, theAdministration estimated that the Defense Department would have to pay $8.1 billionin FY2003 into the retiree health care reserve fund for accrual costs of 65-and-overhealth care benefits (see the discussion of accrual accounting in Appendix B, below). Later officials said that DOD actuaries were expected to reduce the estimated costwhen they convened later in the year. The House Armed Services Committeereduced military personnel funding by $810 million, 10% of the estimated cost ofhealth benefits accrual. Representative Spratt, the second ranking Democrat on thecommittee, criticized this measure, saying that the $810 million is at the upper limitof the amount DOD said might be saved. If defense actuaries did not revise their costestimate as much, there could be a shortfall of several hundred million dollars inmilitary personnel accounts.

The House Appropriations Committee reduced funding for health benefits accrual by $405 million, the lower end of DOD estimates of likely savings. TheSenate Appropriations Committee reduced accrual contributions by $372.6 millionto reflect changes in retiree health benefits that were approved in the FY2002 defenseauthorization act ( P.L. 107-107 ). The committee also said it would revisit theamount of accrual contributions after defense actuaries met. The Administrationpackage of appeals on the House and Senate authorization bills opposed the Houseauthorization measure. The conference agreement on the defense appropriations billreduces funding for health benefits accrual by $405 million.

Increase in Personnel End-Strength. The House Armed Services Committee approved an increase of 12,552 in active dutyend-strength, including increases in full time guard and reserve personnel. TheHouse-passed authorization bill provided $528 million in FY2003 to cover associatedcosts in the military personnel accounts. Each of the military services has requestedan increase of personnel end-strength recently, with Army seeking the largestincrement of as many as 40,000 additional soldiers over the next few years. Secretary Rumsfeld has resisted increases, however, arguing repeatedly that addedpersonnel would be very expensive over the long term and that measures shouldinstead be taken to reduce demands on the force.

It was not clear whether the House Armed Services Committee intended the end-strength increase to be a temporary measure related to the war against terrorismor a permanent addition to the force. Once fully phased in, an increase of 12,552 inend-strength would cost more than $1 billion a year in the personnel accounts (see Table 4 ), with additional costs required in operation and maintenance accounts tofully train, sustain, and equip the added troops.

Table 4. Congressional Budget Office Estimate of the Costs of the House Armed Services Committee Increase in Active Duty End-Strength (budgetauthority in millions of dollars)

Source: Congressional Budget Office.

The Senate Armed Services Committee did not include an increase in end-strength in the authorization bill it reported. But on the floor on June 27, theSenate approved an amendment offered by Senators Cleland and McCain to increaseauthorized active duty end-strength by 12,000. Senator Cleland called for an increaseof 40,000 service members over the next five years. The Defense Department'spackage of appeals on the authorization opposed any increase in end-strength.

The House Appropriations Committee did not approve an increase in end-strength, arguing that requirements are uncertain. The committee report said thatany increase that might be needed in FY2003 should be addressed in a supplementalappropriations request. The Senate Appropriations Committee also did not approvean increase in end-strength. The appropriations conference report does not includefunds for an overall increase in end-strength.

The conference agreement on the defense authorization bill does not include an increase in end-strength. In report language, conferees said that an increase is neededbut that the appropriations bill did not provide enough money. The conferenceagreement also allows the Secretary of Defense to increase end-strength by up to 3%above the authorized level - standing law had allowed a 2% increase - and it givesthe military service secretaries independent authority to increase end-strength by upto 2%. The agreement also establishes a floor on end-strength equal to the requestedlevels, and it repeals a measure that allowed the Secretary of Defense flexibility toreduce end-strength below authorized levels.

Army Modernization

The Army's modernization plan involves three overlapping initiatives: one, to upgrade and recapitalize the existing "legacy" force of heavy armored forces; asecond to build new, more easily deployable "interim brigade combat teams"; and athird to develop the "objective force" of the future.

Key elements of legacy force modernization include upgrading existing weapons with digitized communications links and new surveillance and reconnaissancecapabilities. The most controversial elements of the plan have been the Comanchehelicopter, which has experienced repeated development delays and cost increases,and the Crusader artillery system.

The central element of the interim force is a new light armored vehicle, recently named the "Stryker." Congress has supported the interim force concept, althoughthere has been some debate about the characteristics of the armored vehicle. In thepast, the issue was whether it should be a tracked vehicle instead of the wheeledsystem the Army has selected. More recently, the issue has been whether the newvehicle will be transportable on C-130 airlift aircraft.

The key element of the objective force is the "Future Combat System," which is an integrated suite of capabilities, including new armored systems and alsoimproved communications, intelligence, and surveillance capabilities. The Army'sFY2003 budget request includes funds to accelerate FCS development.

Congressional Action. Congress has generally supported the Army's modernization plan, including plans for theinterim combat brigade teams and development of the Future Combat System. Butseveral issues have been contentious, including funding for the Crusader artillerysystem, and for some Army helicopter programs.

Crusader Artillery System. One of the most contentious issues in the defense budget this year was the fate of the Crusaderself-propelled artillery system. Advocates of defense transformation have long beencritical of the program, arguing that the 40-ton system is not readily deployable. Supporters of the system responded that the weight has been reduced substantiallyand that the system was needed to allow artillery to keep up with rapidly movingarmored forces on the battlefield. On the eve of the House Armed ServicesCommittee markup of the defense authorization bill, Deputy Secretary of DefenseWolfowitz informed committee members that DOD was ordering the Army toprepare an analysis of alternatives to the Crusader within 30 days, a step towardcanceling the $11 billion program. DOD officials later confirmed that SecretaryRumsfeld intended to terminate the project.

The Crusader had considerable support in Congress, however. In the authorization markup the House Armed Services Committee provided the full $475.6million for Crusader R&D that was in the Administration's February budget request. The Committee also included language in its report on the bill, though not in thestatutory language of the measure, that prohibits a cut in funding until after a moreextensive, formal analysis of alternatives was completed, which likely would not beuntil April 2003. This prompted the White House to threaten a presidential veto ofany bill if it included any statutory provisions limiting the Administration's abilityto cancel the program. The Rules Committee did not permit any floor amendmentsto reduce Crusader funding.

When it marked up its version of the authorization bill on May 9, the Senate Armed Services Committee deferred action pending a committee hearing on theCrusader. The reported bill included $475.6 million for Crusader. But whenreporting the bill, committee Chairman Carl Levin said that the committee mightoffer an amendment to reduce funding when the bill is on the floor. Later, SenatorLevin said that DOD's civilian leadership had not given the Army adequate time toreview the alternatives to the Crusader that civilian officials supported.

On May 29, the Administration formally submitted an amendment to its defense budget request asking Congress to allocate the Crusader funding to other Army R&Dprograms, including the Future Combat System, the Excalibur precision artilleryprojectile, the Army tactical unmanned aerial vehicle, and a new precision guidedmortar munition (see Table 5 ).

Table 5: Crusader Budget Amendment/Non-Line of Sight Cannon Funding: Appropriations Action (budget authority in thousands ofdollars)

Source: FY2003 Defense Appropriations Conference Report, H.Rept. 107-731 , p. 257.

On June 13, the Senate Armed Services Committee held a closed session to consider action on the Crusader. The committee approved an amendment that wouldfence Crusader funding for 30 days after the bill is signed into law and require theArmy to complete a study of alternatives during that time. Subsequently the measure

would permit the Secretary of Defense to submit a request to the congressionaldefense committees to reprogram the money into other Army indirect fire weaponsdevelopment. Senator Levin proposed the committee amendment on the floor onJune 19. Senator Warner then offered a second degree amendment to permit theSecretary of Defense to allocate funds to other development programs withoutseeking congressional permission through a reprogramming request. The Warneramendment was agreed to by unanimous consent, and the Levin amendment, asamended by Warner, was subsequently approved by a vote of 96 to 3.

Subsequent to House and Senate action on the defense authorization bill, however, the issue was resolved in a fashion acceptable to the Administration. In itsversion of the defense appropriations bill, the House Appropriations Committeeagreed to terminate the Crusader program and to fund the alternatives that theAdministration proposed in its May 29 budget amendment. But the committee alsosaid that development of an alternative indirect fire system must be coupled withdevelopment of an appropriate platform to carry a new cannon. The committeetherefore added $173 million to develop a platform and new munitions andspecifically earmarked funds for that purpose in a general provision. The generalprovision also required a system to be delivered by 2008. Like the House, the SenateAppropriations Committee added $173 million for a non-line of sight cannon to bedeployed by 2008.

