Front Loading the CVN-77 ...
or ... Why Sausage Making is Like
Date: Tue, 21 Jul 1998
This message refers to 3 attachments:
 Sec. 122, CVN-77 Program, National Defense Authorization Act 1998
Conference Report to accompany H.R. 1119, October 23, 1997
 "Shipyard says faster-built CVN-77 would save money, but final price
tag is unclear as ship is partly a protoype for next carrier class."
Virginian-Pilot, January 6, 1998.
 "Carrier's Cost Understated By Half A Billion," Defense Week, July 13,
Today, the United States spends about $265 billion on defense, almost three
times as much as all its potential adversaries combined (China, Russia,
Iraq, Syria, Iran, North Korea, Sudan, North Korea, Libya, Cuba). Yet
planners in the Pentagon have not be able to construct a proactive strategy
for evolving new force structures and capabilities to match the changing
set of threats or for financing the much smaller forces of the post-cold
war era. My aim in this message to use a case study to explain how
factional politics in the military-industrial-congressional complex plant
the seeds for continued paralysis.
Since the collapse of the Soviet Union, planners in each military service
have used a stylized, two-war regional strategy for confronting some
combination of Iraq, Iran, or North Korea (combined defense budgets of less
that $10 billion) to justify retaining the their existing mix of cold-war
capabilities, albeit in smaller force packages, for the intermediate term.
They have struggled to protect the status quo over the longer term
(2010-2020) by defining notional (imaginary) "peer" or "near peer"
competitors. More recently, they have resorted to constructing
hypothetical visions of "full spectrum dominance" across the entire
spectrum of "asymmetric niche competitors," who may emerge all over the
world during the 21st century.
There is a common denominator behind their tortured logic, however. It is
the unchanging "wish list" for new high-cost, high-complexity, weapons
(e.g., the F-22, Comanche helicopter, THAAD missile defense system, the new
attack submarine, and a whole litany of precision-guided munitions),
together with the supporting reconnaissance, surveillance, and command and
control systems to wire these weapons into the SAME kind of all-seeing,
all-knowing military machine envisioned by the technological soothsayers of
the Cold War.
Our capability to execute a two war regional strategy is now an open
question. Combat readiness is deteriorating sharply, in part because the
requirements of the regional strategy (which includes peace keeping) have
led to an over-commitment of a shrinking, albeit, high-cost force
structure. Moreover, the cost of maintaining aging cold-war weapons in
even a low state of readiness is increasing rapidly, so money has been
'migrating' from the modernization budget to the operating budget for
several years now, even though readiness continues to decline.
The 'migration' problem exacerbates the existing shortfall in modernization
created by low production rates. The new weapons are so expensive, the
Pentagon can not buy enough of them to modernize the force on a timely
basis, even if Congress approves its plan to increase the procurement
budget by 50% by 2003, there are no cost overruns, and modernization
budgets continue to increase sharply for 5 to 10 years thereafter. (Note,
this kind of budget growth can only be financed by reversing the direction
of migration, which, in turn, will create even more pressure to rob the
readiness budget). The low rates of replacement will steadily drive up the
average age of weapons during the first decade of the next century, and
because older weapons are more expensive to maintain and operate, there
will be increasing pressure to transfer money out of modernization budget
to pay for the rising cost of operations.
Finally, it is also clear that a corrupt accounting system renders it
impossible to figure out how to resolve the conflicting pressures created
by first two problems. Moreover, the budget shambles makes a mockery of
the Constitutional precepts of accountability and checks and balances.
Bear in mind, the strategy/budget conundrum exists even though we are
outspending our three regional adversaries by 26 to 1. The accounting
shambles exists even though everyone in the Pentagon has taken a sacred
oath to preserve and protect the Constitution (which clearly includes a
duty to preserve accountability and protect the system of checks and
balances). Bear also in mind, no one in the Pentagon or on Capital Hill
has rebutted the analyses upon which the preceding statements about
readiness, modernization, and corrupt accounting systems are based.
Nevertheless, the preparations for the summer program/budget review show
conclusively that senior leadership intends to IGNORE these problems for
yet another year.
