There is a small bit of good news for defense contractors in the Army budget: The worst may be over. A smart company can prevail as the dust settles over a messy budget process.If budgets are a true reflection of priorities, then the Army’s priority for the future is procurement. The outlook is nothing like the golden years of the 1980s, but the budget course over the next five years may provide some much-needed stability and a chance at real growth for weapons procurement. The numbers show Army procurement will increase from $14.3 billion in fiscal year 2015 to $20.2 billion by 2019. Adjusting those numbers for inflation, that’s a 30.5 percent increase in buying power.This growth in procurement, however, is fragile—squeezed inside a flat topline (budget ceiling) that is dependent upon another bipartisan budget agreement and reliant on reforms that are politically sensitive. Sustaining the programmed growth in procurement is possible but only if the trend of brinksmanship budgeting ends. Let’s examine these areas to understand the inherent risk in the Army’s promising budget forecast.A Shift in Fiscal NegotiationsThe negotiating process to establish an annual budget topline for defense underwent a fundamental change with passage of the Budget Control Act of 2011. Enacted to resolve the limit on borrowing authority threatening the nation’s financial solvency, this legislation also created a “supercommittee” tasked to reduce the deficit by $1.5 trillion over 10 years. The committee failed. Once the frosting melted off this cake, we were left with a nauseating fruitcake baked in the 1980s using the Gramm-Rudman-Hollings sequestration recipe. The defense topline served up was essentially set in law for the next 10 years.No longer is the annual defense budget topline negotiated between the Secretary of Defense and the President, then to be debated and set into law by Congress. National security objectives and defense priorities were put on the back shelf for budgeting purposes. Replacing the give and take of budget negotiations was a formulaic process intended to repress discretionary spending as part of a larger campaign of nursing along the nation’s fiscal health. The legislation was well-intended, if not overly lopsided against discretionary spending, but the result is the law tied the right hand of the administration to the left ankle of Congress. Forward progress is awkward at best, and it can only be made with an agreement on the heading direction and then some cooperation getting there.When sequestration was triggered in 2013, followed by a self-inflicted government shutdown, the Bipartisan Budget Act of 2013 came to the rescue, providing relief for fiscal years 2014 and 2015. Congress agreed to funding levels slightly higher than sequestration levels, but only for two years. In 2016, budget levels will drop back to sequestration levels. This is the first threat to the Army’s budget forecast.The defense budget for 2016 to 2019—the fiscal guidance that allows for the Army to increase procurement—is built on a budget profile that grows from 2014 and 2015. This fiscal guidance is above the caps or ceilings of the Budget Control Act of 2011. The budget forecast ignores the law and hopes instead for an increasing yet somewhat austere level similar to 2014 and 2015.What happens to the Army’s budget if it returns to sequestration levels? The difference between the two budget levels—the current program and the sequestration level—is about $27 billion for the Army over the four-year period. Taking out $27 billion from 2016 to 2019 would eliminate the entire growth in the procurement accounts and operation and maintenance accounts, and it would cause the Army to consider additional reductions to military strength and civilian employment.Without the political courage to address the nation’s entitlement programs and to examine revenue measures, Congress could fall back to the bludgeon of the law of sequestration in 2016.Another Look at GrowthHow else can the Army grow procurement? If you can’t get new money to grow programs, then you need to find old money—cut a larger slice of the same-size pie. This means finding trade-offs within existing programs. Weak and outdated programs will naturally wither away, throwing off money for reuse, but to find real money you need to reform the underlying structure. Many of these reforms need a thumbs-up from Congress, which is the next impediment to the Army’s budget forecast.In this year’s budget plan, DoD identified about $93 billion in savings over fiscal years 2015 to 2019 from its “more disciplined use of resources” campaign. The Army generated and presumably kept $22 billion of these savings. This money was plowed back into Army programs or used to offset externally imposed budget reductions. The budget depends on these booked savings turning into real savings because if the savings fail, then existing programs get cut. When DoD needs money, it will look to cut those programs with growth-like procurement.Savings that require a change in law are a tough sell with Congress. Every program has its constituents, and Congress is loath to take away something it has given. For example, two DoD-wide savings programs are particularly vulnerable—the reduction in the subsidy to commissaries in the U.S. and another attempt to control the government’s share of the cost of military health care. These two reforms save $13.2 billion over the five-year period, but only $1 billion of that in fiscal year 2015. Denial of these reforms will cause the services to cut more deeply into procurement programs and readiness. Like most programs, they have a vocal, well-organized constituency opposed to using their particular program to achieve balance across the DoD budget. It’s the not-in-my-backyard syndrome.Congress’ one-year horizon makes selling long-term savings jump-started with near-term sacrifices almost impossible. Congress passes a defense budget one year at a time, and touting savings that accrue over five years is not very appealing to someone whose job is up for renewal in the meantime. From one perspective, it’s about the next election, not national defense.For every program Congress buys back in 2015, the services are stuck with finding money over the next five years. With a fixed topline, it’s back to eating the seed corn and thinning the herd when savings fail. Procurement programs—stretching out buys or cancelling programs—are a likely source to cover savings reforms Congress couldn’t swallow.Potential Problems, Definite SolutionsThe congressional aversion to ignoring vocal constituents for the greater good doesn’t bode well for two other reform initiatives DoD is championing. The administration proposed—and Congress, with some expansion of the proposal, established—a Military Compensation and Retirement Modernization Commission. DoD reports the “cost of military pay and allowances, combined with military health care … have been growing rapidly in recent years, about 40 percent faster than growth in the private sector.” These costs constitute more than one-third of the defense budget. Reducing the size of this slice of the pie gives more money to procurement and readiness programs.DoD has also advocated for another round of base closures. This will cost money in the near term but save money overall as excess facilities are shuttered or turned over to local communities. Nevertheless, Congress has already said it has no stomach for closing bases.Like the current set of reforms, defense can shrink the size of these programs only if Congress finds the political will to do so. Growing the budget is not an option, yet reforming the structure of defense programs has proven to be politically unpalatable. Something needs to give.There is still one other source of procurement on the table—the Overseas Contingency Operations (OCO) fund. This account, formerly called the Global War on Terrorism, covered the cost of the wars in Afghanistan and Iraq. Since 2001, these war accounts have funded more than $149 billion of procurement within the Army. OCO will be around for several more years, but the account is quickly drying up as U.S. military operations draw to an end in Afghanistan.The appeal of the OCO account is that it’s outside Budget Control Act caps. It’s immune to the painful trade-offs just discussed, but to maintain some reasonable credibility, the requirements need to be linked to the war. The Army can use OCO to repair and replace equipment used in the war. This could be a source of procurement for worn-out weapon systems over the next few years if those weapons are still needed to support planned structure.* * *If we believe the budget, then the worst could be over for defense contractors, but building a solid defense program over the next five years will require a degree of compromise and sacrifice for all players. Smart companies will be engaged in the process and be prepared to adjust as actions unfold.