The New Budget Is Here! The New Budget Is Here!

Major General Arnold Punaro:
The administration is essentially requesting in calendar year 26, $1.7 trillion for the Department of War. Certainly the timeframe is not realistic in terms of getting all that done in 70 legislative days.
Roman Schweizer:
From DOD to Congress and from the White House to Wall Street, the NatSec Need-To-Know Podcast, an unrehearsed podcast presenting insightful discussion and forecasts of the major national security and defense issues of the day. Welcome to the NatSec Need-To-Know. Joining me today is major general retired Arnold Punaro of the Punaro Group. We're going to cover the just released $1.5 trillion budget request for FY27 for the war department. It's a historic request, but there's plenty of hurdles to getting it funded. We'll dig into that and more. Let's get after it.
Arnold, it's great to be with you again. Thanks so much for joining. And it's budget season officially. We've had first pitch, first games. The budget is out. OMB released, I guess, a skinny budget, but kind of more like a whole budget. There are a bunch of exhibits released as well. And then surprisingly, the war department also released the Dash-1s, which I had not been expecting. We've had it for a couple of days, everyone furiously pouring over it. We did get the $1.5 trillion top line that many had been expecting and hat tipped to you. So what's your overall first impression about where things are at and just maybe even your perspective on what's in the budget or a first take on it?
Major General Arnold Punaro:
Well, Roman, always a privilege to join you. And I would say what we need to focus on right now is basic arithmetic. And the basic arithmetic is as follows. There are only 70 legislative days left when the Congress comes back after a two-week recess, a week from next week after Easter week. And the budget is two months late. It's been that way for many administrations now. So they don't get started in one February like they're supposed to. So for two months, plus we haven't known what was in the budget, what was going to be requested. And now, they only have 70 legislative days to get anything done before one October. And we know we're going to start the fiscal year under continuing resolution. It's also an election year, the midterms. They're absolutely going to go home on one October. There's nothing that's going to keep them in town.
And the House and the midterms are always, always at risk. You have now some of the political pundits, of which I'm not one, suggesting the Senate might be in play. So the pucker factor in terms of the elections is real. They're going to be out of here, no question. And only 70 legislative days are off most of the month of August. And in those 70 legislative days, to basically deal with basic arithmetic, first of all, 1.1 trillion is in the base budget request. 350 billion, they'd like to get through the reconciliation process. I should mention the base budget has to follow the normal appropriation process. That means you've got to get 60 votes in the United States Senate for any appropriation bills. The reconciliation, 350 billion, can be passed on a party line vote, but is a lot of process involved to get to the point where you actually voted up or down.
And then there's a supplemental in the wings. And knowing Department of Defense has sent a supplemental request to OMB. It's been down there for some time now. Even though the media is reporting it at 200 billion, my information was it originally got sent over around 220 billion, now it's up to around 240 billion. The war has gone on longer than when they sent it originally. So if you add all that in for our Department of Defense, the administration is essentially requesting in calendar year 26, $1.7 trillion for the Department of War. So that's the basic arithmetic. And you can talk to anybody about whether or not the timeframe is realistic. Certainly the timeframe is not realistic in terms of getting all that done in 70 legislative days. Then you've got the issue of a lame duck. And most of the lame ducks in recent years have been really lame, they don't want to get anything done.
If the House flips, the Democrats are not going to cut any appropriation deals with the administration in the lame duck because they're going to wait. Like Trump has done twice when he won power and the Republicans won power, they wait till the next calendar year they're in power. So I think there's an even better than even chance that the CR will carry in, even though it'll run out right after the election, it'll carry in to the new year. Another piece of arithmetic that I think we need to take into account is typically in a continuing resolution, the spending level is set at what is called current services. That means it is set at the previous year's appropriation bill. Well, guess what? Because 156 billion of the money that went to the Department of War came through the reconciliation process last year, it was not in the Defense Appropriation Bill.
The Defense Appropriation Bill that passed and was signed into law is roughly 858. So if you set the CR at 858, which would be the normal way that CRs are done, we're losing a lot of purchasing power compared to what our current spending levels are in the roughly $1 trillion rate. So there are people like myself that are arguing, if we're going to start with a CR, and we know we will, we should set it at the current level of expenditures, which is roughly around a trillion dollars. There's another reason for that arithmetic, Roman, and that is let's say the house flips. Let's say the appropriation process gets kicked into counter 27. Let's say that the Trump administration is not willing to increase domestic discretionary spending, which has been cut in the 27 budget. They claim it's been cut 10% or 70 somewhat billion dollars.
