Quick Hits - What it Means
Highlights: This week, The HAC convened to consider the FY19 defense appropriations bill, while the FY19 NDAA is being debated on the Senate floor. SAC-D defense appropriations markup is on track for completion in June.
FY19 Defense Appropriations Bill Markup in the House
Earlier today, June 13th, the House Appropriations Committee (HAC) marked the FY19 defense appropriations bill, after the Subcommittee on Defense approved its markup last Thursday, June 7th. The bill was ordered to be reported favorably, 48-4, and includes funding for operations, readiness, equipment modernization, and health and quality-of-life programs for troops and military families. The markup has DOD receiving $674.6 billion to defense for FY19.
The HAC released “tables” late last night to accompany the draft released last week, which includes a breakdown in numbers on the appropriations procurements.
- Military Personnel and Pay: $144b ($139.3b base requirements and $4.7b OCO).
- Operation and Maintenance: $245.9b ($197.6b base requirements and $48.3b OCO). This includes $1b above the request to fill readiness shortfalls, $1.05b above the request to invest in facility sustainment, restoration, and modernization programs, and $20.6b total for depot maintenance.
- Research and Development: The bill contains $92.4b ($91.2b base requirements and $1.2b OCO). Specifically, this supports R&D for the F-35 Joint Strike Fighter; space security programs; nuclear force modernization; the Ohio-class submarine replacement; Future Vertical Lift; and the Israeli Cooperative Programs. It also supports continuation of the E-8 JSTARS recapitalization program, rejecting the Air Force’s strategy to replace them.
- Equipment Procurement: $145.7b ($133b base requirements and $12.7b OCO).
- $22.7b for Shipbuilding and Conversion, Navy, including:
- Three Littoral Combat Ships (made in two versions by Lockheed Martin and Austal Ltd)
- Three DDG-51 guided missile destroyers
- Two Virginia-class submarines
- Two TAO fleet oilers,
- One Expeditionary Sea Base,
- One Towing, Salvage, and, Rescue Ship
- Continued procurement of the Columbia Class submarine
- $9.4b for 93 F-35 Joint Strike Fighter aircraft (Lockheed Martin)
- $1.9b for 24 F/A-18E/F Super Hornet aircraft (Boeing)
- $1.5b for the upgrade of 85 Abrams tanks (General Dynamics)
- $22.7b for Shipbuilding and Conversion, Navy, including:
- Savings and Cuts: $870m in savings from rescissions of unused prior-year funding. (TAKE NOTE – nearly $1b in unobligated funding from prior year appropriations!)
- Cuts $115.7m of FY18 funds from Tomahawk program due to mismanagement of the program by the U.S. Navy, according to the report.
NDAA Passage Looming in the Senate; Subcommittee Hearings in SAC-D
The Senate resumed consideration of the FY19 National Defense Authorization Act (NDAA) earlier today, and is expected to pass the bill as early as this week. Yesterday, a major block to NDAA passage was removed by acting chair Senator Jim Inhofe (R-OK), who shelved an amendment sponsored by Senator Bob Corker (R-TN) limiting President Trump’s authority to issue tariffs on the basis of national security. According to Inhofe, Corker was blocking consideration of all amendments to the FY19 defense authorization bill until guaranteed a vote on his provision. Even so, other Republicans are still posing more blocks, like Senators Rand Paul (R-KY) and Mike Lee (R-UT) as they try to secure a vote on a provision prohibiting indefinite detention of U.S. citizens. The White House is also at odds with a bipartisan amendment that would restore penalties on the Chinese telecommunications giant ZTE Corp.
As for the FY19 defense appropriations, the Senate Appropriations Subcommittee on Defense (SAC-D) is continuing the appropriations process with budget request hearings. Most recently, there was a classified hearing to review defense innovation and research funding, which took place last Wednesday, June 6th. The pace for the process this year has been faster than in previous years, as all markups are expected to be completed by the end of June.
