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March 04, 2024 Feature

How Fiscal Law Principles Shape US Government Spending

Lyle Gravatt and Nicole Vele

The US budgetary process is riddled with challenges that over time have only become more complex. Despite an express congressional desire to return to “regular order” and the best of intentions, what, in theory, should function as a well-oiled machine consistently gets derailed by competing priorities, dynamic world events, polarized political stances, and near-peer adversaries. In fact, with only a few rare exceptions, Congress has not successfully passed a budget on time since the fiscal year (FY) was set back in 1977. These delays cause negative consequences for agencies, government employees, contractors, and the nation writ large.

This article begins with a discussion of how the United States classifies its appropriations and undergoes its budgetary process. Next, it offers a discussion on the challenges associated with the US budgetary process and how fiscal law principles shape government spending. Finally, it provides an overview of the tools contractors can employ during periods of high inflation, authorities agencies use to increase fiscal flexibility, and a brief exploration of what is expected in the near future for the US budget.

Classifying Federal Appropriations—Mandatory and Discretionary Spending

Federal spending is classified in two main categories: mandatory and discretionary. Mandatory spending, also known as direct spending, stems from laws that authorize the program, determine the program’s purposes, and establish the program’s funding (e.g., Social Security, Medicare, Medicaid, federal military and civilian retirement, etc.). Discretionary spending is handled differently. Discretionary spending has an authorizing law that establishes the program, agency, or activity, and an annual appropriation sets the funding level (e.g., defense spending, civilian agency operating budgets, grant programs, etc.). Each year, the president requests funding for the nation’s discretionary programs, and his/her request is reviewed, revised, and set by the House and Senate Appropriations Committees in 12 appropriations bills that are sent back to the president for his/her approval or veto. For emergencies or unplanned expenditures that arise after the FY has begun, supplemental appropriations may be passed. Supplemental appropriations are budget authority granted in an appropriations act outside of the annual appropriations process.

Expectation vs. Reality in the US Budgetary Process

The US FY runs from October 1 through September 30. To ensure the government’s budgetary process stays on track, budgetary planning begins a year before it is to go into effect. The timeline for the government’s budgetary process begins the first Monday in February with the president submitting his/her budget to Congress for the following FY. Then, both the House Appropriations Committee and the Senate Appropriations Committee are responsible for drafting a version of all 12 appropriations bills that comprise the national discretionary spending budget. Between February and March, the House Appropriations subcommittees begin holding hearings and “marking up” (amending) all 12 appropriations bills. Between March and June, the Senate Appropriations subcommittees hold hearings and “mark up” its 12 appropriations bills. Once both committees have voted on their versions of the 12 appropriations bills, both versions are sent to conference committee. During conference committee, a single version of the appropriations bills is negotiated and approved by both the House and the Senate. Then, the reconciled versions of the appropriations bills are sent to the president for signature or veto. Ideally, this occurs between August and September so the new FY budget is approved by October 1.

When Congress fails to pass a budget that is approved by the president before or on October 1, the government shuts down because it experiences a lapse in funding. One way for Congress to avoid a shutdown and buy itself more time is through the approval of a continuing resolution (CR). CRs are interim budget authority at a specified rate that allows agencies to obligate funds at a rate necessary to continue operations funded in the previous fiscal year. While CRs are better than having the government shut down completely, they are often challenging for agencies because they generally prohibit agencies from carrying out new programs, projects, or activities that were not funded in the previous FY. CRs can also include anomalies within appropriations that enumerate exceptions to the duration, amount, or purposes for which funds may be used for certain accounts or activities, meaning funding for existing programs, projects, or activities can be increased, decreased, or eliminated completely.

Since 1977, Congress has enacted one or more CRs in all but three FYs—FY1989, FY1995, and FY1997. While CRs have become a common modus operandi for Congress, the constant looming threat of a government shutdown wreaks havoc on the US economy and the defense industrial base. Government employees gear up for indeterminate furloughs, federal contractors are forced to plan for stop work orders or limited access to work sites, and veterans or other individuals who rely on government funds wait anxiously to see if their benefits will be temporarily cut off. However, those concerns are only the tip of the iceberg. Arguably, the worst result of an unresolved CR is the triggering of sequestration. Sequestration is an across-the-board reduction in federal agency budgets, and it occurs when action is not taken to reduce the federal deficit as required under the Budget Control Act of 2011. Sequestration targets both mandatory and discretionary spending programs and has lasting impacts such as slowed economic growth, increased unemployment, and decreased personal earnings.

