Congressional Budget Office
Director's Blog

The Department of Veterans Affairs (VA) provides health care at little or no charge to more than 5 million veterans annually. VA is operating its medical care system and associated research program with a budget of $48 billion for 2010, a rise of 8 percent in nominal terms (without adjusting for inflation) from 2009. That budget grew at an average nominal rate exceeding 9 percent annually between 2004 and 2009. Unlike programs like Medicare and Medicaid, VA’s health care program receives its funding through the annual appropriation process. VA’s health care budget will face continued pressure over the next few years: Additional veterans are likely to seek care from VA, and cost increases in medical care are expected to continue to outpace cost increases for other goods and services.

In a report mandated in the Consolidated Appropriations Act, 2008, CBO examines, under two different scenarios discussed below, prospective demands on VA’s health care system and the potential budgetary implications of meeting veterans’ health care needs over the 2011–2020 period. CBO projects that the future costs for VA to treat enrolled veterans will be substantially higher than recent appropriations for that purpose. CBO finds that the cost (in 2010 dollars) of providing health care services to all veterans who would seek treatment at VA facilities would range from $69 billion to $85 billion in 2020, representing a cumulative increase of roughly 45 percent to 75 percent over the funding provided in 2010. The projections for both scenarios exceed CBO’s baseline projections for such health care spending, which assume that future appropriations are equal to the most recent appropriation with adjustments for inflation.

One group of veterans—those who have deployed or will deploy to overseas contingency operations (OCO), including those in Iraq and Afghanistan—will represent a growing share of enrollments in VA’s health care system over the next decade. However, the share of VA’s resources devoted to the care of those veterans is likely to remain small through 2020, in part because they are typically younger and healthier than the average VA enrollee.

Scenarios

To account for possible policy changes, uncertainty about the number of veterans who will be enrolled, and growth of medical expenditures per enrollee, CBO analyzed two scenarios to capture some of the range of possible outcomes. The scenarios differ in their assumptions about the number of enrollees in VA’s health care system and the costs of providing medical services.

Scenario 1. Scenario 1 was crafted under assumptions that generate lower resource requirements than Scenario 2. The assumptions about factors affecting enrollment include the following:

• VA’s eligibility, cost-sharing, and other policies at the beginning of 2010 remain in effect through the projection period. Those policies include the easing of enrollment restrictions that began in 2009 for certain veterans who have no compensable service-connected disabilities and whose income is no more than 10 percent above VA’s income thresholds.
• The number of troops deployed to overseas contingency operations drops to 30,000 by 2013 and remains at that number throughout the next decade.
• VA’s medical expenditures per enrollee for each priority group grow in nominal terms at slightly more than 5 percent per year, about the same rate as that anticipated in the general population over the decade.

Scenario 2. CBO developed the second scenario to illustrate potential policy changes and other outcomes that may result in higher resource needs for VA’s health care services. The assumptions for this scenario are as follows:

• VA changes its eligibility rules to allow veterans who have no compensable service-connected disabilities and whose income is no more than 30 percent above VA’s income thresholds to enroll.
• The number of troops deployed to overseas contingency operations declines more slowly than in Scenario 1, dropping to 60,000 by 2015 and remaining at that number through the rest of the decade.
• VA’s medical expenditures per enrollee for each priority group grow initially at the rate VA assumed in preparing the Administration’s 2011 budget request that was transmitted in February 2010 and, in subsequent years, at an annual rate that is about 30 percent higher than that anticipated in the general population.

Potential Future Costs

Under Scenario 1, CBO estimates that total enrollment would grow from 8.0 million in 2009 to more than 8.8 million by 2016—an increase of about 10 percent—but would edge down to 8.7 million in 2020. The costs of treating all enrolled veterans would be about $69 billion (in 2010 dollars) in 2020.

Under Scenario 2, enrollment would be 620,000 higher in 2020 than in Scenario 1, with 340,000 new enrollees resulting from VA’s further relaxation of the restrictions on enrollment and 280,000 from the higher troop deployments. The costs of treating all enrolled veterans would reach nearly $85 billion in 2020, or 22 percent more than under Scenario 1. The disparity between the growth rates of medical expenditures per enrollee in the two scenarios accounts for the lion’s share of the difference—$13 billion.

