I‘. v I 7, ' - .:~t“:3 T“ ‘K, ‘ 1 /' r j '1"? /5”’ /,r“""“' " 1“ ' ,v ‘V5 "’_ "'3. H‘) /x ,1} fl“.- ::::,_| \ . 5- "1’ I V’ , .v ' ,. ‘ I , ‘ ' 4 ~.,1 V‘ 1 r‘ " I 1/ aw.» .9 ,g.-' L-r 4 85-1036 F - 7 ‘1 T "\~<*: Congressional Research Service The Library of Congress Washington, D.C. 20540 POLICY ALERT GRAMM-RUDMAN-HOLLINGS DEFICIT REDUCTION PROPOSAL: DEFENSE IMPLICATIONS OF THE SENATE-PASSED VERSION Govennnent Pubhcafionfi Unit NL 22 3994 Washington Umversity Librafles. St. Louis, MO 63130 ‘ ~. "‘ "\ 'V‘ (Q N I’ '» ¥\ ‘r /' 7 T“ -”'I- ' as '41\ , rfi-.: . «,2 V g,.. ‘- /, r g___ ._4 ‘L . v ' ".\ "'-~ v-~« ~-— .. Hi rt. /. , 5 z r_ of‘ ~;. v-» I L \ ‘xx _ 9,; J‘ 3 . -y,.‘ I ‘ O ‘ ‘ ‘ .4. ‘ r v I 4*.‘ =~. i Alice C. Maroni Analyst in National Defense and Robert E. Foelber Analyst in National Defense Foreign Affairs and National Defense Division November 4, 1985 UV 10 B ssouri - Colu I Tull IN W394 ll a Hill I‘) 010 ylflii DEFENSE IMPLICATIONS OF THE SENATE-PASSED VERSION OF THE GRAMM-RUDMAN-HOLLINGS DEFICIT REDUCTION PROPOSAL INTRODUCTION On October 10, 1985, the Senate passed the Balanced Budget and Emergency Deficit Control Act of 1985, otherwise known as the Gramm-RudmaneHollings deficit reduction proposal. (The bill was a part of H.J.Res. 372, to increase the public debt limit.) Because the Senate-passed proposal has received brief -- if intensive -- review in Congress, considerable uncer- tainty remains as to precisely how it would affect the defense budget. Differing interpretations of the meaning of various aspects of the legislation -- e.g., how to apply a "uniform percentage" to reductions in "controllable expenditures" -- lead to very different projections of the. distribution of outlay reductions between defense angfnon-defense programs and among different programs within the defense budget if the proposal were to take effect. Debate is likely to grow over the extent to which deficit reduction measures should apply to the defense budget and how the burden on the defense budget should be apportioned among defense programs. This paper examines the following questions: I A. What are the main elements of the Senate-passed deficit reduction provision? B. What would be the defense share of total Federal outlay reductions under the Gramm—Rudman-Hollings proposal? _._......._. CR5-2 C. How would the outlay reductions within the defense budget be distributed? D. What are some of the arguments of critics and advocates regarding the proposal's impact on defense? E. What are possible implications for the congressional defense budget process? B This paper does not address either the House-passed deficit reduction amendment (adopted November 1, l985) or other proposed alternatives to the Senate-passed version of the proposal. Nor, does it_address non-budgetary issues such as the question of the constitutionality of the proposal. A. bibliography of selected references on the Senate-passed proposal is provided. I A. PROPOSAL HIGHLIGHTS The Gramm-Rudman~Hollings deficit reduction proposal is designed to reduce the Federal deficit to zero in FY 1991 by setting annual deficit V targets and ceilings. The targets begin at $180 billion in FY 1986 and decline each year by $36 billion. The ceilings, which trigger the deficit reduction provisions, begin at $192.6 billion in FY 1986, drop to $151.2 billion in FY 1987, and then decline each year by $37.8 billion. if The procedures outlined in the proposal represent a substantial revision to the congressional budget process established by the 1974 Budget Act. According to the proposal, if the projected deficit -- the average of the deficit projections made by the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) -- exceeds the if The ceiling is 7% higher than the deficit target in FY 1986 and 5% higher in subsequent years. ' CRS-3 ceiling for a given year, the President would be required to take steps to reduce Federal outlays based on the following formula. One-half of the required outlay reductions, to be ordered by the President, would come from "automatic spending increase programs," e.g., entitlements, (category I programs), while the other half would be "sequestered" or withheld from "controllable expenditures" (category II programs). If projected automatic spending increases amounted to less than 50% of the required reduction in Federal outlays, the remainder of the deficit reduction would be taken from controllable outlays. In reducing controllable expenditures, the formula calls for outlay reductions of a "uniform percentage" to be distributed among "each affected program, project, or activity (as defined in the most recently enacted relevant appropriations Acts and accompanying committee reports) or . . . each affected account if not so defined." For example, if