Fiscal Law Fundamentals—Congressional Authorization and Appropriation of Funds

Expending public funds is permissible when Congress has authorized the program and appropriated funds for the authorized programs, and the expenditures meet the Purpose Statute, the Bona Fide Needs Rule (Time), and appropriation, apportionment, or formal administrative subdivision Amount limits.

Both Appropriation and Authorization Are Needed

Authorization bills create, extend, or make changes to statutes and specific programs and specify the amount of money appropriators may spend on a specific program. Authorizations, as a general rule, do not provide budget authority. These are different from appropriations bills in that appropriations bills provide the discretionary funding available to agencies and programs that have already been authorized. Appropriations provide the budget authority that allows agencies to incur obligations and make payments out of the Treasury for specified purposes. Both are required because, by itself, an authorization of appropriations does not provide funding for government activities and Congress is not required to provide appropriations for all authorized programs.

Fiscal Law Legal Framework

Article I, Section 9, Clause 7 of the US Constitution states: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” This means, when it comes to the expenditure of public funds, it is only permissible to do so when it is specifically authorized by Congress. So, the default position of “there is nothing in the law that says we cannot act in this manner, so we most likely can,” does not apply to fiscal law. Instead, fiscal law requires us to determine “Where does it say we can do this?”

To determine when appropriated funds are legally available, there are three elements that must be met: (1) purpose, (2) time, and (3) amount. These rules provide Congress’s right and left boundaries for how agencies may expend public money, and all three must be observed for the obligation or expenditure to be legal.

Purpose—General or Express Authority to Expend Funds

Title 31 U.S.C. § 1301(a) states, “Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law.” To comply with this statute, an agency will either have the express authority to expend funds in the manner proposed or the expense will have to be a “necessary expense” in the proper execution of the appropriations’ general purpose.

For example, section 127 of the FY23 National Defense Authorization Act provided express permission for the Secretary of the Navy to enter into one or more fixed-price contracts for the procurement of airframes and engines in support of the CH-53K heavy lift helicopter program. So, provided the Navy received the corresponding appropriation for this authorization, it may purchase airframes and engines for the CH-53K heavy lift helicopter program.

That said, because the authorization did not provide the Navy with an extensive list of every supply or service it could buy for its CH-53K heavy lift helicopter program, if the Navy was unsure whether a proposed expenditure was appropriate, it would apply the necessary expense test. The necessary expense test allows for the expenditure of funds when (1) it bears a logical relationship to the appropriation, (2) the expenditure is not prohibited by law, and (3) the expenditure is not otherwise provided for in a different appropriation. So, in this case, if the Navy wanted to buy uniforms with this pot of money, that would not be permissible because buying uniforms would violate this appropriation’s purpose. However, if the Navy wanted to purchase screws, metals, etc. needed to build the CH-53K airframes or engines, it would be appropriate to use this appropriation because those supplies are necessary for the CH-53K heavy lift helicopter program.

It is possible to have more than one appropriation available for an agency’s requirement. When that occurs, the agency should use the appropriation that is more specifically tailored for the requirement. However, in the event there is more than one appropriation, but neither appropriation is more specific than the other, then either may be used for the requirement. For the Navy’s CH-53K heavy lift helicopter program, if there were two possible appropriations equally available to fund it, the Navy would have to elect the appropriation it intends to use for this requirement and stick with that appropriation. If the appropriation the Navy elected runs out of money, the Navy would not be able to switch to the other appropriation.

Time—When a Bona Fide Need Arises

Title 31 U.S.C. § 1502(a) requires that “[t]he balance of an appropriation or fund limited for obligation to a definite period is available only for payment of expenses properly incurred during the period of availability or to complete contracts properly made within that period of availability and obligated consistent with 31 U.S.C. § 1501.”

There are three types of appropriations based on duration: annual, multiple year, and no-year appropriations. Annual appropriations are available for one fiscal year, multiple-year appropriations are available for a definite period of time in excess of one fiscal year, and no-year appropriations are available without fiscal year limitation. To comply with an appropriation’s time limitations, an agency can only obligate funds to purchase goods or services that are a bona fide need during the fund’s period of availability.