The Bottom Line: Top Line numbers and next steps for FY19 defense spending are as follows
|President’s Budget||Base: $617.1 billion||OCO: $69 billion||Timeline|
|Base: $616.7 billion||OCO: $69 billion||Waiting on Senate Vote
Next: Conference Committee
|Base: $617.6 billion||OCO: $68.5 billion||Floor Action – Debate
Next: Passage (as early as this week)
|HAC-D||Base: $606.5 billion||OCO: $68.1 billion||Full Committee Markup
Next: Introduction in House
|SAC-D||Base $607 billion [302(b) allocation]||OCO: $67.9 billion [302(b) allocation]||In Subcommittee
Next: Markup (late June)
Highlights: Congress is on recess this week. Last week the FY19 NDAA passed on the House floor and made progress in the Senate. The FY19 defense appropriations process also continued in both chambers.
NDAA Progress in the House and Senate
The House version of the National Defense Appropriations Act (NDAA), H.R. 5515, passed with a 351-66 vote last Thursday the 24th. That same day, the NDAA also made progress in the Senate, when it was advanced through the Senate Armed Services Committee (SASC) and ordered to be reported, making it possible to be introduced to the whole Senate. Both versions attempt to address issues of oversight and management, accidents caused by military equipment, proper alignment of resources to meet priorities and demands, and a degrading state of capabilities, reflected in years of continuous war operations and what has been considered a lack of adequate funding.
Funding breakdown in the Senate:
- $639.2 billion for base DOD and DOE national security programs, $617.6 billion and $21.6 billion respectively
- $68.5 billion for Overseas Contingency Operations (OCO)
- $8.2 billion for defense related activities outside NDAA jurisdiction
- Total for FY19 national defense spending $716 billion
Funding breakdown of NDAA in the House:
- $616.7 billion for base DOD and $22.1 billion for DOE for a total of $638.8 billion
- $69 billion for OCO and $8.9 billion for mandatory spending
- Total for FY19 national defense spending $717 billion
- Aviation: The House and Senate both authorized the purchase of 24 Boeing F/A-18 E/F Super Hornet aircraft.
- Missile Defense: Both the House and Senate NDAA include provisions for procuring Standard Missile-3 Block IB missiles, effectively awarding a five-year contract worth roughly $1.9 billion to Raytheon for up to 204 of the missile interceptors. The Missile Defense Agency certified that the contract would save $212 million over annual purchases.
- Nuclear Warheads: In keeping with President Trump’s Nuclear Posture Review, both the House and Senate versions authorize development of low-yield nuclear warheads to be carried on submarine-launched ballistic missiles. Previously prohibited by the fiscal 2004 NDAA, development and production is being backed by $65 million in the Senate version.
- Tough on China: Both chambers increased pressure on President Trump not to weaken prohibitions on ZTE Corp., a Chinese telecommunications equipment maker accused of violating trade-sanction agreements and considered a threat to U.S. national security. The legislation includes bans on the use of ZTE-made technology by government agencies and prohibits the DOD from renewing contracts with vendors that work with ZTE Corp.
- Aviation: The House NDAA authorized the purchase of 77 Lockheed Martin F-35 Joint Strike Fighters, which is two more than requested by the SASC. The House also approved the purchase of 12 Boeing Co. KC-46A tanker aircraft, three fewer than requested, while the Senate authorizes 14, only one fewer than requested. Both moves were made “to restore program accountability,” amidst delays that Boeing is experiencing in delivering the tankers.
- Sea Power: The House NDAA has paved the way for the construction of an additional Ford-class aircraft carrier, CVN-81, to be made by Huntington Ingalls Industries Inc., while the Senate version does not back the purchase. The two versions also differ in requests for Littoral Combat Ships. The Senate NDAA authorizes one ship, the same as the Pentagon’s request, while the House authorized three ships, made in two versions by Lockheed Martin and Austal USA.
- Cyber: While both versions include provisions that provide funding for cyberspace activities and increasing cybersecurity capabilities, the Senate version addresses Russian cyber attacks, whereas the House version only makes mention of Chinese “malicious cyber activities.” The Senate NDAA specifically authorizes the White House and Secretary of Defense “to direct U.S. Cyber Command to take appropriate and proportional action through cyberspace to disrupt, defeat, and deter systematic and ongoing attacks by Russia in cyberspace.”
The Bottom Line: For all the differences between the two versions, both chambers address aircraft and ship procurement needs as enumerated by the Pentagon, and provide funding to help bolster U.S. capabilities in areas like missile defense and cyber. The breakdown of allocations is only slightly different in both versions, and any discrepancies will eventually be worked out when the bill goes to conference committee as early as late summer.
