WASHINGTON — The U.S. Navy is short hundreds of millions of dollars for ship depot maintenance this year and is already looking at just shy of $1 billion in unfunded maintenance in 2020, shortfalls that threaten to upend progress toward improved readiness and clearing its maintenance backlog.

During a midyear review of 2019 budget spending, the Navy found it had more than $3 billion in emergency costs that needed to be covered, including nearly $1 billion for ship depot maintenance. And while it’s unclear to what degree the 2019 and 2020 shortfalls overlap, there is at the very least nearly $1 billion in unfunded ship repair, meaning the fleet will need to find money or defer to later dates, according to three sources who spoke on condition of anonymity.

That move could have a cascading effect that means other ships may not get the full maintenance packages they need, putting pressure on an already beleaguered ship maintenance system. The shortages come in a year that saw a record $750 billion defense budget. That means that while the Navy should be toasting its good financial fortunes, it will instead be scrambling to find money to fix its ships.

Because of everything from President Donald Trump’s border wall to hurricane relief to addressing problems with public-private housing ventures, the Department of Defense is rapidly closing in on the $4 billion cap Congress set on how much money can be moved between accounts to pay for midyear surprises. Those surprises almost always includes ship maintenance costs that increase once workers at maintenance yards pop the hood and discover new problems.

That, in turn, is forcing the Navy to take a fleetwide look and identify what issues are most important — a triage process that ensures that some issues that could be addressed in scheduled maintenance availabilities today will instead be pushed off and become more expensive in the future.

The Navy is also hitting capacity at both its public and private shipyards and is having to defer maintenance simply because there is no room at the inn.

The problem is exacerbated by a reduction in the overall amount of money Congress allows for the Pentagon to reshuffle in any given year without having to go ask lawmakers for new legislation and new authorities in that year. In years past, the DoD had $4.5 billion of authority to reshuffle money. In 2018, that was reduced to $4.25 billion; and in 2019, the year that’s causing the problems, that was reduced to $4 billion.

“We can’t reallocate the way we have in the past,” said a defense official with knowledge of the situation who spoke on background. “Things like the border wall, they didn’t cause the shortfall, they contributed to our ability to address and mitigate the shortfalls. We’ve got the sources, we just can’t reallocate them.”

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But that only goes so far in explaining the predicament. According to a Congressional Research Service Report on transfer authorities, since 2016, the DoD hasn’t used more than $3.5 billion in transfer authority, and in 2016 and 2017 it used less than $2.1 billion per year. This means that in most years, $4 billion in transfer authority exceeds what the Navy and the rest of the DoD would need.

Border wall blues

The bulk of the crunch inside the DoD comes from the wall.

The DoD burned through $2.5 billion, or 60 percent, of its transfer authority by shuffling the money to the border wall, which Trump freed up through a declaration of emergency at the southern border. Effectively, the Navy and the rest of the DoD had $1.5 billion left over in transfer authority, $100 million of which was used for an Air Force satellite program, according to Rick Berger, an analyst with the American Enterprise Institute.

“No matter how one cuts it, the administration’s use of the Pentagon’s transfer authority will weaken the [Pentagon’s] ability to meet the unfolding contingencies it now faces and will face in the months ahead,” Berger wrote in April, a prediction that is bearing out in the Navy’s maintenance accounts.

The attack submarine Boise arrives at Huntington Ingalls Industries' Newport News, Va., shipyard on June 18, 2018, to begin an extended engineering overhaul. (Ashley Cowan/Huntington Ingalls Industries)

For the Navy’s beleaguered maintenance accounts, the fiscal mess plays out this way: Growth work discovered during maintenance periods combined with insufficient capacity at the shipyards caused maintenance budgets to run over by almost $1 billion. But because the DoD used the majority of its transfer authority on paying for the border wall, the Navy lacks the flexibility to move around money it accounts under the congressionally mandated cap.

The Navy points to the reduced cap authority as a primary driver in the situation, as well as a series of unplanned expenses.

“During the Navy’s Fiscal Year mid-year execution review, we identified approximately $3 billion in emergent unfunded requirements, which included items like fuel cost increases, Public Private Venture housing costs, increased utility rates, civilian pay raises, hurricane recovery, and increased ship maintenance costs,” said Lt. Ben Anderson, a Navy spokesman. “Normally, these unfunded requirements would be adjudicated via the mid-year reprogramming, but the reduction in available transfer authority has limited the Navy ability to re-allocate as in previous years.”