The conference agreement on H.R. 4775 , providing supplemental appropriations for FY2002, includes legislative language directing the Army to enterinto a follow-on contract immediately to develop and field a next generation non-lineof sight cannon artillery system by 2008. Subsequently, on July 31, August 1, andAugust 2, all four of the congressional defense committees sent letters to the DefenseDepartment approving a DOD request to reprogram FY2002 funds from the Crusaderto the Army's Future Combat System development program.

Like the House and Senate appropriations bills, the conference agreement on the defense appropriations provides most of what the Administration proposed in itsCrusader budget amendment and adds $173 million for a non-line of sight cannon tobe deployed by 2008.

UH-60, CH-47, and TH-67 Helicopters. The defense committees took different actionson several Army helicopter programs. The House authorization bill added $115million for 8 additional UH-60 Blackhawk utility helicopters and one simulator andspecified what versions to buy. The House appropriations bill added funds for 4helicopters and a simulator. The Senate authorization and appropriations bills added$96.7 million for 9 aircraft allowing the Army to allocate the funds. The conferencereport on the defense appropriations bill provides $269.9 million for 19 Blackhawks,an increase of $116.6 million for seven additional aircraft, and, as in the Houseauthorization, specifies which models to procure and which components will receivethem.

Funding for the CH-47 cargo helicopter was more contentious. The House authorization added $13.5 million to the on-going modification program forcrashworthy seats. The Senate authorization as reported had $4 million forcrashworthy seats, but this was reduced in floor action as offsets for other programs. The Senate appropriations bill added just $1 million for crashworthy seats. TheHouse appropriations bill, however, added $45 million to the modification plan toincrease the production rate and instructed the Army to plan to upgrade all CH-47sto the most modern "F" version over the next several years. The appropriationsconference adds $39.1 million to support an increased production rate and directs theArmy to ensure that all requirements for upgraded aircraft are fulfilled by 2016.

The House authorization and appropriations bills and the Senate appropriations bill added funds for 6 TH-67 training helicopters. The Senate authorization providedno funds. The appropriations conference agreement provides $9.6 million for sixaircraft.

Comanche Helicopter. The Comanche helicopter program has also been a target of criticism from some transformationadvocates. Last year, the program cost increased, the development plan wasrestructured, and projected procurement was delayed. DOD reportedly consideredcanceling the Comanche as one of a number of steps to reduce the procurement "bowwave" at the end of the decade. The House Armed Services Committee included ameasure in its version of the defense authorization bill to establish a cap of $6 billionon total engineering and manufacturing development (EMD) costs for the Comanche- a level that now appears to be below the amount the Army is projecting fordevelopment of just the first versions of the aircraft. The House bill also required anannual review of the EMD program by the Defense Department's Inspector General. In its report on the defense appropriations bill, the House Appropriations Committeewarned that its support for the Comanche program is in jeopardy because of delaysand cost growth, and the committee urged the Army to begin exploring low-costalternatives.

For its part, the Defense Department has also been scrutinizing the program, and in October the DOD's decision-making body, the Defense Acquisition Board,decided to cut planned procurement of the Comanche by about half. The conferencereport on the authorization bill eliminates the House cap on EMD costs and therequirement for an Inspector General review but requires quarterly reports toCongress on the status of the program.

Other Army Weapons Programs. There were a number of significant differences between the various bills on severalother Army programs. The House and Senate appropriations bills eliminated fundsfor the Wide Area Munitions program and instructed DOD to terminate it. TheHouse authorization and appropriations bills added $60 million for Bradley fightingvehicle upgrades for the National Guard, while the Senate authorization andappropriations bills added no money. The House authorization also added $45million to upgrade tank recovery vehicles for the National Guard. The House billsand the Senate appropriations bill added money for up-armored HMMWVs. TheHouse bills both cut money for ATACMs Block II missiles, but the Houseauthorization added back money to upgrade some Block I missiles. The Senateappropriations bill eliminated funds for Block II missiles. The House authorizationadded $61 million for SINGCARS radios and the House appropriations added $17million. The Senate authorization, however, cut $22.1 million that was requested forthe program in the DERF. The Senate appropriations bill provided the amountrequested, including the$22.1 million requested in the DERF. Both the House andthe Senate appropriations bills eliminated R&D funds for the Brilliant Anti-ArmorSubmunition (BAT) Product Improvement Program, though neither version of theauthorization bill reduced funding. Both House bills shifted funds for PAC-3anti-aircraft missile procurement from the Army to the Missile Defense Agency, butthe Senate bills did not.

The defense appropriations conference report terminates the Wide Area Munitions program, adds $48 million for Bradley upgrades, eliminates funds for theATACMS Block II, but adds money to upgrade Block I missiles, adds $11.9 millionfor SINGCARS radios, provides funds for up-armored HMMWVs, and terminatesthe BAT Product Improvement Program. The conference agreement also follows theHouse and shifts Patriot PAC-3 procurement from the Army to the Missile DefenseAgency.

Stryker-Equipped Interim Combat Brigades. The Army now plans to outfit six brigades (acombat division has three brigades plus support and command units) with the new"Stryker" light armored combat vehicle. These brigades are designed to be morerapidly deployable than heavy armored units but more capable and survivable thanlight infantry or airborne units. These units are intended to be an interim approachto transformation of the Army while development of the Future Combat Systemproceeds. Recently, there have been reports that the Defense Department isconsidering a measure that would reduce the number of Interim Combat Brigades tothree. This is one of many options DOD is considering in preparing theFY2004-FY2009 defense plan. Congress has not debated any specific proposal toreduce the number of new brigades, and the Administration has not yet decided onthe proposal. But the appropriations conference report adds $59.5 million for Strykerbrigade deployment and includes a general provision, Section 8121, that requires theArmy to budget for six brigades.

Table 6: Appropriations Action on Major Army Acquisition Programs (amounts in millions of dollars)

Source: H.Rept. 107-532 ; S.Rept. 107-213 ; H.Rept. 107-732 .

Navy Shipbuilding

The pace of Navy shipbuilding was a major focus of attention in Congress this year. The FY2003 budget request included funds for five new ships, far short of the8.5 ships per year needed, in principle, to sustain a fleet of 300 ships, which has longbeen the Navy's goal.

Congressional Action. The House Armed Services Committee provided funds to procure an additional DD-51 destroyeron condition that the Justice Department reach as settlement with General DynamicsCorporation in the long-standing A-12 termination lawsuit. The tentative settlementwould have provided $385 million in advance procurement for Virginia-classsubmarine acquisition. By the time the authorization and appropriations conferenceagreements were being negotiated, however, that settlement had failed.

In the absence of a settlement, the House authorization added $810 million to be distributed among several shipbuilding programs, including $415 million forVirginia class submarine advance procurement, $210 million for cruiser conversionadvance procurement, and $185 million for a nuclear submarine refueling overhaul. The committee also added funds to accelerate procurement of the next aircraft carrier,the CVN(X). The Navy plan to procure the ship had slipped by one year, with halfthe funding to be requested in FY2007 and the remainder in FY2008. The committeeadded $229 million in advance procurement to accelerate production and instructedthe Navy wants to move the start date back to FY2006.

The Senate Armed Services Committee also added a significant amount for Navy shipbuilding, including $690 million that Senator Levin said was transferredfrom missile defense R&D. The committee additions included $415 million inadvance procurement for Virginia-class attack submarines, $200 million for refuelingrather than retiring an SSN-688 Los Angeles-class attack submarine, $150 millionin advance procurement for LPD-17 amphibious ships, and $125 million in advanceprocurement for DDG-51 destroyers. Like the House Armed Services Committee,the Senate Armed Services Committee provided $229 million to accelerate CVN(X)procurement.

The House Appropriations Committee took a substantially different approach to shipbuilding in general and to aircraft carrier procurement in particular. Ratherthan provide money to accelerate CVN(X) procurement, the committee added $250million for the CVN-77 carrier, which is now being built, and instructed the Navy toincorporate a more advanced radar and other electronic systems into the ship as atransition to the CVN(X). The committee did not add money for other majorshipbuilding programs, and it eliminated $253 million requested for the LHD-8amphibious assault ship - this ship was started in FY2001 and is being incrementallyfunded through FY2006.

