MILITARY UPDATE
Pay proposal links raises to inflation instead of private sector

Military Update focuses on issues affecting pay, benefits and lifestyle of active and retired servicepeople. Its author, Tom Philpott, is a Virginia-based syndicated columnist and freelance writer. He has covered military issues for almost 25 years, including six years as editor of Navy Times. For 17 years he worked as a writer and senior editor for Army Times Publishing Co. Philpott, 50, enlisted in the U.S. Coast Guard in 1973 and served as an information officer from 1974-77.

By Tom Philpott

The director of the White House's Office of Management and Budget has surprised senior Defense Department officials by proposing a series of caps on annual military pay raises, starting in January 2004.

With U.S. troops battling terrorism and massing in the Persian Gulf for possible war with Iraq, Mitchell E. Daniels Jr., director of OMB, has asked Defense officials to expect to cap the 2004 military pay raise at 2 percent, versus the 3.7 percent planned, government sources said.

Moreover, Daniels wants future military raises tied to inflation — the annual rise in cost of living — rather than to wage growth in the private sector. That could reduce the competitiveness of service pay, but it also would save the government billions of dollars during the next decade, sources said.

The proposed pay cap for 2004 alone would save $1 billion in its first full year. A 2 percent military raise also would match the raise penciled into the administration's budget for federal civilian employees.

Senior military officers say they don't believe the OMB plan will survive final scrutiny within the administration. If, as expected, the Department of Defense opposes the pay raise guidance, President Bush could be asked to decide the issue.

Daniels' pay raise plan is aimed at easing a federal budget deficit that is beginning to soar.

The federal deficit for fiscal 2002 hit $159 billion. Only a year earlier, the government reported a surplus of $127 billion.

"It's now clear that the unexpected surge in revenues toward the end of the last decade was temporary, and that revenues are returning to historic levels," Daniels said in announcing the deficit Oct. 25. Given that, and new spending to address terrorism, "it is absolutely essential that we set aside business as usual and keep tight control over all other spending."

Business as usual for military pay in recent years has been above-average raises to make up for earlier caps. Until the OMB guidance, DoD assumed a 3.7 percent military raise in 2004, based on a 1999 law that set pay adjustments a half percentage point above annual wage growth in the private sector as measured by the Bureau of Labor Statistics' Employment Cost Index. ECI-plus-a-half was to run through 2006 to narrow a vaguely defined gap between military pay and private sector wages.

With Congress adhering to this formula for a fourth year, service members next month will get a minimum pay hike of 4.1 percent — one-half percentage point above wage growth measured by last year's ECI.

Daniels wants to shelve not only the ECI-plus-a-half but any link to private sector wage growth, a source said. Instead, he wants raises linked to the Consumer Price Index, which tracks the cost of goods and services. OMB projections show raises tied to inflation, rather than wage growth, will save a lot of money during the decade.

Congress adopted the ECI-plus formula in 1999 when the services faced serious recruiting and retention challenges. It was to close a perceived pay gap gradually. The manpower challenges have eased for active forces, but the war on terror, and homeland security demands, resulted in 130,000 reserve and National Guard forces being called up in the past year. Thousands of troops are deployed to the Persian Gulf, readying for war should Bush give the order.

That's why Defense officials are said to be shaking their heads at the timing of the OMB's call to cap military raises in 2004 and beyond.

A final administration decision on pay raises likely will be unveiled in February when the president sends his proposed budget to Congress.

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