Fiscal 2019 Could Be 'High-Water Mark' of Defense Spending

With the defense budget enhanced and set for fiscal 2019, contractors should “enjoy the moment,” Pentagon Comptroller David Norquist told an industry audience on Monday.

In processing the newly augmented $700 billion spend that Congress delivered before the start of the fiscal year, many on his finance staff had no recollection, he said, of a time decades ago when the military wasn’t always coping with the uncertainty of multiple continuing resolutions and government shutdowns.

“We’re in a very different place now,” he told 300 attendees at the Professional Services Council’s 54th annual Vision Federal Market Forecast conference, held in in Fairfax, Va. “Under a continuing resolution, we often had to wait until spring to do some things—now we can finalize them now or do them on schedule.”

Norquist declined to get ahead of the White House in addressing the impact of President Trump’s recent directive to all agencies to cut spending next year by 5 percent. But the economic forecasts shared by the 400-member contractor group portray the fiscal 2019 defense budget as “the high-water mark” for defense spending while also warning of rising debt and a coming recession.

Norquist predicted major shifts in the defense budget’s structure based on the Trump administration’s December 2017 National Security Strategy. Its underlying theme, he said, “is a return of great power competition” with Russia and China, which will requires sub-agencies and contractors to better serve the warfighter bound for “high-end fights” in unwelcoming terrain and “unfriendly planes” overhead during the voyage to the battleground.

Already, the Pentagon has begun hiring thousands of new Air Force, Navy shipyard and munition production-line workers, while foreign military sales to allied partners have risen from $33 billion to $54 billion, he said.

As the official in charge of the Defense Department’s most ambitious audit ever, Norquist stressed its importance as a service to taxpayers—despite a risk he was questioned about that the uncovering of waste may produce bad publicity. “I’m more concerned that people will misread the findings,” he said, citing the example of a financial statement that “produces dramatic numbers” in bookkeeping on a prior historic event “but has zero effect on operations.”

People can argue for not embarking on the audit—slated to cost $1 billion—“but that’s a dangerous way to look at the world,” Norquist said, citing the adage “ignorance is not a good strategy.” His predecessors viewed the Pentagon’s lack of a clean audit as “a problem best left to my successor,” he joked. But the Trump administration has vowed a start to “find out all that we have” and learn “what are the weaknesses, and fix them.”

Yes, the defense budget is “large and complex,” he said—displaying a slide showing that if one combined the inventories, employees and assets of WalMart, Apple and the state of California, one would still not match those of the Pentagon.

His team will look at the condition of equipment and supplies as well as warehouses and buildings to generate what he expects to be “a laundry list of weaknesses.” Auditors will ask whether the items exist, whether the data are accurate, whether items are missing and whether they show up on the financial statements.  Contractors who built the systems being used, he added, will be in on “the very quick feedback loop on what’s being fixed.”

More accurate and analytical data, Norquist said, “has forced us to move from doing a summary report down to the transaction level” for the full list of items rather than just a sampling. The new “ability to transform the way operations are done is dramatic.”

Even more beneficial, Norquist said, is the requirement that the audit examine whether components comply with the cybersecurity demands of the 2014 Federal Information Security Modernization Act in protecting access to data. Hackers may not want to get into our audits, he said, “but if they hacked into a logistics or payroll system,” they could harm operations. “We want to close those doors.”

As the services work toward the later stage of fully auditable statements, Norquist said, “If we want the Army and Navy to push toward a clean opinion, it helps if the Air Force got there first.”

Tactically, the comptroller advised contractors to focus less on their “cool idea” that many agency contract officers can’t connect to their agenda, and to focus instead on an agency with a problem to which they bring a solution that they can directly relate to.

Norquist’s colleague, Assistant Defense Secretary for Acquisition Kevin Fahey, updated contractors on the Pentagon’s efforts to decentralize and move functions out of the Office of the Defense Secretary. “Most of our programs have been delegated from OSD,” he said. Out of 80 programs, only nine remain with Under Secretary of Defense for Acquisition and Sustainment Ellen Lord, among them the F-35, the nuclear triad and the space program, he said. “For a significant amount of people at OSC, all they did was prepare for the milestone program,” Fahey said.

“If you delegate responsibility to the lower level, you will get innovation, they will take on responsibility, and you will get speed,” he added. “The challenge from Congress is how we will maintain transparency on these programs, so that in five years we don’t have to pull them back.”

The PSC’s market forecaster, consultant Lou Crenshaw, said that “2019 is as good as it gets in terms of real money” for defense. He warned that the national debt as a percentage of GDP is now the highest since World War II and that by 2028, the government’s spending on interest on the debt will be higher than the defense budget.

“Debt is a hindrance to our ability to recover from recessions,” Crenshaw added, citing a likelihood of a downturn by 2021. The current approach by Trump and the Republican-led Congress of tax cuts and defense hikes is unusual, he said. “Normally when the economy is doing well, we wouldn’t be pouring in more stimulus.”

In an evaluation of the Congressional Budget Office’s past performance, Crenshaw said “the good news is that CBO has woefully overestimated interest rates, but when predicting actual deficits, CBO has been 250 percent short” of the eventual numbers.

Norquist’s notion that the new defense strategy and improved auditing will bring major shifts in spending was overstated, “a red herring,” in Crenshaw’s opinion. When Crenshaw was a Navy budget officer, he said, “we didn’t go through the budget to see what was [Overseas Contingency Operations] and what wasn’t—we didn’t care; we just spent the money.”