New Defense Budget Structure

The DoD’s $850B annual budget is not structured for the current dynamic national security environment. It continues to operate the world’s biggest bureaucracy with a budget system designed in the 1960s. The current PPBE processes post a great risk to the DoD’s ability to modernize a Joint Force to deter or defeat our adversaries.

At a strategic level, the annual budget request from the DoD/White House and the appropriations bills from Congress represent a disconnected, confusing, and analog structure. Flipping through the budget overview briefing or report as well as the PDF of the Xeroxed defense appropriations bills, one struggles to see the big picture.

The complex budget structure contributes to the DoD being forced to operate under a continuing resolution for three to six months into each fiscal year. The FY25 defense budget was submitted Mar 11, 2024 - 330 days ago - with hopes of a budget in the next month or two. The complexity is also why the DoD has failed audits for seven years running, but is optimistic it will pass in 2028.

At the tactical execution level, the current budget structure is heavily program-centric, managing over 1,700 RDT&E and Procurement budget accounts. Nearly 40% of these accounts are funded at less than $20M. Given that budget planning for these accounts takes place years in advance, discrepancies with actual needs are inevitable once Congress finalizes appropriations. However, the DoD can only reprogram a small fraction between these accounts without external approval. Significant reprogramming of funds necessitates a cumbersome process involving OSD, OMB, and requires the consent of all four Congressional defense committees. This rigidity, in an era of rapidly evolving operational demands, threats, and technologies, significantly jeopardizes the DoD's capacity to modernize and operate effectively.

As part of PPBE Reforms, portfolio management, and related acquisition reforms, we along with the PPBE Reform Commission, have long advocated for consolidating RDT&E and Procurement budget accounts (PEs/BLIs). There are piecemeal efforts across DoD and Congress underway to include the Army’s efforts for UAS, C-UAS, and EW.

While tactical, bottom-up efforts to consolidate related small accounts within a dynamic capability area is a prudent initiative to pursue, we wanted to provide a bold new recommended defense budget structure for consideration. Related to the PPBE Reform Commission recommendation #4 outline:

The current defense budget structure is:

• Appropriation (RDT&E/Procurement/O&M)

  • Service/Component (Army, Navy, Air Force, Defense-Wide)

    • Budget Line Item (Program)

The proposed defense budget structure is:

• Service/Component (Army, Navy, Air Force, Defense-Wide)

  • Capability Area (Aircraft/Ships/Missiles/Space)

    • Appropriation (RDT&E/Procurement/O&M)

The core of the new structure is around a set of broad capability areas within each Service. Each capability area would include the operations and maintenance of legacy systems as well as the investment of modern systems.

Reprogramming Funds

• Having the ability to reprogram funds within a capability area portfolio would enable greater responsiveness to the rapid changes in operations, threats, and technologies. If Program A is encountering issues or better opportunities arise elsewhere, funding could be shifted to Program B for greater mission impact. Successful prototypes or commercial solutions could be rapidly transitioned into development, integration and production without the long delay associated with gaining a new start approvals. A portfolio executive that accelerates the delivery of new systems could then retire legacy systems and repurpose those funds to improve the readiness levels of other fielded systems.

• This approach would still preserve the ability of Congress to dictate where funds should be allocated. It would just remove a level of management that hinders the ability to fully leverage available technologies. A monthly report to Congress could document all major transfers within the portfolio. Ideally ongoing discussions between the Service, OSD, and Congress would minimize any surprises and garner support for smart, thoughtful actions.

• Reprogramming funds across Capability Areas (e.g. from aircraft to ships) above a certain threshold would require Congressional approval. This would be supported by regular collaboration with key congressional members and staffs to align strategic objectives and balance risks, threats, and opportunities.

Open Questions

Establishing the capability area portfolios in the right way is not completely straight-forward. There are numerous options that can be argued in one direction or another.

• Should capability areas be designated by platform type or mission-based?

  • A mission based structure enables Mosaic Warfare by viewing capabilities through kill chains, rather than isolated platforms. The challenge is some platforms are in multiple kill chains.

  • Instead of calling out surface ships, carriers and subs - capability areas could be aligned to the missions of Sea Control and Power Projection. Under this approach, unmanned surface vessels could be procured in each portfolio to support either maritime or land-based engagements.

  • Portfolios could be aligned more to Joint Warfighting Concept areas such as Contested Logistics which would allow an array of air, sea and land capabilities to be procured to support that specific mission set.

• Should manned and unmanned capabilities be procured together within capability areas (e.g. aircraft, surface ships, subs, ground systems) or should unmanned be in a standalone portfolio?

  • Unmanned systems have historically been underfunded by the DoD and Congress in favor of traditional manned platforms. Yet as Replicator and Hedge strategies have shown, we need to produce hundreds of thousands of unmanned systems ASAP.

  • Keeping them in the same portfolio ensures greater alignment, flexibility, and competition against common mission sets. It also funds interoperability between manned and unmanned platforms.

  • Having a separate capability area within each Component protects funding and provides a clear total addressable market for industry developing unmanned solutions.