CBO also estimated the portion of VA’s costs that would be incurred to treat veterans of OCO. CBO estimates that between the time hostilities began and the end of 2020, VA would enroll a total of 1.4 million or 1.7 million OCO veterans under Scenarios 1 and 2, respectively. The annual costs (in 2010 dollars) of treating OCO veterans would increase from an estimated $2.0 billion in 2010 to $5.4 billion in 2020 under Scenario 1 and to $8.3 billion under Scenario 2. In either case, the cost to treat OCO veterans accounts for 10 percent or less of VA’s costs in 2020.

This study was prepared by Heidi Golding of CBO’s National Security Division.
 

The Congress created the Arsenal Support Program Initiative (ASPI) in 2001 to help maintain the functional capabilities of the Army’s three manufacturing arsenals, which are located in Rock Island, Ill., Watervliet, N.Y., and Pine Bluff, Ark. A primary goal of the program is to enable commercial firms to lease vacant space at the arsenals once it has been renovated, thereby encouraging collaboration between the Army and commercial firms as well as reducing the costs the government incurs to operate and maintain the arsenal facilities. Since the ASPI’s inception, a number of commercial tenants have leased unused property at the arsenals; however, the financial benefits generated by the program have proved to be small relative to the program’s funding.

To determine whether the ASPI is meeting certain of its objectives, the Congress directed CBO to conduct a “business case” analysis of the program. In response to that directive, today CBO released a study examining the costs, return on investment, and economic impact of the program.

The ASPI has received more than $87 million in funding from its inception in 2001 through 2010. As of the end of 2009, a total of  $54 million had been disbursed. Most of the funds have been used to renovate and improve arsenal properties and infrastructure. Funding for the ASPI is not used to pay employees who work for the office that manages the program; those costs are paid out of the Army’s operation and maintenance account

The principal outcome of the ASPI to date is that commercial tenants have begun to lease unused property at the arsenals, typically vacant buildings or portions of buildings that the Army has renovated specifically for that purpose. Tenants compensate the arsenals mostly in the form of negotiated rental payments or services in lieu of rent. As of 2009, a total of 46 tenants were leasing more than 200,000 square feet of space at the arsenals under the ASPI; payments and services provided to the government totaled $1.3 million in that year.

CBO’s analysis shows that the total stream of financial benefits that the ASPI has generated for the government so far and can be expected to generate in the future will fall short of the up-front investment required to ready the arsenal properties for tenants. In making this determination, CBO first estimated the revenues and other financial benefits that the program has generated for the government so far and those that might be generated in the future. CBO then compared the present value of those revenues and benefits to the outlays required to make space available to tenants. That calculation measures the economic value, in 2010, of projected future cash flows and noncash benefits using a discount rate that attaches a market price to the risk associated with those flows.

Under the assumptions that the ASPI receives no additional appropriations for renovations after 2010 and that the government continues to pay for marketing and administering the program, CBO estimates that, measured in 2010 dollars, the economic value of outlays for the program would total $99 million through 2075 and the economic value of the financial benefits that the program will generate for the government would total $47 million. The resulting net present value is negative $52 million, effectively translating into a government subsidy of about 50 cents for every dollar spent on the program.

In terms of the program’s broader economic impact, the ASPI positively affects the local economies in two ways: government spending for the program probably leads to additional jobs for civilians and income for area businesses; and commercial tenants who relocate to the arsenal regions because of the program buttress economic activity in the area. On a national basis, the ASPI has had little if any net economic impact, in CBO’s judgment, because the program primarily causes a shift in resources from one region of the country to another.
 
This study was prepared by Daniel Frisk of CBO’s National Security Division.

Earlier this week, CBO’s Acting Assistant Director for National Security, Matthew Goldberg, spoke to the National Commission on Fiscal Responsibility and Reform on the topic of discretionary defense spending. Last month, representatives of CBO spoke to the commission on three different occasions to provide information on tax policy, discretionary spending, and mandatory spending.

