'Slush fund': How the Pentagon's war chest became a Washington budget gimmick

By Tony Bertuca  / April 3, 2019

The Overseas Contingency Operations account was introduced in 2009 to fund wars abroad, meant to give the Pentagon greater flexibility to pay for unexpected costs.

While this account has long been criticized as a "slush fund," this year marks a startling departure. The Trump administration's OCO request amounts to 150 percent more than sought the year before, and the Pentagon freely admits it's not to cover direct war requirements. Instead, the White House is seeking to use the war account to finance a $34 billion increase to the defense budget.

Mackenzie Eaglen, an analyst with the conservative American Enterprise Institute, has criticized misuse of the OCO account in the past.

"The only difference now is that DOD doesn't deny it," she said.

The new request stems from the 2011 Budget Control Act, which capped defense and non-defense spending for a decade after Congress failed to reach a bipartisan deal to reduce soaring deficits. The OCO account is exempt from the spending caps, creating a loophole that has at times given both Congress and the Pentagon a way to fund base budget priorities without violating the law.

Pentagon and White House officials argue inflating the OCO account is the only way to properly fund national security needs without violating the caps, but critics say it's a workaround to avoid having to provide equal increases to non-defense spending.

Still, detractors and advocates alike say the latest request, for an OCO account totaling $174 billion, is the natural result as the fund has morphed from an emergency war chest into a regularly employed budget gimmick.

OCO and 'FOCO'

In February, headlines that DOD intended to request a $174 billion OCO budget for fiscal year 2020 -- a more than $100 billion increase from FY-19 -- to skirt the budget caps alarmed congressional staffers from both parties as well as defense budget analysts.

"Everyone has known for a while that OCO is a bit of a slush fund, but this is just insane," one government official said.

The BCA limits the total defense budget, most of which is Pentagon spending, to $576 billion in FY-20. The Trump administration, however, set an objective of $750 billion. To enable that, the administration proposed complying with the BCA cap for base defense spending and using the OCO account to house the additional $174 billion. The administration would then leave the $542 billion BCA cap in place for non-defense spending.

But the oversized OCO request comes as the United States has drawn down its presence in the Middle East and is considering further troop reductions in the region. The $174 billion request would be second in size only to the $189 billion DOD requested for FY-08, when the military was actively involved in wars in Iraq and Afghanistan.

The Pentagon's breakdown of the $174 billion FY-20 OCO request, which it provided last month, brings the department into new territory. DOD conceded only $25.4 billion is for "direct war requirements," while $41.3 billion is for "enduring requirements" that will remain after the end of combat operations abroad.

Meanwhile, the Pentagon acknowledged another $97.9 billion marked in "OCO for base requirements" is only there to comply with a cap on the base budget, but still increase overall spending. The department also requested a controversial $9.2 billion in OCO "emergency funding" to construct a wall on the southern border and repair hurricane damage to military installations.

Acting Office of Management and Budget Director Russ Vought wrote in a Real Clear Politics op-ed that "expanding the use of OCO funds remains the administration’s only fiscally responsible option in meeting national security needs while avoiding yet another increase to the spending caps."

He acknowledged that "fiscal conservatives may feel uncomfortable using OCO in this way," but said it is the only way to increase defense spending, block Democrats' plans to increase non-defense funding and avoid increasing the BCA caps.

But the request has drawn the ire of Republicans and Democrats alike.

Rep. Mac Thornberry (R-TX), the ranking member on the House Armed Services Committee who was instrumental in engineering a $165 billion defense spending increase last year, told reporters last month the inflated OCO request makes the president's budget "less relevant." He said it is highly unlikely Congress will allow defense to be exempt from spending caps without a bipartisan deal that increases non-defense spending as well.

"I have to confess the reasoning behind doing it that way is not clear to me," he said. "Everybody kind of dismisses it."


House Armed Services Committee Chairman Adam Smith (D-WA), meanwhile, has been harsher, calling the $97 billion "OCO for base" portion of the account "FOCO" or "fake OCO."

"It uses the Overseas Contingency Operations fund as a slush fund," he said during a late March hearing. "It takes that money and says because it's off-budget we can pump . . . over $90 billion [into it] . . . and claim that we have stuck to the Budget Control Act numbers."

Smith vowed the budget will never be approved.

"There is bipartisan opposition to it, and I can assure you the Democratic-controlled House is not going to pass a budget that creates $174 billion OCO and guts every other aspect of funding," he said.

'Like rabbit for bicycle'

Pentagon officials in recent weeks have tried to defend the OCO request, but congressional staffers have pointed out the awkwardness of recent Capitol Hill hearings, in which senior defense officials attempting to justify the increase must also concede the money would not be used to conduct or support overseas combat operations.