controllable defense outlays constitute 60% of all controllable outlays, 60% of the reductions in category II programs would be made in defense. In the case of category I programs, defense expenditures may be re- duced in three ways: by allowing some unexpended, unobligated appropriations from previous years to go unspent and lapse, by renegotiating contracts and saving outlays from prior-year obligations, and/or by reducing new budget authority for the current year. One of the issues currently being debated is whether, under the Gramm-Rudman~Hollings proposal, outlays from prior-year contracts count as "controllable expenditures,’ and hence whether outlay savings can be achieved by renegotiating prior-year contracts. Most of the outlay reduction requirements would probably necessitate cutting current year budget authority. Very different percentage CRS-4 cuts in individual program budget authority, however, would be required to generate uniform percentage cuts in outlays. Spending affected by the President's sequester order would be with- held from obligation for 30 days following the issuance of the order, to allow Congress time to consider an alternative deficit reduction plan. The order would take effect in the absence of a congressionally approved alternative. The procedures would not take effect if the projected deficit, were less than 5% (7% in FY 1986) above the deficit target for that fiscal year. B. DEFENSE'S SHARE OF OUTLAY REDUCTIONS The impact that imposition of the Gramm-Rudman-Hollings deficit reduction provisions would have on the size of the defense budget over the next six years can not be easily estimated. 2] To illustrate the effect of the proposal on defense outlays, the Congressional budget Office prepared a hypothetical example applying the proposed mechanism to achieve a reduction of $25 billion in Federal outlays in FY 1986. 2/ As estimated by CBO, defense outlays would be 3] The size of the outlay reduction would depend on many factors, including, economic conditions, congressional spending and revenue legis- lation, the size of annual deficits in FY 1986-1991 as estimated by OMB and CBO, the programs included in the two major program categories (cate- gories I and II) for which funding may be reduced, the definition of "controllable" outlays, the size of defense's share of controllable outlays in category II programs, and how much of the deficit reduction imposed by Gramm-Rudman-Hollings can be achieved by halting automatic program increases. 2/ CBC prepared a series of hypothetical examples for use by the con- ferees considering the Gramm-Rudman-Hollings proposal in which alternative assumptions were made about outlay controllability and the composition of category I programs. CRS-5 reduced by either $10.4, $11.8, or $13.7 billion, depending on the program composition of category I and how one defines outlay "controllability." ff Based on CBO's calculation, cuts in defense outlays would represent between 42-55% of the total outlay reduction. Measured as a percentage of total defense and outlays, a cut of $10.4 to $13.7 billion would represent a reduction of more than 4% in total DOD outlays. The remaining outlays cut from non-defense programs ($11.3 to $14.6 billion) would represent a reduction of only 2~3Z in total non-defense outlays. §/ Requirements to achieve outlay cuts of lg§§_than the $25 billion would reduce the disproportionate effect on defense, while larger outlay cuts would increase the disproportionate effect on defense .(as the larger outlay cut is compared to a constant defense outlay base). Some analysts are interested in the implications of the Gramm-Rudman- Hollings provisions on real growth in defense as well as the size of the outlay cut imposed. Given the uncertainties, estimating future real growth in defense budget authority and outlays under the Senate-passed proposal is highly problematical. It seems clear, however, that the greater the excess of a projected deficit over the ceiling, the more dramatic would be the effect on the growth in defense spending. It is possible to conclude that the Gramm-Rudman-Hollings proposal would, given 3/ Some observers believe that the Senate-passed version of the Gramm-Rudman-Hollings proposal would require that anywhere from one-half to two-thirds of the total Federal outlay reduction would be made in defense spending. Les Aspin. An Open Letter to Secretary Weinberger. The Washington Post. October 27, 1985. p. B8. 