Discretionary defense spending makes up half of all discretionary spending (that is, spending that is subject to the annual appropriation process) in the federal budget. The Department of Defense (DoD) requested and the Congress provided about $530 billion in appropriations for fiscal year 2010. But current plans would require greater funding in future years. In a report released in January, CBO estimated that to implement the programs, plans, and policies in the Administration’s 2010 budget would require appropriations averaging about $570 billion (in constant 2010 dollars) over the period extending through 2028, excluding any potential costs for overseas contingency operations. DoD’s 10-year budget plan for the period starting in 2011 would require about $50 billion per year more over the next decade than CBO projected in January, mostly to fund overseas contingency operations (including, but not necessarily limited to, the ongoing operations in Afghanistan and Iraq).

An important factor contributing to the projected increases in defense funding needed to implement current plans is that many weapon systems being acquired today are much more expensive than their predecessors. For example, the Air Force has been spending nearly as much annually to purchase relatively small numbers of F-22 fighter jets and Joint Strike Fighters (JSFs) as it did to purchase much larger numbers of F-15s and F-16s during the 1980s.

Another factor contributing to increases in the defense budget has been increases in pay and other benefits for military personnel. Several enhancements to the pay and medical benefits of retired military personnel have been enacted over the past decade, most prominently for the TRICARE for Life program (which supplements Medicare for retirees who are eligible for both programs). In addition, in each of the past six years the military pay raise has exceeded the percentage increase in the Employment Cost Index (a measure of average wages and salaries in the private sector). In contrast, certain charges that military retirees pay under TRICARE Prime (the military system’s health management organization), such as the $460 annual family enrollment fee and the $12 copayment for a civilian outpatient visit, have not been increased in over 10 years.

Recent CBO studies have identified some particular areas where added spending may be needed to meet DoD’s current objectives. The JSF program has thus far experienced a cumulative delay of four years, which will adversely affect the Navy and Marine Corps as well as the Air Force and could necessitate additional spending over the next five years or more to maintain fighter inventories until the JSFs become available in large quantities. As discussed in a CBO study, F/A-18 Hornets in the Navy’s and Marine Corps’ fleets are rapidly approaching the maximum number of hours for which they are certified to fly, at which point (absent further action) they will have to be retired. To maintain fighter inventories at or close to their goals, those two services may have to invest in extending the service lives of their Hornets or purchase additional F/A-18E/F Super Hornets in order to bridge the gap until the JSFs are delivered.

The costs of the Navy’s shipbuilding program may also result in additional pressures on the defense budget. Another CBO study analyzed the Navy’s most recent shipbuilding plan, which covers the 30 years starting in 2011. The Navy’s plan calls for the purchase of 276 ships over that period, but CBO’s analysis indicates that those purchases would not be adequate to meet the Navy’s goal of having a total inventory of 322 ships for most of that period. Further, CBO estimates that purchasing the 276 ships and conducting related activities such as refueling nuclear-powered aircraft carriers would cost an average of $21 billion per year (in 2010 dollars)—considerably more than the $15 billion per year the Congress has appropriated for those purposes on average over the past 30 years, or the $13 billion per year the Congress has provided during the past five years.

The United States Navy and Marine Corps operate a fleet of more than 1,100 tactical fighter aircraft that provide air-to-air and air-to-ground combat capabilities. Those aircraft include Hornets (F/A-18A, B, C, and D), Super Hornets (F/A-18E and F), and Harriers (AV-8B); within the next few years, a new and more advanced aircraft—the F-35 Joint Strike Fighter (JSF)—will start being added to the fleet. Although current plans call for the purchase of about 700 new fighter aircraft over the next 15 years, the Department of the Navy is projecting that purchases planned for the next 5 to 10 years will be unable to keep pace with the retirement of today’s Hornets as they reach the limit of their service life. In a report released today, CBO compares four alternatives for maintaining the Navy’s and Marine Corps’ fighter inventories.

The alternatives discussed in the report consist of different combinations of three approaches.  One approach involves extending the service life of Hornets by up to 600 flight hours (roughly two additional years) beyond the current 8,000-hour limit by modifying and inspecting those aircraft in the high-flight-hour (HFH) program (comprising a series of structural repairs and more-frequent inspections). A second approach would implement a service-life extension program (SLEP) of more-extensive modifications, which would enable Hornets to reach 10,000 flight hours, and the third would purchase more Super Hornets than current plans call for. Some HFH modifications have already been done, and Super Hornets are still in production—but research and planning for the Hornet SLEP is not expected to be complete until 2014 (the Navy has indicated that it may begin SLEP modifications on some aircraft as early as 2012).

