McCain skeptical about incrementally funding new subs

John M. Donnelly, CQ Roll Call
12 April 2016

John McCain, the chairman of the Senate Armed Services Committee, is “very skeptical” about a Navy plan to pay in installments to procure the first of a new class of nuclear missile submarines, instead of budgeting for it up front.
The cost to develop and acquire the dozen planned SSBN(X) subs, known as “boomers,” is $139 billion — one of the most expensive federal discretionary programs in the next two decades. If the Navy is able to pay this full bill, it may only do so at the expense of other important warships, officials worry. The first boat is the most expensive at $14. 5 billion, because that inaugural boat’s price tag includes the cost of a lot of design and engineering work. The subsequent subs average $9.8 billion apiece.
The Navy disclosed at the end of a Senate Armed Services subcommittee hearing last week how it would spread the procurement cost of the first of these subs over several years — a process known as “incremental funding.” It is not clear if the Navy plans similar arrangements on any of the other 11 subs.
McCain, like most other members, has yet to focus on the details of this newly revealed budget plan. But the Arizona Republican told CQ that he’s wary about it.
“In general,” he said, “I don’t approve of such a process. I do not. Because we already have these tremendous cost overruns. If we are now looking at incremental funding, I would be very skeptical. That is such a departure from the way we normally do business. I’d have to look at it very closely.”

Paying Up Front Is Norm

Although such installment payment plans are a departure from the budgetary norm, they are nonetheless happening increasingly often, experts say.
It “used to be an exception, and now it is becoming more common for larger shipbuilding investments,” said Michele Mackin, the Government Accountability Office's director of acquisition and sourcing management, in an email response to a query. “In general, full-funding is preferable because it provides greater visibility over cost control and doesn’t tie the hands of future congresses.”
Congress has largely eschewed incremental funding since the 1950s because of its downside. Another risk of this approach: deferring budgetary obligations from the current year to later years helps alleviate immediate budget pressures but only worsens those in subsequent years for all programs, some experts note. In the long run, it merely defers budget choices rather than make them.
Incremental funding occasionally makes sense as a way of dispersing the budgetary impact of major spending spikes for multibillion-dollar ships—such as aircraft carriers or amphibious assault ships, two types of vessels now regularly procured with money budgeted over multiple years.
"For some major capital investments, like an aircraft carrier or a submarine, incremental funding alleviates some of the immediate funding burden,” Mackin added.

Dispersing Pain

The Navy has already begun to spend money from its research and development accounts on the new boomer class. The service plans to tap its separate procurement coffers starting in the coming fiscal year to build the first sub. Still more procurement money for that one boat is spread out over at least six years after that, according to prepared testimony delivered to the Senate Armed Services Seapower Subcommittee on April 6.
So-called “advance procurement” of that first boat’s so-called long lead items — in other words, components that take a while to procure, such as nuclear propulsion equipment — would start in fiscal 2017 with $773 million, according to the plan. Spending on such early procurement would continue with several billion dollars over the three years that follow.
Then comes the formal “procurement” of the first boat, which is slated to occur in three additional years, with $3.6 billion planned for fiscal 2021, $3.1 billion in fiscal 2022 and $2.1 billion in fiscal 2023, the Navy testimony reveals.
If there are overruns on the first boat — and there typically are — they would be covered in fiscal 2024 and beyond.
The budgetary contortions are necessary because the cost of buying a dozen SSBN(X)s from fiscal 2021 to 2035 will require the annual ship procurement budget to rise from an annual average of $16. 5 billion to over $20 billion, according to Sean Stackley, the Navy’s acquisition chief.
“If the Navy is going to have to fund that within our notional shipbuilding budget, then that's going to put pressure on all of our procurement accounts,” Stackley told the Seapower panel this month.
Besides incremental funding, another strategy to relieve that budget pressure is a proposed special account outside the Navy’s budget called the National Sea Based Deterrence Fund. A similar approach has been taken with U.S. antimissile programs, which are not paid for by the individual services but in a so-called Defense-wide account.
Congressional authorizers have approved the fund, but appropriators have so far declined to put any money toward it.
The Navy’s bid for special treatment through the new fund has created a problem, McCain said.
“Then there are others, like the secretary of the Air Force, who are now saying, ‘Why don’t we do that with the Long Range Bomber?’” McCain said in the interview. “Then somebody else will say, ‘Let’s do that with Fill in the Blank.' "

Problem for Next President

As for incremental funding, a key question going forward is whether the Navy will seek to use it on new boomers beyond the first one. The budgetary case for doing so weakens as the subs are built more frequently. When they're being bought at a rate of nearly one a year over a 15-year period, deferring some of the cost of any SSBN(X) would only create a bow wave of unpaid bills in subsequent years when follow-on subs will also have to be funded — not to mention all the other warship procurements.
Ronald O'Rourke of the Congressional Research Service has suggested the option of spreading out the procurement schedule so the Navy can use incremental funding more often.
An official with the Office of Management and Budget said the White House has only approved incremental funding for the first boat. Congress does not have to approve incremental funding. It can step in to block it. That seems unlikely, particularly for the first boat, despite the skepticism of McCain and others.“OMB considered the lead SSBN(X) boat unique in that, although it will go into operation in the fleet, it also serves as a research and development (R&D) article to test the production line for the new SSBN(X),” the official said in an email. “Therefore, OMB approved similar, R&D-like budget flexibilities for the lead SSBN(X). The approval was just for one boat. The next Administration will make any decisions for FY 2018 and beyond.”
The Navy had not responded by press time to a question about whether it would seek incremental funding for any new boomers other than the first one.
“The first year was the easy year,” Stackley said in his testimony this month, in an apparent reference to getting incremental funding authority from the White House. Going forward, he said, the Navy would “continue to work this.”