A Tale Of Two Budgets: The New FY25 DoD Budget Is Out With Congress Still Closing The Book On FY24

Roman Schweizer, Aerospace & Defense Policy Analyst, discusses the recently released FY25 DoD budget with a reporter roundtable and a panel of budget experts.

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Transcript

Doug Berenson:

The AI number. They mentioned a number for what they plan to spend in FY25, but they did not ever compare it with what they said in FY24. Is this really an area of priority or is it just an area where we can quote a number to you and get off the stage?

Roman Schweizer:

From DOD to Congress and from the White House to Wall Street, the NatSec Need To Know podcast, an unrehearsed podcasts presenting insightful discussion and forecasts of the major national security and defense issues of the day. Welcome to the NatSec Need To Know. We’re leading off with our editors round table to discuss the top national security issues in Washington, and hey, it’s budget week. Last week the Defense Department released the FY25 defense budget and we’re going to get into some of the details. Joining me is a murderer’s row of experienced Washington editors and reporters, including Marjorie Censer from Defense News, Aaron Mehta from Breaking Defense and Tony Bertuca from Inside Washington. They’ve each covered Washington and the Pentagon for years and are as well sourced as anyone. Thank you all for joining. Let’s get after it.

All right, thanks for joining us, everyone. We’ve got a full plate of issues to talk about this month. The Defense Department has released its fiscal year 25 budget. We’re starting to get the details as the department rolls out all of its luminous budget justification material and the hearing cycle starts with most of the COCOMs, or combatant commanders, going through their posture hearings, and then we’ll get into some of the individual service briefs. Before we’ve got that, though, we still need to close the books on fiscal year 24, theoretically a national security supplemental, and then perhaps even a tax bill which would influence defense companies with the section 174 R&D tax credit fix. The one thing I do is open it up to our panel and see if anyone’s got any insights they’d like to chime in on regarding how we’re going to get 24 closed out with the CR expiring on Friday.

Tony Bertuca:

One of the things that I can kind of see, given what I’m hearing from Capitol Hill is there doesn’t seem to be a lot of suspense around whether or not DOD gets the FY24 appropriation. It’s sort of related to non DOD things. The holdup right now is over DHS and can they CR DHS and then change the back half of the Fiscal Responsibility Act, so not everybody’s got to take a 1% decrement across the board if you just CR1? But this morning the Defense Writers Group talked with Senate Armed Services Committee Chairman Jack Reed from Rhode Island. He’s obviously waiting on the FY24 appropriation like everybody else, but he sort of seems a lot more focused on getting the supplemental, that 95 billion security supplemental. The Senate moved bipartisan vote last month and it’s sort of waiting in the house right now and you got Johnson, the speaker of the House, has said he kind of sort of maybe wants to consider doing it after he does the FY24.

That’s a departure from his outright opposition saying it was DOA. Maybe we see movement on that. But the most interesting thing Jack Reed probably said related to that was if we don’t get the supplemental, people like him, and remember Jack Reed’s an appropriator, he said people like him might be open to breaking the Fiscal Responsibility Act caps, saying maybe you need to do something in 25 to get that supplemental money moving because he said it’s not just about Ukraine, not just about Israel. He said it’s about getting us weapons replenished that have been sent to Ukraine. He said this is actually a national security priority for him because you want to upgrade the US weapons that have been transferred and without the supplemental DOD hasn’t budgeted for that.

Roman Schweizer:

Great. By the way folks, that melodious voice you’ve heard is Tony Bertuca who’s new to the pod for this session. Thanks for those comments, Tony. I would just say, I mean in terms of the supplemental, I think it’s pretty well understood that if either the Senate’s $95 billion supplemental or the House bipartisan 66 billion supplemental was put on the House floor under suspension of the rules, it would pass by a pretty healthy bipartisan margin. It’s just a function of Johnson pulling the trigger on that and potentially upsetting Donald Trump. That is a great segue into the Fiscal Responsibility Act and the Fiscal 25 budget, which we all know by now is constrained at a 1% top line growth, which means investment spending is down 1% when you accommodate for military personnel spending a pay raise, O&M spending, which is an annual grower. We just had DOD’s roll out. I want to throw it out there maybe if we want to lead off with Marjorie. Any surprises in terms of how that budget was rolled out and things you’ve seen in it?

Marjorie  Censer:

I don’t think it was very surprising. I mean, certainly the overall number was not surprising because it had been set in this legislation. I think we heard a lot of members of Congress who were displeased with this budget, but of course that number came from Congress. I don’t think there were a lot of surprises. There were, I think what the Pentagon would describe as some tough choices they had to make. This did not allow them to keep up with inflation, but I think that mostly they chose what was anticipated and maybe left some openings for Congress to add things back in if they do want to break those caps, as Tony hinted.

Roman Schweizer:

Aaron, you’re nodding. It seems like you want to pile on perhaps maybe with some thoughts. What do you see in that budget?

