Time To Put The Pentagon Into Chapter 11

When a private company finds itself with a crushing weight of debt, a dysfunctional organization, overly restrictive labor agreements and operating rules that make it impossible to alter its cost structure, it can declare bankruptcy. Most companies file under what is known as Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11, a business is allowed to continue operating while it reorganizes itself, restructures its existing debt and long-term liabilities such as pension costs, renegotiates labor agreements and gets rid of excess inventory and infrastructure. Corporations that have filed Chapter 11 include General Motors, United Airlines, Lehman Brothers, and K-Mart. The GM case became a political issue not only because it was the largest bankruptcy by a manufacturing company in U.S. history but also because the federal government provided significant financial support for the restructuring effort (around $50 billion). What often gets lost in the retelling of this story is that GM was able to sell off unprofitable parts of the business, radically reduce the number of dealerships it had to support, shrink the number of models it offered for sale, restructure its debt to bondholders and liberalize labor contracts with its union workforce. As a result, GM is again a viable company, although the federal government has never fully recovered its investments, and retiree pension and healthcare costs will burden the new company for decades to come.

It is time for the Department of Defense (DoD) to consider requesting protection under the U.S. Bankruptcy Code. Like GM and other major U.S. corporations, the Pentagon is burdened by high, and increasing, personnel costs, excess infrastructure, antiquated processes and practices, and too many rules and regulations. In addition, for the foreseeable future, defense is not a growth sector. Defense spending is projected to decline at a minimum by nearly $500 billion over the next decade. This is like a company suddenly having its line of credit reduced. Unless sequestration is nullified, an additional $500 billion will be pulled from planned future defense spending over the next decade.

Like GM before it was allowed to enter bankruptcy, DoD has struggled to find ways of reducing its current and future costs so as to meet projected budget limits without having to gut its military capabilities. It has proposed being allowed to reduce its massive physical infrastructure by 20 percent, limit pay raises for uniform personnel, modestly increase the costs to individuals and families of government-provided healthcare and open up more maintenance and sustainment work to public-private competitions. It has proposed also eliminating obsolescent “models” from its portfolio.

A recent briefing by the prestigious Congressional Budget Office (CBO) illustrated how much money could be saved by modest and reasonable changes to pay and benefits alone. For example, replacing some 70,000 uniform personnel in non-specialized assignments with a smaller number of civilian employees would provide equal value and save $19 billion between 2014 and 2023. Capping military pay raises to keep them in line with the increase in pay raises in the civilian workforce would save approximately $25 billion over the same period. Increasing TRICARE payments and/or altering eligibility for subsidized healthcare for working-age veterans could save between $20 and $70 billion through 2023. Finally according to CBO, eliminating the current situation whereby disabled veterans receive compensation from both DoD and the Veterans Administration would save more than $100 billion. The total savings from these relatively modest changes in personnel compensation could be as much as $214 billion over the coming decade.

Restructuring the defense enterprise could save tens, even hundreds of billions more. Additional savings of up to $10 billion annually could be achieved merely by reducing excess infrastructure. Between 1997 and 2007, when Congress opened up maintenance work normally restricted to government entities to private competition, DoD saved some $10 billion in operating costs and additional billions by reducing required manpower by 40 percent. Breaking free from DoD’s antiquated supply systems and making better use of modern enterprise software and automated transaction systems could save between $10 and $25 billion annually. Making greater use of commercial items could save tens of billions more. Overall, if DoD took full advantage of its bankruptcy request to modernize its business practices it could potentially save $500 billion over the next decade. In total, changes in personnel costs and business processes could provide savings that even exceed impending spending cuts. As a result, there would be no requirement to cut force structure or eliminate modernization programs.

The reason to propose that the Pentagon apply for Chapter 11 protection is that virtually all the reforms discussed above have already been proposed. They have been rejected by the Obama Administration and Congress, acting as the Pentagon’s Board of Directors. The only way to achieve the kinds of structural changes the Pentagon desperately needs and the politicians are unwilling to support is by taking these decisions out of their hands and putting DoD in the hands of a bankruptcy judge.