Front Loading the CVN-77 ...
or ... Why Sausage Making is Like Maneuver Warfare
Date: Tue, 21 Jul 1998
This message refers to 3 attachments: [1] Sec. 122, CVN-77 Program, National Defense Authorization Act 1998 Conference Report to accompany H.R. 1119, October 23, 1997 [2] "Shipyard says faster-built CVN-77 would save money, but final price tag is unclear as ship is partly a protoype for next carrier class." Virginian-Pilot, January 6, 1998. [3] "Carrier's Cost Understated By Half A Billion," Defense Week, July 13, 1998. Today, the United States spends about $265 billion on defense, almost three times as much as all its potential adversaries combined (China, Russia, Iraq, Syria, Iran, North Korea, Sudan, North Korea, Libya, Cuba). Yet planners in the Pentagon have not be able to construct a proactive strategy for evolving new force structures and capabilities to match the changing set of threats or for financing the much smaller forces of the post-cold war era. My aim in this message to use a case study to explain how factional politics in the military-industrial-congressional complex plant the seeds for continued paralysis. Since the collapse of the Soviet Union, planners in each military service have used a stylized, two-war regional strategy for confronting some combination of Iraq, Iran, or North Korea (combined defense budgets of less that $10 billion) to justify retaining the their existing mix of cold-war capabilities, albeit in smaller force packages, for the intermediate term. They have struggled to protect the status quo over the longer term (2010-2020) by defining notional (imaginary) "peer" or "near peer" competitors. More recently, they have resorted to constructing hypothetical visions of "full spectrum dominance" across the entire spectrum of "asymmetric niche competitors," who may emerge all over the world during the 21st century. There is a common denominator behind their tortured logic, however. It is the unchanging "wish list" for new high-cost, high-complexity, weapons (e.g., the F-22, Comanche helicopter, THAAD missile defense system, the new attack submarine, and a whole litany of precision-guided munitions), together with the supporting reconnaissance, surveillance, and command and control systems to wire these weapons into the SAME kind of all-seeing, all-knowing military machine envisioned by the technological soothsayers of the Cold War. Our capability to execute a two war regional strategy is now an open question. Combat readiness is deteriorating sharply, in part because the requirements of the regional strategy (which includes peace keeping) have led to an over-commitment of a shrinking, albeit, high-cost force structure. Moreover, the cost of maintaining aging cold-war weapons in even a low state of readiness is increasing rapidly, so money has been 'migrating' from the modernization budget to the operating budget for several years now, even though readiness continues to decline. The 'migration' problem exacerbates the existing shortfall in modernization created by low production rates. The new weapons are so expensive, the Pentagon can not buy enough of them to modernize the force on a timely basis, even if Congress approves its plan to increase the procurement budget by 50% by 2003, there are no cost overruns, and modernization budgets continue to increase sharply for 5 to 10 years thereafter. (Note, this kind of budget growth can only be financed by reversing the direction of migration, which, in turn, will create even more pressure to rob the readiness budget). The low rates of replacement will steadily drive up the average age of weapons during the first decade of the next century, and because older weapons are more expensive to maintain and operate, there will be increasing pressure to transfer money out of modernization budget to pay for the rising cost of operations. Finally, it is also clear that a corrupt accounting system renders it impossible to figure out how to resolve the conflicting pressures created by first two problems. Moreover, the budget shambles makes a mockery of the Constitutional precepts of accountability and checks and balances. Bear in mind, the strategy/budget conundrum exists even though we are outspending our three regional adversaries by 26 to 1. The accounting shambles exists even though everyone in the Pentagon has taken a sacred oath to preserve and protect the Constitution (which clearly includes a duty to preserve accountability and protect the system of checks and balances). Bear also in mind, no one in the Pentagon or on Capital Hill has rebutted the analyses upon which the preceding statements about readiness, modernization, and corrupt accounting systems are based. Nevertheless, the preparations for the summer program/budget review show conclusively that senior leadership intends to IGNORE these problems for yet another year. No doubt