The Senate Appropriations Committee added a substantial amount for shipbuilding, but it allocated funding quite differently from the other committees. The committee added $530.9 million to cover cost overruns on LPD-17 amphibiousships, DDG-51 destroyers, and Virginia-class submarines approved in prior years,while it reduced funding requested for advance procurement for the same programs. The committee also criticized the Navy for overusing advance procurement, sayingthat it should only be employed for long lead components of ships and that it shouldnot comprise as large a share of the total cost of ships as it has in recent years. Thecommittee also added $306 million to pay for the cost of an agreed transfer of workon LPD-17s and DDG-51s between the two major shipbuilders. Like the authorizingcommittees, the committee provided $229 million to accelerate CVN(X) procurementand about $200 million for an SSN-688 attack submarine refueling overhaul.

The appropriations conference report adds $90 million, rather than the $250 million in the House bill, to incorporate advanced electronics on CVN-77. Theconference report provides $160 million, rather than the $229 million in the Senatebill, to restore the CVN(X) procurement schedule. As in the Senate bill, theconference report provides $530.9 million in added money for prior year cost growth. The agreement provides $243 million for LHD-8, rejecting the House reduction. Asin the Senate bill, the agreement provides $165 million for an additional SSN-688refueling overhaul.

After congressional action on the authorization and appropriations bills was well underway, a new issue arose when the Navy announced that it planned to acceleratedevelopment of a new, smaller vessel called the Littoral Combat Ship (LCS). TheLCS program was one element of the Navy's plan to develop a series of new shipsunder the DDX program that was announced in 2001 after the DD-21 destroyerprogram was canceled. During the summer of 2002, the Navy said it wanted topursue the LCS more rapidly, and it informally asked Congress for additional moneyto begin studying alternatives. The Senate report on the authorization bill included$4 million for the program. The program had not undergone the review process thathas normally been part of the acquisition process, however, which includes, amongother things, a formal assessment of requirements for a new system, projections ofthe program schedule and costs, and an analysis of alternatives. The defenseauthorization conference report provides $4 million for the program, but it includesa long discussion of the need for a thorough review of program requirements andalternatives, and it requires DOD and the Navy to report to Congress on theassessments that had previously been required under DOD acquisition regulations.

Table 7: Appropriations Action on Major Navy Shipbuilding Programs (amounts in millions of dollars)

Sources: H.Rept. 107-532 ; S.Rept. 107-213 ; H.Rept. 107-732 .

Aircraft Programs

Funding for several major aircraft programs was included in the FY2003 Administration request, including Marine Corps V-22 tilt rotor aircraft developmentand procurement; Air Force F-22 fighter development and procurement; Air Forceand Navy F-35 Joint Strike Fighter development; Navy F/A-18E/F multirole fighterprocurement; and C-17 cargo aircraft procurement. The Navy has reportedly beenconsidering reducing future planned F-35 procurement, but this has not affectedcongressional support for the program to date.

Congressional Action. Both the House and Senate Armed Services Committees approved requested funding for mostmajor aircraft programs, including the F-22, F-35, V-22, and C-17. The HouseArmed Services Committee added funds for a few lower profile programs, includingtrainer aircraft, Navy helicopters, and F-15 communications upgrades. The SenateArmed Services Committee added funds to procure an additional 4 F/A-18EFfighters for the Navy and Marine Corps. Both committees added funds for EA-6Belectronic warfare aircraft upgrades. The House Appropriations Committee addedfunding for F-22 R&D, but otherwise made few changes in the request for majoraircraft programs. The Senate Appropriations Committee added funds for 4additional F/A-18E/F fighters. The committee also added money to fully fundprocurement of C-17 aircraft.

The appropriations conference report adds $120 million for 2 additional F/A-18E/F aircraft, half as many as in the Senate bill. The committee also addedmoney to fully fund C-17 procurement.

C-17 Funding Profile. One rather technical, but potentially significant issue this year was whether the funding approachthat the Air Force proposed for future C-17 procurement sets a precedent that woulderode DOD policies designed to promote long-term fiscal discipline. In the past,DOD typically requested enough money to procure a specific number of fullyequipped end-items - funding requested for 15 C-17 aircraft, for example, would besufficient to buy 15 deployable aircraft. This year, however, the Air Force requestedonly enough money to finance progress payments on a new 5-year contract formulti-year procurement of the aircraft. The effect is to reduce amounts requestedearly in the multi-year contract and increase costs in the later years.

This is technically at odds with longstanding DOD policy which calls for full funding of the cost of end-items being requested in any given year, and it is the firsttime a significant breach of the full funding policy has occurred in an area apart fromNavy shipbuilding. (For an extensive discussion, see CRS Report RL31404 , DefenseProcurement: Full Funding Policy - Background, Issues, and Options for Congress ,by [author name scrubbed] and [author name scrubbed].)

The House Armed Services Committee approved the requested C-17 procurement profile, but warned DOD against using this funding approach in thefuture. The House Appropriations Committee rejected the Air Force approach andrequired the Air Force to use C-17 funding in FY2004 to procure complete aircraft. The committee also instructed the Defense Department to restructure future fundingplans for the C-17 to use full funding. The Senate Appropriations Committeespecifically rejected the Air Force's incremental funding approach and instead added$585.9 million to finance the full cost of procuring 15 aircraft. The appropriationsconference agreement mandates full funding of the C-17 - as in the Senate bill, itadds $585.9 million for full funding in FY2003, and it retains House languageinstructing the Air Force to request full funding in the future.

Tanker Aircraft Leasing. Last year, the conference report on the defense appropriations bill included a provision allowingthe Air Force to pursue negotiations with the Boeing Corporation to lease tankeraircraft for a ten-year period. The provision was structured so that the aircraft wouldbe returned to the manufacturer after the lease expired. As a result, the lease isconsidered an "operating lease" rather than a "lease-purchase" agreement, so thatonly the annual cost of actual payments on the lease would be scored in the Air Forcebudget on a year-to-year basis - otherwise, the full cost of the contract would haveto be scored in the years when the money would be obligated. Boeing has offered tolease 100 767 aircraft as tankers.

Senator McCain and some others have objected to the leasing provision, arguing that it will cost the government more in the long run than simply procuring additionaltanker aircraft. Both the Office of Management and Budget and the CongressionalBudget Office have prepared analyses which project considerably higher costs forleasing than for regular procurement. (The text of the CBO letter is availableelectronically at ftp://ftp.cbo.gov/34xx/doc3413/tankers.pdf .) Mitch Daniels, theDirector of OMB, has criticized the plan, insisting that it will be cheaper either to buynew tankers or to re-engine older aircraft. In its markup of the defense authorizationbill, the Senate Armed Services Committee approved an amendment proposed bySenator McCain that would require Congress to authorize and appropriate funds forany tanker lease agreement. In floor action on the defense appropriations bill,however, Senator McCain offered but then withdrew a similar amendment. Recently,the Air Force has reported that it is very close to reaching an agreement with Boeingon the tanker leases.

The appropriations conference agreement provides $3 million for the tanker lease program (in Operation and Maintenance, Air Force). The agreement alsoincludes a general provision, Section 8117, that provides that payment for tankerleases may be made one year in advance and that permits funds either forprocurement of aircraft or for operation and maintenance to be used for the leases. On October 16, Senator McCain made a floor statement that was strongly critical ofthe leasing provisions in the conference report ( Congressional Record , pp.S10519-10520).

The authorization conference report includes a provision (Section 133) revising Senator McCain's amendment. The revised provision prohibits the leasingagreement unless funds have been specifically authorized and appropriated for theprogram, or unless a reprogramming notification has been submitted to thecongressional defense committees. In report language, the conference agreementsays that it expects the Secretary of Defense to seek congressional approval for a newtanker lease.

Table 8: Appropriations Action on Major Aircraft Programs (amounts in millions of dollars)

Sources: H.Rept. 107-532 ; S.Rept. 107-213 ; H.Rept. 107-732 .

Notes: Funding for 4 KC-130Js was requested in the Defense Emergency Response Fund(DERF). B-2 requestincludes $50 million for R&D requested in the DERF.

Missile Defense

The Administration requested $7.8 billion for missile defense programs in FY2003. The request included

$3.2 billion for mid-course defenses, including funds for the National Missile Defense program to develop ground-based systems to protect theentire United States, and the Navy Theater Wide program, which is a theater defensesystem to be based on navy ships;

$1.1 billion for battle management and related supportprograms;

$935 million for the ground-based Theater High Altitude AreaDefense (THAAD) system;

$858 million for Patriot PAC-3 development and procurement;

$797 million for boost phase defense systems, including theAirborne Laser (ABL) and the Space-Based Laser (SBL); and

$373 million for space-based sensors, including theSpace-Based Infrared System-Low (SBIRS-Low);

an additional $815 million in the Air Force budget for theSpace-Based Infrared System-High (SBIRS-High).

