Pentagon Cost Cutting: Generating Savings From Operations & Maintenance Will Be A Challenge

The U.S. Department of Defense plans to spend over $200 billion in fiscal 2011 on operations and maintenance. That’s more than any other country spends on its entire military establishment. Some observers think “O&M” is a good place to look for savings as Secretary Gates initiates a multi-year campaign to wring efficiencies from the military departments and agencies. O&M is a catchall account for anything that doesn’t readily fit under the rubrics of research, procurement or personnel, and it is by far the biggest of the Pentagon’s umbrella budget accounts, so the logic of seeking savings there is clear enough. However, the closer you look at O&M the less opportunity you see for cutting without creating troublesome consequences.

Congressional Research Service analyst Stephen Daggett captured the complexity of the O&M account in testimony before the House budget committee on February 4 of last year when he said this:

It is a bit difficult to analyze why O&M grows at such a relentless, steady pace, because the O&M budget covers all kinds of very different activities — advertising and recruiting; basic and advanced individual and unit training; professional military education; fuel costs; transportation; medical care for service members, their dependents and some retirees; utility bills; facility maintenance and repair; warehouse and supply operations; purchases of spare and repair parts; day-to-day operation of weapons and equipment; overhauls, including sometimes extensive upgrades, of weapons and equipment; defense think tank studies of strategy and of trends in O&M; pay and financial management; and management of much of the Defense Department.

Daggett’s description certainly makes O&M sound like a place where waste and inefficiency might be lurking, but identifying items to cut is no easy task. About 30% of O&M funds are allocated to pay and benefits for the civilian employees of the defense department. Since Secretary Gates launched a separate initiative last year to hire tens of thousands of additional civil servants in place of outside contractors, no net savings are likely there in the near future. The same is true of the 15% of O&M outlays covering military healthcare programs, because those programs are experiencing rapid cost growth just like their private-sector counterparts. Secretary Gates has recently made the case for tightening up on how military healthcare services are delivered and paid for, but Congress is not likely to make any cuts in uniform medical coverage while the nation is at war (it’s more likely to add new benefits).

Beyond those two sizable slices of the O&M account, most of what remains can only be trimmed by reducing readiness. Any reduction in the purchase of spare parts, maintenance services or fuel will diminish the availability of equipment and thus lead to stresses in the force. Similarly, cuts in spending on military education, training and recruitment will leave personnel less prepared for war than they otherwise might have been. Failure to fund upgrades to aging systems could prove a false economy given the department’s plan to curtail many next-generation weapons programs. With legacy programs likely to remain fielded longer than originally planned, the military will probably need to increase outlays for repair and reset rather than cutting back.

And then there is one other little detail about the O&M budget that rarely gets discussed. Over 80% of the intelligence community’s funding — $40-50 billion annually — is squirreled away somewhere in the defense budget, and much of it is probably hidden in bogus O&M accounts. That may be one reason why experts like Daggett of the Congressional Research Service can’t figure out what is driving the steady increases in O&M expenditures. Having recently authorized major new investments in both human and technical intelligence, it doesn’t seem likely that Secretary Gates would be willing to cut those portions of the O&M account. So while O&M is a big part of the defense budget, the opportunities for savings may be less than meets the eye.