Aaron Mehta:

What’s funny is somehow tragically, although we’re all very young, we also all remember the sequestration situation of over a decade ago. The playbook at that point was, “Okay, let’s cut things or make a big show of not doing things that we know lawmakers want us to do or want us to have.” I think you’re seeing a little of that play out and how this budget’s rolled out. To Marjorie’s point, the budget top line was set by Congress. The Pentagon is saying based on inflation and the way the top line is set, they have to actually trim … the number they threw out was 10 billion versus the FY24 request because of the way of the inflation and the top line requirements to spend go. So what did they cut? Well, let’s find some things that are going to make lawmakers upset. A negative count for warships, retire 10 ships, buy only six. Congress loves adding more ships in.

Another one is they delayed spending on the next generation fighter for the Navy. Everyone loves spending on fighters. They cut the MH139, a gray wolf helicopter buy, which is notionally for protection on nuclear bases, which is a big thing, but also a number of the ones that are getting cut under this budget are supposed to be used to transport members of Congress around DC. I don’t think that’s a coincidence. That’s one of the ones they made a big schwack at. This is a tried and true playbook. It’s, “All right. Congress says we have to take a cut. Well, then we’re going to try to cut in a way that members of Congress are going to go back and say, “Well actually let us add this back in because this is really important to us.”

Roman Schweizer:

I do just want to comment that, Aaron, I feel attacked as the oldest member of this panel that perhaps I’m not as young as the rest of you. You do make the point that yes, there is gambling in Rick’s Casino and that this is the tried and true method to gold watch some things. But the other thing I would sort of say, and this is maybe a fine line, the Navy cut Virginia, cut one Virginia from the budget, F35 numbers are down. There are certain missile programs that the rate is not as high as it was projected to be. I think some of this, and I clearly don’t disagree with you, but I think there’s also a sense that, look, if industry can’t build it at a certain rate, why should DOD continue to buy it at that rate? The Navy’s building 1.4 Virginias a year, and why do you keep piling on two per year and just perhaps exacerbating situation.

The F35 program has yet to get to 156 per year, has had a couple of years worth of delivery issues most recently over TR3 but even the year before over the engine issue when they had a sort of crash investigation at Fort Worth, so it’s a challenging time, I think, across the industrial base and we’ll have to see how that kind of manifests itself I guess later on this year through the markup cycle. What do you think … I mean, we’re in a weird year. Well, let me just go back. Would anyone like to respond to that?

Tony Bertuca:

Again, mining the conversation with Jack Reed earlier this morning, one of the things I was struck by was he didn’t come out swinging against the Virginia class cut. He said, “We absolutely need the two subs a year and we need more because we’ve got AUKUS to deal with.” But he said maybe we should review this because maybe this is a defense industrial base issue. He said [inaudible 00:09:11] going to jump into conclusions and he was going to review what industry can do and review what DOD said it wants. That’s a departure from Joe Courtney, representative Joe Courtney, To Sub Joe from Connecticut, and his colleague Roger Wicker, the ranking Republican on the Senate Armed Service Committee who did come out swinging saying absolutely not.

I think you are seeing some concern about what the ship builders can actually put together. One of the things Reed said was maybe this is a chance to “Put the house in order and try to invest other places.” What will get us back on schedule? That’s what he said is the focus. Does buying two boats get us back on schedule? Does investing further down the industrial base, does that get us back on schedule? That’s what he cares about.

Marjorie  Censer:

I just want to chime in that I think also the Navy tried to make the case not give us a second boat, but look at the money we’re going to put into the industrial base so that they can actually build two boats a year, two subs a year. I feel like I can’t say boat and-

Tony Bertuca:

Boat is the proper reference. Boat is the proper reference, yes.

Marjorie  Censer:

All right, all right. I don’t want to be responsible for that. But they said that they’ll be able to buy two a year in FY30 and FY31 where they weren’t necessarily going to do that before if they invest the amount that they’re planning to invest in the industrial base to get it where it needs to go for the long term. I think that was the Navy’s pitch and perhaps they’d like to have it all, but I certainly think that they were making the case that this makes sense and we’re laying the groundwork investment wise to get to the rate we want to be at.

Aaron Mehta:

I do think there’s a little bit of a potential chicken and egg situation going on here where we’ve heard … there’s now this big focus on the industrial base post Ukraine. People have been raising the issue, certainly we’ve all written about it for years, talked about it for years, but now you hear every member of Congress talking about the industrial base, we got to get production up. You hear it in Europe in a place you never did before. There’s the focus now and then when you talk to industry, the response is always, “Okay, so show us the money. Where’s the investment? We need the money.”

I feel like there might be a little bit of a chicken/egg, snake eating its tail, whatever metaphor you want to run to the ground of, okay, so does the Pentagon need to keep giving money to industry when they know they can’t hit this rate, but the industry is only going to invest to be able to hit that rate if the Pentagon keeps putting this money in. I don’t know if there’s any good answers there, but certainly I think proponents of doing this would argue that that’s potentially the issue.