The SBIRS-High program has experienced very large cost increases, and early in the year, the program was under review because the cost growth violated Nunn-McCurdycost cap provisions. DOD decided to continue the program, however, though itsstatus remains a matter of concern. There continues to be extensive debate inCongress about the status of the National Missile Defense program, which theAdministration has tried to accelerate, and about space-based systems like the SBL.

Congressional Action. The House Armed Services Committee generally supported the Administration's request. Thecommittee reduced funding for the ABL (now funded under the title "Air-BasedBoost" defense) by $77.5 million, on the premise that a second test aircraft, that wasincluded in the request, may not yet be needed. That judgment was disputed inHouse floor action on the defense appropriations bill (discussed below). Thecommittee distributed the savings to a number of other missile defense programs. The House Armed Services Committee also refused to fund Patriot PAC-3 orMedium Extended Air Defense System (MEADS) development in the Army budget,as requested, but instead shifted the money back to the Missile Defense Agency.

During the House Armed Services Committee markup, Representative Spratt offered an amendment to reduce funding for the SBL and for space-based kineticinterceptor development and to transfer the savings to the PAC-3 and Arrow theatermissile defense programs. The amendment was defeated in the committee. On thefloor, the House approved an alternative offered by Representative Hunter to addfunds for PAC-3 and Arrow to be financed from funds available to the MissileDefense Agency, but without specifying the offsetting source of funds.

In committee markup, Representative Spratt also offered an amendment to prohibit deployment of nuclear tipped interceptor missiles for missile defense, whichwas rejected. On the floor, the Rules Committee did not make in order anamendment on the issue, but Representative Spratt offered a motion to recommit thebill to committee with instructions to prohibit nuclear interceptor development, andthat motion was defeated.

The Senate Armed Services Committee reduced overall missile defense funding by $814.3 million (see Table 9 for a detailed tabulation of funding), promptingseveral Republicans on the committee to vote against reporting the bill. Most of thereductions were in systems engineering and other support activities, which thecommittee argued are not adequately justified in support material provided by DOD.This became a major issue on the Senate floor. The Senate Armed ServicesCommittee also reduced ABL funding by $135 million and SBIRS-High funding by$100 million.

In addition, the committee approved several provisions designed to require stricter oversight of missile defense programs and adherence to more traditionalacquisition procedures in the development programs. One provision would requirethe independent Director of Operational Test and Evaluation to conduct an annualassessment of specific missile defense programs. Another provision requires theSecretary of Defense to provide annual schedule and cost estimates for majorelements of the program to Congress.

On June 12, Secretary Rumsfeld send at letter to Senator Levin opposing the Senate Armed Services Committee reduction in missile defense funding andobjecting to the committee's provisions regarding acquisition procedures. Thecommittee's measures, said Rumsfeld, "would impose a number of burdensomestatutory restrictions that would undermine our ability to manage the programeffectively." The Secretary said he would recommend a veto if a final authorizationbill includes either the Senate cuts in missile defense funding or the Senateprovisions regarding management of the program. OMB's June 19 "Statement ofAdministration Policy" repeated the veto threat.

On June 26, the Senate approved an amendment offered by Senator Warner, with a second degree amendment by Senator Levin, to restore some or all of themissile defense funding that the committee cut. The amendment would permit thePresident to allocate up to $814.3 million of anticipated inflation savings either tomissile defense or to counter-terrorism programs. The Levin amendment stipulatesthat priority should be given to counter-terrorism. The Senate did not consider anymeasures to revise committee provisions on program management.

Also on June 26, the Senate approved an amendment proposed by Senators Feinstein and Stevens to prohibit development or deployment of nuclear armedinterceptors for missile defense. This measure is similar to the Spratt amendmentthat the House turned down.

The House Appropriations Committee made a number of changes in requested missile defense funding. The committee denied funding for Navy sea-based terminaldefense, a replacement for the terminated Navy Area Defense program, saying thatDOD had not presented a plan for using the research funds. The committee alsodenied funding for the Russian-American Observation Satellite Program (RAMOS)because the Russian government has not yet responded to a U.S. proposal toimplement the program. The committee said it would revisit the issue in conferenceif the two governments sign an agreement. The committee also cut funding forsea-based and space-based boost phase defenses, saying that requested large increasesin funding were not justified in view of requirements for near term programs like thePAC-3 system. The committee added $30 million for additional PAC-3 testing andrequired a report on planned testing of the Theater High Altitude Area Defense(THAAD) system.

In floor action, the House approved an amendment by Representative Spratt to reduce funding for the space-based kinetic interceptor program by $30 million andshift the funds to the Airborne Laser program.

The Senate Appropriations Committee largely followed the Senate authorization bill. In a general provision, it provided an additional $814.3 million for missiledefense or for counter-terrorism programs, offset by anticipated inflation savings. The provision also itemized the programs to and amounts for which funds are to berestored, should the President choose to allocate these funds to missile defense.

The appropriations conference report provides most of what the Administration requested for missile defense. In all, it reduced funding by $43 million. It added $45million for Patriot PAC-3 procurement (offset by a $25 million reduction in supportfunding) and $70 million for the U.S.-Israeli Arrow program. It reduced funding forRAMOS but did not eliminate it as in the House bill.

The authorization conference report includes revised provisions governing management of missile defense programs. It requires that DOD submit annualreports to Congress on performance goals and development baselines for eachdevelopment block of each missile defense system as part of annual budgetjustification material; it requires year-by-year funding profiles for each block of eachsystem that could be fielded; and it requires the Defense Department's JointRequirements Oversight Council (JROC), which is chaired by the Deputy Chairmanof the Joint Chiefs, to provide to Congress a one-time review of cost, schedule, andperformance criteria. The agreement also requires that DOD provide a life-cycle costestimate for the Theater High Altitude Area Defense (THAAD) program - the Senatehad prohibited obligation of more than 50% of the money authorized for THAADuntil the report is submitted, while the conference agreement permits 85% to beobligated. The conference report also requires the director of the Missile DefenseAgency to provide reports to Congress on each flight test of the Ground-BasedMid-Course National Missile Defense System. The authorization conferenceagreement drops provisions in the Senate bill requiring annual JROC reviews ofmissile defense programs and operational assessments of some programs by theDirector of Operational Test and Evaluation.

The authorization conference report also prohibits the use of FY2003 funds for development of a nuclear-armed interceptor for missile defense - the Senate versionof the bill had flatly prohibited development.

Table 9: Congressional Action on Missile Defense Funding byProgram Element and Project (millions of dollars)

Sources: Department of Defense, FY2003 RDT&E Program Descriptive Summaries; H.Rept.107-436 ; S.Rept. 107-151 ; H.Rept. 107-532 ; S.Rept. 107-213 ; H.Rept. 107-732 .

* Note: Warner/Levin amendment to the Senate authorization bill provides up to $814.3million formissile defense and counter-terrorism programs.

Strategic Nuclear Weapons Policy

In January, the Administration completed a congressionally mandated Nuclear Posture Review and submitted a classified report on the review, with an unclassifiedsummary, to Congress. Parts of the classified report were later leaked to the press,prompting considerable public debate about several issues, including the potentialuse of nuclear weapons against non-nuclear states that use or threaten to usenon-nuclear weapons of mass destruction, plans to shorten the time needed to resumenuclear testing, and potential development of new nuclear weapons for missions suchas destruction of deeply buried and hardened targets. The review also reaffirmedAdministration plans to reduce offensive nuclear warhead numbers. Later, on May13, the White House announced an agreement with Russia on a treaty to reducestrategic offensive force levels to between 1,700 and 2,200 warheads.

Congressional Action. In the House Armed Services Committee markup, Representative Tauscher offered anamendment to limit strategic nuclear force levels to 1,700. The proposal was rejectedin committee. On the floor, the House approved a Tauscher amendment to requirea report on options for achieving a level of 1,700 to 2,200 warheads. RepresentativeSpratt offered an amendment, also rejected in committee, to require one-year advancenotification of a decision to resume nuclear testing. The Rules Committee did notpermit a floor vote on the amendment. The full House also rejected an amendmentoffered by Representative Markey to prohibit development of a nuclear earthpenetrator weapon.

