Aguilera

The Budget Debate: Key Facts for Leaders Ricardo Aguilera Director Chief Financial Officer Academy National Defense University, iCollege “The views expressed in this presentation/article are those of the author and do not reflect the official policy or position of the National Defense University, the Department of Defense, or the U.S. Government.”

The Fiscal Future: Issues and Options •

Issue: Balance Budget  Debt limit agreements to date do not balance the budget  Current FY 14 President’s Budget plans for deficits into future  Option: Start long-term revenue increases and/or spending cuts

•

Issue: Pay Down National Debt  Requires initial balanced budgets and long-term surpluses  Option: Control growth in mandatory spending and/or raise revenue

•

Issue: Ensure Long-Term Social Insurance Programs solvency    

Social Security will be able to pay out full benefits until 2036 After this point tax revenue will fund pay outs of 75% of full benefits Medicare will fund full benefits until 2024. Option: Reduce benefits and/or increase revenue

The Fiscal Future: Federal Leaders Watch List • Understand Politics Calendar/Process Baselines

Federal Debt

Held by the Public and Gross 20

16.7

17.9

18.7

18 5.1

Dollars in Trillions

16 14

5.0 4.7

12 Government Account

10

Public 8 6

11.9

12.9

13.6

4 2 0

Deficit:

2013

2014

0.7

0.6

Source: OMB

2015

0.6

Congressional Issues Issues: • May 18, 2013 • October 1, 2013 • October 17, 2013 • December 13, 2013 • January 15-18, 2014 • February 7, 2014 • March 4, 2014 • October 1, 2014 • November 4, 2014

  

Democrats 200 Republicans 232 Vacant 3



Democrats 53 (including 2 independents)  Republicans 45

5

Debt Reduction Remaining • •

•

All budget-related legislation to date brings annual deficits to “historic norm” of about 4% of GDP Most economists agree $4T in savings/revenue increases over 10 years needed to balance the budget and initially pay down the debt Debt Reduction Required: ___  Required  Achieved to date  Difference

•

($T) 4.0 2.7 1.3

$1.3T additional still needed to a achieve $4T in savings/revenue

Source: Bi-Partisan Policy Center

Sequestration’s Effect on Debt

Federal Budget Trends In current (as-spent) dollars, both Federal receipts and outlays have grown rapidly and are expected to continue growth. Federal Budget Trends: 1948-2016 $5,000 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500

19 84 19 90 19 96 20 02 20 0 20 8 14 es t

19 60 19 66 19 72 19 78

$0

19 48 19 54

Current Dollars in Billions

$4,500

Fiscal Year (w /o TQ) Receipts

Outlays

Source: Office of Management and Budget

Budget Deficits Around the World One measure of fiscal stress is the additional borrowing required by a government relative to the size of its economy. This slide from OECD indicates that, for the FY 2006-9 period, the US and UK were in the middle of a group – seemingly worse off that Germany, Japan or France, but less stressed than Ireland, Spain or Greece.

Fiscal Year 2015 The President’s Budget $3,337B Receipts

$3,901B

Outlays

FY 2015 Deficit = $564B

Average Annual Deficit FY 16-24 ~ $485B

Source: OMB 10

FY 12/13 DoD Requests vs. Appropriation (Budget Authority in $ Billions) 600

495.5 500

11.8 63.3

496.0 12.0 62.8

495.6 7.8 63.5

Revolving Funds Family Housing

400 91.1

92.4

90.4 Military Construction

300

Research, Development, Test and Evaluation

194

192.8

198.7

200

Procurement Operation and Maintenance

142

142

135

Military Personnel

100 135.4

135.9

135.2

FY 2013

FY 2014

FY 2015

0

Does not include $26B from Initiative Fund in FY 15 or $79B OCO Source: OMB

Fiscal Year 2015 President’s Budget (Outlays) TOTAL $3,901B Immigration Reform** 0%

Mandatory $2,709B (69% of total)

Net Interest 6%

Defense 16%

Discretionary $1,192B (31% of total)

Other Mandatory 18% Other Discretionary 15%

Medicaid 9%

Medicare 13%

* Includes $6B in disaster costs ** About $8B in Implementation costs

Social Security 23%

Baby Boom Births by Year 4.5

4.3

3.9 3.7 3.5

3.3 3.1 2.9 2.7

= Baby Start/End Year

1967

1966

1965

1964

1963

1962

1961

1960

1959

1958

1957

1956

1955

1954

1953

1952

1951

1950

1949

1948

1947

1946

1945

1944

2.5

1943

Millions of Births

4.1

Source: Statistical Abstract of the United States

Growth in Outlays by Agency Distribution of Outlays by Agency 100 90 80 70 60 50 40

Howard G. Borgstrom

30 20 10

Treasury (Int) October 14, 2010

Soc. Secur.