Appropriations Progress and 302(b) Allocations – How the Funding Breaks Down
The Senate Appropriations Committee (SAC) Chairman Richard Shelby (R-AL.) and Vice Chairman Patrick Leahy (D-VT) announced 302(b) Subcommittee allocations for FY19 last Thursday after the first full committee markup. All 12 subcommittee allocations must adhere to the $1.244 trillion discretionary spending cap set earlier this year by the Bipartisan Budget Act of 2018, which includes $647 billion for defense funding, $597 billion for non-defense funding, and $77 billion in funding for OCO. In the Senate, a markup of the Defense Appropriations Act for FY19 is expected the week of June 25-29.
302(b) allocations in the Senate: $607 billion for defense funding, $67.9 billion for OCO. $21.9 billion is also allocated for DOE defense related activities as part of the Energy subcommittee.
The House Appropriations Committee (HAC) also approved their 302(b) allocations in adherence with the Bipartisan Budget Act of 2018, submitting their report on Wednesday of last week. The 302(b) allocations in the House are $607 billion total.
Highlights: Mark up Season is Well Underway. Finding the Loose Change in FY18.
Appropriations Process and NDAA Movement
The appropriations process is underway with multiple House appropriations subcommittees marking their versions of FY19 spending bills. While the House defense subcommittee has yet to mark, it will likely vote out of subcommittee and full committee by the end of May. The Senate appropriations defense subcommittee will mark its version of the defense appropriation during the last week of June.
On May 9-10, the House Armed Services Committee passed the FY19 defense authorization bill (the NDAA) by a 60-1 vote.
The $717 billion defense policy bill now moves to a full House vote in the coming weeks, and the Senate Armed Services Committee is scheduled to adopt its own draft of the defense policy legislation next week.
What is in the NDAA Bill:
- Troops: The bill approves nearly 16,000 additional active-duty troops across the military and implement a 2.6 percent pay raise.
- Aviation: The bill provides $39 billion for aviation upgrades and more than $25 billion for equipment maintenance. It also authorizes the purchase of 77 F-35 Joint Strike Fighters, though there is an amendment that would allow the Defense Department to buy an unspecified number of additional F-35s if it can find savings.
- Sea Power: Big additions for the Pentagon’s budget dealt with ships. Construction of a fourth Ford-class aircraft carrier was accelerated, and lawmakers provided funding for long-lead time materials for two additional Virginia-class submarines to be built in 2022 and 2023. The bill also authorized two additional Littoral Combat Ships.
- Nuclear: In line with the Trump administration’s desire for a Nuclear Posture Review, the bill authorizes $65 million for developing and producing a low-yield nuclear warhead.
Points of Opposition in HASC:
- “Fourth Estate” Cuts: House Armed Services Committee Chairman Mac Thornberry’s effort to cut more than $25 billion dollars by 2021 was met with bipartisan opposition. He walked back his attempt to reduce Pentagon bureaucracy by eliminating 7 of the 28 non-military management agencies in the Fourth Estate, giving more deference to the Pentagon on providing solutions to cut costs. Furthermore, an attempt to preserve the Defense Information Systems Agency was defeated along party lines, but an amendment to protect the Test Resource Management Center was approved.
- Checks on Trump: Many attempted amendments dealing with Trump Administration decisions did not make it into the final cut, including limits on Trump’s planned Veterans Day military parade to only ceremonial units and equipment, limits on the role of National Guard troops ordered to the U.S.-Mexico border by Trump, and prevention Department of Defense funds from going to building a border wall. In addition, an amendment that would have slowed down the groundwork for a space force was also defeated, after Trump suggested he would be in favor of creating a sixth military branch dedicated to space
The Bottom Line: Defense authorizations are on a fast track, setting the pace and laying the framework of the FY19 national security budget. As a historical point, final defense authorization bill passage hasn’t happened before the start of the new fiscal year since 2009. Could this be the year?