The Senate Armed Services Committee version of the authorization eliminates $15.5 million requested in the Department of Energy weapons budget fordevelopment of a "Robust Nuclear Earth Penetrator" warhead and requires a detailedreport on the proposed program. On July 26, the Senate approved an amendment tothe bill, offered by Senators Feinstein and Stevens, to prohibit development ordeployment of nuclear armed interceptors for missile defense (see the discussion ofmissile defense programs, above).

The Senate bill also includes a provision that would require the Secretary of Energy to request funds before beginning research and development or productionof any new or modified nuclear weapon. The provision also requires a specificauthorization for a new or modified nuclear weapon program before funds could beobligated or expended.

The authorization conference report provides funds for the Robust Nuclear Earth Penetrator warhead but prohibits obligation of the money until 30 days after Congressreceives the report required by the Senate version of the bill. The conferenceagreement also includes a revised version of the Senate requirement that theDepartment of Energy specifically request funds to develop any new nuclearweapons. The conference report also requires a report on options for resumingnuclear testing.

Environmental Restrictions on DOD Training

The Defense Department has voiced increasing concern in recent years about the effect on training of environmental regulations. Shortly before the House ArmedServices Committee markup of the defense authorization bill, the Administrationproposed legislation to exempt DOD training activities from the requirements ofseveral environmental statutes ranging from the Endangered Species Act to the CleanAir Act.

Congressional Action. The House-passed version of the authorization bill includes provisions exempting DODfrom or waiving application of the Endangered Species Act, the Migratory BirdTreaty Act, and the Wilderness Act to areas used for military training exercises. Onthe Endangered Species Act, Section 312 of the House bill would allow DOD tosubstitute its own Integrated Natural Resource Management Plan to protectendangered species rather than having installations designated as a critical habitat. DOD would, however, still be prohibited from taking any actions that would harmendangered or threatened species. In designating new critical habitats, the bill wouldalso require that the effect on national security, as well as the economic impact, mustbe considered.

Section 311 of the House bill provides that in the case of military training activities, DOD would not be subject to the part of the Migratory Bird Treaty Actthat designates certain types of activities as unlawful. According to the committeereport, this provision was intended to permit DOD to carry out military exerciseseven if they might unintentionally harm migratory birds. The language adoptedwould exempt DOD more broadly from any activity deemed to be unlawful under theAct.

The House bill also permits DOD to conduct training activities and have emergency access to the Utah Test and Training Range, despite the fact that a portionof that range has been designated as a wilderness area with certain restrictions onnoise and disturbances. The House bill also includes provisions that would designateseveral areas owned by the Bureau of Land Management that are adjacent to the UtahTest and Training Range as wilderness areas although DOD's training activities inthese areas would also not be covered by Wilderness Act restrictions. (For adiscussion of these and other provisions, see CRS Report RL31456 , Defense Cleanupand Environmental Programs: Authorization and Appropriations for FY2003 , byDavid Michael Bearden, and CRS Report RL31415 , The Endangered Species Act,Migratory Bird Treaty Act, and Department of Defense Readiness Activities: CurrentLaw and Legislative Proposals , by [author name scrubbed].)

The House Armed Services Committee did not address other environmentalmeasures that DOD included in its legislative proposal. In the House ArmedServices Committee markup, Representative James Maloney offered an amendmentto remove the environmental waiver provisions, but the proposal was rejected. TheRules Committee did not permit a similar amendment proposed by RepresentativesRahall, Dingell and Maloney to be offered on the floor.

The Senate Armed Services Committee did not address these environmental issues in its version of the authorization bill. Instead, it referred the Administration'sproposals to the Environment and Public Works Committee, which recently held ahearing on those proposals. The Senate bill authorizes $20 million to allow theSecretary of Defense to acquire lands adjacent to military installations to serve as abuffer zone and provide additional natural habitat areas for endangered species inareas where animals have moved to military installations as a result of development.

The authorization conference report includes a revised version of the House provision regarding the Migratory Bird Treaty Act. The House provision would havealtered the Act to exempt military training from certain provisions. The conferencerevision temporarily exempts training activities and requires the Secretary of theInterior to prescribe regulations to exempt DOD.

The conference report does not include the House provision regarding the Endangered Species Act, but it includes without change the House provisionsregarding the Utah Test and Training Range.

Cap on Military Personnel in Colombia

Under current law, there is a cap of 400 on the number of U.S. military personnel who can operate in Colombia. The cap specifically excludes personnelserving diplomatic functions or performing emergency missions. The Houseauthorization bill included a provision that would establish a cap of 500 on thenumber of U.S. military personnel in Colombia who are supported or maintained byDepartment of Defense funds. The measure also would permit the Secretary ofDefense to waive the cap for national security reasons and provided he informsCongress within 15 days of a waiver. The authorization conference report does notinclude the House provision.

Base Realignment and Closure

Last year, Congress approved a measure that will permit a new round of military base closures in 2005, following procedures that were used in earlier rounds in 1991,1993, and 1995. In the House Armed Services Committee markup of theauthorization bill, Representative Taylor offered an amendment to repeal last year'sbase closure provisions. The committee defeated the amendment by a vote of 38-19. The Rules Committee did not allow the amendment to be offered on the floor, whichwas a matter of considerable contention when the bill was debated.

Abortions in Military Hospitals Overseas

Abortions are readily available in the United States, but are often not available to U.S. personnel deployed abroad. Congress has perennially debated measures toallow abortions for U.S. military personnel at military hospitals overseas.

Congressional Action. In the House Armed Services Committee markup, the committed rejected an amendmentby Representative Sanchez to allow abortions at U.S. military hospitals abroad; thefull House rejected the proposal in a floor vote. On June20 the Senate debated andon June 21 approved by a vote of 52-40 an amendment to the authorization bill bySenators Murray and Collins that would remove the prohibition on privately fundedabortions at overseas military facilities. The authorization conference report dropsthe Senate provision.

Limitation on Transfer Authority

Like other House FY2003 appropriations bills, the House-passed measure includes a provision, Section 8122, that prohibits the transfer of funds to any otheragency unless approved in an appropriations act. One effect would be to prevent thetransfer of defense funds to the new Department of Homeland Security without theapproval of the appropriations committees. That provision is not included in theappropriations conference agreement.

Legislation

Congressional Budget Resolution

H.Con.Res. 253 (Nussle)

A concurrent resolution establishing the congressional budget for the UnitedStates government for fiscal year 2003 and setting forth appropriate budgetary levelsfor each of fiscal years 2004 through 2007. Reported by the House BudgetCommittee ( H.Rept. 107-376 ), March 15, 2002. Passed by the House, 221-209,March 20, 2002.

S.Con. Res. 100 (Conrad)

An original concurrent resolution setting forth the congressional budget for theUnited States government for fiscal year 2003 and setting forth the appropriatebudgetary levels for each of the fiscal years 2004 through 2012. Reported by theSenate Budget Committee, March 22, 2002. Written report filed ( S.Rept. 107-141 ),April 11, 2002.

Defense Authorization

H.R. 4546 (Stump)

A bill to authorize appropriations for fiscal year 2003 for military activities ofthe Department of Defense, and for military construction, to prescribe militarypersonnel strengths for fiscal year 2003, and for other purposes. Marked up andordered to be reported by the House Armed Services Committee, May 1, 2002. Report filed ( H.Rept. 107-436 ), May 3, 2002. Considered by the House andapproved, with amendments (359-58), May 10, 2002. Laid before the Senate, Senatestruck all after the enacting clause and substituted the language of S. 2514 , and passed by the Senate by unanimous consent, June 27, 2002. Conferencereport filed ( H.Rept. 107-772 ), November 12. Conference report agreed to in theHouse on suspension of the rules by voice vote, November 12. Conference reportagreed to in the Senate by voice vote, November 13.

H.R. 4547 (Stump)

A bill to authorize appropriations for the costs of the war against terrorism. Considered by the House Armed Services Committee, May 1, 2002. Marked up andordered reported by the House Armed Services Committee July 18, 2002. Reportfiled ( H.Rept. 107-603 ), July 23, 2002. Considered under suspension of the rules,yeas and nays ordered, and further consideration postponed, July 23-24, 2002. Approved by the House (413-3), July 24, 2002.

S. 2514 (Levin)

An original bill to authorize appropriations for fiscal year 2003 for militaryactivities of the Department of Defense, for military construction, and for defenseactivities of the Department of Energy, to prescribe personnel strengths for suchfiscal year for the Armed Forces, and for other purposes. Marked up and ordered tobe reported by the Senate Armed Services Committee, May 9, 2002. Report filed( S.Rept. 107-151 ), May 15, 2002. Considered by the Senate, June 18, 19, 20, 21, 24,25, 26, 27. Approved by the Senate as amended (97-2), June 27, 2002.