2/ This measurement compares the outlay cut that would be imposed with total defense and total non-defense program outlays (minus interest on the national debt). CRS-6 sizable required cuts, limit real growth in defense funding and spending levels considerably below the estimated levels assumed in the Reagan Administration five-year plan of August 1985. Some have estimated that real growth might even be negative, that is, the purchasing power of DOD budgets might actually decline under the Senate-passed deficit reduction provisions compared to recent Administration projections. C. IMPACT ON VARIOUS DEFENSE PROGRAMS There are two critical factors relevant to determining the impact of the Gramm-Rudman-Hollings deficit reduction provisions on individual de- fense programs. They are 1) whether the uniform percentage reductions would apply to individual defense programs and 2) the meaning of "control- _lable expenditure." Level at Which Cuts are Imposed In an attempt to safeguard congressional budget priorities in the Presidential order to sequester funds, the original Gramm-Rudman-Hollings proposal was amended by the Senate to require that reductions must be made proportionally across the board in "each affected program, project, or activity" as defined in the relevant appropriations bills or committee reports. Because annual defense appropriation bills are accompanied by committee reports that contain considerable line item budget detail, the effect of this provision according to some Members would be to apply cuts uniformly to all individual defense programs in category II. CRS~7 Notably, not all defense programs are mentioned in committee reports. In some budget accounts, the only programs listed are those for which requested funding has been changed by congressional action. Strictly interpreted, according to some, the Senate-passed proposal calls for outlay reductions only in those specific programs for which requested funding has already been changed by Congress. Others maintain that required outlay reductions would be applied at a higher level of program aggregation, allowing greater flexibility in allocating reductions among individual programs. Q] Regardless of the level of detail at which reductions would be made, the Gramm-Rudman—Hollings proposal stipulates that no program terminations may be made. Some observers have argued that, as a result of this provision, program funding might be slowed indiscriminately, resulting in procurement stretch-outs and higher unit costs. 1/ Alternative Views of "Controllable Expenditures" As with determining the relative distribution of reductions between defense and non-defense programs, ambiguities in the meaning of "control- lable" outlays make it difficult to assess precisely the implications of reductions for various individual defense programs. One interpretation gj U.S. Congress. House. Armed Services Committee. Press Release. October 29, 1985. 1] Some have asserted that, in cases where only a few units would be procured, even small reductions could mean weapons production might not be possible, given available resources. See Les Aspin. An open letter to Secretary Weinberger. The Washington Post. October 27, 1985. p. B8. CRS-8 (Case I in table I on page 10) suggests that gll_defense outlays are con- trollable, and hence that any reduction in defense spending would have to be applied uniformly across all programs.. A 10% reduction in defense spending would thus require outlay reductions of 10% for all defense programs -- investment and support. According to this interpretation, the relative distribution of outlays among defense investment and support programs would remain the same before and after application of the sequester process. The House Armed Services Committee has prepared an estimate that shows that, if the reduction were applied uniformly to all” defense programs, 44% of the outlay reduction would come from investment programs and 53% from support programs. An alternative interpretation (Case II in table I on page 10) would exempt outlays generated by prior-year contracts. In this case, a 10% defense outlay reduction would be applied uniformly to a smaller set of defense programs with a dramatically different impact. Because a large percentage of defense procurement outlays in any given year result from prior-year contracts, the outlay cuts in defense according to this second interpretation, while uniform, would fall much more heavily on operation and support programs. The House Armed Services Committee has produced one estimate showing that, if one exempted outlays from prior-year con- tracts, 23% of the reduction in defense outlays would come from investment programs and 74% from support programs. Alternative interpretations of "controllable expenditures" also have a significant impact on the distribution of reductions in budget authority to achieve the required cut in outlays. The amount of budget authority needed to achieve a given outlay saving varies because appropriations for CRS-9 different kinds of defense programs -- personnel versus procurement, for example -- are