Of the four alternatives that CBO analyzed, the first two are limited to extending the service life of existing Hornets. They are generally consistent with various plans the Navy has proposed or is considering:

• Alternative 1: Execute the HFH program on the 509 Hornets suitable for those modifications;
• Alternative 2: Execute the HFH program on 220 Hornets and the more-extensive SLEP on 289 Hornets.

The third and fourth alternatives would combine some service-life extensions for Hornets with changes in planned purchases of new aircraft:

• Alternative 3: Implement the HFH program in the same way that Alternative 1 would, but also increase purchases of Super Hornets by 126 aircraft (beyond the planned total of 515) and decrease purchases of Joint Strike Fighters by 93 aircraft between 2018 and 2023;
• Alternative 4: Modify 509 aircraft through the HFH process and purchase 126 additional Super Hornets, as in Alternative 3, but do not reduce purchases of JSF aircraft.

CBO measured the increase in inventory offered by those alternatives and the funding that each would require relative to a base case under which the service life of Hornets would not be extended and additional aircraft would not be purchased. CBO found that Alternative 1 would increase the Navy’s and Marine Corps’ fighter inventory by an average of 66 aircraft over the 2011–2025 period; Alternative 2 would add an average of 106 aircraft to the inventory; Alternative 3—an average of 128; and alternative 4—an average of 148.

Relative to the cost of the base case in which none of the three approaches are undertaken, the cost of Alternative 1 would be about $2.2 billion higher (in fiscal year 2010 dollars). Alternative 1 has the lowest total cost of the alternatives examined by CBO, but it provides the smallest increase in inventory.

Alternative 2 would provide the largest increase in inventory that can be achieved with the HFH and SLEP modifications currently being considered—but at a cost of about $7.7 billion, it would be more than twice as costly as Alternative 1 when measured per increment of additional service.

Alternative 3 would provide larger increases in inventory than would Alternatives 1 and 2. Moreover, each additional Super Hornet provided under Alternative 3 would offer improved performance (a more-capable radar, longer range, and the ability to carry more weapons) than would a SLEP Hornet. The reduction in JSF purchases would result in fewer of the most advanced aircraft after 2020. At about $3.8 billion to $4.8 billion higher than the cost of the base case, the total cost of Alternative 3 would fall between the costs of Alternatives 1 and 2. In the near term, however, the cost would be substantially higher than for Alternatives 1 or 2 because the savings from reducing JSF purchases would not offset the cost of new Super Hornet purchases until after 2017.

Alternative 4 would provide the largest increase in inventory before 2025 and would also provide increased inventory well beyond 2025, because additional purchases of Super Hornets would not be offset by fewer purchases of JSFs. The advantages of new aircraft provided in Alternative 4 would come at a cost of $12 billion to $13 billion more than under the base case (nearly all of which would be incurred in the next five years). Alternative 4 would be the most expensive per increment of additional service provided between 2011 and 2025.

CBO did not evaluate whether the inventories that would be realized under the various alternatives would be sufficient to meet the Navy’s and Marine Corps’ operational needs. Further, if additional delays were experienced with the JSF program, the inventories realized under all four alternatives would be lower, and any corresponding shortfall would be larger.

This report was prepared by David Arthur of CBO’s National Security Division.

The Navy is required by law to submit a report to the Congress each year that projects the service’s shipbuilding requirements, procurement plans, inventories, and costs over the coming 30 years. Since 2006, CBO has been performing an independent analysis of the Navy’s latest shipbuilding plan at the request of the Subcommittee on Seapower and Expeditionary Forces of the House Armed Services Committee. Today CBO released its latest report that summarizes the ship requirements and purchases described in the Navy’s 2011 plan and estimates their implications for the Navy’s funding needs and ship inventories through 2040.