Defense Appropriations

P.L. 107-248 , H.R. 5010

Making appropriations for the Department of Defense for the fiscal year endingSeptember 30, 2003, and for other purposes. Marked up and reported by the HouseAppropriations Committee ( H.Rept. 107-532 ), June 25, 2002. Considered by theHouse and approved as amended (413-18), June 27, 2002. Marked up and reportedas amended by the Senate Appropriations Committee ( S.Rept. 107-213 ), July 18,2002. Considered by the Senate July 31 and August 1, 2002. Approved by theSenate, as amended (95-3), August 1, 2002. Conference report filed ( H.Rept.107-732 ), October 9, 2002. Conference report agreed to in the House (409-14),October 10, 2002. Conference report agreed to in the Senate (93-1), October 16,2002. Signed into law October 23, 2002.

P.L. 107-249 , H.R. 5011

Making appropriations for military construction, family housing, and baserealignment and closure for the Department of Defense for the fiscal year endingSeptember 30, 2003, and for other purposes. Marked up and reported by the HouseAppropriations Committee ( H.Rept. 107-533 ), June 25, 2002. Considered by theHouse and approved, as amended (426-1), June 27, 2002. Senate struck all after theenacting clause and substituted the text of S. 2709 , as reported, July 17,2002. Approved by the Senate, with an amendment (96-3), July 18, 2002. Conference report filed ( H.Rept. 107-731 ), October 9, 2002. Conference reportagreed to in the House (419-0), October 10, 2002. Conference report agreed to in theSenate by unanimous consent, October 11, 2002. Signed into law October 23, 2002.

S. 2709 (Feinstein)

An original bill making appropriations for military construction, family housing,and base realignment and closure for the Department of Defense for the fiscal yearending September 30, 2003, and for other purposes. Marked up and ordered to bereported by the Senate Appropriations Committee, June 27, 2002. Report filed( S.Rept. 107-202 ), July 3, 2002.

FY2002 Supplemental Appropriations

P.L. 107-206 , H.R. 4775

Making supplemental appropriations for the fiscal year ending September 30,2002, and for other purposes. Reported by the House Appropriations Committee( H.Rept. 107-180 ), May 20, 2002. Considered by the House, May 22-23, 2002. Approved by the House (280-138), May 24, 2002. Measure laid before the Senateand Senate struck all after the enacting clause and substituted the language of S. 2551 to be used as original text, June 3, 2002. Cloture motionspresented in the Senate, June 4, 2002. Cloture motion invoked (87-10), June 6, 2002. Approved by the Senate (71-22), June 7, 2002. Conference agreement reported( H.Rept. 107-593 ), July 19, 2002. Conference report agreed to by the House(397-32), July 23, 2002. Conference report agreed to by the Senate (92-7), July 24,2002. Signed into law August 2, 2002.

S. 2551 (Byrd)

An original bill making supplemental appropriations for further recovery fromand response to terrorist attacks on the United States for the fiscal year endingSeptember 30, 2002, and for other purposes. Marked up and ordered to be reportedby the Senate Appropriations Committee, May 22, 2002. Written report filed( S.Rept. 107-156 ), May 29, 2002.

For Additional Reading

CRS Report RL31310 . Appropriations for FY2003: Military Construction , by DanielH. Else.

CRS Report RS21327. Concurrent Receipt of Military Retirement and VA Disability Benefits: Budgetary Issues , by [author name scrubbed].

CRS Report RS21218 . Crusader XM2001 Self-Propelled Howitzer: Background and Issues for Congress , by [author name scrubbed] and Steven R. Bowman.

CRS Report RL31456 . Defense Cleanup and Environmental Programs: Authorization and Appropriations for FY2003, by David Michael Bearden.

CRS Issue Brief IB10062. Defense Research: DOD's Research, Development, Test and Evaluation Program , by John Dimitri Moteff.

CRS Report RL31415 . The Endangered Species Act, Migratory Bird Treaty Act, and Department of Defense Readiness Activities: Current Law and LegislativeProposals , by [author name scrubbed].

CRS Issue Brief IB93103. Military Medical Care Services: Questions and Answers , by Richard A. Best, Jr.

CRS Issue Brief IB10089. Military Pay and Benefits: Key Questions and Answers , by [author name scrubbed].

CRS Report 95-469(pdf) . Military Retirement and Veterans' Compensation: Concurrent Receipt Issues , by Robert Goldich and Carolyn Merck.

CRS Issue Brief IB85159. Military Retirement: Major Legislative Issues , by [author name scrubbed].

CRS Report RL31111 . Missile Defense: The Current Debate , coordinated by [author name scrubbed] and [author name scrubbed].

CRS Report RS20535. Navy Ship Procurement Rate and the Planned Size of the Navy: Background and Issues for Congress , by [author name scrubbed].

CRS Report RS20643 . Navy CVNX Aircraft Carrier Program: Background and Issues for Congress , by [author name scrubbed].

CRS Report RS21059. Navy DD(X) Future Surface Combatant Program: Background and Issues for Congress , by [author name scrubbed].

CRS Issue Brief IB94040. Peacekeeping: Issues of U.S. Military Involvement , by Nina Maria Serafino.

CRS Report RL31297(pdf) . Recruiting and Retention in the Active Component Military , by [author name scrubbed].

CRS Issue Brief IB92115. Tactical Aircraft Modernization: Issues for Congress , by [author name scrubbed].

CRS Report RL31187(pdf) . Terrorism Funding: Congressional Debate on Emergency Supplemental Allocations , by [author name scrubbed] and Larry Q. Nowels.

CRS Report RS21133(pdf) . The Nuclear Posture Review: Overview and Emerging Issues , by [author name scrubbed].

CRS Report RL31384 . V-22 Osprey Tilt-Rotor Aircraft , by [author name scrubbed].

Appendix A: What the Defense Authorization and Appropriations Bills Cover

Congress provides funding for national defense programs in several annualappropriations measures, the largest of which is the defense appropriations bill. Congress also acts every year on a national defense authorization bill, whichauthorizes programs funded in all of the regular appropriations measures. Theauthorization bill addresses defense programs in almost precisely the same level ofdetail as the defense-related appropriations, and congressional debate about majordefense policy and funding issues usually occurs mainly in action on theauthorization. Because the defense authorization and appropriations bills are soclosely related, this report tracks congressional action on both measures.

The annual defense appropriations bill provides funds for military activities of the Department of Defense (DOD), including pay and benefits of military personnel,operation and maintenance of weapons and facilities, weapons procurement, andresearch and development, as well as for other purposes.

Most of the funding in the bill is for programs administered by the Department of Defense, though the bill also provides (1) relatively small, unclassified amountsfor the Central Intelligence Agency retirement fund and intelligence communitymanagement, (2) classified amounts for national foreign intelligence activitiesadministered by the CIA and by other agencies as well as by DOD, and (3) very smallamounts for some other agencies. Five other appropriations bills also provide fundsfor national defense activities of DOD and other agencies including:

the military construction appropriations bill, which finances construction of military facilities and construction and operation of military familyhousing, all administered by DOD;

the energy and water development appropriations bill, which funds atomic energy defense activities administered by the Department ofEnergy;

the VA-HUD-independent agencies appropriations bill, which finances civil defense activities administered by the Federal Emergency ManagementAgency, activities of the Selective Service System, and DOD support for NationalScience Foundation Antarctic research;

the Commerce-Justice-State appropriations bill, which funds national security-related activities of the FBI, the Department of Justice, and someother agencies; and

the transportation appropriations bill, which funds some defense-related activities of the Coast Guard.

Appendix B: Overview of the Administration Request

On February 4, 2002, the Administration submitted its formal FY2003 budgetrequest to Congress. The Administration proposed $396.8 billion for the nationaldefense budget function, about $46 billion above the estimated FY2002 level (notincluding supplemental FY2002 appropriations of $14 billion proposed on March21). (2) The increase between FY2002 and FY2003is the largest since at least the firstyears of the Reagan Administration. And with supplemental counter-terrorismfunding for FY2001 and FY2002 included, the total increase in defense in the lastyear is the largest, in inflation-adjusted dollars, since the Vietnam War. TheAdministration projects continued growth in defense through FY2007, though at amuch more modest pace - Table B1 shows the long term trend in defense spendingunder the Administration's plan.