spent at very different annual rates. Ninety-seven percent of all of the funds appropriated for military personnel is spent in the year for which it is appropriated. Thus, a $103 million out in budget authority for a personnel program may generate $100 million in outlay savings. In weapons procurement, where only 13% (on the average) of the funds appropriated annually are spent in the year for which they are provided, a budget authority reduction of as much as $770 million would be required to generate a comparable $100 million in outlays savings. As a result of this relationship, budget authority would have to be reduced by a relatively larger amount if "controllable expenditures" in- cluded outlay savings from prior-year investment contracts. The Housed Armed Services Committee analysis shows a disproportionate reduction made in budget authority for investment f86Z) when prior-year investment con- tracts are considered controllable. The House Armed Services Committee estimates, summarized in table I, illustrate varying distributions of budget authority and outlays produced by alternative definitions of outlay controllability in the application of the Senate-passed proposal. CRS-10 TABLE I. The Effect of Alternative Interpretations of Controllability on Defense Budget Authority and Outlays _y/ (expressed as a percentage of total defense reduction absorbed) I Budget Authority Outlays Case I 3/ Case II 3/ Case ICE] Case II b] Operations and Support Programs . 13 42 53 74 Investment Programs 86 55 44 23 3/ Case I assumes spending from prior-year obligations i§_ controllable. b/ Case II assumes spending from prior-year obligations is not controllable. Source: U.S- Congress. House. Armed Services Committee. Press Release. October 29, 1985. D. ELEMENTS OF THE DEBATE Table II summarizes selected arguments made by advocates and critics of the Gramm-Rudman-Hollings deficit reduction proposal. The arguments do not necessarily address the same issues and may reflect differing interpretations of key legislative provisions. Not all the arguments identified belom as those of advocates and critics are endorsed by all advocates or critics of the proposal. STABLE II. Selected Arguments Made by Critics and Advocates of the Gramm-Rudman+Hollings Deficit Reduction Proposal Advocates Category Critics National Defense budgets generated The state of the economy Security by the Gramm-Rudman- is a key component of Hollings deficit reduction national security. The proposal would seriously nation's economic health impair U.S. military force is threatened by recent capability. They would high Federal budget be insufficient to counter deficits and requires continuous improvement in nothing less than a Soviet military force capa- rigid formula to force bility and to correct Congress and the President pexisting U.S. military to take decisive action deficiencies. to reduce the deficit. 3/ Large, poorly reasoned Slower growth in defense reductions in the defense budget authority will not budget send the wrong endanger U.S. national message to the Soviet security which has bene- Union about U.S. resolve fitted from large defense which could undermine budget increases in recent America's stance in years. arms control negotiations. a/ . . . our proposal brings a dose of reality and will force some choices are made . . . . A Reply to Bill Bradley. hard choices in domestic spending, defense spending and taxes. But that is the intent. It is far preferable to the current process, in which no Senator Warren B. Rudman. The Amendment Works: The Washington Post. October 10, 1985. p. A27. TABLE II. CRS-12 Selected Arguments Made by Critics and Advocates of the Gramm-Rudman-Hollings Deficit Reduction Proposal, Continued . v<~ Advocates Category Critics DOD The proposal would generate The defense outlay reduc- Planning unstable defense spending tions imposed by the and patterns in response to Senate-passed proposal Management fluctuating economic con- would not be made on a Defense's Share of the Cuts ditions without regard to national security require- ments..b/ All defense programs would be cut uniformly, without regard to program differ- ences in funding priority and the extent to which reductions might be reasonably made. The defense budget takes a disproportionately larger share of the likely outlay and budget authority reduction. DOD should be required to take only its "fair share" of the cuts. "line item" basis, pro- viding DOD management flexibility to allocate the burden of the cuts. The current budget process does not provide for a responsible, well-reasoned allocation of resources among defense and non- defense programs and the Senate-sponsored proposal can only repre- sent an improvement. 