Sen. Elizabeth Warren (D-MA), who has made cutting defense spending a signature feature of her 2020 presidential campaign, was blunt when questioning acting Defense Secretary Pat Shanahan during a March Senate Armed Services Committee hearing.

"What we're really talking about here is the establishment of a slush fund to hide what is happening with defense spending and get it out from underneath the statutory caps," she said.

Shanahan asserted the department is being transparent and honest with Congress about its plans for the requested money.

"There is no slush fund," he said. "We have provided in our justification books 100 percent transparency. We can take the money and tie it back to our National Defense Strategy and what we need to defend America."

But Warren said the last time the OCO request approached the FY-20 level was in 2010 when the United States had approximately 100,000 troops deployed to Afghanistan and another 50,000 to 100,000 in Iraq. Today, there are about 21,000 combined U.S. troops deployed to Afghanistan, Iraq and Syria.

Acting Deputy Defense Secretary David Norquist, who appeared alongside Shanahan, said the department has clearly labeled the $97 billion "OCO for base" money in the budget request, but Warren said the labeling is irrelevant.

"You can call it whatever you want," she said. "I think it's time to stop this business of more, more, more for the military and establishing a slush fund like this and say[ing], 'Oh, because we put it in two different accounts,' somehow changes the fact -- it's just not true."

Sen. Angus King (I-ME) also took issue with the "OCO for base" label.

"That's like rabbit for bicycle," he said. "I mean, those two things aren't really consistent."

During a House Budget Committee hearing last month, Norquist said the Pentagon "presented it the way we are asked to present it."

"I will leave it to the Congress and OMB to work out the negotiations," he said.

Curious case of Mick Mulvaney

Mick Mulvaney, the former OMB director and now acting White House chief of staff, was famously known as an opponent of OCO spending when he was in Congress, regularly calling the account a "slush fund."

Neither OMB nor the White House would provide an on-the-record statement from Mulvaney on his OCO policy stance, but a senior administration official who declined to be identified said "acting Chief of Staff Mulvaney is committed to our budget proposal and fully supportive of it."

Mulvaney's transformation on the issue has perplexed many in the Washington defense community who recall his fiery speeches and press releases opposing OCO growth.

Smith, the House Armed Services Committee chairman, said during a hearing last month that "breathtakingly irresponsible" OCO growth has been condemned in the past by "no greater authority on that subject than current chief of staff Mick Mulvaney."

"He said it three years ago when he was a member of the Congress and not trying to weasel his way around the budget problem as a chief of staff, but he made it clear that OCO should not be a way to sneak around the budget caps and that is the heart and soul of the budget going forward," Smith said.

During his January 2017 confirmation hearing to become OMB director, Mulvaney pledged he would "advocate for an end to OCO, and to moving true war-related costs in the base defense numbers," but acknowledged the Trump administration may "settle on a different policy."

The newly proposed OCO growth is also at odds with plans Mulvaney laid out in last year's "Green Book" spending forecast to begin shifting OCO spending back into the base budget.

Tom Spoehr, a former Army budget official who is now an analyst at the conservative Heritage Foundation, said Mulvaney's stamp on the FY-20 budget indicates creative OCO accounting has gotten out of hand.

"It has jumped the shark," he said, using a phrase often applied to television shows that begin steep declines in popularity following especially outrageous storylines. "There is no clearer sign of that than Mick Mulvaney, the ultimate past critic of OCO, now serving as the architect of this year's budget plan with a massive OCO dollop."

'Original sin'

Several defense analysts and two former Pentagon comptrollers who spoke to Inside Defense said Congress' passage of the 2011 Budget Control Act -- and subsequent deals to lift the spending caps it mandated -- helped set the stage for misapplication of the OCO account.

"The original sin is definitely the 2011 Budget Control Act," said Michael O'Hanlon, an analyst at the left-leaning Brookings Institution.

He said turning OCO into a "workaround fund" for normal DOD expenses dilutes congressional oversight.

"I like the fact that, constitutionally, Congress must explicitly appropriate additional funds for wartime operations," O'Hanlon said. "In eras when we no longer declare war, this is the main way we exercise checks and balances on executive authority with the military."

Still, he said, "given the choices that we had the last decade, with a dysfunctional Washington, the kind of sins we've all learned to commit, accept, and forgive ourselves for together are perhaps less egregious than the likely alternatives."

Todd Harrison of the Center for Strategic and International Studies said it first became clear to him in FY-14 the Obama administration was including base budget spending in the OCO account "because the number of troops was coming way down, but the OCO budget stayed flat."

For Harrison, there are two "original sins" that made abusing OCO "acceptable among the DC crowd" and led to the Trump administration's more extreme maneuver.

