Defense forecast: Army cash-flow troubles continue despite hefty emergency allowance.

• Author: Erwin, Sandra I.
• Position: Cover story

FOR THE ARMY, the upcoming budget season is shaping up to be a competition between "boots" and "hardware," even though officials have argued that they should not have to trade one for the other.

Ultimately, they may have to, analysts predict. Unless troops are pulled out of Iraq in the coming months, the Army is likely to start the year with a budget plan that could be anywhere from $20 billion to $100 billion short of its own estimates of what it needs to keep fighting the war and to replenish equipment.

While the Army has been the largest beneficiary of emergency supplemental war appropriations in recent years, its expenses are climbing faster than Congress is able to appropriate funds, even under emergency measures. This hurts the Army; officials contend, because the emergency funds arrive at the end of the budget year and force the service to "cash flow" war expenses from its regular accounts. Not until Congress approves the emergency funds can the Army replenish its coffers. For that reason, service leaders have asked for a major increase in the regular budget for fiscal year 2008, although it is doubtful that, in the near term, it can reduce its dependence on emergency funds.

In fiscal year 2005, 20 cents of every dollar the Army spent came from emergency appropriations, noted Maj. Gen. N. Ross Thompson III, director of program analysis and evaluation. By 2006, that share was up to 42 cents, and it could be as high as 50 cents in fiscal year 2007.

"When supplementals are delayed, we cash flow out of the baseline programs," Thompson told an industry conference. "Ideally, we want the supplementals before the end of the fiscal year ... In 2003 and 2004 they were late." An early "bridge supplemental" of $70 billion appropriated for fiscal year 2007 was "helpful" in stemming cash flow problems in the Army, Thompson added.

The budget for fiscal year 2008, due before Congress next month, is not expected to fix the Army's financial predicament, analysts warned, The Army is seeking $139 billion as its baseline budget for 2008--that is nearly $45 billion more than its 2007 baseline budget. In addition, it could seek up to $80 billion over and above the $139 billion request to cover personnel, operations and equipment costs associated with the wars in Iraq and Afghanistan.

All indicators point to higher budgets for the Army in 2008. The amount of the increase, however, is not going to be as large as the Army wants it to be, analysts predict. "The Army must achieve at...