The Navy’s report—issued in February and covering fiscal years 2011 to 2040—contains some significant changes in its long-term goals for shipbuilding. The new plan appears to increase the required size of the fleet compared with earlier plans, while reducing the number of ships to be purchased—and thus the costs for ship construction—over the next three decades. Despite those reductions, the total costs of carrying out the 2011 plan would be much higher than the funding levels that the Navy has received in recent years, according to analysis by CBO. Specifically,

• Language in the 2011 shipbuilding plan and in related briefings by the Navy implies that the service’s requirement for battle force ships (aircraft carriers, submarines, surface combatants, amphibious ships, and some logistics and support ships) now totals 322 or 323—up from 313 in the Navy’s three previous long-term plans. The battle force fleet currently numbers 286 ships.
• The 2011 plan calls for buying a total of 276 ships over the 2011–2040 period: 198 combat ships and 78 logistics and support ships. That construction plan is insufficient to achieve a 322- or 323-ship fleet. In comparison, the previous shipbuilding plan (for 2009) envisioned buying 40 more combat ships and 20 fewer support ships over 30 years.
• If the Navy receives the same amount of funding for ship construction in the next 30 years as it has over the past three decades—an average of about $15 billion a year in 2010 dollars—it will not be able to afford the purchases in the 2011 plan.
• The Navy estimates that the construction of the new ships in the 2011 plan will cost an average of about $16 billion per year. Expenditures for other activities that are typically funded from the Navy’s budget accounts for ship construction—such as refueling nuclear-powered aircraft carriers and outfitting new ships with various small pieces of equipment after the ships have been built or delivered—will add about $2 billion to the Navy’s average annual shipbuilding costs under the 2011 plan, in CBO’s estimation, bringing the average cost to a total of $18 billion per year.
• Using its own models and assumptions, CBO estimates that the average total cost to implement the Navy’s plan will come to $21 billion per year. about 18 percent higher than the Navy’s estimates overall. That figure masks considerable variation over time, however: CBO’s estimates are 4 percent higher than the Navy’s for the first 10 years of the plan, 13 percent higher for the following decade, and 37 percent higher for the final 10 years of the plan. Those differences result partly from different estimating methods and different assumptions about the design and capabilities of future ships. The estimates also diverge because CBO accounted for the fact that costs of labor and materials have traditionally grown much faster in the shipbuilding industry than in the economy as a whole, whereas the Navy does not appear to have done so. That difference becomes more pronounced over time.

This study was prepared by Eric Labs of CBO’s National Security Division.

To attract and retain the military personnel it needs, the Department of Defense (DoD) must offer a competitive compensation package—one that adequately rewards service members for their training and skills as well as for the rigors of military life, particularly the prospect of wartime deployment. This morning CBO senior analyst Carla Tighe Murray testified before the Senate Armed Services Committee’s Subcommittee on Personnel to discuss compensation for members of the armed forces.

The best barometer of the effectiveness of DoD’s compensation system may be how well the military attracts and retains high-quality personnel. Between 2005 and 2008, the services periodically had trouble recruiting or retaining all of the high-quality personnel they needed. To address those problems, the Congress authorized increases in both cash compensation (such as pay raises and bonuses) and noncash compensation (such as expanded education benefits for veterans and their families). All of the services met their recruiting and retention goals in 2009 and are continuing to do so in 2010. However, the relationship between specific changes in pay rates and benefits and the amount of recruiting and retention is not clear. In particular, a variety of factors—including economic conditions—may have significant effects on DoD’s ability to recruit and retain personnel during a given period.

Another way to determine whether military compensation is competitive is to compare it with civilian compensation. Today’s testimony focused primarily on such comparisons—which can be useful but not definitive, in part because of the significant differences in working conditions and benefits between military and civilian jobs. The testimony addressed three questions:

How does military cash compensation compare with civilian wages and salaries?

CBO’s most recent analysis, for calendar year 2006, found that average cash compensation for service members (including tax-free cash allowances for housing and food) was greater than that of more than 75 percent of civilians of comparable age and educational achievement. Since then, military pay raises have continued to exceed the increases of civilian wages and salaries, so that finding has not changed.

Is there a “gap” between civilian and military pay raises over the past few decades?

The answer depends on how narrowly military cash pay is defined. One common method of comparison is to calculate the cumulative difference between increases in military and civilian pay using military basic pay, a narrow measure of cash compensation that does not include, for example, tax-free allowances for housing and food. Applying that method would indicate that, cumulatively, civilian pay rose by about 2 percent more than military pay between 1982 and the beginning of 2010. But that measure does not encompass the full scope of military cash compensation. Using a broader measure that includes cash allowances for housing and food indicates that the cumulative increase in military compensation has exceeded the cumulative increase in private-sector wages and salaries by 11 percent since 1982. That comparison excludes the value of noncash and deferred benefits, which would probably add to the cumulative difference, because benefits such as military health care have expanded more rapidly than corresponding benefits in the private sector.