HHS

DOD (Military)

at e

es

tim

at e tim 20 15

20 10

es

20 05

20 00

19 95

19 90

19 85

19 80

19 75

0

19 70

Percent of Total

All unlisted agencies – NASA, Education, Energy, Interior, Commerce, State and Foreign Aid, Justice, Homeland Security, SBA, EPA, Judicial Branch, Legislative Branch, etc. – compete for less than 10% of the spending.

VA/OPM/AG/DOT/DOL 14

Fiscal Year 2015 President’s Budget (Revenue) TOTAL $3,337B Excise, Estate, Customs 5% Othe Social Insurance 2%

Immigration Reform 0% Other Receipts 4%

Medicare 7% Corp Tax 13%

Indiv Income Tax 46%

*

Social Security 23%

Source: OMB 15

Much of what people see as a growing tax burden is through increased payments into Social Security and Medicare; the personal income tax per se has been very stable and corporate income taxes are proportionately decreased since WWII.

Federal Revenue Sources 1948-2016 100 90 70 60 50 40 30 20 10

20 es 16 t es t

08 20

12

04

20

20

00

20

96

92

19

19

88

19

84

19

80

76

19

19

72

19

68

19

64

60

19

19

56

19

52

19

48

0 19

Percent of Total

80

Fiscal Year (w/o TQ)

Ind Inc Tax

Corporate Inc Tax

Social Insurance

All other

Source: OMB

Corporate Taxes Paid as a Percent of Taxable Income 35%

Percent of Taxable Income

30%

25% Asset Value of Corporation $1-5M

20%

$5-50M 50-500M

15%

500M+

10%

5%

0% 1994

1997

Source: Internal Revenue Service

2000

2003

2006

2009

In 2008, the US had one of the lowest tax burdens among OECD nations, in terms of tax revenues as a percent of GDP. Comparative Tax Burden, 2008 Denmark Sweden Belgium Italy France Finland Austria Norway Hungary Netherlands Slovenia Germany Iceland Czech Republic United Luxembourg Portugal OECD - Total Poland Israel New Zealand Spain Greece Canada Slovak Switzerland Ireland Japan Australia Korea United States Turkey Chile Mexico

0

10

20

30

40

50

60

Taxes as Percent of GDP

Source: OECD

Budget Totals in President’s FY 2015 Budget Request DoD Topline, FY 2001 – FY 2019 (Current Dollars in Billions)

$750 666 3

$500 316

438 73

345

468

479

91

76

8 3

187

146

287

687 645

479

513

162

159

614* 581 115 578 85 82

528

528

530

166

575 79*

565 30*

574 30 *

581 30*

589 30*

496

535

544

551

559

116

17

6

23

$250

1 7

601 535

691

666

328

365

377

400

411

432

496

496

$0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Base Budget

OCO

Other

* Reflects FY13 Enacted level excluding Sequestration * Placeholders only

Focus Only On Base Budget For Remainder Of Briefing No FY 2015 OCO Budget Yet 2

Source: DoD

Since 2001, real growth has occurred in all major categories, but O&M has grown the most in dollar terms FY 2001 Actual

FY 2014 Enacted

Dollar Growth

Percent Change

Percent of Total Growth

Military Personnel

101.1

135.2

34.8

34%

30%

Operation and Maintenance (ex. DHP)

114.0

160.5

46.5

41%

40%

Defense Health Program (DHP)*

16.0

32.3

16.3

102%

14%

Procurement Research, Development, Test, and Evaluation Military Construction Family Housing Other TOTAL

81.6

92.4

10.9

13%

9%

54.4

62.8

8.4

15%

7%

7.1

8.4

1.3

18%

1%

4.8

1.4

-3.4

-70%

-3%

1.4

2.2

0.8

56%

1%

380.5

496.0

115.6

30%

100%

FY14$ in billions, base budget

*The

DOD Unified Medical Budget ($48 billion in FY 2015) includes both DHP and some additional Military Personnel funding.