planners in the Pentagon (and "pro-defense" big spenders in Congress) will ask the President for more money to execute the two-regional war strategy over the next six years, but when the Defense Department is outspending all its regional adversaries by 26 to 1, and its accounting system is broken, there is NO WAY anyone can assure the taxpayer that increasing the budget will match our strategy or program plans to the world's changing conditions. So, why are decision makers paralyzed? To answer this question, we need to look inside our federated system of distributed decision making. We need to examine how the individual players in the military-industrial-congressional complex game the system for their narrow advantage. The decision by Congress to accelerate spending for the next Nimitz class, nuclear powered aircraft carrier, the CVN-77, provides an excellent case study of the roots of paralysis. First, some background. Traditionally, money for weapons procurement is appropriated under the concept of "Full Funding." In the case of a warship, this means Congress appropriates the entire cost of a ship in one year. The money would then be spent over the time interval (as much as 8 years) it takes to build the ship. The only exception to the full-funding principle is an early appropriation for advanced procurement to pay for long-lead items, like the containment vessel of a nuclear power plant.. 'Full funding,' in theory, has several advantages: It forces the decision makers in the Pentagon and Congress to make their commitments visible, because they must account for all the money at one time. This forces planners to fit new commitments into the context of ongoing commitments, which helps to avoid over-commitment. Full funding makes the total cost of the program, together with cost overruns, evident to the taxpayer, who pays the bill, and it provides an audit trail for ensuring accountability and assessing liability when problems arise. Of course, all these advantages are theoretical, because they assume integrity in the bookkeeping system. The alternative to 'full funding' is 'incremental funding.' Under this concept, Congress appropriates money to continue work on a year by year basis. Incremental funding makes it easier to start a program and keep it going, because Congress needs only to appropriate enough money to start or continue work for a year. Under an incremental funding plan, it may not even be necessary for the contractor to deliver a product in a given year. The inherent elasticity in measuring work complicates issues of accountability and liability, and because the focus is on inputs rather outputs, there is no well-defined baseline for measuring performance, particularly if the contractor is not required to deliver a product. CVN-77 Case Study. The Defense Department's Fiscal Year 1998 budget plan, submitted to Congress in February 1997, contained a normal full funding schedule for CVN-77, with about $700 million for advanced procurement in Fiscal Year 2000 and about $4.5 billion in 2002 for the CVN-77. Under this plan, CVN-77 would be delivered to the Navy in 2008. Newport News Shipbuilding (NNS), the prime contractor for CVN-77, began to lobby Congress for a change in the funding schedule in the Spring of 1997. Without a change, NNS claimed it would have to lay off 2000 to 3000 pipe fitters, welders, and electricians as construction of the USS Ronald Reagan (CVN-76) approached completion in 2002. Many of these people would leave the area or find other jobs, and NNS said it would have to hire and train new employees, which would raise the cost of the CVN-77 by the time of its full-funding appropriation in 2002. William P. Fricks, the CEO of NNS, said he could save jobs and reduce the total cost of the CVN-77, if Congress accelerated appropriations by two years and INCREMENTALLY FUNDED the CVN-77 over the four years between Fiscal Year 1998 and 2001. Despite the two-year acceleration in the funding schedule, NNS would still deliver the CNN-77 to the Navy in 2008, however. Fricks called his plan 'Smart Buy' and said this procurement strategy would require to Congress appropriate $345 million in FY 1998. He claimed 'Smart Buy' would save $600 million over the long term, because the acceleration of funding plus the shift to incremental funding would enable NNS to preserve a strong supplier base and shipbuilding skills during the construction gap between CVN-76 and CVN-77. His reference to a "supplier base" is a veiled allusion to protecting jobs all over the nation. (Fricks' idea is an old one. There is a sordid history of Incremental Funding in ship construction, with horror stories dating back to at least 1816, which is one of the reasons why Congress adopted a Full Funding policy, but that will be the subject of my next message.) Congress took the bait and slipped the nose of Incremental Funding