How would the costs of using bonuses to enhance recruiting and retention compare with the costs of adding more to basic pay?

Traditionally, service members receive an across-the-board increase in basic pay each calendar year, and proposals are frequently made to boost the rate of increase. Changing the basic-pay raise that would take effect on January 1, 2011, from the 1.4 percent requested by the President and DoD to 1.9 percent, for example, would increase DoD’s costs by about $350 million in 2011 and by a total of about $2.4 billion through 2015, CBO estimates. A larger pay raise would probably enhance recruiting and retention, although the effect would be small. One possible alternative would be to increase cash bonuses by enough to achieve the same recruiting and retention effects as a higher across-the-board pay raise. That approach would have a smaller impact on DoD’s costs because bonuses can be awarded only to the types of service members the military needs most. Bonuses can also be focused on current personnel or potential enlistees who are at the point of making career decisions. Unlike pay raises, bonuses do not compound from year to year (a higher pay raise in one year will cause the following year’s raise to be applied to a higher base), and bonuses do not affect retirement pay and other elements of compensation.

What amount of budgetary resources might be needed in the long term to carry out the Administration’s plans for defense that were proposed during 2009? CBO addresses that question in a study prepared at the request of the Chairman and the Ranking Member of the Senate Budget Committee. The study updates the resource projections contained in CBO’s January 2009 paper Long-Term Implications of the 2009 Future Years Defense Program, reflecting changes that the new Administration made to defense plans in preparing the President’s budget request for fiscal year 2010.

In CBO’s estimation, carrying out the Department of Defense's (DoD’s) 2009 plans for 2010 and beyond—excluding overseas contingency operations (the wars in Iraq and Afghanistan and some much smaller military actions elsewhere)—would require defense resources averaging at least $573 billion annually (in 2010 dollars) from 2011 to 2028. That amount, CBO’s base projection, is about 7 percent more than the $534 billion in total obligational authority the Administration requested in its regular 2010 budget, again excluding overseas contingency operations.  The projection also exceeds the peak of about $500 billion (in 2010 dollars) during the height of the Reagan Administration’s military buildup in the mid-1980s. During that period, for example, DoD was pursuing a Navy fleet of 600 battle force ships, more than twice the size of the current fleet of 287.

The department’s resource requirements to execute the same plans could be even greater. CBO has also estimated some “unbudgeted” costs that reflect the likelihood that weapon systems would cost more than initially estimated; that medical costs and fuel prices would grow at rates faster than DoD has anticipated; and that pay raises the Congress enacts for military personnel and DoD’s civilian employees might exceed the percentages in the department’s plans. Furthermore, additional appropriations may be necessary to fund overseas contingency operations.

Including the unbudgeted costs increases the projection to an annual average of $632 billion through 2028, or 18 percent more than the regular funding requested for 2010. Some 35 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations; in particular, the analysis includes the potential costs—about $20 billion per year—of deploying 30,000 troops to contingency operations from 2013 through 2028. The total costs of $670 billion at the endpoint in 2028 would approach the peak of the past three years (measured in 2010 dollars), which includes the height of operations in Iraq.

Not included in the unbudgeted cost projections, however, is the funding needed to increase U.S. presence in Afghanistan as the President announced on December 1, 2009.  Although the Administration’s 2010 budget planned for an increase in U.S. service members in Afghanistan from 59,000 to 68,000, neither that budget nor CBO’s projection anticipated the further increase of 30,000 troops in Afghanistan. (See CBO’s recent analysis of the funding needed to support an additional 30,000 troops in Afghanistan.)

This study was prepared by a team led by Matthew Goldberg; the primary authors were Adam Talaber and Daniel Frisk of CBO’s National Security Division.
 