The large increase requested for defense has not been enough, however, to allay the concerns of defense advocates in Congress. In their view, the budget is notadequate to accommodate needed increases in weapons procurement. In the House,several Members threatened to vote against the proposed budget resolution becauseit set aside $10 billion for defense in a reserve fund available only for costs of theglobal counter-terrorism campaign. The Administration requested the $10 billion asan unallocated contingency fund for costs of counter-terrorism operations in FY2003,but several members of the Armed Services Committees both in the House and in theSenate have said they would prefer using that money to increase spending on majorweapons programs, especially shipbuilding.

Table B1. National Defense Budget Function and Department of Defense Budget, FY2000-FY2007, AdministrationProjections (current and constant FY2003 dollars in billions)

Sources : U.S. Office of Management and Budget, Historical Tables: Budget of the United States Government, Fiscal Year 2003 , February 2002. Constant dollar figuresare CRS calculations using deflators from DOD Comptroller.

Notes: This and other tables in this report use OMB data that reflect enacted and proposed changes in accounting for retirement benefits. Figures reflect (1) enactedaccrual accounting for health care benefits for over-65 military retirees beginning inFY2003; (2) proposed accrual accounting for health care benefits for under-65 militaryretirees beginning in FY2004; and (3) proposed accrual accounting for all civilianretirement pension and health benefits beginning in FY2003. OMB has also adjustedFY2001 and FY2002 to be consistent with FY2003 and later treatment of civilianretirement benefits. Data in these tables also reflect OMB scoring of funds provided inthe Emergency Terrorism Response (ETR) supplemental appropriations act approvedin September 2001. OMB figures do not show the allocation of $9.8 billion of fundingprovided for defense in the ETR supplemental.

The Impact of Accrual Accounting for Military and Civilian Personnel Retirement Benefits on the Defense Budget

One important complicating element in the FY2003 defense budget is a series of changes in accounting for military and civilian personnel retirement benefits. Most federal retirement benefits, including benefits for uniformed military servicemembers and DOD civilian personnel, have long been funded on the basis of"accrual accounting," in which the cost of future benefits for current employees ischarged to the employing agency as the benefits are accrued. Under accrualaccounting procedures, federal agencies pay the actuarily determined cost of futurebenefits into a fund. Payments to retirees are then charged to the fund, not to theagency. In the FY2003 and FY2004 defense budgets, three substantial adjustmentsinvolving accrual accounting have a large effect on budget totals. These are:

Accrual accounting for over-65 health care benefits for uniformed personnel: The FY2001 Defense Authorization Act, P.L. 106-398 ,included a provision, known as "Tricare-for-Life," that guarantees DOD-providedhealth care to 65-and-over military retirees and their dependents. Beginning inFY2003, these benefits are being funded on an accrual basis. This results in (1) anincrease of $8.1 billion in FY2003 in the military personnel accounts to reflect theaccrual cost of future benefits for current uniformed personnel and (2) a reduction of$5.6 billion in operation and maintenance accounts to reflect a payment from thehealth care trust fund to DOD for providing care to over-65retirees.

Accrual accounting for all civilian personnel retirement pension and health benefits: While most federal civilian retirement benefits havebeen funded on an accrual basis, a small part has not been. The Administration hasproposed funding all retirement benefits on an accrual basis. In FY2003, theproposed change results in an increase of $3.4 billion (both in budget authority andin outlays) in the Department of Defense budget. OMB has adjusted FY2001 andFY2002 figures - though not figures for earlier years - to be comparable to the new,proposed treatment of civilian retirement and health benefits. Thus, OMB figuresinclude $3.0 billion in FY2001 and $3.2 billion in FY2002 Department of Defensebudget totals (both in budget authority and in outlays) for increased civilianretirement accrual even though this accounting procedure was not in place in thoseyears.

Accrual accounting for under-65 health care benefits for uniformed personnel: Beginning in FY2004, the Administration is also proposingto finance health care benefits for under-65 military retirees on an accrual basis, inwhich, again, DOD would pay into a fund the cost of future benefits for currentemployees and would receive reimbursement from the fund for costs of under-65retiree health care that it provides. Both the contributions to the fund andreimbursements from the fund are reflected in budget projections from FY2004on.

Table B2 shows the year-by-year impact of these changes in accrual accounting on the defense budget through FY2007.

Table B2. Effects of Accrual Accounting on the Defense Budget (millions of dollars)

Source: Office of Management and Budget.

"Must Pay" Bills in the Defense Budget

The cost of changes in accrual accounting is only one of a number of so-called "fact of life" or "must pay" bills in the FY2003 defense budget. Much of theFY2002-2003 budget increase is taken up by accounting changes, inflation, payraises, changes in weapons cost estimates, and costs of the global counter-terrorismcampaign rather than by increases in weapons investment. DOD Comptroller DovZakheim has told congressional committees that such "must pay" bills leave less than$10 billion for new initiatives.

According to the Defense Department, increased costs include:

$6.7 billion for inflation;

$2.7 billion for pay raises;

$8.1 billion for accrual payments for 65-and-over health carebenefits for current uniformed personnel when they retire (discussedabove);

$3.3 billion for increased accrual payments to retirementaccounts for current civilian DOD personnel (also discussed above - the OMBestimate is $3.4 billion for FY2003);

$7.4 billion for what DOD calls "realistic costing," half forrevised estimates of weapons costs (including the F-22 fighter and already contractedNavy ships) and half for closer to full funding of projected operating costs;and

$19.4 billion for counter-terrorism, including $10 billion in anunallocated contingency fund for continuing the war and $9.4 billion for specificcosts associated with ongoing operations.

In all, this adds up to $47.5 billion in new costs, but the total is offset by $9.3 billion in savings from procurement programs that were in the FY2002 budget but are notin the FY2003 plan. So an increase of almost $50 billion in the defense budget, bythis account, still leaves relatively little available for new programs.

Although the point is generally well taken, some items are missing from the arithmetic. For one thing, DOD is receiving $5.6 billion in payments from the retireehealth care trust fund in FY2003 to cover costs of providing services to 65-and-overretirees - money it did not receive in FY2002. Also, some counter-terrorism costswere included in the FY2002 budget, so the increased cost in FY2003 is $16 billionrather than $19 billion. Moreover, OMB budget figures (though not some of thefigures DOD used in its early briefings on the budget), show $3.2 billion in costs ofcivilian accrual accounting in the FY2002 budget for purposes of comparison withthe FY2003 request, so the added cost in FY2003 is only $0.2 billion. And, finally,a substantial part of the $9.4 billion for specifically allocated war-related funding willgo to procure material, such as Unmanned Aerial Vehicles (UAVs), intelligenceinfrastructure, and communications equipment, that will be in the force for some time- DOD officials have said that at least $3 billion of the amount for counter-terrorismis for weapons procurement. So, in all, the money available for new initiatives inFY2003, compared to FY2002, is more like $20-25 billion - not the whole of thedefense budget increase, but still not insubstantial.

The Impact of Growing Personnel and Operating Costs

The impact of "fact of life" cost increases on the FY2003 budget is relatively large because of some special factors, but it is by no means unique. Table B3 compares the FY2003 defense request with FY2002 estimated funding byappropriations title - a fairly common way of looking at the budget - with commentson major reasons for some of the changes. What stands out is how much of the largeincrease between FY2002 and FY2003 is going to military personnel and to operationand maintenance (O&M) rather than to procurement or to research and development(though, as noted, some procurement is being financed from war-related fundsrequested in the operation and maintenance title).

Table B3. Changes in Requested National Defense Funding by Appropriations Title (budget authority in billions ofdollars)

Source: Office of Management and Budget; CRS calculations.

Notes: OMB figures include $3.4 billion for civilian retirement benefits accrual in FY2003and $3.2 billion in FY2002. FY2002 estimate does not include $14.0 billion insupplemental appropriations requested for counter-terrorism operations on March 21,2002.

Military personnel accounts have grown especially rapidly in recent years because of pay and benefits increases that Congress approved beginning with theFY2001 defense authorization act ( P.L. 106-398 ), passed in October, 2000. That billincluded:

a 3.7% across-the-board pay raise;

"pay table reform" that provided additional substantial payraises to mid-career personnel to bolster retention;

the first increment of a Clinton Administration proposal toreduce out-of-pocket off-base housing costs by increasing basic allowance forhousing benefits;

"Tricare for Life," guaranteeing DOD-provided health care toover-65 military retirees; and

a requirement that future military pay raises be equal to the"employment cost index," a broad measure of personnel costs in the economy as awhole, plus 0.5%.

