March 28, 2022
FY22 Defense Spending—Preliminary Analysis
On March 15, the Department of Defense (DOD) received its annual FY22 appropriation. Both the Defense appropriations bill and the Military Construction/Veterans Affairs appropriations bill passed as part of the larger consolidated spending bill (P.L. 117-103). The FY22 DOD (051) topline (excluding emergency spending) is $742.7 billion which is $27.6 billion more than President Biden requested. P.L. 117-103 includes an additional $13.9 billion in emergency spending which brings the total DOD topline to $756.7 billion. Of the emergency spending, $6.5 billion is provided in Division N of the consolidated appropriations bill for reimbursement of operations supporting Ukraine.
Following President Biden’s lead, P.L. 117-103 allows for emergency spending without a breakout for Overseas Contingency Operations (OCO) or Global War on Terror (GWOT) spending. The appropriation provides $52.7 billion (7.5%) more in budgetary resources than was enacted in FY21. In non-emergency spending, the increase is 5.7%. For comparison purposes, the FY21 enacted numbers exhibited in Chart 1 include OCO spending.
The 5.7% nominal increase in budget authority is consistent with FBIQ’s forecast and provides the Defense Department a nearly $40 billion increase compared to the enacted levels of FY21, but that increase is still below the 7.9% annual inflation rate reported in February. While the nominal growth of the Department is above 5%, it still remains below the current National Defense Strategy’s target of 3-5% real (inflation adjusted) growth. The overall increases in Operation and Maintenance (O&M) from FY21 hold DOD harmless for increased operational tempo as a result of disaster response, the withdrawal from Afghanistan, and the anticipated requirements associated with Ukrainian support. Looking at non-emergency O&M, the growth rate was a more modest 3%. Year-end spending plans for O&M accounts must adjust for increased fuel prices. The procurement accounts are held relatively flat while the real growth takes place in the Research, Development, Test, and Evaluation (RDT&E) accounts.
FBIQ views 11% growth in congressionally-approved funding for these accounts as an important and positive market signal for modernization.
While the Army’s operational tempo should increase as a result of Russia’s bellicose actions, the planning process for the President’s FY22 budget began 22 months ago. Congress did not address those activities in any granularity other than the emergency spending identified in Division N of the bill. Expect the FY23 budget and associated emergency spending to address increased operational demands on the Army.
P.L. 117-103 contains nearly $1.3 billion for the Army’s cyberspace activities operations. This is split relatively evenly between cyberspace operations and cybersecurity. The Act supports the continued development and operational test of the Army’s Integrated Visual Augmentation System (IVAS) and recommends a transfer of $55 million from Other Procurement, Army to RDT&E, Army for continued design, development, and testing activities. It provides $405 million to maintain contractual production requirements, but withholds $350 million until initial operational test and evaluation is completed.
In the procurement accounts, Congress added $120 million to the Gray Eagle program to recapitalize the legacy MQ-1C to extended range configuration. It also added $140 million above the request to increase the CH-47 helicopter program and adds $227 million for an additional 23 Paladin Integrated Management (PIM) vehicles. Congress also provides $175 million above the ask for an additional 20 Abrams tanks. There is a large ($434 million) appropriation for the Counter Small Unmanned Aerial System (C-SUAS) account which is an increase of $374 million above the request.
The Act provides a nearly 100% increase above the request for the Army’s C3I Cyber Advanced Development from $31 million to $61 million for high bandwidth cryptomodule enhancements and certification. Likewise, Army high performance computing modernization receives a $40 million program increase above the $189 million President’s request.
The report language in the conference agreement takes issue with the Navy’s budget strategy criticizing its recent pattern of submitting budgets to Congress that deliberately underfund critical Navy programs with the expectation Congress will restore the funds. As an example, it points out that the Navy proposed to break a multi-year procurement (MYP) contract for the DDG-51 Destroyer while at the same time requesting additional funds for the ship by listing it as its top unfunded priority. The conference agreement directs the Comptroller General to review the Navy’s process for identifying and budgeting funds required to fully fund multi-year procurements.
The omnibus funds the Navy’s O&M cyberspace activities at $558 million which is just below the request of $566 million. It also funds the Marine Corps cyberspace activities at the request of $233 million. The Navy’s enterprise information for base support is more than double the request of $735 million at $1.474 billion due to a transfer from an RDT&E Navy account for a software pilot program. The Congress also provides an additional $88 million to the Navy for INDOPACOM wargaming analytical tools as part of combatant commanders direct mission support.
Typically, Navy shipbuilding procurement accounts are among the most controversial in the President’s budget. This year was no different. Congress added nearly $1.7 billion above the request for the DDG-51 (one additional destroyer), $577 million for the expeditionary sea base program, and $590 million for expeditionary fast transport. Congress also added three additional ship to shore connectors (hovercraft) for a total additional price of $235 million.
For aircraft, the bill contains nearly $18 billion, $1.3 billion more than the request. The appropriation added $900 million for an additional twelve F/A-18E Hornets, $250 million for an additional two CH-53K heavy lift helicopters, $320 million for four additional MV-22 Ospreys, and $323 million for two additional MQ-4 Tritons.
The Navy’s information technology development activity receives $271 million, a $27 million (10%) increase above the request to address areas such as cyber solutions in classified environments, aviation innovative cyber solutions, advanced shipyard technologies, and actionable analytics for reliable maintenance. The Navy’s Next Generation Enterprise Network (NGEN) Software Pilot Program has a $778 million transfer from RDTE to Operation and Maintenance and a $175 million transfer to Procurement.