Yesterday CBO senior analyst Eric Labs testified before the House Armed Services Committee’s Subcommittee on Seapower and Expeditionary Forces to discuss the challenges that the Navy is facing in its plans for building its future fleet. Specifically, the testimony focused on three matters: the Navy’s draft shipbuilding plan for fiscal year 2011; the effect that replacing Ohio class submarines (certain submarines that carry ballistic missiles) with a new class of submarines will have on the Navy’s shipbuilding program; and the number of ships that may be needed to support ballistic missile defense from the sea. CBO’s analysis of those issues indicates the following:

• If the Navy receives the same amount of money (adjusted for inflation) for ship construction in the next 30 years that it has over the past three decades—an average of about $15 billion per year in 2009 dollars—it will not be able to execute its fiscal year 2009 plan to increase the fleet from 287 battle force ships to 313. As a result, the draft 2011 shipbuilding plan drastically reduces the number of ships the Navy would purchase over 30 years, leading to a much smaller fleet than today’s fleet or the one envisioned in the 2009 plan.
• The draft 2011 shipbuilding plan increases the Navy’s stated requirement for its fleet from 313 ships to 324 through 2040, but the production schedule in the plan would buy only 222 ships, too few to meet the requirement.  The reduction would come from the Navy’s combat ships.  By 2040, the fleet would decline to 237 ships: 185 combat ships and 52 logistics and support ships.  In comparison, today’s fleet has 287 ships:  239 combat ships and 48 logistics and support ships.
• CBO’s preliminary estimate is that implementing the draft 2011 shipbuilding plan would cost an average of about $20 billion per year (in 2009 dollars) for all activities related to ship construction (including modernizing some current surface combatants and refueling ships’ nuclear reactors). A more detailed estimate will follow after the Navy formally submits its final 2011 plan to the Congress in February with the President’s budget request.
• Replacing the 14 ballistic missile submarines (SSBNs) of the Ohio class—which are due to start reaching the end of their service lives in the late 2020s—with 12 new SSBNs could cost about $85 billion.
• Sea-based ballistic missile defense, a relatively new mission for the Navy, could require a substantial commitment of resources. That commitment could make it difficult for the Navy to fund other ship programs.

CBO’s Acting Assistant Director in charge of the National Security Division, Matt Goldberg, testified today before the House Committee on Armed Services about the long-term implications of the fiscal year 2010 budget submission for the Department of Defense (DoD). Today’s testimony is similar to CBO’s testimony before the House Budget Committee last month. Decisions about national defense that are made today—whether they involve weapon systems, military compensation, or numbers of personnel—can have long-lasting effects on the composition of the nation’s armed forces and the budgetary resources needed to support them.

In previous years, CBO used DoD’s Future Years Defense Program (FYDP), which the department typically prepares each fiscal year and submits to the Congress as part of the President’s budget request, as a key source of information for projecting defense spending. This year, however, the Administration did not submit a FYDP. CBO’s projections for fiscal years 2011 through 2028 are based on the President’s 2010 budget request; changes to defense plans announced in early April 2009 by Secretary of Defense Robert M. Gates; and other sources, including press releases and briefing materials.
 
Base Projections of Defense Spending
 
CBO’s base projection of DoD’s current plans averages about $567 billion annually (in constant 2010 dollars) from 2011 to 2028—excluding overseas contingency operations (that is, overseas military operations against hostile forces, such as those in Iraq and Afghanistan). That amount is about 6 percent more than the $534 billion in total obligational authority requested by the Administration in its regular 2010 budget. Four main factors in particular account for the higher resources in the long term:

• The likelihood of continued real growth in pay and benefits for DoD’s military and civilian personnel;
• Projected increases in the costs of operation and maintenance (O&M) for aging equipment as well as for newer, more complex equipment;
• DoD’s plans to develop and field advanced weapon systems to replace many of today’s military systems that are nearing the end of their service lives; and
• Investments in new capabilities, such as advanced intelligence, surveillance, and reconnaissance systems, to meet emerging security threats.

Rather than having funding provided through supplemental and emergency appropriations, the Administration has requested a full year of anticipated appropriations for overseas contingency operations along with its regular defense budget request for fiscal year 2010. The Administration’s request of $130 billion would support 100,000 service members in Iraq and 68,000 in Afghanistan. CBO does not have access to DoD’s estimates of costs for overseas contingency operations in 2011 or later that would have been contained in the 2010 FYDP.
 