Last year, the FY2002 defense authorization bill included some additional changes in the pay table to further boost income for selected mid-career personnel, and the billalso increased special pays and bonuses.

Increased pay and benefits appear to have improved military recruitment and retention, though recent gains may, in part, also be due to a less robust economy. Theincreases have also driven up personnel costs dramatically. Table B4 illustrates thepoint. Under the Administration's plan, total military personnel funding will growfrom less than $70 billion as recently as FY1998 (in current year dollars - i.e., notadjusting for inflation) to $94 billion in FY2003 and to $117 billion by FY2007. After adjusting for inflation (using the Consumer Price Index), personnel costs willgrow from about $48,000 per active duty troop to more than $65,000 in FY2003prices over the same period.

Table B4. Trends in Military Personnel Funding, FY1990-FY2007 (budget authority)

Source: CRS calculations based on data from the Office of Management and Budget.

*Notes: "CY$" refers to "current year" dollars - i.e., not adjusted for inflation. FY2003 constant dollar figures are calculated using CPI-W deflators. DOD militarypersonnel deflators are not appropriate to use because they count the amount ofannual pay raises and benefits increases simply as inflation.

A similar, though much longer-term upward trend applies to operation and maintenance (O&M) accounts. A very simple measure of the trend is to calculatetotal O&M funding per active duty troop in constant, inflation adjusted prices. Making some adjustments to reduce inconsistencies from year to year, the resultshows a very constant pattern of growth of about 2.5% per year above inflation fromthe mid-1950s on - Figure 1 illustrates the trend.

Continuing, unabated growth in personnel and in O&M costs takes up a substantial share of projected increases in overall defense spending over the next fewyears. Table B5 shows Administration projections of defense funding byappropriations title through FY2007. Between FY2000, the last full year of theClinton Administration, and FY2007, overall national defense funding is projectedto increase by $166 billion. Of the increase, $90 billion is for personnel and O&Mand $63 billion is for procurement and R&D.

Table B5. National Defense Budget Function by Appropriations Title, FY2000-FY2007 (budget authority, current year dollars in billions)

Source: Office of Management and Budget.

Note: OMB figures show $3.0 billion in FY2000 and $3.2 billion in FY2001 for full accrual accounting for civilian retirement benefits, though it was not in effect in those years and is proposedto begin in FY2003.

Reversing the "Procurement Holiday"

One key issue in congressional debate about the defense budget has been whether the $70 billion or so requested for procurement in FY2003, or even the $99billion projected for procurement in FY2007, is enough to reverse what formerSecretary of Defense William Perry called the "procurement holiday" in defensebudgets that followed the end of the Cold War. A decline in new weapons purchases,said Perry in 1996, was justified in the early 1990s, first, because threats haddeclined, second, because many new weapons ordered in the 1980s had just enteredthe force, and, finally, because older weapons were retired first as the size of theforce declined, so the average age of equipment was dropping even without newacquisitions. But the holiday would have to end soon, said Perry, in order to avoidcreating an unaffordable "bow wave" of costs in the future to replace large numbersof rapidly aging weapons.

At the time, the Joint Chiefs set $60 billion per year for procurement by FY1998 as the goal, a target reached in the Clinton Administration's final budget for FY2001. In the years since Perry laid out the argument, however, the debate has shifted. Nowthe issue, at least among defense advocates, is no longer whether $60 billion a yearis adequate, but rather, how much more than $60 billion is needed to meetmodernization needs.

Much of the discussion has been shaped by a series of studies of the amounts needed to sustain a "steady state" procurement rate for major weapons: i.e., howmuch is needed to replace the existing stock of weapons with more modern systemsas weapons reach the ends of their planned service lives. A study by the Center forStrategic and International Studies estimated $160 billion a year, in FY2000 prices,if strategic nuclear weapons are included in the calculus, and $110 billion a yearwithout strategic modernization. The Congressional Budget Office made its ownestimate of about $90 billion a year, and the Center for Strategic and BudgetaryAssessments said $80 billion, both also in FY2000 prices. Most recently theChairman of the Joint Chiefs, General Richard Myers, said that a Joint Staff study,not released for public review, concluded that $100-110 billion a year, in FY2001prices, is needed. (3) After adjusting for inflation, the$99 billion projected forprocurement in FY2007 does not quite reach CBO estimates of steady-stateprocurement requirements: $99 billion in FY2007 prices equals about $83 billion inFY2000 prices.

Many members of the congressional defense committees have expressed concern that the Administration's budget plan - both in FY2003 and in future years- does not appear sufficient, despite large increases in the defense total, to financeplanned weapons procurement programs. In the FY2003 request, committeemembers have been especially critical of the shipbuilding budget, which calls forprocuring just five new ships. Assuming a 35-year service life for Navy ships, itwould take an average of 8.5 new ships per year to maintain a force of 300 ships inthe fleet. Only in the later years of the FY2003-2007 defense plan does theshipbuilding rate reach the nominal "steady-state" replacement rate. Some argue thathelicopters, munitions, and other programs are inadequately funded as well.

The Procurement "Bow Wave"

Most recently there have been reports that DOD has been discussing how to cope with a substantial "bow wave" of procurement costs in FY2007 and beyond. Analytically, a "bow wave" refers to the normal pattern of funding for weaponsprograms. The annual budget for any major acquisition program tends to grow as asystem moves from technology development to full scale engineering developmentto production. Then the acquisition cost will decline again as production windsdown. Thus the shape of a bow wave. A very large cumulative bow wave candevelop if many new systems are scheduled to begin full production at about thesame time.

This situation now appears to be facing the Defense Department at the end of the decade, when a number of new systems will be in production, including the F-22and F-35 (Joint Strike Fighter) aircraft, the Comanche helicopter, and several newNavy ships. According to numerous press accounts, the Defense Department hasbeen considering how to cope with the substantial projected shortfalls in procurementfunding. The Navy, reportedly, is proposing to cut back substantially on plannedprocurement of F-35 fighters, and Secretary of Defense Rumsfeld is reportedlyconsidering terminating several weapons programs - perhaps some in addition to theCrusader self-propelled artillery system - in order to safeguard future funds for more"transformational" weapons (see below).

Defense Transformation

During the presidential election campaign, then-candidate George Bush strongly endorsed the notion of a defense transformation to meet the needs of a dramaticallynew security environment. Both President Bush and Secretary of Defense Rumsfeldhave reaffirmed their commitment to transformation in major policy speeches inrecent months. (4) Defense transformation has beendefined in diverse ways, however,and the Administration has been under some pressure from Congress to articulate itsdefinition more fully.

Most recently, using categories of transformation laid out in the Quadrennial Defense Review that was released last September, (5) Deputy Secretary of Defense PaulWolfowitz gave a rough estimate of the amount of money requested fortransformation-related initiatives in FY2003 and future years. In testimony beforethe Senate Armed Services Committee on April 9, (6) Wolfowitz said

The six specific transformation goals identified in the QDR are first, to defend the U.S. homeland and other bases ofoperation and defeat nuclear, biological and chemical weapons and their means ofdelivery. Second, to deny enemy sanctuary, depriving them of the ability to run orhide, any time, any where. Third, to project and sustain forces in distant theaters inthe face of access denial threats. Fourth, to conduct effective operations in space.Fifth, to conduct effective information operations. And sixth, to leverage ourinformation technology to give our joint forces a common operationalpicture.

In all, Wolfowitz said, about $21 billion is requested in FY2003 for such transformational goals, and $136 billion is planned over the next 5 years.

Appendix C: Summary Tables

Table C1. Congressional Action on Defense Authorization by Title (budget authority in billions of dollars)

Sources: H.Rept. 107-436 ; S.Rept. 107-151 ; H.Rept. 107-772 .

Note: DERF allocation as shown by the Senate Armed Services Committee in S.Rept. 107-151 .

Table C2. Congressional Action on Defense Appropriations by Title (budget authority in billions of dollars)

Sources: H.Rept. 107-532 , S.Rept. 107-213 , H.Rept. 107-732 .

Note: DERF request as shown in the appropriations conference report is reduced by $716.849 million that is transferred to military construction appropriations. DERF allocation is as shown bythe Senate Armed Services Committee in S.Rept. 107-151 .

Table C3: Summary of Congressional Action on Defense and Military Construction Appropriations (budget authority in millions of dollars)

Source: Summary tables of appropriations conference reports in Congressional Record , October10, 2002, pp. 7807 and 7816.