To determine when the agency’s bona fide need arises, the first step is to classify the acquisition as either a supply or a service.

1. Procurement of Supplies—Lead Time & Stock Level Exceptions

For supplies, a bona fide need exists when the agency will use the supplies. If the supplies will be used prior to September 30, then you will use current-year funds. If the supplies will be used after September 30, then the agency will use the next year’s funds unless an exception applies. If one of the exceptions applies, then you may use current-year funds. The three exceptions to keep in mind for supplies are delivery lead time, production lead time, and stock level.

The delivery lead time exception allows agencies to obligate current-year money for a current-year requirement when the agency will not use the supply until the next fiscal year due to a delay stemming from delivery lead time. For the expenditure to be appropriate, the delay must be due to delivery, the time between the contracting action and delivery cannot be excessive, and the supplier requires the delivery lead time.

The production lead time exception allows agencies to obligate current-year money for a future-year requirement when the agency must order the supply now to have it when required due to production lead time, provided the intervening period is needed for production and the supply is not commercially available.

The stock level exception allows agencies to obligate current-year money to replace stock items consumed during the current fiscal year, even when they will not use the items until the next fiscal year. The purpose of this exception is to allow agencies to maintain adequate stock levels of readily available common-use standard supplies to prevent the interruption of on-going operations between fiscal years.

2. Procurement of Services—Severable or Non-severable

For services, the agency’s bona fide need arises when the services will be performed. There are two types of services: severable and non-severable. Generally, if the services will be performed before September 30, then current-year funds are used. If the services will be performed after September 30, then next year’s funds will be used unless an exception applies.

Severable services are funded with money current at the time services are rendered. A service is severable when it can be separated into components that independently meet a need of the government (continuing/recurring). Things like landscaping, laundry, janitorial services, etc. are treated as severable services. However, severable service contracts may cross FYs provided the period of performance does not exceed one year and it is authorized by statute.

A service is non-severable if the service produces a single or unified outcome, product, or report and cannot be subdivided for separate performance in different fiscal years. One example would be a long-term study that is intended to produce a singular report. Non-severable services are funded up front with current-year money at the time of contract award.

Amount and Overspending Violations (the Anti-Deficiency Act)

Title 31 U.S.C. §§ 1341, 1342, and 1517 prohibit the obligation of funds in excess of an appropriation, the obligation of funds in advance of an appropriation unless authorized by law, and the acceptance of voluntary services unless authorized by law.

The Anti-Deficiency Act (ADA) prohibits any government officer or employee from making or authorizing an expenditure or obligation in excess of the amount available in an appropriation; making or authorizing expenditures or incurring obligations in excess of formal subdivisions of funds, or amounts permitted by regulations prescribed under 31 U.S.C. § 1514(a); incurring an obligation in advance of an appropriation, unless authorized by law; and accepting voluntary services unless otherwise authorized by law.

When an agency official or employee obligates public funds in violation of the purpose, time, and amount rules, they may have committed a violation of the ADA. Violations of the ADA are taken very seriously as they carry the possibility of administrative discipline and criminal liability for the individuals involved. Additionally, a report containing all relevant facts and a statement of actions taken must be transmitted to the president, Congress, and the comptroller general at the same time. Given the level of visibility and potential liability at stake for individuals that have run afoul of the ADA, agencies thoroughly investigate all ADA allegations to determine if a violation did in fact occur.

Suspected violations of the ADA may be avoidable if (1) proper funds were available at the time of the erroneous obligation and (2) proper funds were available for the agency to correct the erroneous obligation. So, it is imperative that agency investigators analyze whether an erroneous obligation is correctable before reporting a finding of an ADA violation.

Available Tools for Fiscal Law Flexibility

While the US budgetary process provides annual funding, the allocation of budgets across agencies and programs relies on the Office of Management and Budget’s projections, which typically use a 10-year horizon, and even consider 25-year implications. One does not need to look decades into the future for complexity. Near-term projections provide plenty of factors to consider, such as high inflation, elevated debt, the reverberating effects of the pandemic, climate change, artificial intelligence, expansive data analytics reshaping industries, the global economy, and international affairs—all contribute to high levels of uncertainty. As a result, the need for fiscal flexibility has never been higher.