Roman Schweizer:

I do think we are in the midst of this unusual sequencing where we’ve got the 25 budget out. We still don’t know what the final 24 appropriations are, what any of the EOQ money for multi-year, say, on missiles looks like and some things like that. There’s definitely a lot of … and as you point out, the supplemental, the security supplemental includes 3.2 billion I think was the number for submarines or AUKUS related. There’s a bunch of capital investment that theoretically needs to occur across the industrial base, which is just surprising. I mean, to think over the last 20 years, or maybe it’s even since the ’80s really, that the industrial base was scoped for sort of peer competitor, peer competitor being the Soviet Union, as opposed to what it ramped up and what it was building during the time of the global war on terror post 9/11 period, whatever we want to call that.

Any thoughts on … and I will poke on this, but I still think it’s somewhat serious and because we’re still crunching through the numbers on the budget detail, Replicator was sort of referenced. Kath Hicks, Deputy Secretary of Defense Kathleen Hicks talked about the investment being made and sort of scooped up under those programs. Any thoughts or criticisms you’ve heard about how that has been rolled out?

Tony Bertuca:

Yeah, I hear criticisms from everybody. There’s a lot of criticisms that the Pentagon’s being far too cute with this, that one day you will ask senior defense officials to talk to you and they say, “We just can’t say”, well then the very next day, the Deputy Secretary of Defense gives you numbers, because she’ll talk about it, Kath Hicks, because this is very much her effort. I think one of the things that’s clear is nobody wants to get ahead of Deputy Secretary Hicks on this and they don’t want to get caught talking about it. If she wants to say, like she did, 500 million in FY25, they’re going to let her say it. It’s not going to be on a briefing slide that we get. If she wants to say it’s a $500 million reprogramming request maybe for ’24 or maybe you squeeze it into the ’24 approach deal, they’re going to let her say it. You aren’t going to get it from anybody but her.

Industry would like a little more publicly available information. I think the press maybe feels that way too, but for now it’s sort of kind of classified, but yet maybe the deputy talks about it when she’s up to it. So that seems to be [inaudible 00:14:20].

Aaron Mehta:

Kath Hicks is very smart person. People who have worked with her for years say just the best things about her. The rollout of the Replicator thing has been just kind of messy in a way that seems unusually chaotic for this kind of effort. To Tony’s point, it really seems like it’s because this is Hicks’s program and she’s driving it and people, I think to Tony’s point, don’t want to get in the way a bit and get in her way, in front of her and anything. But also you talk to people in the Pentagon, certainly around the time this was announced, and they all went, “Yeah, we just found out about it when she made the speech”, and there’s a lot of confusion still about what is Replicator or what isn’t Replicator. I think some people are hesitant to talk not just for the internal politics reasons, but because I don’t think there’s still a very good understanding of what this actually is inside the building.

Marjorie  Censer:

We certainly didn’t get a lot of information from the services who I think, as Tony said, did not want to get ahead of the deputy secretary. I think there was an expectation of getting more information faster just based on the pace of this program. Not to date myself, as Roman has claimed being the oldest on this podcast, but if you remember the MRAP program, it felt like a constant flow of contracts and awards and we were really seeing the money flowing, and I think maybe industry thought a program with a very set deadline like this, you might see some of the same pace of contract awards flowing in full public view.

Roman Schweizer:

No, I mean I think I have sort of two thoughts on Replicator and one, I think, Marjorie, along the lines of what you said is a broader criticism, fair or not, of the Biden DOD is sense of urgency. Whether that is awarding contracts for Ukraine, replenishment of presidential drawdown stuff, of shifting arms to Taiwan, of making decisions on what should go or should not go to Ukraine on Middle East policy, defense policy, not necessarily state, and then certainly on Replicator. My second view is there’s been some discussion as whether or not this is an evolution or revolution in terms of unmanned and robotic warfare. But I think to use a double metaphor, like Aaron, either the genie is out of the bottle or the toothpaste is out of the tube, that there’s really no going back when you have a country that really doesn’t have a Navy, Ukraine, sink a quarter of the Russian Black Sea fleet using something that the US Navy doesn’t even have fielded, theoretically in an unclassified sense or the use of first person drones and that kind of stuff.

As an analyst, I’m skeptical and frustrated and as a American and taxpayer, I really hope there’s something super secret behind the veil that everything is being done. But we’ll see. Being the more senior person on this podcast, I’m used to being disappointed in this town, so we’ll see. Any thoughts on, and this is going to be a crazy year before we even talk about next year. Typically, we go through the budget cycle or the budget release, we get to the hearings markup, sort of May/June timeframe, obviously Congress has to take the month of August off, but this year we’re in full on campaign mode. Any thoughts on when we’re going to know what the defense budget’s really going to look like?

Tony Bertuca:

I mean, theoretically we know. I mean, if they stick to the deal that they said they were going to do, you got the Fiscal Responsibility Act. In theory they should just go right ahead and move these amounts and just do a little tinkering as to where they go. But again, mining Jack Reed, he said this morning, every budget’s different. Yeah, we’ve got this deal. We had to stick to it because of the debt ceiling and that’s how it is. But maybe people want to up defense and then, according to him, you should up non-defense too, and then you end up back in the situation again with parody. Politically do they want to open that up in an election year? I don’t know. There’s a lot of thoughts about that and then what maybe the House GOP might be willing to do or what the speaker might be willing to do, depending on where his caucus is headed.