No doubt planners in the Pentagon (and "pro-defense" big spenders in
Congress) will ask the President for more money to execute the two-regional
war strategy over the next six years, but when the Defense Department is
outspending all its regional adversaries by 26 to 1, and its accounting
system is broken, there is NO WAY anyone can assure the taxpayer that
increasing the budget will match our strategy or program plans to the
world's changing conditions.
So, why are decision makers paralyzed? To answer this question, we need
to look inside our federated system of distributed decision making. We
need to examine how the individual players in the
military-industrial-congressional complex game the system for their narrow
The decision by Congress to accelerate spending for the next Nimitz class,
nuclear powered aircraft carrier, the CVN-77, provides an excellent case
study of the roots of paralysis.
First, some background.
Traditionally, money for weapons procurement is appropriated under the
concept of "Full Funding." In the case of a warship, this means Congress
appropriates the entire cost of a ship in one year. The money would then
be spent over the time interval (as much as 8 years) it takes to build the
ship. The only exception to the full-funding principle is an early
appropriation for advanced procurement to pay for long-lead items, like the
containment vessel of a nuclear power plant..
'Full funding,' in theory, has several advantages: It forces the decision
makers in the Pentagon and Congress to make their commitments visible,
because they must account for all the money at one time. This forces
planners to fit new commitments into the context of ongoing commitments,
which helps to avoid over-commitment. Full funding makes the total cost of
the program, together with cost overruns, evident to the taxpayer, who pays
the bill, and it provides an audit trail for ensuring accountability and
assessing liability when problems arise. Of course, all these advantages
are theoretical, because they assume integrity in the bookkeeping system.
The alternative to 'full funding' is 'incremental funding.' Under this
concept, Congress appropriates money to continue work on a year by year
basis. Incremental funding makes it easier to start a program and keep it
going, because Congress needs only to appropriate enough money to start or
continue work for a year. Under an incremental funding plan, it may not
even be necessary for the contractor to deliver a product in a given year.
The inherent elasticity in measuring work complicates issues of
accountability and liability, and because the focus is on inputs rather
outputs, there is no well-defined baseline for measuring performance,
particularly if the contractor is not required to deliver a product.
CVN-77 Case Study.
The Defense Department's Fiscal Year 1998 budget plan, submitted to
Congress in February 1997, contained a normal full funding schedule for
CVN-77, with about $700 million for advanced procurement in Fiscal Year
2000 and about $4.5 billion in 2002 for the CVN-77. Under this plan,
CVN-77 would be delivered to the Navy in 2008.
Newport News Shipbuilding (NNS), the prime contractor for CVN-77, began to
lobby Congress for a change in the funding schedule in the Spring of 1997.
Without a change, NNS claimed it would have to lay off 2000 to 3000 pipe
fitters, welders, and electricians as construction of the USS Ronald Reagan
(CVN-76) approached completion in 2002. Many of these people would leave
the area or find other jobs, and NNS said it would have to hire and train
new employees, which would raise the cost of the CVN-77 by the time of its
full-funding appropriation in 2002.
William P. Fricks, the CEO of NNS, said he could save jobs and reduce the
total cost of the CVN-77, if Congress accelerated appropriations by two
years and INCREMENTALLY FUNDED the CVN-77 over the four years between
Fiscal Year 1998 and 2001. Despite the two-year acceleration in the
funding schedule, NNS would still deliver the CNN-77 to the Navy in 2008,
however. Fricks called his plan 'Smart Buy' and said this procurement
strategy would require to Congress appropriate $345 million in FY 1998. He
claimed 'Smart Buy' would save $600 million over the long term, because the
acceleration of funding plus the shift to incremental funding would enable
NNS to preserve a strong supplier base and shipbuilding skills during the
construction gap between CVN-76 and CVN-77. His reference to a "supplier
base" is a veiled allusion to protecting jobs all over the nation.
(Fricks' idea is an old one. There is a sordid history of Incremental
Funding in ship construction, with horror stories dating back to at least
1816, which is one of the reasons why Congress adopted a Full Funding
policy, but that will be the subject of my next message.)