The race is on to find the loose change in FY18 spending. Many agencies are simply not able to obligate all of their FY18 funding as originally planned; late arrival of FY18 funds has forced agencies to request permission from Congress to move funds (if greater than $10 million), or “sweep up” unobligated funds before year end so they might be applied to programs and projects deemed “ready now.” Are you waiting on FY18 funds? If so, you should be in position to clearly understand the spend plan of your program office for the coming months. We can help if you are not sure how to ask the right questions that will assure contract funding.Read more
On Thursday afternoon, the House passed a 1.3 trillion dollar omnibus spending package to avoid a third government shutdown this year, which would have occurred after the expiration of the continuing resolution passed earlier in February. Just after midnight Friday, the spending bill also passed in the Senate despite initial misgivings from Senator Rand Paul. Friday afternoon, President Trump signed the spending package, which includes all 12 appropriations bills and conforms to new spending caps set by the Bipartisan Budget Act of 2018 that was passed last month. Trump had earlier threatened he would veto the bill due to a lack of funding for his cornerstone border wall with Mexico, and a dismissal of addressing or extending protections for DACA recipients. However, after a phone call with Secretary Mattis, he praised the increase in defense spending, funding the government through September.
What is included in the omnibus spending bill?
- Homeland Security: At the center of the spending package is a “strong military and secure border,” according to the White House, and indeed this bill provides $6 billion for a border wall with Mexico and related border security technologies, as well as boosts the Department of Homeland Security’s budget by $6.3 trillion.
- National Defense: The bill increases military spending and provides $654.6 billion for the Pentagon — $700 billion including OCO funding. It specifically increases funding for procurement across the services, provides a pay raise to military personnel, and increases research and development funding.
- Rebuilding Infrastructure and Combating the Opioid Crisis: The bill provides funding for new Infrastructure projects, specifically $650 billion for Amtrak’s Gateway project, which aims to bolster railway infrastructure between New York and New Jersey, and provides $4 billion across different agencies to deal with the opioid epidemic.
- Gun Measures and School Safety: Included in the spending package are measures meant to strengthen gun sale background checks and more that $2 billion for new funding to improve school safety.
The Bottom Line: The federal government is funded through September. Of note, there are some allowances for DoD to spend portions of the funds beyond the end of the fiscal year in recognition of the challenge to obligate and spend the funds fully half way through FY 2018. Look for FY18 funds to be flowing into program offices no later than early June.
Busy weeks on Capitol Hill this month. Over the past two weeks I personally observed appropriations staffs moving about their counterpart’s offices working diligently toward completing conference of the FY18 omnibus appropriation. Their stated goal was to be complete well before the March 23rd deadline (when CR number five expires). Chairman Frelinghuysen (House Appropriations) put the heat on subcommittee chairmen to exercise their authority, make decisions and get the bill ready for vote. Look for the House to vote on the bill this week, leaving several days of cushion to allow for any Senate fireworks. Fingers crossed, a bill will make it to President Trump for signature no later than March 23rd.
There are plenty of indications that despite said Congressional relief in timing of FY18 spending, DoD will still end the fiscal year with billions that are not able to be obligated. What this means is that there will be multiple opportunities to reprogram funds late in FY18. Staying close to your PEO and PM with ready solutions that have an available contract vehicle could serve you well. You cannot over-communicate with your PM this year.
Change of Office
Senator Shelby (R-AL) appears well-positioned to assume the Chairmanship of both the Full Senate Appropriations Committee and the Senate Appropriations Defense Subcommittee upon the April 1st retirement of Senator Cochran (R-MS). No Senators have spoken publicly of any other challenger to these key Chairmanships.Read more
The Bottom Line
After a brief shutdown that occurred over night and lasted less than six hours, the Senate approved yet another stopgap funding bill early this morning with a 71-28 vote, followed by a House vote of 240-186 to send the agreement to the president’s desk. The new stopgap bill will keep federal agencies and the military running until March 23rd. While this new legislation includes the framework for a longer budget agreement born out of the Senate on Wednesday, it is important to note that this is not a full appropriation. According to appropriations staffers, the House and the Senate will use this newly extended deadline to finally parse togetherFY18 defense appropriations. President Trump signed the bill first thing this morning.
What is Included in the Two-Year Budget Agreement?