A lot of uncertainty related to what it’s going to look like and when we’ll know. But I mean, I don’t know if I would say right now they’re sticking to the deal. I don’t know. I think there’s a lot of people unhappy with the deal. We’ll see.

Roman Schweizer:

No, that’s a very good point. I think probably what you’ll see appropriators have to do is go in there and move stuff around, push mud around the floor underneath that top line, and then maybe you get a supplemental on top of that, but probably not before the election. We’re into the fall. Anyone disagree with me that we’re going to start under a continuing resolution?

No? No one’s willing to take-

Tony Bertuca:

Never bet against a CR. Never bet against a CR. Come on.

Marjorie  Censer:

No, we’re younger, but we’re not that young.

Tony Bertuca:

No, no. Never bet against the CR. But you bring up the need for another supplemental though, that’s where you could see this, “Well, we’re not breaking the deal. We just have another supplemental”, and it’s a Christmas tree and it’s all the UPLs that we’ll get in it and it could be that. It could be that.

Roman Schweizer:

Guys, it’s OCO.

Tony Bertuca:

Yeah, it’s OCO. It’s just OCO again. Yeah, because they’re only going to keep sending supplementals.

Roman Schweizer:

NSS is the new OCO, right? National Security supplemental. No, and again, just to make everybody’s head explode, we’re going to have to deal with tax policy, debt ceiling raise all next year. I mean, as bonkers as you think this year is going to be, dare I say next year is going to be even worse. Well, look, that’s a ton of budget news. Anything else anyone’s following? I mean, we’ve got all kinds of things coming up. It seems like a lot of … obviously the Biden administration, Senator Schumer chirping at the Netanyahu government. Honestly, it amazes me what’s going on in the Red Sea, folks that I used to work with in the Navy, I think the quote from the Fifth Fleet commander was this is the most intense naval combat since World War II in terms of stuff being shot and shot down. Any thoughts on big stories that folks ought to be paying attention to? I’ll just throw it out there.

Tony Bertuca:

I mean, I’ll take a left turn from that and sort of separately from geopolitical unrest, I’m watching what Congress does as a result of the PPBE Reform Commission. That’s the Planning, Programming, Budgeting and Execution Reform Commission, for listeners out there who might not know what that is. But they’re going to have a hearing on it, I think SASC’s hearing is … I think it’s this week actually, and they’re going to take recommendations about, “All right, so one of the things PPBE Reform Commission said was you need to make it easier on DOD to start new programs under a CR”, and that’s one of the things that DOD has been living with now forever, and is there a way to keep oversight for Congress that gives DOD a little flexibility there? Or can they get carry over authority in some of their accounts up to a certain amount?

Stuff that X comptrollers when they’re done being comptroller always say, “Oh, this is what I wish I would’ve had.” Well, you’ve got a whole report of it right now, the PPBE Reform Commission. That’s one of the things I’m following to see what Congress does to change how DOD spends its money.

Roman Schweizer:

I would just say we were getting a little bit down the rabbit hole talking about budget stuff, and Tony just took it down a whole other level to talk about PPBE reform, but I fully appreciate that. Again, this goes back to folks who know what the FYDY, Future Years Defense Program, and goes back to McNamara and the Wiz Kids about how the DOD built its budget and none of it really matters once you get past year three or actually past year two. No, I think it’s a very interesting point of view and that would probably be on the next administration, whichever flavor that is to kind of maybe go off and implement, but you need some legislation from Congress to go ahead and implement that. Aaron or Marjorie, anything else that’s on your radar? What do you got your staffs working on?

Aaron Mehta:

I mean, for us, it’s been just so much budget stuff that we’re kind of digging out, but last week, kind of quietly, there was one milestone which … I don’t know, if a milestone can both be important and utterly unimportant, this is really the definition, which is the Pentagon approving full rate production for the F35, which they’ve been flying the F35 for missions, both the US and other nations, for several years now. So what does this actually mean? I mean, not a lot in the real scheme of things, but still it’s one of those milestones that, again, over the course of all of our careers we’ve been covering and caused and delayed and kind of a symbol of the fact that the plane continues to be so behind the schedule that was laid out for it so many years ago. It was funny, they kind of just quietly dropped it late at night with a short press release and moved on. But as I said, it’s a milestone that somehow doesn’t really mean anything in real terms, but just feel like it’s worth noting that one.

Roman Schweizer:

Absolutely. No, that is a very good point and I will say as sort of a former acquisition guy, but not an aircraft, milestone C is a big deal. I mean, it is actually the final graduation exercise and it is a laborious oversight paperwork process, and you do actually get the top levels of OSD to sign off on this thing. There is an implicit gold star that goes with it in terms of education or milestone. But the other thing I think is likely to come from this is now DOD will be able to enter into a multi-year contract because now that you’re technically under full rate production, not LRIP anymore, you might see a block by of three to five years or something like that. DOD has wanted to do that for some time. Foreign countries could do that, but the US could not do it. It had to go through annual budgeting or annual contract options. So no, it was a very good point and I mean, you do have jets that theoretically, at least for Israel, have been flying in combat. So for sure.

Marjorie, how about you? What’s the staff working on?

