US Army juggles effects of Ukraine, recruiting and inflation on budget

WASHINGTON — When Russia invaded Ukraine in February, the United States quickly undertook a massive effort to supply Kyiv with weapons and ammunition.

Now, nearly eight months into the conflict, the Pentagon has committed more than $16.8 billion in aid to Ukraine. It’s allocated 38 High Mobility Artillery Rocket Systems and ammunition, more than 1,400 Stinger anti-aircraft missile systems and more than 8,500 Javelin anti-armor systems to the country, in some cases pulling them from U.S. Army supplies.

The service is working to restock, turning to industry to ramp up or even restart production lines. But the huge movement of weapons has created a challenge for Army budget planners, tasked with determining the service’s needs in fiscal 2024.

As they work to nail down funding plans, there’s no way of knowing how much longer Ukraine will need military aid, how much Congress will decide to send, and whether the supplies will come from Army stockpiles or hot off a defense contractor’s production line.

Concurrently, the Army is debating whether to restore its own stockpiles with more ammunition than it previously kept in reserve, and whether it will replace older supplies with upgraded ones.

Ukraine creates “a big question mark,” Mackenzie Eaglen, a defense analyst at the American Enterprise Institute think tank, told Defense News.

And that’s not the only matter in flux. In response to the war, the service has increased its troop presence in Europe. That deployment effort is taking place amid economic inflation and low Army recruiting numbers, injecting more uncertainty into its plans.

FY24 is a critical year for the Army’s modernization priorities, with roughly two dozen programs set to make it to the field, from the first battery of hypersonic weapons to the Precision Strike Missile to the Mid-Range Capability missile, designed to take out ships.

Service leaders say they won’t let the added pressures of a land war in Europe, recruiting woes and a changing economic environment derail them from ensuring the Army has the budget it needs to meet its milestones.

“One of the things that has enabled the Army to be as successful as we have been to date in making progress on our modernization portfolio has been a fairly consistent set of priorities,” Army Secretary Christine Wormuth told Defense News in a recent interview at the Pentagon.

“We have pretty consistently funded those modernization portfolios,” she added. “That has been a lot of what has allowed us to maintain momentum, and we are, I think, going to continue to be able to do that in FY24.”

Even so, Caral Spangler, the Army’s comptroller, told Defense News the upheaval means the modernization portfolio may see some adjustments, such as delayed schedules and reduced production rates.

Indeed, this year’s budget is one of the most challenging to pin down, according to Eaglen, as the Army “is managing meaningfully higher uncertainty this year.”

Looking to modernization

The Army has already submitted its initial FY24 funding proposal to the Office of the Secretary of Defense, kicking off the budget process. That procedure involves OSD, which is now reviewing the request, the White House’s Office of Management and Budget, and Congress.

In fiscal 2023, the Army requested $178 billion, accounting for 2% inflation. The budget included $13.7 billion for research and development, down from $14.5 billion in FY22, but the Army said it was enough to cover modernization needs.

Doug Bush, the Army’s acquisition chief, said the FY24 budget reflects the service’s improved understanding of what its new major weapon systems are going to cost.

Particularly in the five-year spending plan that accompanies the budget, he said, the Army has “programs that were started over the last four or five years that are now getting far enough along to where you have to build in the production and procurement money.”

That increased fidelity has led to key discussions, he said.

“You’re making trade-offs at that point and having really good across-the-Army conversations about: ‘We have a capability. How much of it do we need, and how much of it can we afford without trading off things we don’t want to trade off?’ ” he explained. “It’s the exact conversation you expect to have and want to have.”

One of those programs is the Mobile Protected Firepower effort. The Army in July 2022 awarded General Dynamics Land Systems a contract to deliver 26 initial vehicles, but the deal allows the service to buy 70 more over the course of low-rate initial production for a total of $1.14 billion.

The Army’s decisions are likely to get more complicated as it gets closer to fielding these newer programs, Eaglen said.

“The Army’s not going to go 34-0 on modernization. We’re going to start to see that process beginning in the ’24 budget request,” she noted. “There will be more winners than losers ... and it’s OK because it’s actually time to whittle down and get serious about what’s scalable and available.”

Wormuth said the question of trade-offs is likely to get harder, not easier, as time goes on. Beyond 2030, when all of the priority programs should be fielded, the budgeting challenge will be “fielding those new platforms in sufficient numbers to really scale them up across the Army.”

“That, obviously, is where you start getting into really big numbers in the budget,” Wormuth explained. “We have plenty of substantial bills, [but] the biggest bills are still ahead of us.”

Ukraine’s impact

Most of the cost of supplying weapons and munitions to Ukraine thus far was covered through supplemental funding from Congress, but it’s unclear what that means for the Army’s budget.

