Programming Funds Summary

The following learning objectives are covered in this lesson:

• Identify the basic flow of the financial management process, to include cost analysis, the Planning, Programming, Budgeting and Execution (PPBE) process, Congressional enactment, and program execution.
• Relate the following building blocks to the PPBE process: Future Year Defense Program (FYDP); Major Program (MP); and Program Element (PE).
• Identify the key events in the programming phase, including the preparation, review and decision process associated with the two primary documents of the phase: the Program Objectives Memorandum (POM) and the Program Decision Memorandum (PDM).
• Given programming and budgeting documents, relate the applicable funding policies to each of the six DoD appropriation categories of greatest interest to acquisition programs.
• Identify two exceptions to the full funding policy.
• Identify the concept of escalation in submitting program and budget documents.

1. The financial management process for defense systems acquisition operates as follows:

• It begins with the operational user's capability need, first documented in the Initial Capabilities Document (ICD) and later in the Capability Development Document (CDD) and Capability Production Document (CPD).
• Following ICD approval, an Analysis of Alternatives (AoA) is conducted, Cost as an Independent Variable (CAIV) trade-offs are made, and a program cost estimate is prepared to project resource requirements.
• Cost, schedule and performance targets are identified in the Acquisition Program Baseline.
• The PPBE process is then used to translate plans and programs into a budget that the President submits to Congress.
• Congress in turn authorizes programs and appropriates funds.
• Finally, budget authority is allocated through a series of steps to the services and defense agencies, enabling them to execute their missions.

2. The PPBE process is a calendar-driven process that helps DoD determine how to allocate resources. This process is divided into four phases:

• Planning phase - Planning examines national defense from a broad perspective in terms of long-term strategies, policies, and objectives. The end product of planning is Joint Programming Guidance, which provides input for the Programming phase.
• Programming phase - Programming translates planning decisions and congressional guidance into time-phased resource requirements. Through programming, military departments and defense agencies allocate resources to support their roles and missions for the next six years in terms of money and next nine years in terms of manpower. They submit their requirements in a Program Objectives Memorandum (POM), which is amended and approved by OSD in the Program Decision Memorandum (PDM). In turn, programming decisions provide input during the Budgeting phase.
• Budgeting phase - Budgeting translates programming decisions into detailed resource requirements for the next fiscal year or two. Each Military Department and Defense Agency produces a Budget Estimate Submission (BES) during the Budgeting phase, which ultimately provides input for the DoD portion of the President's Budget.
• Execution Review Phase : Execution review is accomplished concurrently with the program and budget review. Performance metrics are developed and used to assess actual output against planned performance. These metrics are used to adjust resources to achieve goals.

3. The most important products of the Programming phase are the Program Objectives Memorandum (POM) and the Program Decision Memorandum (PDM):

• Program Objectives Memorandum (POM) - In even-numbered years, each military department and defense agency submits a combined POM and BES to OSD. The POM proposes a six year allocation of resources to satisfy the Joint Programming Guidance (JPG). The POM is reviewed by the Joint Staff, who issue the Chairman's Program Assessment (CPA), and by the OSD staff, who recommend program changes through POM Issue Papers. The military departments and agencies can comment on or reclama the issues raised by OSD. In the odd years, or "off years", changes to the previous President's Budget are submitted in the form of Program Change Proposals (PCPs).
• Program Decision Memorandum (PDM) - The Deputy Secretary of Defense (DEPSECDEF) makes a decision on the POM and documents his decision in a PDM. The DEPSECDEF receives advice in this process from the Senior Level Review Group (SLRG), a group of senior representatives from OSD and each military department. The PDM, along with changes that occur during budgeting, will be reflected in the President's Budget submission.