Marjorie  Censer:

Well, that I cannot tell you, but if Tony wants to talk niche, I’ll talk niche too. I know an area of interest to the industry for a long time is R&D tax credit. It looks like it may actually be moving this time. I know the industry has long wanted that credit back, which came in the 2017 package and then expired, allows them to deduct R&D expenses in that year as opposed to spreading it out. This is a little nichey, but the point is that defense contractors have said they would be encouraged to do more R&D if they got this credit back, and I can’t prove that, but it has been something that they’ve extensively lobbied for and the house has passed it and it’s in the Senate. I don’t think that passage is assured, but perhaps it’s closer than it’s been in quite some time.

Roman Schweizer:

No, I mean look, that is the … theoretically by the 22nd or maybe by the end of the month, we could have Fiscal 24 defense appropriations, a Fiscal 24 national security supplemental and the tax package, which includes the section 174 R&D tax amortization fix. That would be a Christmas in March for the defense companies who would like some certainty finally to get the budget going and start some of the more contracting activity that’s been delayed. Well, I think that means we’re all going to be in the weeds for a few weeks listening to these budget hearings. Just for listeners out there, if you want to see your federal government at work, tune into a hearing once or twice just to understand what that’s like, but realize that you don’t have to because you’ve got great folks at Inside Washington and Breaking Defense and Defense News doing this for you, and so I encourage you to check out the best that these great group of reporters and their editors and their staffs are working on, and we will come back in a few weeks and let you know what’s going on. Thanks everybody. I really appreciate it.

Now we’re going to go in even deeper layer and get into the weeds with two experts on the defense budget, no names. Two of the guys that just really know it inside and out. Doug Berenson, who is a partner in the aerospace and defense practice at Oliver Wyman, and then also Todd Harrison, who is a senior fellow at the American Enterprise Institute. Both have been doing this for a long time and really have a great institutional knowledge on the budget and we’re going to get into some of the surprises and insights of what they’ve seen over the last few days as we all kind of tear into it and figure out what DOD did compared to last year.

Thank you both so much for being here. Really looking forward to a great discussion. I couldn’t think of two other guys that I would rather have to get into the weeds and fully explore what we know and what we still maybe don’t know as we think about the Fiscal 25 budget request and also the FYDP. Not all the documents are out. A little bit of annoying. Navy, come on, catch up. I need those R&D docs, but no surprises.

Todd Harrison:

They just posted.

Roman Schweizer:

You’re killing me. You’re killing me. Of course they have. Of course they have. As you see, that’s what the first week or two of the budget is built for as the folks who really love looking at that stuff. Gentlemen, let’s just start off, top line. No surprise, investment down 1% nominal. Not bad, not a bad place to start, given the top line constraints, and we obviously think the budget’s going to go up. So how do you think the rollout has gone from a surprise perspective? Anything really big before we get into programs and services stuff? Anything you think this season in terms of kickoff? We’ll start off with Todd.

Todd Harrison:

Since a lot of this had either leaked or been telegraphed in the prior weeks, I don’t know if it’s necessarily a surprise, but something that really stands out to me in this budget is on the Milper side that [inaudible 00:29:42] are going down. We knew they were going down because they weren’t able to fill all the authorized positions for ’23 and ’24, but just adding it all up, realizing just how far [inaudible 00:29:57] has dropped in this request was a bit of an attention grabbing thing for me. We’re below 1.3 million in total active duty [inaudible 00:30:09]. That is the smallest we’ve been since before World War II. That’s an interesting trend that we’re seeing, and of course, operation and maintenance costs continue to go up and ultimately that’s what led to the acquisition accounts, investment accounts being squeezed here.

Overall, that was kind of one of my big takes. The other one is also not a surprise, but the FYDP projection for the top line is perfectly flat with inflation from 26 through 29. That clearly indicates that the Biden administration is intending to keep a cap on the DOD budget within the overall federal budget, even though the FRA caps don’t apply to those years. We kind of saw that coming. That’s what they did in last year’s budget request as well.

Roman Schweizer:

You get what you ask for and also at the same time appeals to progressives to restrain defense spending. I am actually … so never been a big Milper guy, so I appreciate the look at that. I mean, is this the reality of filling all those billets? Is it a conscious decision to free up money? I mean, it’s an interesting conundrum, Todd, if you just want to go a little bit on that.

Todd Harrison:

I think it’s just a reflection of reality, that they know they’re not going to be able to fill those billets and they need the money elsewhere, so why park the money there and then have to reprogram it later? Just go ahead and pull the money. I don’t think it is a … Well, maybe with the exception of the Marine Corps, I don’t think in the other services it’s a deliberate intention to downsize. The Space Force grows, but we’re talking very small numbers there, like a few hundred people. But for the other services, it’s just a reflection of reality and they needed the money.

Roman Schweizer:

Right. I didn’t see Kath take any credit for Replicator with unmanned jobs taking the manned jobs or something. I’m obviously joking, that Replicator has been such a success that you can shrink the rest of the military departments.

Todd Harrison:

That would be an interesting twist.

Roman Schweizer:

Right. Doug, let’s kick it over to you. Any sort of major … sort of the headline grabbing observations?

