Dollar's woes in time of budget cuts may create COLA quandary for DOD
January 23, 2005
Editor’s note:With the dollar at near all-time lows, the cost of buying goods and services off base is hitting the American military community hard. Stars and Stripes is running stories in an occasional series to show how Americans are coping — and what the government is doing to help — with these pocketbook issues.
As President Bush’s second term begins, controlling defense spending may become one of the most contentious issues.
Even as the Bush administration ponders cutting $6 billion during 2006, including expensive new weapons systems, the falling dollar may end up negating some of those savings.
Bush administration officials will have to ask Congress for billions in contingency money for operations in Iraq and Afghanistan above the $400 billion or so expected 2006 Department of Defense budget appropriations request. Should the dollar continue its fall — as analysts, investment gurus and currency traders predict — the DOD may have to scramble for supplemental funding, including for the accounts that pay for maintaining the quality of life and buying power of 340,000 or so U.S. troops and DOD civilians stationed overseas.
As the dollar drops against foreign currency, it makes the cost of basing U.S. military personnel in Europe and Asia all the more expensive. For example, every time the euro rises one euro cent in value against the dollar, the dollar increase in salary and benefits for local-national employees at the Navy Exchanges is $187,000 adjusted annually, according to Lt. Cmdr. Lisa Braun, spokeswoman for Navy Region Europe in Naples, Italy. Last fiscal year, the Navy Exchanges lost $1.1 million in local-national employee benefits because of the weak dollar, according to Braun.
If the dollar dropped to the point that it cost as much as $2 for one euro, then Installation Management Agency-Europe, which oversees all U.S. installations in Europe, could be faced with an estimated $17 million to $20 million “must fund” bill, according to Millie Waters, spokeswoman for the IMA-E headquarters in Heidelberg, Germany. That bill would have to be paid by the Department of the Army. If not, various quality-of-life services such as Morale, Welfare and Recreation, or infrastructure projects would potentially be unfunded, Waters said.
The dropping dollar also has a dramatic impact on leave-and-earnings statements. To maintain the buying power of those military personnel overseas, the Department of Defense gives cost-of-living increases, as well as living quarters allowances to those living off base.
In 2000, the overseas COLA program cost the government about $1 billion, with an average supplement of $297 per month, according to the Web site, www.militarypay.com.
But allowances increased dramatically as the dollar fell over the last two years, including about a 10 percent drop just since last September.
In December 2003, for example, a married sailor at pay grade E-7 without children in Naples, Italy, received $980.12 in COLA. This November, the same chief petty officer received about $1,125 based on today’s COLA rate. If he had two children, he’d receive about $1,300.
In Germany, an E-5 with 10 years in and two dependents got a November COLA increase to $785 from $600 the previous pay period, according to Army finance officials.
Multiply that COLA sampling across the globe, and you’re talking billions of dollars if the dollar falls further.
So where does all that money come from?
The currency fluctuation account provides the DOD a budgetary allowance for currency value changes that affect not only COLAs, but other benefits such as overseas housing allowances and fuel costs, according to military budget expert Steve Strobridge in an e-mail reply to a Stars and Stripes query.
“If the dollar drops so much … that budgetary allowance is used up, then DOD would either have to absorb the extra cost within the DOD budget or, if the difference were significant enough, address it in the annual supplemental funding request to Congress,” wrote Strobridge, a retired Air Force colonel who worked at the U.S. Air Force headquarters as the chief of the entitlements division. He is now director of government relations, for the Military Officers Association of America, a Virginia-based non-profit association of retired officers.
In any event, Strobridge stated, “there is no worry that somehow DOD will be held hostage and won’t be able to keep adjusting COLAs to reflect changing currency values. Those changes will continue to be made, and DOD will come up with the money to pay for them one way or another.”
Scott Schonauer contributed to this report.