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  • Can We Bank on the Pentagon's Savings?
    Posted by Michael Bruno 9:50 PM on Feb 18, 2011

    Questions are already being raised over the Pentagon and White House’s plans to “save” up to $178 billion over the next five fiscal years in defense spending, with Wall Street and lawmakers lining up doubts as everyone digests the fiscal 2012 request and future years defense plan (FYDP).

    As Capital Alpha Partners put it after attending Aviation Week’s Aerospace and Defense Technology and Requirements conference in Washington this week, “aspirations are nice but plans are better.”
    We were a bit disappointed by some things that the comptroller of the DOD stated during his presentation. The first was in response to our question about the source of further savings and efficiencies beyond those identified in the FY12 and FYDP just released. The comptroller’s response was that “logistics and healthcare” are two potential areas for additional savings. Furthermore, we got the impression that savings efficiencies beyond FY12 are not as firm as the numbers might suggest. While logistics and healthcare may well be places for savings – they are almost too obvious and their mention begs the question of why logistics didn’t figure more prominently in the FY12 efficiencies.

    We were hoping for a firmer answer about future cost savings plans including additional de-layering of overhead, better DOD buying practices, divestiture of assets that are costly to sustain and maybe even a look at some things DOD is doing in depots and arsenals that might be done by outside contractors at lower cost. Clearly some elements of an answer along this line would be controversial.  But given the budget challenges the DOD is facing, a bit more controversy could be a good thing. A tighter answer that maybe even had some numbers to it would have been more convincing that DOD cost reductions are not a one shot deal for FY12 and the FYDP. To the comptroller’s credit, he mentioned that the secretary of Defense is trying to instill a culture of cost savings and that’s positive. But a deeper understanding of how much fat is on the bone is surely needed.
    In turn, the institutional investor consultancy sees some risk for defense investors regarding future defense modernization spending.

    “DOD cost efficiency plans need to be monitored for signs of slippage or new sources of cost growth that could undo the modest modernization growth now assumed,” Capital Alpha says.

    Meanwhile, on Capitol Hill where Defense Secretary Robert Gates and the top leadership of the department were testifying this week regarding the Feb. 14 budget request, Rep. J. Randy Forbes (R-Va.) continued to pound away at the Pentagon’s inability to audit its financial statements. Forbes, who chairs the House Armed Services readiness subcommittee, went as far as to threaten an amendment to the next continuing resolution to eliminate $2 million currently allocated to Gates to host parties and dinners until DOD complies with the law requiring auditable statements.

    “The Secretary of Defense has put us in the untenable position of trying to defend the Department of Defense budget when he cannot even tell us where the money is going. However, we will not allow the secretary to continue to defy the law and maintain a culture of secrecy at the Pentagon,” said Forbes. “My amendment simply says no more ‘parties’ until the DOD audits its books, sending a clear message that the DOD is not above the law and that Congress is serious about making the most of all taxpayer dollars spent on defense.”

    Forbes and the Republican leadership of the HASC started actively noting the Pentagon’s lack of auditable finances after Gates last fall unveiled plans to shut down U.S. Joint Forces Command, which is based in southeast Virginia and has come to be a major employer of outsourced contracting work. Still, as parochial as Forbes’ effort may be, Aviation Week also has noted that the Pentagon has a real problem with audits – or lack thereof.

    I expect seeds of doubt to continue to be sown, leaving the Pentagon – whether through audits or leadership statements – facing as much of a challenge proving it has saved money as trying to push through those savings to begin with.

    Tags: ar99, defense, spending

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