Congress took the bait and slipped the nose of Incremental Funding into the
programmatic tent, when it approved the National Defense Authorization Act
for FY 1998 in October 1997. Sec. 122 of the House-Senate Conference
Report [Atch #1], which accompanied the act, effectively approved Fricks'
Smart Buy proposal. But instead of authorizing $345 million of new money
in FY 1998, Congress authorized only $50 million in new money [paragraph
(b)] and gave the Secretary of Defense the authority, but did not require
him, to transfer $295 million from other programs [paragraph (c)] to make
up the difference. The FY 98 Authorization also established a "cost cap"
of $4.6 billion [paragraph (f)(1)], which is also consistent with "Smart
Buy," being about $600 million less than the money programmed under the
original Full Funding proposal.
The condiments accompanying this feast are more interesting than the main
course. Note, for example, Congress inserted an escape clause in the fine
print [Atch #1, paragraph (f)(2)(D)] which allows for adjustments in the
cost cap if "… there are increases or decreases in costs of the CVN-77
that are attributable to new technology compared to the technology used in
CVN-76 aircraft carrier." To be sure, the Authorization bill requires the
Secretary of the Navy to report the reasons for any changes in the cost cap
when the budget is submitted to Congress each January [paragraph (f)(3)].
But the language says that Secretary of the Navy would report those
adjustments which occurred during the preceding fiscal year. The preceding
fiscal year would have ended four months earlier on Sept 30. So, the
effect of this law is to let adjustments to the "cost cap" creep in
incrementally each year, and Congress will be asked to approve or
disapprove the new cost estimates after they have occurred.
Although the Congressional language authorized the Pentagon to completely
fund the $345 million of the first increment of 'Smart Buy' proposal, the
fine print did not force the Pentagon to put up all the money. Not
surprisingly, decision makers in the Pentagon chose not to transfer the
$295 million from other programs. Consequently, the Pentagon budgeted only
$50 million for first increment of 'Smart Buy.' But Fricks sold 'Smart
Buy' by saying the future savings would occur under a schedule of
incremental payments that assumed a much larger amount would be spent in FY
1998. So, by reducing the initial funding from $345 to $50 million, the
DoD, in effect, gave NNS an excuse to justify an absence of, or a reduction
in, the future savings, should either occur sometime during the next eight
years (long after most of the players have left the scene and their
promises are forgotten).
It seems fair to conclude, therefore, the loose language of the Conference
Report turned on the money flow SOONER, made it EASIER for the Navy or NNS
to increase costs in the future, but kept the same date for delivering the
Officials at Newport News Shipbuilding (NNS) lost no time in exploiting the
murky uncertainties implicit in this situation. On January, 6, 1998, Dale
Eiseman reported in the Virginian-Pilot [Atch #2] that Navy documents said
the cost of the CVN-77 would be $580 million less than its original $5.18
billion price tag. But a NNS official told him the savings did NOT account
for the added cost of "new technologies" that the Navy now wants to include
in the 90,000 ton carrier. He said the Navy views CVN-77 as "almost a
prototype," and while it will have the same hull design as a Nimitz class
carrier, it may be very different in other ways. In maneuver warfare, this
kind of hedging statement would be called a 'battlefield shaping' operation.
Six months later, the chickens started coming home to roost. John Donnelly
reported in Defense Week on July 13 [Atch #3] that the Navy's program
office estimates that the CVN-77 will probably cost $4.9 billion between
1998 and 2001 (or about $300 million over the $4.6 billion cost cap), but
the defense budget includes only $4.45 billion. When Donnelly queried key
staff members of the congressional defense panels about this $450 million
mismatch, they expressed no concern. On the contrary, it appears they
rationalized it as being natural, or at least expected, which should not be
surprising considering the loose language in the Conference Report they
helped draft and the shaping operation begun by NNS in January.
The Defense Power Games.