Source: OMB

PB15 DoD Base-Budget Topline ($B)

600

575

FY 2014 President’s Budget (PB14)

577

559 551

550 541 535 537

PB15

525

500 496

500

Sequester - Level Budgets

475 FY14

FY15 PB14

FY16

FY17

Sequester - Level Budgets

FY18

FY19

PB15 3

Source: DoD

PB15 DoD Base-Budget Topline (Effects Of Sequester-Level Budgets) ($B)

600

575

FY 2014 President’s Budget (PB14)

550

PB15

$115B Cut

525

500

Sequester - Level Budgets 475 FY14

FY15 PB14

FY16

FY17

Sequester - Level Budgets

FY18

FY19

PB15 15

Source: DoD

PB15 DoD Base-Budget Topline (Opportunity, Growth, and Security Initiative) ($B)

600

575

FY 2014 President’s Budget (PB14)

550 541

PB15

525

$26B Initiative 500

Sequester - Level Budgets

496

475 FY14

FY15 PB14

FY16

FY17

Sequester - Level Budgets

FY18

FY19

PB15 13

Source: DoD

FY 2015 Opportunity, Growth, and Security Initiative • Total $26 billion for DoD • Readiness enhancements – Training adds in Army – Spares and logistics in Navy – Unit training in USMC – Training in Air Force • Investment increases – Army Helicopters (56) – Navy P-8 (8), E-2D Aircraft (1) – USMC Light Armored Vehicle – Air Force F-35 (2), C-130J (10), MQ-9 Aircraft (12) – Science and Technology ($335M) • Installation support increases – All Services increase base sustainment – All Services add MilCon funding 14

Source: DoD

The OMB budget review schedule July

Aug

Sept

Oct

Nov

Jan

Feb

Mar

Apr

May

• Director’s Review • Revised Economic Assumptions

Program/Budget Review with Agency HQ

July: OMB issueds revised A-1l guidance

Dec

Passback/ Appeals

Budget Review Board Meetings

MAX Database: Prior Years MAX Database: Budget Years

State of the Union and Budget Submission

Budget Chapter Writing Review Agency Budget Justifications Review Proposed Authorizations with Budget impact • Review of Congressional Testimony and Actions • Ongoing Budget Oversight • Mid-Session Corrections •Apportionments

June

The Budget Calendar and the PPBE Process FY 2014 – 2016 Budget Status FY 2014 Budget

Planning

Prog/Budget

Today

Planning

FY 2015 Budget

Prog/Budget

Q2

Q3

Q4

FY12

Q2

Q3

Q4 FY13 Q2

Congressional Action???

Planning

FY 2016 Budget

FY11

Execution

Congressional Congressional Action Action

Q3

Q4

FY14

Prog/Budget

Q2

Q3

Q4

FY15 Q2

Execution

Congressional Action

Q3

Q4

FY16

Execution

Q2

Q3

DoD Planning, Programming, Budgeting, and Execution (PPBE) System Overview Yearly PPBE Process and Milestones Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

PPBE Phases Planning (QDR, DPPG, GEF)

Budget Estimate Submission (BES)

Execution Review

Program Review

Budget Review

Components submit estimates

Program/Budget Estimates

JCS Chairman’s Joint Planning Document

Strategic Planning

Program Objective Memorandum (POM)

JCS Chairman’s Program Assessment

Final JCS risk assessment

Prog Decision Memo Front End Asses Prog. Review?? Budget Review

3-Star Dep. Mgmt Act. Grp

Small Group/Large Group

3-Star Dep. Mgmt Act. Grp

PDMs

Small Group/Large Group

Budget Submission Budget Justification

Resource PBDsMgmt Decision Execution Review

OUSD(C) performs an Execution review. Result: Omnibus Reprogramming

PBD = Program Budget Decision; PDM = Program Decision Memorandum

Congressional Process and Timeline

Mar

Feb

President’s Budget Hearings, briefings, questions

Sep-Aug-July

Congress: Budget Committees

Authorizers

House Committee

Hearings, briefings, questions

Senate Committee

Appropriators

HAC, Subcommittee

Conference

SAC, Subcommittee

Conference JR

Bill CR President Signs

PL JR Bill Omni President Signs

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What does it mean for us? Building Better Budgets Future Budget Pressures  Decisions made within short deadlines at aggregated levels  Budget leaders are in the room when decisions are made  Do they have the facts that can sway a decision your way?

•

Get Better Numbers  Analysts ask: “What is the impact of $1 more/less on this program?”  Metrics need to link funding to agency outcomes/goals  Output measures are no good.

 Self audit: Be honest  Self examine the programs - criteria, condition, cause, and effect

•

Tell Better Stories  Program officials must explain simply how previous funding brought gains  Program’s story for future funds needs to be compelling and well-reasoned  Tell your story consistently and often