The departments and agencies responsible for budgets tied to US national security are responding to the constantly shifting global crises, where budget flexibility is paramount. Ukraine faces a tough test in its counteroffensive against Russia, pushing the US defense industry to streamline acquisition and increase production capacity. The defense of Israel and the humanitarian support of Palestinians have exponentially grown following the recent attacks by Hamas. The Indo-Pacific region continues to require the focus of US assets, particularly in the information space, to ensure long-term peace and stability. Even domestic borders and ports present evolving national security challenges that require the rapid deployment of cutting-edge technologies.

Appropriations bills are the result of a lengthy and often complex budget process. Once an agency or program is awarded a lump-sum appropriation, what legitimate flexibilities are available when spending these funds? What tools are available to federal contractors to adjust to disruptions to supply chains and costs? Notably, in Shannon v. United States, the Supreme Court held that legislative history is not law and carries no legal significance unless “anchored in the text of the statute.” However, the applicable statutes come not just from the annual budget process, but through the operation of other laws. Two areas where Congress has provided devices to account for uncertainty, both historically and currently, address inflation concerns and the desire to streamline innovation.

Inflation’s Impact on Contractors; Mechanisms for Relief

While many are predicting inflation will be waning in 2024, it remains an acute problem. In turn, federal contractors continue to grapple with the ongoing challenges of higher costs, many of whom were not around in the 1980s to experience the last peak of inflation, which rose to 13.6 percent during the summer of 1980. Contractors have been pressing the Department of Defense (DoD) and policymakers to grant economic relief, while the government continues to focus on controlling costs and the growing debt.

Fixed-price contracts are likely the most vulnerable to rising inflation costs because they offer greater certainty to the government by locking contractors into fixed rates for their goods or services. An analysis by the Center for Strategic & International Studies shows that small and medium contractors tend to engage in more fixed-price contracting. These smaller contractors also have much less ability to lobby the DoD and policymakers for relief, even though they likely carry a disproportionate share of the inflationary impact. Even when working with prime contractors, small subcontractors can be subjected to their efforts to drive down costs and increase supply chain predictability, and many are often locked into multiyear commitments.

Further, time-and-materials contractors could be facing labor rate pressures as wages adjust to inflation. Even under a cost-type contract, where the risk for cost increases generally falls on the government, specific costs may be challenged by the contracting officer, shifting the burden of proof to the contractor to demonstrate that such costs are reasonable. Many federal contractors have not faced an environment with notable inflation during their professional careers, so it is helpful to examine relief mechanisms that may assist in their recovery of rising costs.

Economic Price Adjustment Clauses

For fixed-price contracts, a contractor may find some relief through the incorporation of an economic price adjustment (EPA) clause, which was designed to protect both the government and the contractor from cost fluctuations. EPAs can be included at the outset of a contract or added when the contractor has a clear case that macroeconomic conditions are making a significant impact on their performance abilities. Notably, for DoD contractors, DFARS 216.203-4 limits the use of the FAR EPA clauses to DoD contracts where performance is longer than six months and the award exceeds the simplified acquisition threshold (currently $250,000, with exceptions).

When an EPA clause is included in a federal contract, it may allow an inflation adjustment based on a change to the contractor’s established pricing (e.g., Federal Supply Schedule) or a change to the actual cost experience of the contractor related to labor, fringe benefits, or materials. Additionally, an agency may prescribe a clause recognizing a public index of labor, fringe benefits, or materials to benchmark these costs and permit adjustments as these fluctuate. While helpful, there are some limitations. For example, under the FAR EPA clause addressing labor and materials, there must at least be a three percent impact on the then-current total contract/order price for the EPA to be granted, and notice of the fluctuation must be provided within 60 days.

On May 25, 2022, the DoD provided guidance to contracting offices about using EPA clauses to remedy inflation. Use of EPA clauses was encouraged in the May 25 guidance: “For contracts being developed or negotiated during this period of unusually high inflation, an EPA clause may be an appropriate tool to equitably balance the risk of inflation between the government and contractor.” However, in that same guidance, Director Tenaglia appeared to encourage the use of tailored agency-prescribed clauses, saying, “In crafting an EPA clause, COs must be mindful that the impacts of inflation vary widely, depending on the nature of costs. Therefore, when selecting indices to be used to measure inflation for purposes of an EPA clause, the CO should take care to use an index that is closely related to the cost components judged to be most unstable.” In either case—incorporating a standard EPA clause into a contract or using agency-tailored EPA clauses—the DoD’s guidance offers clear support for contractors to use these clauses as an inflationary cost-adjustment tool.