The insertion of an under-funded CVN-77 into the budget raises two general
questions about the current state of defense budgeting: (1) Why would the
Defense Department deliberately understate the likely cost of a new weapon
in its budget? (2) Why would staff members on Capital Hill casually
dismiss questions about the integrity of Defense Department's budget
numbers, given the powers delegated to Congress by the Constitution
(Article 1 Section 8), not mention its duty (Article 1 Section 9) to make a
"…regular statement and account of the receipts and expenditures of all
The key to answering these questions is to place particulars of the CVN-77
story in the larger, more general context of the Defense Power Games.
[The Defense Power Games Report is one of the documents hot-linked at the
web site below my signature block. In the interest of brevity, I will be
making a series of declarative statements in the following paragraphs.
Readers who doubt the veracity of these statements are urged to read this
report as well as the relevant sections of the two other reports available
at the web site.]
The Defense Power Games are a bureaucratic strategy for waging budget
warfare in Washington. The adversary is the system of distributed
decision-making power enshrined by checks and balances of the Constitution.
The Defense Power Games employ various combinations of the two
complimentary tactical techniques, known as Front Loading and Political
Engineering, to wage the budget war (much like maneuver-warfare
practitioners use combined-arms fire and movement techniques on a real
battlefield). The strategic aim in a Washington budget war is to
insensibly infiltrate the distributed decision-making system at all levels
in order to turn on the money flow and then build a powerful patronage
network to ensure the money continues to flow over the long term.
The Front Loaders are the penetration troops. They infiltrate the
decision-making system by downplaying or misrepresenting the future
consequences of current decisions. The aim of a front-loading operation is
twofold: (1) get the program STARTED and (2) buy the TIME needed by the
Political Engineers to build a political barrier to its cancellation.
Political Engineers are the follow-on storm troopers. They exploit the
gaps created by the Front Loaders, widening and deepening the initial
penetrations by spreading subcontracts and jobs to as many Congressional
districts as quickly as possible. These spreading operations may start
insensibly, but their operational aim is political blitzkrieg: build up
jobs and profits in congressional districts rapidly, making their effects
more visible and powerful over time, until their brutish ubiquity PARALYZES
the discretionary decision-making power of the Executive and Legislative
branches of government.
There are many tactics for misrepresenting the future consequences of
current decisions, but by far, the most popular Front Loading tactic is the
'buy in.' Low balling a cost estimate by predicting future savings in a
budget plan makes it easier to convince decision makers in the Pentagon and
Congress to spend more money in the near term. Once the program is
approved and inserted into the defense budget, the money starts flowing to
the prime contractors, who, with encouragement by the sponsoring agency,
start setting up the sub-contracting and vendor relations needed to spread
the money to hundreds of congressional districts. The Political Engineers
use this money to create the jobs and profits needed to buy the votes of as
many members of Congress as possible. The aim of a political-engineering
operations is to ensure that a majority in Congress continues to vote for
funding the program over the long term.
Once the real costs of a front-loaded, politically-engineered program start
to become apparent, the sponsoring military service and the contractor use
the political leverage gained by the spreading operation to extort even
more money out of the President and Congress (i.e., the taxpayers).
So, in a grand strategic sense, the Front Loaders and Political Engineers
use taxpayer's dollars to finance the construction their nationwide
political protection network (a multilateral system of alliances), which
increases their future leverage, when it becomes necessary to obtain even
more money from the taxpayers.
Some people have called this kind of incestuous amplification a
"self-licking ice cream cone." On the other hand, those with a
mathematical bent will sense immediately that the non-linear, positive
feedback loops created by these activities are likely to generate some form
When one considers that the defense budget is made up of hundreds of
front-loaded, politically-engineered programs, the combination of cooked
books, inevitable cost growth, and the power to extort money out of
Congress is a prescription for confusion and disorder, and ultimately
paralysis, on a colossal scale. It is in the nature of front loading to
start more programs than can be afforded over the long term. The resultant
welter of upward cost pressures wreaks havoc with the entire defense
budget. At the same time, the web of overlapping patronage networks
created by the Political Engineers makes it difficult, if not impossible,
for decision makers in the Pentagon or Congress to pick winners and losers
from among the individual programs competing for money. To make matters
worse, there will always be constraints on the total amount of money, so
the incapacity to pick winners and losers at the microscopic level means
that all programs get stretched out over time. Thus, it is difficult or
impossible shape priorities and adapt the larger system to changing
So, given these pressures, it is not surprising, indeed, it is inevitable
that we have a modernization program that can not produce enough new
weapons to modernize the force. Nor is it surprising that decision makers
constantly dip into the readiness budgets in a futile effort to bail out
the sputtering modernization program. Viewed in this light, the
book-keeping shambles is not an aberration. On the contrary, cooked books
are a necessary condition to play the game.