Doug Berenson:

For me, I think it would be the extent to which space took a hit, in both R&D and procurement, space was down really in real terms and given how rapidly it has been growing for the last nearly 10 years, that was pretty striking. Obviously this was a hard budget year in which to sustain growth for almost any broad category of investment. But space, look, you can make cuts to ships and aircraft and count on the Congress to fix the problem later in appropriations by some sort of means at their disposal. Space has generally not really relied nearly as much on congressional ads to get well, and so the decision to make some significant cuts in space investment I think was really a surprise to me.

There’ve been other categories over time that grew really rapidly and then leveled off. Cyber comes to mind. It was a time where cyber kept growing in real terms every year, then sort of finally leveled off. I’m wondering is that where space is getting to or is this really just a momentary phenomenon of a year of fiscal austerity? So space is one. Another one is the way in which the department handled missiles and munitions spending in the ’25 budget. Just to level set, overall spending on missiles and munitions in the ’25 budget is down by a pretty wide margin. By my calculation, it’s something like 9% from the ’24 president’s budget to the ’25 president’s budget in the procurement account. It’s up in R&D, but the reduction in missiles and munitions really seems to belie the push to expand production capacity and stockpiles.

Now, a big part of this, obviously, as the services communicated earlier this week, is they’re really counting on the FY24 supplemental request to get where they need to be in a whole range of missile and munition programs. But we don’t know where that supplemental request is going to go. It’s almost certainly going to be a fraction of the size of what was requested last October. We really don’t know what is in store for fiscal year 25, that maybe there’ll be a supplemental for ’25 on top of this request, but of what scale we simply have no idea. Whether the department is going to make good on the multi-year production objectives that it’s set for itself, we’re a long way from really knowing that.

Roman Schweizer:

All right, I think that’s a great observation and I think my concern is that just the industrial base can’t sustain or isn’t ready or is having trouble ramping to the growth across multiple … I don’t just mean missiles and munitions, right? I mean, we see that with F35. We see that in ship building, particularly in Virginia class. Not to bash industry, because I just don’t get the sense from OSD, the Pentagon and the services that there is this sense of urgency and how sometimes you just got to be sloppy and throw money at the problem and do it quick and get going. But again, maybe that’s just me being old-fashioned.

Doug, you brought up a great point. I mean to me, when you look at the categories in the program acquisition cost by weapon system book, I mean, it looks like aircraft and ship building funding are about flat, but you see this big jump up in C4I spending and they note that it’s because this sort of recalculation of including JADC2, AI and 5G, all the magical fairy dust that’s going to make us 10X more effective, where the hell was that money before? Was it [inaudible 00:37:14]. I’m just wondering how it naturally … I mean, it’s a 50% … they went from 14 billion I think to 21 billion if I’m thinking of it. How the hell does that happen? Anybody got a view on that?

Doug Berenson:

I’ve never really understood how the department categorized investment spending into a series of groupings. Frankly, they’ve used a series of terms to put investment spending in discrete buckets that are very different than the terms that I tend to use, and so when I look at C4ISR and I use a category that I call C4ISR and cyber and that category is up in FY25 and the FY25 president’s budget, but only by about 1.5%, and so the short answer to your question is I’m not sure where the department was categorizing that spending. I think there was a mission support category which was in more an enterprise wide kind of activity, which I had always associated with stuff like facilities and stuff that was really, really far away from the pointy end of the spear. Clearly that included more C4I maybe business IT systems and things of that nature that got re-categorized.

But look, I think there’s a lot less than meets the eye in terms of the spending growth that that re-categorization implied. In terms of C4ISR and cyber, there is some growth. Forgive me, I’ll quote you a couple of numbers for what that’s worth. In procurement, it’s basically flat, it’s up less than 1%. In RDT&, C4ISR and cyber, as I calculated, is up about 2.7%. I think they are spending … and in a year where the budget overall was down and the investment categories were down, that’s a pretty significant achievement. It is clear that the difference in treatment of RDT&E versus procurement means they really are trying to lean into next generation capabilities like AI and 5G and sort of the broader JADC2 heading.

I noticed that one of the newly created line items this year in the budget is specifically a JADC2 implementation line. It’s under the auspices of the office of the Secretary of Defense. There’s been a lot of criticism. I think Todd has leveled some of this, that there’s really no centralized adult control over JADC2 implementation. It would seem that they’re sort of trying to get toward that kind of arrangement.

Todd Harrison:

I mean, the one thing I would add there is first of all, back to your original question, I never used DOD’s categorizations. If they can’t show me a line by line itemization of what went into which category, I had no idea how they’re defining it, best to use your own categorization than to rely on theirs. But in terms of JADC2, I mean, that has been one of the big issues all along is it’s this big concept that’s supposed to be at a joint level, but the actual implementation and program funding lines have been fragmented among the services. Then when you go and you talk to those services, those program offices on their own, they’re kind of like, “Yeah, sure we’re JADC2, but are we talking to the other services? Well, no, we’ve got to get our own house in order first.” So it’s like, “Okay, so you’re just building siloed networks. What’s different?”