Requests for Equitable Adjustment

In addition to EPAs, the DoD’s guidance released on September 9, 2022, provides alternative fiscal flexibility, recognizing that fixed-price contracts already awarded may not include any EPA clause. Director Tenaglia notes “an accommodation can be reached by mutual agreement of the contracting parties … provided adequate consideration is obtained for the government, [and] such an accommodation may take the form of schedule relief or otherwise amending contractual requirements.” With the accommodation by the government comes new consideration by the contractor—creative approaches should be considered, without inappropriately creating an out-of-scope contract modification.

This additional tool in the contractor’s arsenal is a request for equitable adjustment (REA)—a contractor’s request for adjustment to the contract price and/or schedule due to unforeseen changes or unintended circumstances that have impacted the performance of the contract. REAs have historically been used only in extraordinary circumstances, including where the contractor suffers a loss directly due to government action, a mistake is made that must be mitigated, the contracting officer formally requests task modifications or a stop or suspension of work, or site conditions have unexpectedly changed. The September guidance encourages the use of this “Extraordinary Contractual Relief,” noting that the DoD “will consider contractor requests to employ this authority [under FAR Part 50], subject, of course, to available funding.”

Section 822 of the 2023 National Defense Authorization Act (titled “Modification of Contracts to Provide Extraordinary Relief Due to Inflation Impacts”) provided new authority for defense contractors (and subcontractors) to obtain price increases to address the impacts of inflation using REAs. Under Section 822, the DoD was permitted to “make an amendment or modification to an eligible contract when, due solely to economic inflation, the cost to a prime contractor of performing such eligible contract is greater than the price of such eligible contract,” and such an amendment may be made without requesting consideration from the contractor (or subcontractor, if applicable). Unfortunately, for contractors, this temporary authority expired December 31, 2023, and the FY2024 NDAA did not extend this authority (though several attempts were made to extend or otherwise provide REAs for inflation).

Claims Under the Contract Disputes Act

The Contract Disputes Act (CDA) sets forth the procedure for pursuing contract claims and provides a statutory basis for reviewing a contracting officer’s final decision by the Court of Federal Claims or the Boards of Contract Appeals. Any contractor submitting an REA should take great care to ensure their request does not qualify as a claim under the CDA. Though the line between the two can be murky, a key consideration when discerning between the two is whether the contractor asks the contracting officer or agency to “make a final decision,” either explicitly or implicitly.

Typically, an REA signals that the contractor is open to a negotiation, initiating a dialogue with the agency and its personnel. A CDA claim, however, is generally considered more adversarial and formal, implicating various procedural time limits. The choice between the two options is not necessarily binary: An REA may be used as an informal precursor to a claim, which has a six-year statute of limitations. Once negotiations stall, or a reasonable amount of time passes, the REA claim may be converted to a claim.

REA and CDA claims should not only be considered if inflation pressures result in rising costs. These tools may be appropriate whenever a contractor experiences higher costs and/or lost profits due to the government’s acts or omissions, such as informal changes to contract requirements or breach of clauses therein.

Streamlining Acquisitions for Adopting New Technologies and Diversifying Supply Chains

Clearly, as the COVID pandemic and global conflicts have highlighted, inflation is not the only factor disrupting the procurement process. Supply chains have again come under scrutiny, and, again, new action plans are being deployed and developed. Defense experts continue to highlight the need to accelerate and diversify the adoption of new technologies, particularly dual-use technologies from the private sector. While entire tomes can be dedicated to the various innovation programs, policies, and procedures implemented historically, available now, and coming down the pipeline, the present discussion will narrowly focus on two broad capabilities available today—Other Transaction Authority (OTAs) and the Adaptive Acquisition Framework (AAF)—then wrap up by surveying the current conditions and initiatives in development.