into the programmatic tent, when it approved the National Defense Authorization Act for FY 1998 in October 1997. Sec. 122 of the House-Senate Conference Report [Atch #1], which accompanied the act, effectively approved Fricks' Smart Buy proposal. But instead of authorizing $345 million of new money in FY 1998, Congress authorized only $50 million in new money [paragraph (b)] and gave the Secretary of Defense the authority, but did not require him, to transfer $295 million from other programs [paragraph (c)] to make up the difference. The FY 98 Authorization also established a "cost cap" of $4.6 billion [paragraph (f)(1)], which is also consistent with "Smart Buy," being about $600 million less than the money programmed under the original Full Funding proposal. The condiments accompanying this feast are more interesting than the main course. Note, for example, Congress inserted an escape clause in the fine print [Atch #1, paragraph (f)(2)(D)] which allows for adjustments in the cost cap if "… there are increases or decreases in costs of the CVN-77 that are attributable to new technology compared to the technology used in CVN-76 aircraft carrier." To be sure, the Authorization bill requires the Secretary of the Navy to report the reasons for any changes in the cost cap when the budget is submitted to Congress each January [paragraph (f)(3)]. But the language says that Secretary of the Navy would report those adjustments which occurred during the preceding fiscal year. The preceding fiscal year would have ended four months earlier on Sept 30. So, the effect of this law is to let adjustments to the "cost cap" creep in incrementally each year, and Congress will be asked to approve or disapprove the new cost estimates after they have occurred. Although the Congressional language authorized the Pentagon to completely fund the $345 million of the first increment of 'Smart Buy' proposal, the fine print did not force the Pentagon to put up all the money. Not surprisingly, decision makers in the Pentagon chose not to transfer the $295 million from other programs. Consequently, the Pentagon budgeted only $50 million for first increment of 'Smart Buy.' But Fricks sold 'Smart Buy' by saying the future savings would occur under a schedule of incremental payments that assumed a much larger amount would be spent in FY 1998. So, by reducing the initial funding from $345 to $50 million, the DoD, in effect, gave NNS an excuse to justify an absence of, or a reduction in, the future savings, should either occur sometime during the next eight years (long after most of the players have left the scene and their promises are forgotten). It seems fair to conclude, therefore, the loose language of the Conference Report turned on the money flow SOONER, made it EASIER for the Navy or NNS to increase costs in the future, but kept the same date for delivering the final product. Officials at Newport News Shipbuilding (NNS) lost no time in exploiting the murky uncertainties implicit in this situation. On January, 6, 1998, Dale Eiseman reported in the Virginian-Pilot [Atch #2] that Navy documents said the cost of the CVN-77 would be $580 million less than its original $5.18 billion price tag. But a NNS official told him the savings did NOT account for the added cost of "new technologies" that the Navy now wants to include in the 90,000 ton carrier. He said the Navy views CVN-77 as "almost a prototype," and while it will have the same hull design as a Nimitz class carrier, it may be very different in other ways. In maneuver warfare, this kind of hedging statement would be called a 'battlefield shaping' operation. Six months later, the chickens started coming home to roost. John Donnelly reported in Defense Week on July 13 [Atch #3] that the Navy's program office estimates that the CVN-77 will probably cost $4.9 billion between 1998 and 2001 (or about $300 million over the $4.6 billion cost cap), but the defense budget includes only $4.45 billion. When Donnelly queried key staff members of the congressional defense panels about this $450 million mismatch, they expressed no concern. On the contrary, it appears they rationalized it as being natural, or at least expected, which should not be surprising considering the loose language in the Conference Report they helped draft and the shaping operation begun by NNS in January. The Defense Power Games. The insertion of an under-funded CVN-77 into the budget raises two general questions about the current state of defense budgeting: (1) Why would the Defense Department deliberately understate the likely cost of a new weapon in its budget? (2) Why would staff members on Capital Hill casually dismiss questions about the integrity of Defense Department's budget numbers, given the powers delegated to Congress by the Constitution (Article 1 Section 8), not mention its duty (Article 1 Section 9) to make