If they’re actually going to try to have real funding at a centralized line under OSD, I mean, we’ll see how that works out, but that is a good first start towards actually getting control. You don’t have authority over something in the Pentagon unless you have budget authority and if the budget authority is in OSD, they can actually force jointness in this. But you’ve still got all the services program lines that are off running and doing their own thing. Let’s see how well they can do at herding the cats there.

Roman Schweizer:

Right, and so true, I just want to reinforce one of the things Todd says is you do not have oversight or authority of anything unless you have control of the budget. If you’re not moving money, your opinion really doesn’t matter all that much. All right. Well, and the amazing thing to me, I got this question a couple of weeks ago or maybe two weeks ago, just about AI and if you’re on Wall Street or you’re investing in technology these days, AI is the great buzzword and I do want to just call out for anybody paying attention, DOD lists its investment in AI in this budget as 1.8 billion of the, call it, 143 billion in R&D. If you’re just scoring at home, the defense budget is $850 billion. I mean, to the fact that we’re going to have Terminator and Skynet, we’re doing it at a pretty cut rate cost right now.

I mean, DOD takes AI seriously but not to the tune of even spending $2 billion a year on it yet. [inaudible 00:42:47]. I just think that’s a somewhat unique and maybe petty observation on my part. But also I just want … another lovely term, maybe even more amorphous than JADC2, is Replicator. It is Dep Sec Def Kath Hicks’s a big initiative. I think once we get in and crunch the budget and look at the FYDP, there is going to be some real horsepower there or some real shifts maybe increases in procurement in this idea and I think it’s probably an existing programs of record. During the press brief, she mentioned that there was sort of $500 million a year over, I guess, ’25 and ’26, I’m assuming not counting a reprogramming that’s theoretically on the hill, classified reprogramming on the hill.

Any sort of call outs or observations from you guys on Replicator? To quote an old throwback since we all three are gentlemen of distinction in some years, “Where’s the beef?”, to quote an old commercial. Any thoughts on where you see Replicator going?

Todd Harrison:

Well, a couple of thoughts off the bat. One is the Air Force and the Space Force are not playing in it. Not right now. I talked to folks in their budget office and just asked, “Did you get anything out of Replicator?” and the answer was “No. Maybe next year.” This is not across all the services. That probably tells you something about how it was rolled out internally and maybe they didn’t all believe something was going to happen. But what I’m waiting to see is is this new money, is this a new initiative or is this a rebranding initiative? I suspect it is probably more rebranding of things that were already in the pipeline than it is actually starting new things. It will be really hard to tell that for sure if many of the programs that are being cited as Replicator are classified funding lines. But we could go back and look at the history of some of those lines. If they are named classified lines, like the Navy has a number of fun named classified [inaudible 00:45:13] lines, Pilot Fish, things like that-

Doug Berenson:

Retract Maple.

Roman Schweizer:

[inaudible 00:45:20], we’ve all got our favorites. Yes.

Doug Berenson:

[inaudible 00:45:23]. Well, we know that’s their next gen fighter.

Todd Harrison:

Right, right.

Roman Schweizer:

Yes, that’s a good one.

Todd Harrison:

Yeah, but if it turns out it’s one of those and then you can look back and say, “Yeah, they already funded that”, or at least already planned to fund it. Then it’s not really anything new. I kind of suspect it’s more rebranding than anything.

Doug Berenson:

I think that’s true, but I’ll also give them some credit for putting some shoulder into it. Look, there’s a handful of line items that they’re not called Replicator so the Army Future Tactical Unmanned Aircraft System, FTUAS, that line item, which I think is probably one of several funding vehicles that’ll be used to advance Replicator. That budget line is up way up in the FY25 president’s budget request. It’s probably twice as large as the Army projected it would be in last year’s FYDP for FY25. At $128 million in FY25, it’s not enormous, but I think it does reflect that OSD and the services found some areas that they could really goose to try and prime the pump on some of these things, and there’s some evidence that they are actually making progress.

One of the things that I found really irritating frankly about the budget rollout earlier this week is, and Roman, you mentioned the AI number, they mentioned a number for what they planned to spend in FY25, but they did not ever compare it with what they said in FY24. So you didn’t really get any kind of sense of are we doing more, are we doing less? Is this really an area of priority or is just an area where we can quote a number to you and get off the stage?

Roman Schweizer:

Correct.

Todd Harrison:

Can I echo one? That’s where I think they might’ve been a little misleading in some things, unnecessarily so. Doug, you talked about how the Space Force budget went down from ’24 to ’25, yes, but if you go back and look at the Space Force’s projected top line, 425 in last year’s request, it’s almost equal with what they’re requesting this year. They just followed the last year’s FYDP projection. It is down, but they could have communicated it in a different way. That is one of the key things I always like to do is go back and look how does what they’re requesting in this budget, not just this year, but over the FYDP, how does it compare to last year’s FYDP? That’s where you can see where they actually made changes and priorities.