Other Transaction Authority for Bypassing Traditional Regulations

Since 1958, the government has utilized other transaction (OT) authority to carry out projects using agreements that bypass certain FAR provisions found in traditional federal contracts. Notably, the authority to enter into OT agreements is limited to certain agencies, and those that are granted authorities (e.g., NASA, TSA, NIH) have broad authorizing statutes that create uncertainty as to whether specific OT awards are “proper” or “necessary.” However, the DoD has been granted express and specific authority to acquire certain goods and services in accordance with mandated procedures. These OT authorities grant DoD the flexibility to adopt common commercial standards and business practices in its awards to encourage development of dual-use research and development from nontraditional defense contractors.

The three types of OT agreements for the DoD are for a research purpose (10 U.S.C § 4021), a prototype purpose (10 U.S.C. § 4022), and a production purpose (10 U.S.C. § 4022(f)). Research, or science and technology, OT agreements allow for basic, applied, and advanced research projects intended to spur dual-use research and development. Prototype authority enables a streamlined transition from research to production for both dual-use and defense-specific projects. Production agreements are noncompetitive follow-ons to prototype OT agreements that were competitively awarded and successfully completed.

While OT authorities offer significantly more flexibility and speed by working outside of the FAR, DFARS, and certain competition limitations found in other federal procurement contracts, contractors are still subject to certain federal laws. For example, laws of general applicability when working with the government, like the False Claims Act and Freedom of Information Act, still apply, as well as the Procurement Integrity Act. When leveraged appropriately, OT authorities provide the government with tailored project conditions to access the state-of-the-art technology of, and foster new relationships with, both traditional and nontraditional defense contractors through a multitude of potential teaming arrangements.

Adaptive Acquisition Framework, the New Federal Acquisition Policy

On September 8, 2020, DoD Directive 5000.01, The Defense Acquisition System, described the six main tenets of the Adaptive Acquisition Framework as representing “one of the most transformational changes to acquisition policy in decades” for developing “a more lethal force based on U.S. technological innovation and a culture of performance that yields a decisive and sustained U.S. military advantage.”

To accommodate the various systems and services DoD acquires, the AAF framework restructured and incorporated prior guidance to detail policies and procedures for six distinct pathways of DoD acquisition, each of which is further tailorable:

  • Urgent Capability Acquisition (DoDI 5000.81) for fulfilling urgent operational needs and quick-reaction capabilities;
  • Middle Tier Acquisition (DoDI 5000.80) for rapid prototyping and demonstration of capabilities;
  • Major Capability Acquisition (DoDI 5000.85) for major systems and programs, as well as certain automated information systems;
  • Software Acquisition (DoDI 5000.87) for development and procurement of custom software;
  • Defense Business Systems Acquisition (DoDI 5000.75) for supporting business capabilities across the DoD; and
  • Defense Acquisition of Services (DoDI 5000.7) to focus specifically on services instead of products.

These changes to the Defense Acquisition System were initiated by Congress through NDAAs, which repeatedly introduced and revised concepts that led to the middle-tier and software-acquisition pathways—two gap-filling solutions that are included in the six diverse acquisition pathways of the AAF.

The middle-tier pathway is intended to demonstrate new capabilities and meet emerging military needs. However, the objective under this path is to meet defined requirements within five years of the program start date. This rapid capability development provides program managers with a couple options: streamlining development before transitioning to a longer-term acquisition pathway or minimally developing a capability before moving it into rapid fielding. This pathway is uniquely suited to generate fresh approaches and attract private sector innovators new to defense procurement, potentially breaking free of complacency in historical vendors.

Whereas the middle-tier pathway filled a gap between major and nonmajor systems, the software-acquisition pathway addresses an entirely unaddressed segment of products and services, and one that is becoming increasingly critical to national security. The software pathway integrates modern practices, such as agile software development, DevSecOps (Development, Security, and Operations), and lean practices, by facilitating a rapid, iterative process with active user engagement.

The AFF framework is meant to streamline innovation, development, and procurement; however, challenges remain as success metrics are honed and implementation results are assessed. In any case, the AAF and OT authorities are just two initiatives among a whole host of innovative pipelines, funding mechanisms, and procurement tools available to the DoD and potential federal contractors. The recent passage of the FY2024 NDAA and the various commissions and ongoing studies will continue to foster more opportunity, challenges, and change.