But if you look at individual agencies, some of the agencies have been cut 35%, 40%, 50%. Those kind of cuts didn't even pass the House Republican Appropriation Committee last year. So you could be in a situation where if the White House is not willing to compromise on spending, we could be in not just a four or five month CR, we could be in a multi-year CR. To hedge against that process for our department, the Pentagon, we'd like to see the spending at least at the trillion dollar level. So all of these things are just basic arithmetic before you even get to what is actually in the budget request. So with that, maybe let me, having given you a long-winded answer here, stop and see what your specific questions might be.
Roman Schweizer:
It's a conundrum, and I think those are the questions that I've gotten over the last several days is, and again, people love to jump to end game, but we've got a base budget request. Again, at 1.1, current policy, not the 850, so magically bumping up to that new number. You've got 350 billion in reconciliation. We've got something like a $200 billion war supplemental, or who knows? And then how does that time phasing all happen? My thinking is, and I'll explain my thought rationale and then you tell me, the appropriations process is going to play its way out as it normally does, but for reconciliation, we're going to see that really quickly, right?
As soon as Congress gets back, probably by the end of April, we need to see what the plans are from the House and Senate budget committees on what the plan is for reconciliation, and is it one bill or two bills, one quick by June 1st, one after, and how that plays out. Your thoughts on how you see the time phasing of the year and when we might be able to see those signs?
Major General Arnold Punaro:
Well, Roman, before they were unable to resolve the Department of Homeland Security Funding, if you talk to senior leaders in the Congress on both sides of the aisle, but more importantly, on the Republican side of the aisle with the people that would have to do reconciliation, everybody said it was in the two hard box for this year. There wasn't going to be reconciliation. Even the president talked about, "We don't need reconciliation." Now when they came up with, "Well, the only way we're going to get funding for DHS is through the reconciliation process," that put the pressure on actually reopening the possibility of a reconciliation bill, and then they would try to add the 350 billion for the Pentagon to ride that process. But if you go look at how long it took them the last time to do reconciliation, the notion somehow that the budget committees have to mark up a reconciliation bill. The reconciliation bill has guidance for the authorizing committees. The authorizing committees then have to mark up their own legislation and report that out.
That's combined into a larger bill that has to pass both bodies, and it has to be ultimately identical. So it could have to go to conference depending on how they package it up. The challenges of getting all that done by one June, certainly past history would indicate they had never been able to move that fast in the past. Now, again, in the legislative process that anything is possible, but I'm a skeptic that they're going to be able to move back quickly. If it was just DHS funding, that'd be different. I think that basically just getting and funding a very small amount of money that they still need for the Department of Homeland Security, that can move pretty quickly because it's a pretty simple process.
One committee's involved. But the other thing is, what are the Republicans going to want to do in terms of Christmas treeing the reconciliation bill? You're going to have people that want to talk about cutting taxes. You're going to have Freedom Caucus that says, "Wait a minute, who's paying for the $350 billion for the Pentagon? Doesn't it have to be offset?" And of course, you've got the Byrd Rule. Some people are talking about, "Well, let's add the SAVE Act." They're working in both the House and Senate with extremely thin margins for passing a bill on party line votes. So again, we're just at the beginning of the process. Obviously, because of the requirement to fund DHS, the window for reconciliation is slightly open, whereas before, it was slam shut. But again, thinking that they can get this done in a very quick period of time certainly is not a history of past reconciliation bills.
Roman Schweizer:
I think it's a conundrum. I think we're going to probably know sooner, right, April, May as to what the probability is? And like you said, they'll definitely want to get out of town for the August recess and then theoretically get back and get a CR quickly in place.
Major General Arnold Punaro:
And I think we need to be understanding also, when I said 70 legislative days, both parties, both the leadership and both parties are going to look at any legislation and whether it advantages or disadvantages them in the mid-year. Those of us that are for strong national defense and think that we've been underfunded in recent years and are glad to see these increases, and particularly increases that are focused on replenishing our munition stocks on basically providing some of the modernization that's been long overdue, obviously very enthusiastic. But there are people in both parties that don't see it as an advantage in the mid-years.
And so it's all going to tie down to no matter what the leadership may want, the rank and file that have to vote. And you've got Republicans in the House that are running in Democratic leaning districts. Not many of them, but their view of what they want to vote for or vote against is going to be very different from a Republican that's running in a Trump plus 12 district. And of course, you've got the issue of redistricting coming up in a couple more states, including Virginia, that can have a real effect on how people vote. So a lot of whether it gets done or not, whether we think it ought to be done on the merits, is going to really depend on how the leaders see it helps them or hurts them in the mid-years.