- Increase in spending by $300B over the next two years (around $165B to the Pentagon and $131B to non-defense domestic spending)
- This year: increase in defense spending by $80B and domestic spending by $63B in excess of the 2011 budget caps
- Next year: increase in defense spending by $85B and domestic spending by $68B in excess of the budget caps
- Raises the debt ceiling until March 2019, after mid-term elections
- Will add around $1.5 trillion to the budget deficit over the next 10 years
- $90B in disaster relief funds for US states ravaged by hurricanes and wildfires
Based on an appropriation being agreed in March, expect funds to flow to agencies in June. Billions of dollars will likely go unobligated as they are being received so late in the year again.Read more
What It Means
Shutdown politics produced no “winners” this weekend. Perhaps C-SPAN’s audience ticked up a few notches than it otherwise might have as Congressional staffs followed the hype. The “losers” will prove to be Congressional incumbents of both parties as we approach 2018 mid-term primaries and elections. Most Americans outside of the beltway establishment are simply not following the nuances of the arguments being made – they don’t have the time and Washington fatigue is taking its toll. It all blurs together.
The shutdown outcome produced a continuing resolution that funds the government through 8 February and a promise to bring immigration legislation to the Senate floor by 9 February if an immigration agreement has not otherwise been forged.
What Does This Mean For You?
A fifth Continuing Resolution is in the offing. Look for the prospect of an FY18 omnibus appropriation to now move into February.
Funding negotiations among House and Senate Leaders and the President continue to look dreary. The Continuing Resolution under which the government presently operates will expire 19 January. We’ve reached the point in the timeline where a bill could not be produced for vote and publication by the 19th even if we had a miraculous agreement to terms today.
What Has Happened?
Outlook for Elections
Bottom line for now: another short-term Continuing Resolution next week.
Severe temperatures and snow storms have welcomed us into 2018, and caused Congress to adjourn a day early in their first week back. Below are some quick updates to watch in the coming weeks.
- The storms in the DC area forced Congress to leave a day early, but the deadline for the most recent continuing resolution remains 19 January. Producing non-defense spending equivalence and working on DACA are still the Democrats’ primary goals for the new budget.
- Two Democratic Senators were seated earlier this week, Doug Jones of Alabama andTina Smith of Minnesota, giving the Democrats 49 seats compared to Republicans’ 51. Senator Jones replaced Republican Luther Strange, and Senator Smith replaced former Senator Al Franken.
- On Wednesday the Senate easily confirmed John Rood as the new OSD Undersecretary for Policy, with a vote of 81-7. Rood comes to this position after serving as the vice president of Lockheed Martin, where he focused on increasing the company’s defense footprint in over 70 countries worldwide. Rood’s confirmation completes the senior OSD leadership team nearly a year into the Trump administration.
- President Trump will deliver his first State of the Union Address to Congress on 30 January. He will use this speech to outline his plans for the second year of his administration.
Despite the weather, we will monitor the upcoming legislation to ensure you have the most accurate information to best inform your business needs in the New Year.Read more
As important legislation comes to fruition right before the end of the year, here are our latest updates on the tax reform bill and the third continuing resolution before we take a break for the holidays:
The GOP tax bill passed the House yesterday afternoon with a vote of 224-201, after a procedural issue with the Senate parliamentarian rules forced them to vote a second time. There was unanimous Democrat opposition, as well as 12 GOP members who also denied the bill. The bill passed through the Senate earlier that day, with a vote of 51-48. The President signed the bill into law earlier today during an informal ceremony in the Oval Office , marking the first major legislative victory for Republicans during this administration.
Highlights from the bill include a decline in the corporate tax rate from 35 percent to 21 percent. Republicans predict that the bill will increase hiring and lead to higher wages, as well as incentivize corporations to come back to the US and produce domestically. The total amount in tax cuts in 2018 as a result of the bill is projected to be $135 billion. The bill will also reduce estate taxes and eliminate part of the Affordable Care Act, which could signal an important milestone for the GOP looking to dismantle Obamacare.
With one day to spare, Congress managed to pass a third Continuing Resolution before the 22 December expiration that funds the government through 19 January. While the CR averted a shutdown, the discussion of agreed topline funding levels for FY18 remains unresolved.
When Congress returns from the Holiday recess, it is likely that a two-year agreement on topline appropriations for both fiscal years 18 and 19 will dominate the headlines. As has been the case in recent years, the matter of defense vs. non-defense spending levels will be the crux of the debate.
Of note, an $81B disaster relief package was not included in this funding extension.
We at Capitol Integration wish you a safe and joyous holiday! See you in the New Year!Read more