Roman Schweizer:

No, great point, and especially it’s even more so this year because the US Congress has not given us an appropriations bill, so you can’t really do a year-over-year comp. All you could do is FY25 plan versus FY25 requested. Never admit when you’re lazy, but I have not had a chance to do my drill-down on sort of my bucket of Replicator programs, so Doug, I appreciate your FTUAS comment and my view on Replicator has been that Kath wants to produce things in 18 to 24 months and so the only way to do that is through existing programs of record. To me, FTUAS, robotic combat vehicles, a bunch of the Navy smaller UUVs, USV kind of stuff are probably going to be the places where the services can comply and throw additional dollars, whether it’s money given from OSD, unlikely, but money cobbled together to really, I think I like your term, put the shoulder to this stuff. I also like to say put the finger on the scale to make them move faster.

Look, I know there’s a difference of opinion on this stuff in terms of unmanned and proliferation and is this an evolution or a revolution, but I really just think DOD in terms of drone robotic and counter drone or whatever term of art you want to use, the stuff in Ukraine right now is just amazing. I mean, amazing and whether you count that as terrifying amazing, or technologically amazing, I mean again, the fact that a country with no Navy has pretty much sunk a quarter of the Black Sea fleet and the stuff that FPVs and robotic vehicles are doing, I mean, this is going to be hard for DOD to ignore.

All right. Well, I will get off the soapbox on that. Let’s just, if we can, just shift gears a little bit. Maybe some programmatic surprises, anything sort of down into the weeds. I mean, to me one thing was the fact that the Navy appears or they’ve said that they have deferred or delayed their sort of next gen programs FAXX, SSNX and DDGX, which … I mean, I believe they were going to defer on FAXX, I thought they were behind. I thought they were going to piggyback that with a buy of super hornets. I’m sure Congress and St. Louis will perhaps compel them to do so this year during the cycle. That would be sort of one of the things I would look for. But the Navy’s Next Gen programs have all sort of been delayed in mass still. Navy, we will get to your R&D documents as Todd has alerted us. You can’t hide forever.

Really, I guess the second one, which I didn’t expect to see as much is the GBSD program. Nunn-McCurdy breach and all has a significant cut over the FYDP, and that’s even pre restructuring. We probably won’t know till this summer what a restructured GBSD program looks like. Those are sort of my two of my call-outs. Guys, what do you got? Maybe if we want to lead with Todd.

Todd Harrison:

Sure. I guess one that I didn’t quite see coming but maybe should have is the Space Force’s National Security Space Launch Program line. That one, again, if you compare it to last year’s FYDP, they’re taking a dip in ’25 and ’26 relative to what had been previously planned and then picking back up roughly with what they previously projected in ’27 and beyond. Now, the reason for that is they say the satellites that were going to be launched have fallen behind a bit and so they just don’t need the launches right now. They can push those out into the future. That, though, gives me pause that, okay, there’s other problems if they’re running behind on other programs like that.

Roman Schweizer:

Part of space launch is sustaining a cadence, right? I mean, if you’re the launch providers, you theoretically need to be doing the stuff at a steady rate, right? Like anything else.

Todd Harrison:

Well, that’s true for ULA. That is not true for SpaceX. The government is a tiny fraction of the overall US launch industry now, which is dominated by SpaceX.

Roman Schweizer:

Fair point.

Todd Harrison:

It really only matters to ULA and they’ve been pretty far behind on their Vulcan launch vehicle anyway.

Roman Schweizer:

Right. Fair enough. Doug, kick it to you. Any programmatic in the weeds surprises?

Doug Berenson:

I’ll pick out one and I’ll caveat this by saying I’m still going through the materials to make sure I’ve got it all figured out. But the primary funding line that funds the Collaborative Combat Aircraft program, it’s about half of what was requested in FY24. I would’ve thought that they were really hitting the gas on CCA. Look, maybe it is possible that some of the funding has been shifted to another line item that I haven’t identified yet. That’s totally possible, but I wonder if it also just reflects a fact of life about how hard it is to get a complex undertaking really out of the gate.

Roman Schweizer:

Right. Actually, that’s a surprise. I have not seen that yet. Go ahead, Todd. You can pile on.

Todd Harrison:

I got one more, a different one. The B21 procurement, looking at that, they’ve shifted that funding out into the future. They’ve slipped it, and I didn’t see this at first, but if you look at their FY25 B21 procurement, it’s just under 2.7 billion, last year they projected it would be 3.9 billion and in the PB23 budget request, it was supposed to be up to 4.4 billion in FY25. That tells you something about the B21 program, that they may say it’s all good and everything’s going great and they got their first flight and all of that, but why are they slipping the procurement money if that is the case?

Roman Schweizer:

Yeah, and I mean I just wonder, Doug, to your point on CCA or to B21, I mean what can US industry build at this point? Is it labor, is it supply chain? Is it throughput? But it’s perhaps not great overall. I mean, for sure. Well, gentlemen, we are going to wrap with that. I know we could talk this until the cows come home, I guess. Weird budget reference there. But I do want to thank you and I do want to recommend our listeners, Todd and Doug are well published, the two sharpest minds on the budget and also my go-to for the really hard questions. I think of myself as kind of in the weeds, but these guys really know the material and always insightful, have been doing this for a long time and good friends, and guys, thank you so much for your time. I really appreciate it. Thanks, everyone, for tuning in.