a "…regular statement and account of the receipts and expenditures of all public money..?" The key to answering these questions is to place particulars of the CVN-77 story in the larger, more general context of the Defense Power Games. [The Defense Power Games Report is one of the documents hot-linked at the web site below my signature block. In the interest of brevity, I will be making a series of declarative statements in the following paragraphs. Readers who doubt the veracity of these statements are urged to read this report as well as the relevant sections of the two other reports available at the web site.] The Defense Power Games are a bureaucratic strategy for waging budget warfare in Washington. The adversary is the system of distributed decision-making power enshrined by checks and balances of the Constitution. The Defense Power Games employ various combinations of the two complimentary tactical techniques, known as Front Loading and Political Engineering, to wage the budget war (much like maneuver-warfare practitioners use combined-arms fire and movement techniques on a real battlefield). The strategic aim in a Washington budget war is to insensibly infiltrate the distributed decision-making system at all levels in order to turn on the money flow and then build a powerful patronage network to ensure the money continues to flow over the long term. The Front Loaders are the penetration troops. They infiltrate the decision-making system by downplaying or misrepresenting the future consequences of current decisions. The aim of a front-loading operation is twofold: (1) get the program STARTED and (2) buy the TIME needed by the Political Engineers to build a political barrier to its cancellation. Political Engineers are the follow-on storm troopers. They exploit the gaps created by the Front Loaders, widening and deepening the initial penetrations by spreading subcontracts and jobs to as many Congressional districts as quickly as possible. These spreading operations may start insensibly, but their operational aim is political blitzkrieg: build up jobs and profits in congressional districts rapidly, making their effects more visible and powerful over time, until their brutish ubiquity PARALYZES the discretionary decision-making power of the Executive and Legislative branches of government. There are many tactics for misrepresenting the future consequences of current decisions, but by far, the most popular Front Loading tactic is the 'buy in.' Low balling a cost estimate by predicting future savings in a budget plan makes it easier to convince decision makers in the Pentagon and Congress to spend more money in the near term. Once the program is approved and inserted into the defense budget, the money starts flowing to the prime contractors, who, with encouragement by the sponsoring agency, start setting up the sub-contracting and vendor relations needed to spread the money to hundreds of congressional districts. The Political Engineers use this money to create the jobs and profits needed to buy the votes of as many members of Congress as possible. The aim of a political-engineering operations is to ensure that a majority in Congress continues to vote for funding the program over the long term. Once the real costs of a front-loaded, politically-engineered program start to become apparent, the sponsoring military service and the contractor use the political leverage gained by the spreading operation to extort even more money out of the President and Congress (i.e., the taxpayers). So, in a grand strategic sense, the Front Loaders and Political Engineers use taxpayer's dollars to finance the construction their nationwide political protection network (a multilateral system of alliances), which increases their future leverage, when it becomes necessary to obtain even more money from the taxpayers. Some people have called this kind of incestuous amplification a "self-licking ice cream cone." On the other hand, those with a mathematical bent will sense immediately that the non-linear, positive feedback loops created by these activities are likely to generate some form of chaos. When one considers that the defense budget is made up of hundreds of front-loaded, politically-engineered programs, the combination of cooked books, inevitable cost growth, and the power to extort money out of Congress is a prescription for confusion and disorder, and ultimately paralysis, on a colossal scale. It is in the nature of front loading to start more programs than can be afforded over the long term. The resultant welter of upward cost pressures wreaks havoc with the entire defense budget. At the same time, the web of overlapping patronage networks created by the Political Engineers makes it difficult, if not impossible, for decision makers in the Pentagon or Congress to pick winners and losers from among the individual programs