WASHINGTON -- Forget stealth bombers; the Clinton administration is trying to slide under the budgetary radar the $5.6 billion cost of a proposed pension increase for thousands of military personnel.
The move is reminiscent of what happened when the administration took control of the entire $5.8 billion in accrued unfunded liabilities of the District of Columbia Retirement Board in 1997, without reporting that cost anywhere in the federal budget. And it is seen by some observers as a worrisome indication of how the administration will deal with Social Security reform.
The administration wants to increase pensions for thousands of military personnel who joined after 1986, but not count the costs in the defense budget, leaving it to taxpayers to pick up the estimated $5.6 billion price tag in later years.
If the Defense Department were to pay upfront the hefty bill for retroactively boosting the pensions, it would have billions less to spend over the next five years on new weapons and other goodies.
Feeling the pinch
But the administration is trying to conceal most of the cost of its proposal by changing the way it accounts for expenses in the federal budget. Instead of accounting for the retroactive pension hike as "discretionary spending," which counts toward government spending caps under the balanced budget law, the administration is proposing the cost be paid out of the Treasury Department's coffers over time, as military personnel retire and become eligible for the higher benefits.
Because the earliest military personnel will be eligible to retire with the higher benefits is in 2006, taxpayers would feel the pinch for years afterward.
In fact, one reason the military pared retirement benefits for new personnel 13 years ago was to use the savings to pay for other defense programs and still stay within budget.
"We are concerned about (the Clinton administration proposal) largely because it increases the likelihood that spending will be increased without controls," said a staffer for the House Civil Service subcommittee. "It is simply another device that could be used to evade the limited controls that we have on government spending."
The Clinton administration's proposal in the federal budget for 2000 would repeal the Military Retirement Reform Act of 1986, which trimmed pensions for military personnel retiring after 20 years of service to 40% of basic pay from 50% of pay for all those who entered the armed forces after July 31, 1986.
(The changes did not affect benefits for those retiring after 30 years, or those already in service at the time.)
Defining `retired'
The Pentagon had sought the decreases because of the belief that most military pensions went to people who simply switched to non-military jobs and were not "retired" in the conventional sense.
Now the Clinton administration is arguing it needs to hike both pay and retirement benefits for military personnel to stanch the exodus of midcareer people from the armed forces.
The Senate Armed Services Committee already has approved legislation that is even more generous than the Clinton administration's proposal, and the House Armed Services Committee plans to hold hearings on the administration's proposal this week.
A Pentagon official who declined to be identified said the Clinton administration's proposed pay and pension hikes would be paid for "through a combination of an increased top line, tradeoffs and savings from efficiencies, lower inflation and lower oil costs."
'80s changes
When Congress overhauled the military pension system in 1984 from a pay-as-you-go system to a funded system akin to the private sector, the Treasury Department assumed the approximately $529 billion in unfunded pension liabilities for military service to that point. At the same time, the Defense Department set up a retirement fund into which it contributes an amount each year, out of its annual budget, for pension liabilities accrued since 1984.
The Clinton administration's proposal to repeal the 1986 military pension reform law would boost the unfunded liabilities of the military retirement trust fund by billions of dollars because the Defense Department's current contributions will not cover the retroactive pension hike. Initially thought to be as much as $7.5 billion, the Congressional Budget Office more recently revised its estimate to $5.6 billion.
When the Clinton administration first sought repeal of the 1986 law last September, the CBO estimated the Defense Department would have to hike its contributions to the military retirement trust fund by about $1.7 billion a year to cover a portion of the increase in future liabilities for current military personnel.
The military retirement fund does not in fact exist as a separate trust. Instead, the Defense Department's annual "contributions" are accounted for as intragovernmental transfers between the Defense Department and the Treasury Department, which ultimately pays the pensions to former military personnel.
Echoes of the past
This is not the first time the Clinton administration has attempted such a maneuver.
In 1997, it took approximately $5.8 billion in unfunded pension liabilities off the hands of the District of Columbia Retirement Board, without reporting the cost of that takeover in its federal budget.
The budget did not report that cost because at that time the federal government planned to sell off a part of the pension plan's assets it took over to cover the benefit payments. At that time, the CBO estimated the District of Columbia Retirement Board assets the Treasury took over would cover the cost of benefits until fiscal 2005.
Because the Clinton administration last year decided to liquidate $2.4 billion of the pension fund's assets it took to pay for other government spending, it recorded the revenue from that proposed liquidation of assets in its fiscal 1999 budget.
Not unnoticed
As a consequence, beginning with the federal budget for 2000, the federal government will have to start paying pensions to District of Columbia government workers without any dedicated assets to back those payments.
This similarity between the Clinton administration's pension accounting gimmicks has not escaped the Congressional Budget Office, and private watchdog groups, scanning for clues as to how the administration might handle the even thornier issue of Social Security reform.
A Feb. 10 CBO memo to Capitol Hill staffers comparing the Clinton administration's military and DCRB pension maneuvers estimates the federal government will pay about $450 million in 2000 for District of Columbia pensioners, $540 million in 2003 and more in the future.
The CBO memo, on the eve of proposed hearings on the administration's proposal, warns, "Once a budget gimmick has proven successful, policy-makers will come back to it again." The administration might find this tactic useful for substituting increases in retirement benefits for pay increases for federal workers, "and shift more of the cost to the future without an increase in publicly held debt," said the memo.
CBO officials, who are expected to lay out their concerns at the Feb. 25 hearings on the proposal, declined to discuss the memo.
But Bob Bixby, policy director at the Concord Coalition, a Washington-based non-partisan watchdog, said enactment of this proposal signals that lawmakers can't make difficult choices on Social Security reform.
"One of the key things that bothers entitlement reformers is that the Social Security eligibility age is supposed to start rising to 67, and that is a prospective change," he said.
"But this is showing that when the shoe begins to pinch, the reform is repealed."
Mr. Bixby also is expected to testify against the administration's proposal at the hearings.
No surprises here
Steven Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments, a Washington think tank that examines defense issues, also expressed concerns about the proposal.
"The people who joined the military after 1986 knew what those benefits were. It was not a surprise," Mr. Kosiak said.
He said the administration's proposal is inconsistent with the idea of controlling future Social Security costs "if you are going to make the military retirement system more lucrative than under current law."