3/ With the defense budget pro- jected to grow at 3% real growth, defense can much better afford cuts than non-defense programs, many of which are frozen. bf "I think we can all agree that some orderly spending in national defense pattern [sic] is preferred to radical increases and decreases every year. Gramm-Rudman seems to strip us of this possibility." Senator Lawton Chiles. Congressional Record. October 5, 985. p. S.l2732. 2/ "'Gramm-Rudman is a far more balanced approach to defense than what happened this year in the budget process’ . . . in which Congress 'took vir- tually all the real cuts out of defense’ not domestic programs." Rep. Robert S. Walker as quoted in Aviation Week and Space Technology. Legislation To Balance Budget May Force Drastic Defense Cuts. October 28, 1985. p. 21. «J... .I'fi' CCRS-13 E. IMPLICATIONS FOR THE DEFENSE BUDGET PROCESS IN CONGRESS Whatever the substantive effects, it is important to note that the Gramm-Hollings-Rudman deficit reduction formula is specifically designed to restrict Presidential discretion in shaping budget reductions to meet C prescribed deficit targets. The mechanism is not designed to dictate to Congress how it might otherwise meet the prescribed deficit targets. Congress has the opportunity to 1) meet the deficit targets by completing action on all appropriations and revenue bills, thereby avoiding the sequester process; 2) adopt an alternative set of budget reductions in response to the President's sequester order within 30 days of its issuance; or if Congress has not completed action on all appropriation bills and some Federal agencies are being funded by a continuing resolution 3) allow the President's sequester to take effect temporarily until Congress has completed action on pending appropriation bills and met the prescribed deficit targets. The effect of the Gramm-Hollings-Rudman deficit reduction proposal may be either to pressure Congress into completing action on annual appropriations bills before the start of the fiscal year, or to delay further final action on some appropriations bills, in particular the defense appropriations bill which frequently has been approved by Congress after the start of the fiscal year. At the expense of action on pending appropriations bills, Congress may become preoccupied by the need to review the sequester order. CRS-15 SELECTED REFERENCES Aspin, Les. An open letter to Secretary Weinberger. The Washington post October 27, 1985: B8. Bradley, Bill. The Gram/Rudman plan: ‘Congress at its worst.‘ The Washington post. October 9, 1985: A19. Congressional Budget Office. Esthmated impact of Gramm-Rudman amendment on Federal programs. Inserted in the Congressional Record of October 5, 1985 by Senator Lawton Chiles. p. Sl2733—4 ' . Effect of Gramm-Rudman on Defense. Inserted in the Congressional Record of October 10, 1985 by Senator Bill Bradley. p. Sl3051. . Examples of illustrative defense outlay reductions in fiscal year 1985. Inserted in the Congressional Record of October 10, .1985 by Senator Sam Nunn. p. S13090. Documents prepared for the conferees on H.J.Res. 372. A October 94, 1985. Democratic Study Group. The Gramm-Rudman proposal. Special report no. 99-20. October 6, 1985. . Gramm-Rudman revised: fixed up or papered over? Special report no. 99-21. October 10, 1985. Hoffman. David. Weinberger warns on balanced-budget plan. The Washington post. October 21, 1985: A10. . Weinberger, Shultz warn Reagan about budget plan. The Washington post. November 1, 1985: A4. Mann, Paul. Legislation to balance budget may force drastic defense cuts. Aviation week and space technology. October 28, 1985: 21-2. Merry, Robert W. and Carrington, Tim. Budget-process measure sets up choice of 2 evils: raise taxes or cut defense. Wall Street journal. November 4, 1985: 3. CRS-lb Rudman, Warren B. The amendment works: a reply to Bill Bradley. The U.S. Washington post, October 10, 1985: A27. Congress. House. ‘Increasing the Public Debt Limit. Explanation of Senate Amendments to House Joint Resolution 372. Committee print prepared for the use of the House conferees. 99th Congress, 1st session. Washington, U.S. Govt. Print. Off., October 16, 1985. Congress. House. Committee on Armed Services. Press Release. Aspin says OMB finding lots of loopholes in Gramm-Rudman. October 29, 1985. Congress. House. Committee on Government Operations. Statements presented at the hearing on the Balanced Budget and Emergency Deficit Control Act of 1985. Committee print. 99th Congress, 1st session. Washington, U.S. Govt. Print. Off., October 17, 1985. Congress. House. Committee on Government Operations. The Balanced Budget and Emergency Deficit Control Act of 1985. Hearing on H.J. Res. 372, Increasing the Statutory Limit on the Public Debt. 99th Congress, 1st session. Washington, U.S. Govt. Print. Off., October 17, 1985.