competing for money. To make matters worse, there will always be constraints on the total amount of money, so the incapacity to pick winners and losers at the microscopic level means that all programs get stretched out over time. Thus, it is difficult or impossible shape priorities and adapt the larger system to changing conditions. So, given these pressures, it is not surprising, indeed, it is inevitable that we have a modernization program that can not produce enough new weapons to modernize the force. Nor is it surprising that decision makers constantly dip into the readiness budgets in a futile effort to bail out the sputtering modernization program. Viewed in this light, the book-keeping shambles is not an aberration. On the contrary, cooked books are a necessary condition to play the game. WRAP UP Now when we place the CVN-77 in the context of the Defense Power Games, we see all the elements of a well-executed front loading operation. Each player in the military-industrial-congressional complex did its part to make the initial infiltration operation succeed over the long term. The contractor promised future savings, if the government accelerated funding, shifted to incremental funding, and did not change the delivery date. Congress accepted the contractor's proposal, set a cost cap, and accelerated the funding, but it wrote the enactment legislation is such a way that the contractor or the Defense Department has all sorts of ways to evade the cost cap over the long term. The Defense Department then iced the cake by funding only about 15% of the first year's funding authority, which was enough to start the program but gave the contractor an excuse to blame the government if the savings don't materialize. The Navy also began considering technological changes which, under the language of the enactment legislation, would permit the contractor to jack up the costs over time. Put all this under the ambiguous umbrella of incremental funding, and it will harder to track costs, more difficult to determine acceptable performance, and easier to stretch out or reschedule payments. The front loading operations launched the CVN-77 program the two aims of any front loading operationit started the program and bought time for the Political Engineers to exploit the initial penetration. Congress is happy and it looks like it will give the Political Engineers another $124 million in Fiscal Year 1999 to expand the penetration.. The Pentagon is happy. The contractor is happy. And if Donnelly's reporting is correct [Atch 3], no one even seems to care that only ten months into 'Smart Buy,' the Navy's program office estimates that CVN-77 may already have blown the cost cap by $300 million. What is particularly troubling about this particular front-loading operation is that the Navy does not need to make a 40 to 50 year commitment to a new aircraft carrier, particularly a commitment that projects technologies that were designed to counter the threat posed by the Soviet Union (or perhaps to the Japanese at Midway?). Today, there is no open ocean threat to the US Navy, and the requirements to project maritime power are changing in the direction of supporting expeditionary ground forces in limited littoral scenarios. No one knows what threat the Navy will face during the next 10 to 50 years, but it will not be the waves of Backfire bombers (that shaped the make up of the current carrier battlegroup), nor will is it likely the Navy will face a requirement to strike fixed strategic targets deep in the heartland of an industrial power with airplanes, particularly given its large investment in unmanned attack weapons like cruise missiles. Moreover, the Navy does not need a new carrier to keep its airplanes at sea. It just placed two conventionally powered super carriers (Ranger and America) in mothballs (for about $70 million per carrier), which means the they have useful life remaining in them. The Navy does not even have enough airplanes to equip its remaining carriers with full-strength units. In the past several years, the size of a carrier air wing has dropped from 60 to 50 to 46 fighter/attack aircraft, yet the most politically persuasive theoretical argument for buying the Nimitz class carriers has been that their gigantic size make them the cheapest way to keep a large number of airplanes at sea. Given the uncertainties posed by the unknown threats of the post-cold war era, the Navy might have been better off keeping its options open by extending the life of the America or Ranger and using the savings the buy the additional airplanes to fully equip its fighter/attack squadrons, which after all, are the primary reason for having a carrier in the first place. But of course, that action would not have satisfied the domestic needs of the military-industrial-congressional complex, which is focused inwardly on its own