No matter which factor is given the most weight, the ultimate effect remains unchanged: Maintenance to ships that was supposed to be done this year threatens to snowball into an ever-larger mass of deferred maintenance as more ships in later years may have to sacrifice needed repairs to pay for the maintenance pushed off from this year.

Silver lining

In his opening statement during the prospective Chief of Naval Operations Vice Adm. Michael Gilday’s confirmation hearing, Senate Armed Services Committee Chairman Sen. Jim Inhofe, R-Okla., cited a $1.8 billion maintenance shortfall. That number seems to combine the $977 billion for 2019 and the $810 billion for 2020.

In the 2020 unfunded priorities list, the deferred maintenance comes from three Los Angeles-class submarines — the Boise, Hartford and Columbus — and cites shipyard capacity. The lack of capacity is driven primarily by the midlife overhauls for the Ohio-class ballistic missile submarines and aircraft carriers, which take priority and dry-dock space away from attack boats. An additional $51 million came from the maintenance of surface ships.

In 2019, the same factors applied: Some of the deferred maintenance was due to lack of capacity and some growth work, according to a defense official, who spoke on condition of anonymity. That means that it’s likely that some of the 2020 deferred maintenance is the same as the 2019 maintenance.

The Navy asked for $280.6 million to be reprogrammed in a June reprogramming request to Congress, which would reduce the overall deferred maintenance tally, though it remains unclear by how much.

But the fact that the maintenance bill grew significantly in 2019 may not be all bad, the defense official said. Some of the increased cost has resulted from better planning and more comprehensive work agendas heading into the availabilities, the result of recently implemented changes.

“The Navy has improved some of its planning processes, and we have a better understanding of the work that’s required,” the official said. “It has resulted in better and more productive availabilities, but it has also increased the cost. They are more comprehensive because in the past we haven’t understood what needed to be done. So we’re getting more efficient, but the efficiency is costing us more.”

Delays caused by a green workforce at the public shipyard, which deals with nuclear maintenance (or submarines and aircraft carriers), are also causing delays.

The ‘fester factor’

The problem with delays and deferrals for maintenance is a phenomenon the Navy refers to as “fester factor.” Former Deputy Chief of Naval Operations for Warfare Systems Vice Adm. William Burke told an American Society of Naval Engineers conference in 2013 that costs for deferred maintenance rise on average about 6 percent every year.

So the fester factor for a repair that cost $1.00 in 2019 will likely push the cost to $1.06 in 2020. And when you apply that same 6 percent cost change to $300 million in maintenance availabilities, it’s going to add up quickly. A $1 billion deferred maintenance bill will hit you with a $60 million deferral tax.

But the other factor comes from the fact the Navy seems to consistently underestimate how much ship maintenance is going to cost, a problem that derives primarily from the fact that the availabilities are budgeted for more than a year in advance of the actual start, said Bryan Clark, a retired submarine officer and analyst with the Center for Strategic and Budgetary Assessments.

“You have to build the program a year before the budget cycle starts, so you are really two years out from when you are going to spend the money that you are initially building that program for,” Clark said. “So you are really estimating two years into the future what your maintenance requirements are going to be.”

There are class maintenance plans and class maintenance planners for each class of ship, but sometimes the data is incomplete because an inspection regime isn’t what it should be, Clark said, something that has particularly hampered the surface fleet. However, Clark agreed with the defense official that the Navy has improved its planning and prework inspections.

Regarding private shipyards, the Navy is working toward giving them more notice — six months instead of 30 days — ahead of maintenance availabilities to help shipyards drive down workforce costs by better controlling their workflow, the Navy’s top acquisition official told Defense News earlier this year.

“What we’re trying to do for the ships returning from deployment is we’re moving away from executing a contract 30 days before we needed to start the maintenance. So now we’re back to a six-month goal,” said Assistant Secretary of the Navy for Research, Development and Acquisition James Geurts.

“We’re never going to be able to control every variable. It’s not a commercial effort where you own every route and you can control every variable to hyper-optimize. And, quite frankly, we don’t want to hyper-optimize because then you lose some resiliency. But we’re trying to find that sweet space of enough predictability so that we can be efficient.”