Roman Schweizer:
Yeah, no, I think that's right. And again, you mentioned it. It is a complex vote for Republicans if you're voting for a reconciliation package. And we'll see what the budget committees can hunker down on or what's in the center of that Venn diagram, the sweet spot that can get... Really, you need unanimity practically in the House and certainly a little bit more breathing room, but that's not much in the Senate, as you well know. As we think about the budget and the priorities and what we've seen in the Dash-1s, the P1, the R1s, and I guess we're still expecting a more fulsome defense or war department release on April 21st. Maybe we'll see a fit-up. Again, as a self [inaudible 00:13:27] budget nerd, I'm depressed without a fit-up. I'd like to see a fit-up and see what that looks like. But any surprises to you as in terms of what's in, what's out, where the department seems focused?
Major General Arnold Punaro:
I would say that performing the duties of the comptroller J. Hurst had hoped to be able to give more information when the skinny budget came out. And I compliment them because they did. And we have the Dash-1s, which gives you some insights. Plus in the initial information, they did provide some of the priorities that last year we didn't see till late spring, early summer. I would also say in the OMB documents that came out a little bit later in the day, and you go look at their charts, they actually did provide some [inaudible 00:14:14] numbers, no details, but overall numbers. And so if you look at mandatory and discretionary for 27, it's, like you said, 1.5. For 28, it drops down to 1.2. For 29, it's like 1.3. So they show some limited increases, but to me, I think the signal is really more of a relatively flat fitted.
Now, obviously when you're starting at this huge increase levels, and of course, the budget charts that they put out, and they put out numbers 339, so you can go to those tables and see. Now, we don't know what's in it, and we also know, you and I know the out years are really smoke and mirrors, really all we focus on are the next couple of years. I also would say getting a supplemental, whether it's 200 billion or 240 billion or under 200 billion, I think is going to be a pretty tall order when you're trying to get 1.5 trillion. And I've heard Republicans speak out and say, well, they're skeptical of that amount. It roughly approximates what we used to be doing in what was called the overseas contingency operation funds that we're using doing Iraq and Afghanistan. And 40% of that money in OCO was really base spending money.
So I would say they were pretty consistent. Obviously, there's a lot of money for the Navy. The Navy appears to be the military department that's getting a very nice boost in both the base and in reconciliation for ship building. The Air Force is getting a good jump because they've got the F-47, they've got the nuclear modernization, which generally has strong bipartisan support, the Columbia, the Sentinel, the B-21 bomber, the command and control. You've got a lot of money going to unmanned systems. You've got money set aside for Golden Dome, although most of the Golden Dome money looks to me like they put it in the reconciliation portion of the request. You also have, interestingly, some large amounts of money for the strategic capital and for the Defense Production Act, which tells me the administration is very anxious, again, still to make these investments that some in Congress are skeptical about, equity investments like they did with L3 for the rocket motors.
So being honest, with 12 grandkids over the weekend and Easter, I didn't have time to really dig into the Dash-1s, really, even though I'm glad they put them out and I'm glad you get high level detail in those, you don't get the kind of programmatic detail you and I are interested in. The other good news is, and I didn't add it up, but when they put the columns in there, you've got the [inaudible 00:17:00], they'll show 25, they'll show 26, they'll show 27 budget requests, 27 mandatory requests. So they actually show, like they did too late last year, where the 113 billion of the 156 billion was going to go into the budget. I didn't add it up to see if all of the things added up to 350.
Roman Schweizer:
I will tell you, as a former health staffer, I have to ask, I brought this up because I flagged it partially in my note, but I need to go back and maybe refresh this. So in the procurement P1s, for the procurement-1s, there is $30.7 billion for major equipment OSD, 30.4 billion for Defense Production Act purchases, 20 billion for Office of Strategic Capital, a loan program. And then actually when you go to the R1s, there's 55 billion for the Defense Autonomous Warfare Group, and $41.8 billion for the industrial based analysis and sustainment support. So I don't know what's in those line items, but that sounds like something the appropriators are going to hate. That's $81 billion in the procurement line item and $96 billion in the R&D line item that just sounds like a big bucket of money that appropriators hate to just dole out like that.
Major General Arnold Punaro:
I think you're right. I think that's going to get great scrutiny. The other thing that jumped out at me in terms of macro trends was the huge amount of money that's in defense wide. And when you look at that, that tells me, I'm not going to use the word slush fund, but usually the defense wide spending doesn't have the PPA program project and activity line item detail you see in the military budget. So I think you're right. I think if they are shifting huge sums of money, now don't get me wrong, I think we've got, like Emil Michael, Mike Duffy, Tony Teta, the undersecretaries, these are very strong undersecretaries that are very much on top of their areas.
But if we're shifting these huge amounts of money to defense-wide spending, right now, I argue that defense-wide is percentage-wise the same as the military departments when you add in the Air Force pass-through. So it already had grown too much. It used to be around two to 5% of the budget. They admit it's 17% of the budget, I think it's closer to 30% of the budget. So I think you're right, I think that's going to get really, really strong scrutiny because they're going to ask witnesses, "What are you going to spend the money on?" Well, we can't tell you we don't know for sure, we just think we need it.