preservation, rather than on a high readiness, modernized force that is matched to the real threats we face and is accountable to the people who pay for it, not to mention the soldiers, sailors, and airmen we ask to go in harm's way. One could argue that this front loading operation has established a paradigm an open-ended stream of payments, like the flow of R&D dollars into the never-ending Star Wars, in a procurement program. As we will see in the next commentary, this is by no means a new idea. Protecting shipyards by incrementally funding unneeded shipbuilding programs over long periods of time is a prescription for wasting money dating from at least April 29, 1816. Chuck Spinney Archive of past commentaries or reports can be found at <> [Disclaimer: In accordance with 17 U.S.C. 107, the following material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only.] ------[Atch 1]------ NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 1998 CONFERENCE REPORT to accompany H.R. 1119 October 23, 1997. 105th Congress 1st Session HOUSE OF REPRESENTATIVES Report 105-340 TITLE I--PROCUREMENT SEC. 122. CVN-77 NUCLEAR AIRCRAFT CARRIER PROGRAM. (a) Authorization of Ship.--The Secretary of the Navy is authorized to procure the aircraft carrier to be designated CVN-77, subject to the availability of appropriations for that purpose. (b) Amount Authorized From SCN Account.--Of the amount authorized to be appropriated by section 102(a)(3) for fiscal year 1998, $50,000,000 is available for the advance procurement and advance construction of components (including nuclear components) for the CVN-77 aircraft carrier program. The Secretary of the Navy may enter into a contract or contracts with the shipbuilder and other entities for the advance procurement and advance construction of those components. (c) Other Funds.--Of the funds authorized to be appropriated under this Act for programs, projects, and activities of the military departments and Defense Agencies, other than the CVN-77 aircraft carrier program, up to $295,000,000 may be made available, as the Secretary of Defense may direct, for the CVN-77 aircraft carrier program. Authority to make transfers under this subsection is in addition to the transfer authority provided in section 1001. (d) Management of Funds.--The Secretary of the Navy shall obligate and expend the funds available for advance procurement and advance construction of components for the CVN-77 aircraft carrier program for fiscal year 1998 in a manner that is designed to result in such cost savings as may be required in order to meet the cost limitation specified in subsection (f). (e) Adjustments to Future-Years Defense Program.--The Secretary of Defense shall make such plans for the CVN-77 aircraft carrier program as are necessary to attain for the program the cost savings that are contemplated for the procurement of the CVN-77 aircraft carrier in the March 1997 procurement plan. (f) Limitation on Total Cost of Procurement.--(1) The Secretary of the Navy shall structure the program for the procurement of the CVN-77 aircraft carrier, and shall manage that program, so that the total cost of the procurement of the CVN-77 aircraft carrier does not exceed $4,600,000,000 (such amount being the estimated cost for the procurement of the CVN- 77 aircraft carrier in the March 1997 procurement plan). (2) The Secretary of the Navy may adjust the amount set forth in paragraph (1) for the CVN-77 aircraft carrier program by the following: (A) The amounts of outfitting costs and post- delivery costs incurred for the program. (B) The amounts of increases or decreases in costs attributable to economic inflation after September 30, 1997. (C) The amounts of increases or decreases in costs attributable to compliance with changes in Federal, State, or local laws enacted after September 30, 1997. (D) The amounts of increases or decreases in costs of the program that are attributable to new technology built into the CVN-77 aircraft carrier, as compared to the technology built into the baseline design of the CVN-76 aircraft carrier. (E) The amounts of increases or decreases in costs resulting from changes the Secretary proposes in the funding plan (as contemplated in the March 1997 procurement plan) on which the projected savings are based. (3) The Secretary of the Navy shall annually submit to Congress, at the same time as the budget is submitted under section 1105(a) of title 31, United States Code, written notice of any change in the amount set forth in paragraph (1) during the preceding fiscal year that the Secretary has determined to be associated with a cost referred to in paragraph (2). (g) March 1997 Procurement Plan Defined.--In this section, the term ``March 1997 procurement plan'' means the procurement plan for the CVN-77 aircraft carrier that was submitted to the Navy and Congress by the shipbuilder in March 1997.