While Congress endorsed the Navy’s requested software factories ($72.8 million request) to provide a software pipeline for continuous development, integration, deployment, and upgrades of software into manned and unmanned surface and undersea vessels, it called for further review by the Navy as well as further analysis of the inherently governmental versus commercial roles with regard to software and autonomous operations in Navy programs to improve coordination and limit duplication.
The omnibus provides the Air Force $865 million for cyberspace operations activities which is consistent with the President’s request. The Air National Guard receives $24 million for cyberspace sustainment and $17 million for cyberspace activities. The appropriation increases spending on the C-130J from the requested $129 million to nearly $2.4 billion with the purchase of sixteen new aircraft for the Air National Guard and four new aircraft for the Air Force Reserve. There is also an increase of four MQ-9 Reaper unmanned aircraft for an additional $89 million above the $3.3 million request.
In non-aircraft procurement, the Act provides $74.4 million for general information technology which is an increase of $30.5 million above the request primarily for the INDOPACOM Mission Partner Environment. The Space Force procurement appropriation receives an additional $260 million for an increase of one spacecraft for the GPSIII follow on.
Within the RDT&E accounts, the appropriators provide the Air Force with an additional $10 million within aerospace vehicle technologies for the collaborative hypersonic demonstration and an additional $19 million for extreme wideband RF sensors as well as an additional $7 million for research into the reliability of combat cloud communications systems.
The omnibus includes $52 million more than Biden’s FY22 budget for dominant information sciences and methods including the quantum network testbed, photonic quantum computing, the quantum internet battlefield, and ion trap quantum computing. Within the advanced aerospace sensors account, there is an additional $9.3 million for software verification and validation for autonomous sensors. There is also an increase of $65 million above the request for the advanced battle management system. The Act breaks out hypersonic prototyping from a single line into two distinct lines representing the discreet weapons which are the Air-Launched Rapid Response Weapon (ARRW) ($319 million) and the Hypersonic Attack Cruise Missile ($190 million).
In Space Force RDTE, the next generation Overhead Persistent Infrared (OPIR) line was realigned into four separate elements. The original account remains funded with $126 million and the new accounts are as follows: GEO is funded at $1.2 billion, Polar at $471 million, and Ground at $542 million. Space test and training range development receives an increase above the request of $51 million for the cyber training range as well as the advance threat simulation environment.
This spending package creates a $100 million Agile Procurement Transition Pilot program. Its goal is to aid the warfighter by transitioning technologies from pilot programs, prototype projects, and research projects to scale capability, software, or service acquisitions. The size of the awards will be from $10 to $50 million per year for up to three years. Eligible fund participants must have less than $500 million in cumulative revenue from DOD.
The Defense-Wide procurement accounts fund acquisitions for the agencies and activities outside of the services. This Act provides the Missile Defense Agency (MDA) with an additional $129 million above the $252 million request for fourteen additional THAAD interceptors. It also provides MDA an additional $193 million for Aegis BMD SM-3 Block IIA interceptors on top of the $295 million request. Just as the Congress increased the Army’s budget for CUAS, it increases the SOF warrior systems CUAS account by $78 million. It also increases SOF’s fused panoramic night vision goggles (F-PANO) funding by $28 million to accelerate the activity.
The Defense-Wide RDT&E accounts are where a significant amount of innovation occurs. The omnibus provides $29.1 billion which is an increase of $3.2 billion (12.4% above the request). The bullets below provide highlights:
- Defense Research Sciences increase by $50 million to $446 million with additions to the electronic resurgence initiative 2.0 (ERI) as well as AI, cyber, and data analytics
- The Information and Communications Technology program at DARPA also increases by $50 million to $480 million with plus ups for quantum computing and AI, cyber, and data analytics
- Electronics Technology at DARPA is funded at $393 million with an increase above the request of $36 million for ERI 2.0
- Defense-Wide Manufacturing Science and Technology Program (run out of OSD) receives an increase of $122 million for initiatives such as high performance computing – enabled advanced manufacturing, data analytics and visualization system, and silicon based lasers
- Microelectronics Technology Development and Support (out of DLA) receives $210 million which is $49 million above the request for GaN-on-SI RF Front-end, an on-shore test site, and silicon carbide applications
- Advanced Electronic Technologies (DARPA) has a $24 million program increase for ERI 2.0
- Network Centric Warfare Technology (DARPA) is increased by $71 million above the request to $656 million for deployable surveillance systems and Assault Breaker II acceleration
- Next Generation Information Communications Technology (5G) (OSD) sees a $37 million reduction from the request due to tranche 2 growth without transition plans and unjustified growth for external engagement. The total funding is for $338 million
- Trusted and Assured Microelectronics (OSD) receives $197 million above the request for a total of $706 million for trusted artificial intelligence, advanced node radiation-hardened fully-depleted silicon-on-insulator technology, and secure design and quantifiable assurance development.
- Space Technology Development and Prototyping receives an increase of $568 million for a total of $1.2 billion with an INDOPACOM missile tracking demonstration accounting for $550 million of the increase
- Industrial Base Analysis and Sustainment Support (OSD) is increased by $278 million above the request for a total appropriation of $336 million with increases for the heavy rare earth elements program, a resilient manufacturing ecosystem, defense supply chain enhancement, and lead-free electronics
- Joint Artificial Intelligence (DISA), with a request and a transfer of $187 million receives an $148 million appropriation in this account due to transfers to Operation and Maintenance and due to reductions for duplication
As the Department works to execute the FY22 appropriation, all eyes will now shift to release of the President’s FY23 budget. It has been created with the full knowledge of increased fuel prices, higher inflation, and a geopolitical atmosphere that is potentially much more demanding on DOD. A key market signal will be whether it proposes real growth in the investment accounts, particularly in RDT&E, moving forward.