Now when we place the CVN-77 in the context of the Defense Power Games, we
see all the elements of a well-executed front loading operation. Each
player in the military-industrial-congressional complex did its part to
make the initial infiltration operation succeed over the long term. The
contractor promised future savings, if the government accelerated funding,
shifted to incremental funding, and did not change the delivery date.
Congress accepted the contractor's proposal, set a cost cap, and
accelerated the funding, but it wrote the enactment legislation is such a
way that the contractor or the Defense Department has all sorts of ways to
evade the cost cap over the long term. The Defense Department then iced
the cake by funding only about 15% of the first year's funding authority,
which was enough to start the program but gave the contractor an excuse to
blame the government if the savings don't materialize. The Navy also began
considering technological changes which, under the language of the
enactment legislation, would permit the contractor to jack up the costs
over time. Put all this under the ambiguous umbrella of incremental
funding, and it will harder to track costs, more difficult to determine
acceptable performance, and easier to stretch out or reschedule payments.
The front loading operations launched the CVN-77 program the two aims of
any front loading operationit started the program and bought time for the
Political Engineers to exploit the initial penetration. Congress is happy
and it looks like it will give the Political Engineers another $124 million
in Fiscal Year 1999 to expand the penetration.. The Pentagon is happy.
The contractor is happy. And if Donnelly's reporting is correct [Atch 3],
no one even seems to care that only ten months into 'Smart Buy,' the Navy's
program office estimates that CVN-77 may already have blown the cost cap by
What is particularly troubling about this particular front-loading
operation is that the Navy does not need to make a 40 to 50 year commitment
to a new aircraft carrier, particularly a commitment that projects
technologies that were designed to counter the threat posed by the Soviet
Union (or perhaps to the Japanese at Midway?). Today, there is no open
ocean threat to the US Navy, and the requirements to project maritime power
are changing in the direction of supporting expeditionary ground forces in
limited littoral scenarios. No one knows what threat the Navy will face
during the next 10 to 50 years, but it will not be the waves of Backfire
bombers (that shaped the make up of the current carrier battlegroup), nor
will is it likely the Navy will face a requirement to strike fixed
strategic targets deep in the heartland of an industrial power with
airplanes, particularly given its large investment in unmanned attack
weapons like cruise missiles.
Moreover, the Navy does not need a new carrier to keep its airplanes at
sea. It just placed two conventionally powered super carriers (Ranger and
America) in mothballs (for about $70 million per carrier), which means the
they have useful life remaining in them. The Navy does not even have
enough airplanes to equip its remaining carriers with full-strength units.
In the past several years, the size of a carrier air wing has dropped from
60 to 50 to 46 fighter/attack aircraft, yet the most politically persuasive
theoretical argument for buying the Nimitz class carriers has been that
their gigantic size make them the cheapest way to keep a large number of
airplanes at sea.
Given the uncertainties posed by the unknown threats of the post-cold war
era, the Navy might have been better off keeping its options open by
extending the life of the America or Ranger and using the savings the buy
the additional airplanes to fully equip its fighter/attack squadrons, which
after all, are the primary reason for having a carrier in the first place.
But of course, that action would not have satisfied the domestic needs of
the military-industrial-congressional complex, which is focused inwardly on
its own preservation, rather than on a high readiness, modernized force
that is matched to the real threats we face and is accountable to the
people who pay for it, not to mention the soldiers, sailors, and airmen we
ask to go in harm's way.