• Should related offensive and defensive capabilities be procured together or as standalone portfolios?

  • Small UxS and Counter UxS could be procured from the same portfolio since the expertise in understanding the emerging capabilities of UxS technology could be helpful for defeating that same capability.

  • Conversely, it might be helpful for Congress to more precisely allocate funds with a more offensive or defensive focus to ensure balance is maintained and we don’t overreach in one direction (see our previous thoughts on this).

  • Keeping both within the same portfolio enables greater alignment, flexibility, and interoperability across systems while a standalone portfolio ensures UxS capabilities are properly resourced.

• Should S&T be within each capability area or a standalone?

  • Keeping within each capability area focuses S&T on portfolio solutions. Funding for DARPA, DoD Labs, FFRDCs, UARCs, SBIRs, and related S&T efforts within a capability area will also enable greater tech transition to development and production.

  • A partial or full standalone S&T portfolio looks across capability areas. Funding AI, autonomy, advanced materials, and advanced computing and software research will pay dividends across aircraft, ships, and munitions.

  • Either model must ensure DoD S&T doesn’t duplicate where there is broad commercial solutions or R&D and can instead focus investments on defense applications and defense unique tech areas like hypersonics.

• Should There be a Program Level in the New Structure?

  • While returning to a minimalist structure enables greater reprogramming of funding, a program level would be a good compromise with resistant appropriators. The reprogramming rules above could differentiate between budget structure and reprogramming constraints.

  • While a program level makes sense for larger programs, smaller programs must remain free from reprogramming constraints to enable a dynamic suites of capabilities. Counter-UAS for example shouldn’t be divided into a set of distinct named programs. The new structure focuses on the procurement and R&D of the most promising capabilities including those that are embedded in or integrate multiple traditional programs.

    • Service/Component (Army, Navy, Air Force, Defense-Wide)

      • Capability Area (Aircraft/Ships/Missiles/Space)

        • Program (e.g., F-35, Columbia, B-21)

          • Appropriation (RDT&E/Procurement/O&M)

• Should Combatant Commanders Get Some Budgetary Control?

  • Some have championed the idea of allocating 5-10% of investment budgets to the Combatant Commands to either acquire capabilities directly or spend within the Services acquisition programs.

  • An alternate approach would to treat Combatant Commands as boards whereby Portfolio Executives would have to brief them quarterly/annually on their budget allocations, acquisition strategies, and deliveries to ensure alignment with Combatant Command priorities.

  • Given Combatant Commanders will have competing priorities (e.g. INDOPACOM vs CENTCOM), this is where Joint Staff, CAPE, and Comptroller have traditionally served as the integration and adjudication to provide a unified department priority.

  • Should INDOPACOM get an outsized portion of the CCMD budget authority?

Benefits

For an individual acquisition program, as it progresses through the acquisition lifecycle it will go through bow waves of RDT&E, Procurement, and O&M funds. If development is delayed or has the opportunity to accelerate, this structure provides greater budget flexibility to optimize operational outcomes.

From a broader portfolio perspective, managing the modernization of new weapon systems in the same portfolio as operating and maintaining the legacy systems offers key benefits. It will balance the competing modernization and readiness tensions within each capability area. It will drive accelerating deliveries of new systems to retire costly legacy systems for greater mission impact. It will also provide greater incentives to ensure maintainability and sustainability are baked into systems designs as the costs come from the same budgets instead of handed off as “someone else’s problem.”

As the department seeks to pass an audit for the first time, this new structure provides a valuable holistic view of how much we’re spending for each capability area. Furthermore, it aligns military and civilian personnel accounts for greater apples-to-apples insights. While MILPERS currently has its own appropriation, >820,000 civilian personnel are funded within O&M accounts.

This new structure provides DoD leaders, OMB, and Congress greater clarity on how the defense budget aligns (or doesn’t) with the NSS, NDS, and NMS objectives. With the DoD and Congress operating off the same budget structure, authorization and appropriation bills could be reviewed and approved faster (including leveraging digital tools). It would also provide the foundation for the DoD to pass a clean audit.

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Way Ahead

The foundation of any meaningful PPBE Reform must be built upon restoring trust and improving communications between the DoD and Congress (as well as OSD and the Services). Shifting from a structure that leads with appropriation type based on lifecycle phase (RDT&E/Procurement/O&M) and 1,700 program accounts to one of capability areas within each Service/Component enables a more effective and efficient allocation of resources. It will result in better outcomes, a shared goal of DoD and Congress).

The new administration and Congress have made government efficiency a priority. Restructuring the defense budget to operate in the dynamic, modern national security environment is a strategic imperative. Amid debates on topline budget numbers, we can all agree on the urgency to maximize the ROI of the defense budget investments to achieve national defense objectives.

This proposed structure offers greater strategic clarity on defense investments in every major capability area. It enables greater speed and agility to execute the budget and harness American innovation into military capabilities for our Joint Force.

What do you think of this new defense budget structure?

How would you answer some of the open questions?

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