Roman Schweizer:
Yeah, no. And that's my suspicion, but again, I'm not sure. But you could see some of that money swung into Operation Epic Fury replenishment or things like that if there is some cushion built into that, because that is a big round number that could be used for other purposes. Maybe just as we bring it home, we talked about the process and when we get to a CR in the midterms, if you were to suspect, we're going to have a CR that runs probably in the next year if the House [inaudible 00:20:19], but let's just assume that the standard scenario or everybody's predicting the Republicans will lose the House and hold the Senate, so we'll have a split Congress, and then that really pushes us into next year until we know what the discretionary appropriations look like. Would you think that's the scenario as it stands right now?
Major General Arnold Punaro:
I would say that's conventional wisdom. And conventional wisdom can be very wrong, but you know we're going to start the year with a CR. There is no way they're going to be able to pass 12 appropriation bills by October the 1st. So we're going to start the year to CR. They'll probably have it go right up before Thanksgiving or right after Thanksgiving. And then depending on who wins, if the House flips, then it's going to get kicked into the next year and they'll start over February, March. If the Republicans keep the House and Senate, then there's every incentive to get it all done in calendar year 26. But I think we should expect that we're going to be under a CR, and that's why it's so important, what's the level? Actually, if you're domestic discretionary, you're better off with the current services being last year's domestic appropriation bills.
You're going to get more money under a CR than you're going to get if the president's budget request was passed by the appropriators. In defense, we're going to get less money than what we got last year under a CR, unless they set the current services to include some of the reconciliation money, which is mandatory spending and not discretionary spending. So that's why I say the arithmetic is not working in our favor right now. And even 1.1 trillion and 350, these are very large numbers. And I fully expect Mike Rogers and Roger Wicker to move out smartly, the authorizing committees, get their part of the work done as quickly as possible. That'll be probably in the June timeframe. They don't have the SecDef and the chairman coming. The House has got them towards one day in April and then the Senate the next day, I think it's the 28th and 29th of April.
The appropriators can now begin some of their hearings. But you're going to have the initial markups. Tom Cole is going to drive his appropriators to get bills marked up and reported out. But again, the Senate isn't going to move that quickly, and there are a lot of votes people don't want to take in the Senate for sure. And by the way, in reconciliation, if you have a reconciliation bill in the Senate, and that's certainly the current plan, you have what's called a vote-a-rama. And the Democrats, the minority in the Senate is going to make the Republicans in the Senate take a lot of votes that they, Democrats believe are going to be very unpopular back home.
Roman Schweizer:
I think that sets up for a pretty hectic legislative season that will kick off next week when Congress gets back to town. And again, as you've talked about, and that I'll just remind folks tuning in, so there's really two tracks to pay attention to. One is the normal appropriations process, and then the secondary one is what goes into the reconciliation bucket.
Major General Arnold Punaro:
They've been slow to obligate the 26 money, both the regular appropriation money and the reconciliation money. And now, they're obligating it under federal acquisition regulations that are dramatically changed, the SPEED Act in the House, the Forge Act in the Senate, the internal SecDef, Secretary Award direction to Mike Duffy in terms of the fundamentally changed requirement system and acquisition process. So you're actually making decisions and awarding contracts under a very, very, very different process where speed, innovation, and the willingness of contractors, both traditional and non-traditional, to have skin in the game and take risk are very high priorities. So not only are we talking about a slowness of the 1.1 trillion that we already got funded, we're also, and we're talking now about a huge jump of what, 40 some odd percent to 1.5 trillion, not to mention the supplemental, but we're talking about those things being awarded under a decision process that is very dramatically different than what we've seen in the past. So all this takes a lot of adjusting to and all this basically makes things run a little bit slower than normally people would like.
Roman Schweizer:
I think I've picked up some of that displeasure within Congress as well, because that 150 and change that was approved in reconciliation has been sitting around in the Pentagon's piggy banks since July, and there are a slew of big contracts yet to be awarded. And we'll have to see how that pans out because I do think that money needs to get put on contract. And I think we'll start to see it with some of these munition contracts and maybe some of the aircraft programs as well.
Major General Arnold Punaro:
I think that's going to be a big question for the service secretaries and for the secretary of defense. How much have you actually obligated?
Roman Schweizer:
Yeah, exactly. And before you get more, right?
Major General Arnold Punaro:
Exactly.
Roman Schweizer:
Yeah. Well, Arnold, we have covered a lot of ground. I think we've talked about what we know. I think there's still a lot we don't know and we're going to find out pretty soon. We will perhaps reconvene in a little bit. It's great to hear from you as always, appreciate your insights, and we'll talk to you soon.
Major General Arnold Punaro:
Anytime, thanks so much.