Potential for Higher Costs
 
The long-term demand for defense resources could be larger than CBO’s base projections. CBO has developed a scenario under which, consistent with the Status of Forces Agreement signed by the governments of Iraq and the United States in November 2008, all U.S. troops would be withdrawn from Iraq by December 31, 2011. Under that scenario, the total number of U.S. military personnel deployed worldwide would decline to 30,000 starting in fiscal year 2013, although those troops would be in unspecified locations and not necessarily in Iraq or Afghanistan. CBO estimates that supporting that number of deployed service members would require recurring annual appropriations of about $20 billion in 2010 dollars. CBO refers to those costs as “contingency unbudgeted costs.”
 
Other factors also could increase defense resources above CBO’s base projections. There could be higher costs for developing and purchasing new weapon systems. In addition, as has been true historically, medical costs could rise more rapidly than DoD has assumed. Accounting for those and other factors, as well as contingency costs, CBO has projected the “total unbudgeted costs” of current defense plans. The inclusion of total unbudgeted costs increases the overall projection to an annual average of $624 billion through 2028, or 17 percent more than the regular funding requested for 2010. Some 38 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations.

Today, CBO’s Acting Assistant Director of the National Security Division testified before the House Budget Committee about the long-term implications of the fiscal year 2010 budget submission for the Department of Defense (DoD). Decisions about national defense that are made today—whether they involve weapon systems, military compensation, or numbers of personnel—can have long-lasting effects on the composition of the nation’s armed forces and the budgetary resources needed to support them.

In previous years, CBO used DoD’s Future Years Defense Program (FYDP), which the department typically prepares each fiscal year and submits to the Congress as part of the President’s budget request. This year, CBO’s projections for fiscal years 2011 through 2028 are based on the President’s 2010 budget request; changes to defense plans announced in early April 2009 and subsequently by Secretary of Defense Robert M. Gates; and other sources, including press releases and briefing materials.

Base Projections of Defense Spending

CBO’s base projection of DoD’s current plans excluding overseas contingency operations (those in Iraq, Afghanistan, and elsewhere) would average about $567 billion (in constant 2010 dollars) annually from 2011 to 2028.  That amount is about 6 percent more than the $534 billion in total obligational authority requested by the Administration in its regular 2010 budget. Four main factors in particular account for the higher resources in the long term:

• The likelihood of continued real growth in pay and benefits for DoD’s military and civilian personnel;
• The projected increases in the costs of operation and maintenance for aging equipment as well as for newer, more complex equipment; 
• DoD’s plans to develop and field advanced weapon systems to replace many of today’s military systems that are nearing the end of their service lives; and
• Investments in new capabilities, such as advanced intelligence, surveillance, and reconnaissance systems, to meet emerging security threats.

Rather than having funding provided through supplemental and emergency appropriations, the Administration has requested a full year of anticipated appropriations for overseas contingency operations along with its regular defense budget request for fiscal year 2010. The Administration’s request of $130 billion would support 100,000 service members in Iraq and 68,000 in Afghanistan. CBO does not have access to DoD’s estimates of costs for overseas contingency operations in 2011 or later that would have been contained in the 2010 FYDP.

Unbudgeted Costs

The long-term demand for defense resources could be larger than CBO’s base projections. CBO has developed a scenario under which, consistent with the Status of Forces Agreement signed by the governments of Iraq and the United States in November 2008, all U.S. troops would be withdrawn from Iraq by December 31, 2011. Under that scenario, the total number of U.S. military personnel deployed worldwide would decline to 30,000 starting in fiscal year 2013, although those troops would be in unspecified locations and not necessarily in Iraq or Afghanistan. CBO estimates that supporting that number of deployed service members would require recurring annual appropriations of about $20 billion. CBO refers to those costs as “contingency unbudgeted costs.”

Other factors also could increase defense resources above CBO’s base projections. There could be higher costs for developing and purchasing new weapon systems. In addition, as has been true historically, medical costs could rise more rapidly than DoD has assumed. Accounting for those and other factors, as well as contingency costs, CBO has projected the “total unbudgeted costs” of current defense plans. The inclusion of total unbudgeted costs increases the overall projection to an annual average of $624 billion through 2028, or 17 percent more than the regular funding requested for 2010. Some 38 percent of the total unbudgeted costs between 2013 and 2028 are associated with overseas contingency operations.