One could argue that this front loading operation has established a
paradigm an open-ended stream of payments, like the flow of R&D dollars
into the never-ending Star Wars, in a procurement program. As we will see
in the next commentary, this is by no means a new idea. Protecting
shipyards by incrementally funding unneeded shipbuilding programs over long
periods of time is a prescription for wasting money dating from at least
April 29, 1816.
Archive of past commentaries or reports can be found at
[Disclaimer: In accordance with 17 U.S.C. 107, the following material is
distributed without profit or payment to those who have expressed a prior
interest in receiving this information for non-profit research and
educational purposes only.]
NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 1998
CONFERENCE REPORT to accompany H.R. 1119
October 23, 1997.
105th Congress 1st Session
HOUSE OF REPRESENTATIVES
SEC. 122. CVN-77 NUCLEAR AIRCRAFT CARRIER PROGRAM.
(a) Authorization of Ship.--The Secretary of the Navy is
authorized to procure the aircraft carrier to be designated
CVN-77, subject to the availability of appropriations for that
(b) Amount Authorized From SCN Account.--Of the amount
authorized to be appropriated by section 102(a)(3) for fiscal
year 1998, $50,000,000 is available for the advance procurement
and advance construction of components (including nuclear
components) for the CVN-77 aircraft carrier program. The
Secretary of the Navy may enter into a contract or contracts
with the shipbuilder and other entities for the advance
procurement and advance construction of those components.
(c) Other Funds.--Of the funds authorized to be
appropriated under this Act for programs, projects, and
activities of the military departments and Defense Agencies,
other than the CVN-77 aircraft carrier program, up to
$295,000,000 may be made available, as the Secretary of Defense
may direct, for the CVN-77 aircraft carrier program. Authority
to make transfers under this subsection is in addition to the
transfer authority provided in section 1001.
(d) Management of Funds.--The Secretary of the Navy shall
obligate and expend the funds available for advance procurement
and advance construction of components for the CVN-77 aircraft
carrier program for fiscal year 1998 in a manner that is
designed to result in such cost savings as may be required in
order to meet the cost limitation specified in subsection (f).
(e) Adjustments to Future-Years Defense Program.--The
Secretary of Defense shall make such plans for the CVN-77
aircraft carrier program as are necessary to attain for the
program the cost savings that are contemplated for the
procurement of the CVN-77 aircraft carrier in the March 1997
(f) Limitation on Total Cost of Procurement.--(1) The
Secretary of the Navy shall structure the program for the
procurement of the CVN-77 aircraft carrier, and shall manage
that program, so that the total cost of the procurement of the
CVN-77 aircraft carrier does not exceed $4,600,000,000 (such
amount being the estimated cost for the procurement of the CVN-
77 aircraft carrier in the March 1997 procurement plan).
(2) The Secretary of the Navy may adjust the amount set
forth in paragraph (1) for the CVN-77 aircraft carrier program
by the following:
(A) The amounts of outfitting costs and post-
delivery costs incurred for the program.
(B) The amounts of increases or decreases in costs
attributable to economic inflation after September 30,
(C) The amounts of increases or decreases in costs
attributable to compliance with changes in Federal,
State, or local laws enacted after September 30, 1997.
(D) The amounts of increases or decreases in costs
of the program that are attributable to new technology
built into the CVN-77 aircraft carrier, as compared to
the technology built into the baseline design of the
CVN-76 aircraft carrier.
(E) The amounts of increases or decreases in costs
resulting from changes the Secretary proposes in the
funding plan (as contemplated in the March 1997
procurement plan) on which the projected savings are
(3) The Secretary of the Navy shall annually submit to
Congress, at the same time as the budget is submitted under
section 1105(a) of title 31, United States Code, written notice
of any change in the amount set forth in paragraph (1) during
the preceding fiscal year that the Secretary has determined to
be associated with a cost referred to in paragraph (2).
(g) March 1997 Procurement Plan Defined.--In this section,
the term ``March 1997 procurement plan'' means the procurement
plan for the CVN-77 aircraft carrier that was submitted to the
Navy and Congress by the shipbuilder in March 1997.