4. There are several tools that provide data and structure for programming and budgeting.

• Future Years Defense Program (FYDP) - The FYDP is a single database that summarizes all forces, resources, and equipment associated with programs approved by the Secretary of Defense. In addition to showing past and current funding and manpower levels, it shows funding requirements for the next six years, as well as manpower requirements for the next nine years.
• Major Programs (MP) - The FYDP breaks data into eleven different major programs that contain the total aggregation of resources necessary to achieve a mission objective, such as General Purpose Forces or Research and Development. Each MP is divided into program elements.
• Program Elements (PE) - PEs are the primary units of data in the FYDP, the smallest aggregation of resources controlled by OSD. Represented by an eight to ten digit code, PEs give are considered to be the "building blocks" of the programming and budgeting process.

5.Funding policies are used to govern the PPBE process, and different policies apply to different appropriation categories:

• Annual funding policy - Governs Operations and Maintenance (O&M) and Military Personnel (MILPERS) funds. Annual funding policy requires that we request only the dollars that we need to spend in order to operate, maintain, or pay the forces in a given fiscal year. This generally pertains to routine expenses, for example equipment maintenance and labor costs.
• Incremental funding policy - Governs RDT&E funds and requires you to budget only for the research and development effort that is needed during a given fiscal year. Emphasis is on covering only those expenses to be incurred, based on the work expected to be accomplished during that year.
• Full funding policy - Governs PROCUREMENT, MILCON, and SCN funds and provides for the procurement of useable end items which must be delivered within a 12-month period after delivery of the first item. Full funding requires us to budget sufficient funds to cover the total cost to deliver a quantity of usable end items, such as aircraft, missiles, ships, or vehicles that can be delivered in a future 12 month delivery period. Piecemeal procurement of systems is not permitted.

6. There are two exceptions to the full funding policy:

• Advance procurement funds are set aside to buy certain components, material, or effort before an end item is procured in order to avoid a serious break of continuity. For example, advanced procurement might be used to obtain a long- lead time item to prevent a break in production, or to maintain critical skills that might otherwise be lost between early and later stages of a manufacturing process. Advance procurement funds are budgeted as a separate line item, usually one fiscal year in advance of the funds budgeted for the related end item.
• Multiyear procurement can be used to acquire multiple years worth of equipment with a single contract in order to reduce cost and maintain stability in the acquisition process. The Government makes a commitment to the contractor to procure a specific quantity of a weapon system over several years, thus giving the contractor incentive to realize savings, particularly through economic order quantity (EOQ) purchases and investment in productivity enhancements. Congress must approve all multiyear procurements.

Since Program and Budget requests are projections into the future, they must take into consideration possible market forces that will influence the economy. Escalation allows us to make predictions about expected inflation and outlay rates for each year of the program. There are two types of dollars referred to when we talk about escalation:

• Constant, or Base Year, dollars are tied to a specific year with no inflation across the life of a program. Constant dollars are usually used for cost estimates because it makes it easy to make changes across the year without considering the impact on the cost of money over time.
• Current, or Then Year, dollars include inflation and outlay rates to account for when the money is actually supposed to be outlayed from the Treasury. This type of dollars is used for program and budget documents and is found in the FYDP.

There are two types of indices used when we apply escalation:

• Compound, or Raw, indices relate price levels for each year to a baseline year. This is annual compounding of inflation, similar to the way interest is received on a savings account. The compound indices are used to convert one Base Year to another Base Year dollars.
• Composite, or Weighted, indices factor in the historical outlay pattern of the appropriation and inflation rates associated with the fiscal years when cash flows out of the US Treasury. Based on this rate of outlay, appropriation expenses can be loosely predicted to provide a more accurate budgeting picture. The composite indices are used to convert Base Year dollars to Then Year dollars.

DoD publishes escalation indices at least twice a year for the services and defense agencies to use in preparing PPBE input. Program and budget documentation is initially prepared in constant or Base Year dollars and then escalated into current or Then Year dollars so that the funding requested in those future years will be sufficient to pay for expenses that will be incurred in those years.