March 10 2011: Interesting Comments by Conference Speaker

I attended an industry conference on March 10th and the key note speaker was interesting enough that I thought I would write a little blog article to share and look back on 1-2 years from now.

Ken Krieg was the DoD Under Secretary for Acquisition under Don Rumsfeld during the Bush administration. He currently works in the private sector as a consultant with Renaissance Strategic Advisers ... advising clients how to survive the expected downsizing of the DoD. He was quite knowledgeable and his presentation was stocked with data about government spending and quite a few observations about political behavior and citizen behavior. In short we are headed for a near financial catastrophe if not actually achieving that state due to our gridlock in congress.

1. Americans want lower taxes. In general since WWII our federal tax receipts have ranged between 16-21% of GDP.
2. Americans want higher benefits. In general expenditures since WWII have been 18-25% of GDP.
3. Entitlements grew from 5.8% of GDP in 1962 to 15% in 2011
4. U.S. deficit in 2011 is projected at 11% of GDP and total debt is projected to be about $21T by 2016
5. The U.S. debt portfolio carries an average interest rate of 3% with an average term of 57 months. The average rate from 1970 to 2009 was 6.2%. If we move back to the average of 6% that means the U.S. will need to come up with an additional $400-500B just to pay the incremental interest. This will have to come from either entitlement cuts or new taxes as interest on the debt gets paid first.
6. DoD expenditures including Afghanistan and Iraq total about $700B. In CY $ there have been three major up and down DoD expenditure cycles since 1952. Each cycle (17, 17, and 25) has had a high of $550B and a low of $350B so the current $700B has broken out of the norms we have experienced during the last 60 years. This makes the current budget and in particular the expenditures for new weapons platforms extremely vulnerable to cuts. In addition the public support for two war efforts will likely not be there when faced with higher taxes or cuts to entitlements. Ken's projection is DoD will get cut back to $550B on the high side and low side of $400B. Those suppliers seeking to move from DoD to HLS contracts are in for a surprise ... the total HLS budget is only $40B ... implying there is going to be significant consolidation and drives for efficiency across the DoD supplier base. During the last major DoD downturn (1990 - 1995) top line DoD budget shrank 23% but procurement shrank 52%. Implications were a decade of corporate consolidations, no hiring and reduced maintenance.
7. DoD procurement is cash basis and subject to available budget. Entitlements are the only portion of the budget not subject to annual voting ... the bills come in and they get paid.
8. Ken's prediction. Continuing resolutions will be passed for the remainder of this fiscal year (six months) but more concerning is the budget process is so hosed up and with 8 senators retiring the electioneering will be crazy with no great incentive to pass a budget resulting in continuing resolutions through the 2012 fiscal year. CRs result in government agencies being constrained to what they spent in the prior FY with very little flexibility unless authorized by congress.
9. During Ken's entire time in office even though he was accountable for performance versus schedule and budget and he regularly got grilled on this where he got the most heat from congress was with respect to jobs in "my district"
10. Ash Carter is the current Under Secretary for Acquisition and his mantra is "Do More without More" ... he will be seeking restructuring of primes and driving out redundant operations from prior mergers. He will also be seeking more FFP versus CP or T&M contracts on major programs. CP and T&M puts the risk on the government ... we need to move to a better balance of risk sharing. Also, being "big" may not be an advantage going forward ... the DoD will be seeking lean, smart, agile companies that deliver breakthrough products at breakthrough prices.
11. Question? Has the all volunteer force been a factor in extending the DoD up down budget cycle from 17 years out to the current 25 years? A. During draft times more citizenry had a stake in where our soldiers were sent, they were not paid much and when we did not need them we sent them home. The all volunteer force is highly professional, well educated and well trained and excellent candidates for leadership roles in industry after their service. This does appear to have created a slight disconnect between our broad citizenry having a direct stake in military outcomes. Another factor may be that most volunteers come from red states.
12. Question? Will DoD programs be getting more scrutiny in these tight budget times? A. Yes. Expect much more emphasis on audits and compliance. Unfortunately, this only assures that people are doing what they agreed to do ... not necessarily what is the right thing. Opportunities for improving results after a contract award are typically not highly rewarded. IG & DCAA are box checkers they are not partners in performance for doing more with less.
13. Question? When will entitlements be addressed in this budget cycle? A. No. entitlements will be fixed only when we as a country face a budget crisis. Americans tend to respond to crisis ... only issue is the market determines the interest rates so we have less control than we think. For 50 years Americans have been told they are great and can have as much cake as they want ... it has elevated our lifestyle but it is a borrowed lifestyle. Someone ... actually several senior political leaders ... are needed to lead and be blunt with our population ... we are getting older, we are not healthy, and the baby boomer generation is spending the younger generation's money before they die and then leaving them the remaining bills. Unfortunately, without a financial crisis and a cause to focus on the common good, no elected politicians will have the courage to say raise taxes or cut back on what people think of as things they are entitled to.