On the Horizon

Passing the FY24 Budget or Another Continuing Resolution

On June 3, 2023, US lawmakers avoided defaulting on the national debt by enacting the Fiscal Responsibility Act (FRA, Public Law No. 118-5), which suspended the federal debt limit and established discretionary spending limits through January 1, 2025. These budget caps are enforced through sequestration provisions in the FRA—the automatic process of imposing across-the-board budget cuts if any breach of these spending caps occurs. Further, the FRA includes provisions meant to incentivize Congress to enact regular full-year appropriations legislation instead of relying on continuing resolutions. If lawmakers cannot pass appropriation bills such that the CRs are no longer in effect on April 30, 2024, the sequestration penalty would kick in on May 1.

In letters to the Senate Appropriations Committee, Secretary of Defense Lloyd J. Austin III and our nation’s top defense leaders detailed how the CR-related cuts would have severe repercussions for our national defense strategy, servicemembers and their families, and our military readiness. Chairman of the Joint Chiefs of Staff Charles Q. Brown Jr. noted in his letter that “Thousands of programs will be impacted with the most devastating impacts to our national defense being to personnel, nuclear triad modernization, shipbuilding and ship maintenance, munitions production and replenishment, and U.S. Indo-Pacific Command priorities.”

Budgeting, Spending, and Acquisition Innovation

Though disruption and spending cuts are looming, the FY2024 and recent NDAAs continue to tackle fiscal flexibility restraints to enable rapid acquisition and deployment of much-needed defense technologies and services. For example, Section 1004 of the FY2022 NDAA established an independent Commission on Planning, Programming, Budgeting, and Execution Reform (PPBE Commission) for providing recommendations and actions designed to improve relationships between DoD and Congress to enable innovation and adaptability through data analytics and business systems to align budgets and strategy. The PPBE Commission has recommended looking at the private sector practices to improve understanding, enhance information sharing between DoD and Congress, digitizing business systems, and improving analytics—clearly software solutions and data-driven technologies are seen as foundational to meaningful reform.

In addition to front-end enhancements, the FY2024 NDAA contains a number of provisions meant to improve acquisition policy, including requirements modernization efforts directed towards more collaboration with nontraditional defense companies and the science and technology community, and more focus on digitization and the need for “rapid, dynamic, and iterative processes for software, artificial intelligence, data, and related capabilities.” Section 806 will require the designation of a “Principal Technology Transition Advisor” to support service secretaries with the transition of new technologies from research and development to fielding through, inter alia, DoD innovation organization and program manager interfacing.

Emerging technologies receive a lot of attention in the latest NDAA. Funding for a number of initiatives was increased, like quantum computing and networking, semiautonomous air platform systems, and fuel cell electric vehicles. Further, the FY2024 NDAA requires “the creation of at least three new commercial solutions openings for emerging technologies and dual-use products and services each year,” and further studies on ways to improve the acquisition of commercial products and services. Artificial intelligence receives a lot of attention as well, with focus on funding, bug and vulnerability analysis, and ethical and responsible use. The stability and diversification of the industrial base is addressed through multiyear contracting authority support, leveraging intellectual property pilot programs, and various prize competitions to support modernization.

Conclusion

Clearly, the US budgetary and acquisition process is a quagmire that requires constant restricting and tailoring to evolving national security needs. The DoD and Congress continue to explore new ways to engage and capitalize on the strengths of the private sector while reducing operational risk and uncertainty. The data- and software-driven changes to processes, services, and technologies requires even more rapid, iterative approaches to budgeting, strategy, and acquisition. Uncertainty in domestic and global affairs, combined with lack of fiscal clarity, continues to undermine national security efforts and preparations. Even so, the government continues to develop initiatives to enable flexible approaches to these ever-changing problems. One can hope that the spirit of innovation and invention that has long been a quality attributed to Americans continues to thrive within the US government as well.

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    By Lyle Gravatt

    Michael Best & Friedrich LLP

    Lyle Gravatt is a partner at Michael Best & Friedrich LLP, where he focuses on intellectual property, government procurement, and artificial intelligence.

    Nicole Vele

    Michael Best & Friedrich LLP

    Nicole Vele is a senior counsel at Michael Best & Friedrich LLP, is a member of the firm’s Government Procurement Practice Group, and serves as a co-chair of the ABA Public Contract Law Commercial Products and Services Committee.