“Congress has been very good at providing what we were calling a replenishment fund so that we could buy back and restock” munitions, Spangler said. “In addition to that, they have also supported our efforts to increase production rates.”

But looking ahead, Bush said, “the unknown is future things we send — and replacing those.”

The service is still gathering information from industry on how much it can accelerate production, the acquisition boss explained. But in the meantime, the Army has found creative ways to replenish stocks, such as harvesting parts from old Stinger missiles to build 1,000 new Stingers, he noted.

One complexity is that the service doesn’t just want to replenish its older supplies; it would like to upgrade them.

Army Chief of Staff Gen. James McConville told Defense News last month the Army doesn’t want to replace “old stuff with new-old stuff.”

He said the service would like to see, for example, that Vietnam War-era M113 troop carriers given to Ukraine are replenished in the U.S. Army’s inventory with new Armored Multi-Purpose Vehicles. And as the service sends munitions to Ukraine for use in HIMARS launchers, some of those weapons could be replaced by Precision Strike Missiles, which are expected to begin fielding in FY23, or an extended-range version of the Guided Multiple Launch Rocket System.

The big question in FY24 is “just how much [the Army] is going to be investing in missiles and ammunition that they have cut in the past years,” Stacie Pettyjohn, a defense analyst at the Center for a New American Security think tank, told Defense News.

“Are they going to signal to [the] defense industry that they want them to expand the plants? Are they going to keep buying GMLRS at the rate of 10,000 a year or 30,000 a year? That’s a big difference,” she said.

Recruitment crisis

In FY23, the Army adjusted its budget to account for substantial recruitment issues. Spangler said the new budget will once again lower end strength, meaning the total number of troops.

“A year ago, we were talking about an end strength of 485,000. And then when we submitted the budget, we realized that we were starting to experience headwinds, and so we dropped to 476,000,” Spangler said. “Then to 473,000 in ’23.”

One might assume lower numbers could result in surplus funds to direct elsewhere in the budget, but that isn’t necessarily the case, the Army comptroller added. Instead, she explained, the Army has had to turn that money over to recruitment efforts, including higher bonuses, to try to entice potential soldiers.

Lt. Gen. Paul Chamberlain, the director of the Army’s budget, said during the same interview that the service also used some of that money to pay for additional troop mobilization costs stemming from Ukraine.

Personnel has always been the largest single item in the Army’s budget; not knowing exactly how many will be in the force next year creates budget uncertainty.

Spangler and Chamberlain agreed it’s unclear how much it will cost to recruit and retain. The service has, for example, increased some bonuses, and additional costs may emerge after a recruiting task force generates new initiatives, they said.

The Army’s budgeteers are tracking recruiting progress “minute by minute,” Spangler added.

In an Oct. 3 interview with Army Times, McConville said he isn’t worried “yet” about the service’s ability to fulfill its commitments in FY23 and beyond, but did admit “we’re certainly concerned.” The general once advocated for a much larger force; that was before the recruiting crisis combined with relative budget stagnation to dash those hopes.

Buying power

Spangler said the Army used the same prices for its FY24 budget as it did for FY23 because of the deadline for its budget draft.

“The actual official inflation numbers that will be used when we send the president’s budget for ’24 over to [Capitol Hill] are not determined yet,” she told Defense News.

Before the end of the year, she said, the Office of Management and Budget will determine the inflation adjustment — potentially requiring further tweaks to the Army’s budget.

Bush said the Army is using a tool called the economic price adjustment clause on new contracts to help account for inflation and set conditions with vendors on managing contracts if costs increase. For contracts already in place, the Army is open to traditional renegotiations, but it hasn’t come across a situation requiring that approach, he said.

More companies are preferring two-year renewal deals over the customary five-year deals that the Army uses to lower costs and provide budgetary stability. “They are saying: ‘We want shorter contracts because our sub-suppliers, usually the second tier and below, are understandably not wanting to sign up for a five-year thing when they are not sure about inflation projections,’ ” Bush said.

He also said it is taking longer to negotiate contracts.

The Army, for example, is entering a prototype competition for the Optionally Manned Fighting Vehicle program, through which contractors will begin to build vehicles in FY24.

The service intends to put an economic price adjustment clause into the future contracts to build OMFV prototypes, according to Maj. Gen. Glenn Dean, the Army’s program executive officer for ground combat systems.

He acknowledged that having to spend more on individual systems could take a toll on the program.

“Every little nibble that bites away at our buying power does result ultimately in us buying fewer systems and taking longer to deliver,” Dean said.

Davis Winkie in Atlanta, Georgia, contributed to this report.