First, he said, DOD over the years quietly "shoveled more and more base budget funding into OCO to get around the caps." Secondly, he said, Congress explicitly moved "base funding to OCO to get around the caps publicly."

The illusion of the OCO account as an emergency war fund further unraveled in September 2016 when DOD for the first time publicly confirmed that half the account was paying for "enduring priorities" that would need continued funding even after the conclusion of U.S. conflicts overseas.

The Congressional Budget Office recently reported migration of base budget spending into the OCO account began in earnest after passage of the BCA.

Theresa Gullo, CBO's assistant director for budget analysis, told the Senate Budget Committee earlier this year that almost 60 percent of all the Pentagon's OCO spending since enactment of the BCA has gone toward "enduring activities" that could have been part of the base budget.

"Although OCO funding has paid for the temporary costs of DOD's overseas contingency operations, CBO estimates that since 2012 such funding has also included an average of about $50 billion (in 2019 dollars) each year to cover the costs of enduring activities -- including funding explicitly identified for base-budget activities -- that could have been incorporated into the department’s base budget but were not," she said in written testimony.

Harrison said that was enabled by Congress and the Pentagon during the Obama years, "but now the Trump administration is taking it to a whole new level of crazy."

Creative accountants

Bob Hale and Mike McCord were both Pentagon comptrollers during the Obama administration and at the front lines of the past decade's OCO debate. Both told Inside Defense in interviews that using OCO as a safety valve helped the Pentagon get funding it truly needed, assisted Congress in reaching bipartisan budget deals and protected the military from the dangers of sequestration -- the across-the-board cuts that kick in if the BCA caps are breached.

"OCO was originally better," Hale said.

Hale, who served as Pentagon comptroller from 2009 to 2014, said the OCO account was established to avoid the patchwork of supplemental war appropriations Congress needed to approve throughout the year. These often came late and were difficult to manage.

The FY-11 appropriations cycle marked the first time the Obama administration used the OCO account in the regular budget and appropriations process. But passage of the BCA, coupled with partisan politics and the advent of the Tea Party movement, set Washington on a trajectory of budget dysfunction that has yet to conclude.

"It started out as a good initiative. But budget caps were too tight," Hale said. "Obama and Congress could only agree to small cap hikes. OCO was effectively exempt from caps and money was put there instead of base. A misuse of OCO, but usually no more than $10 billion."

But he said Trump's latest budget "makes extreme misuse of OCO."

McCord, who served as Pentagon comptroller from 2014 to 2017, argued that funding defense at BCA levels would have been disastrous for the Pentagon and lawmakers from both parties knew it.

"DOD would not have been better off," he said.

McCord said the base requirements being funded in the OCO account "kind of crept in over time."

"It all made sense," he said. "There was support structure in [U.S. Central Command] and all the stuff [U.S. Special Operations Command] did. But where do you draw the line when the war drags on?"

'Distortions' in budgeting

In a report released last year, a commission charged with assessing the National Defense Strategy advocated restoring OCO funding to the base budget.

"It is critical that as much DOD spending as possible be covered by the base budget, to provide the department with the stability and long-term planning and investment capability needed to execute the NDS," the report states. "Because of budgetary constraints imposed by the BCA, lawmakers and the Department of Defense have increasingly relied upon the Overseas Contingency Operations (OCO) fund to pay for warfighting operations in the greater Middle East, as well as other activities and initiatives. Yet this approach to resourcing has produced problems and distortions of its own."

The OCO account hinders defense budget planners because it can only be appropriated one year at a time, unlike base budget funds that can sit in Pentagon coffers for several years before expiring. The Pentagon is also unable to factor OCO funds into its five-year budget projections, limiting its ability to plan for the future.

"Furthermore, such operations are no longer a top priority as articulated in the NDS," which is focused on countering China and Russia, according to the commission's report. "OCO is not the way to provide adequate and stable resources for such a long-term endeavor, given its lack of predictability and the limitations on what OCO funds can be used to buy."

The BCA caps, however, are scheduled to remain in place for FY-20 and FY-21, unless Congress can reach a two-year spending deal to lift them. Congress has until Jan. 15, 2020, before across-the-board sequestration cuts take effect.

McCord and Hale, the comptrollers who worked for years to balance the Pentagon's budget against the BCA caps and a bitterly partisan Congress, said the military still requires flexible OCO funding for contingencies abroad.

"The concept is worth preserving," McCord said. "It works great for a short war. It has really broken down now. When a future conflict starts from zero, we'll need this."

Hale said the Trump administration's OCO request might have a "silver lining."

"Perhaps this extreme misuse will prompt Congress to move OCO funds that should be in base back to base," he said. "It is time to return OCO to its role as funding for war."