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Pentagon offset budget cut impact in key areas -watchdog

By David Alexander

WASHINGTON (Reuters) - When $37 billion in budget cuts hit the Pentagon abruptly early this year, officials took steps that minimized the impact on key areas like the Afghanistan war but also took action that could raise long-run costs, a watchdog agency said on Thursday.

The Pentagon was hit by the reductions in March, almost midway through its fiscal year, as part of across-the-board government budget cuts that slashed its approved spending level for the year to about $490 billion from $527 billion.

The Government Accountability Office said that even as the Pentagon reduced Army training, put civilian workers on unpaid leave and cut aircraft flight hours, it was able to shift money among accounts with congressional approval and take other steps to offset some impact of the cuts.

"By setting priorities for funding and using available prior year unobligated balances (funds) to help meet required reductions, DoD (the Defense Department) was able to protect or minimize disruptions in certain key areas," like overseas operations and major defense programs, the GAO report said.

In addition, because of the flexibility it received to shift some funding from lesser priorities, the Pentagon "was able to manage and, in some cases, later reverse some initial actions taken to implement the spending reductions, such as resuming aircraft training," the 44-page report said.

However, the report also said that the Pentagon had adjusted procurement programs by deferring modifications and delaying systems development and testing. It said defense officials had indicated that these actions could result in higher costs in the coming years.

Pentagon Comptroller Robert Hale said the department assisted with the GAO report and thought it was "technically correct," but he added that the purpose of the study was not to examine the impact of the budget cuts or to highlight their effects on the department.

"What I want to make clear is that sequestration did have serious adverse effects on the Department of Defense," he said in an interview. "It led to a number of problems, some of which remain today."

His comments echoed those by the top U.S. military chiefs at a congressional hearing on Thursday. General Ray Odierno, the Army chief of staff, and the leaders of the other service branches warned that the cuts had severely damaged the military's readiness for war.

Hale said the Pentagon had a deep shortfall in its war funding account early in the year because cost estimates made two years earlier were off. The department had to cut elsewhere to make up the difference, for example halting training at the Army's combat training centers.

The Air Force stopped flying 12 combat squadrons for three months, the Pentagon cut back on base maintenance and it laid off temporary and term workers. A faster-than-expected reduction in military personnel saved some money, and much of the rest was shifted from procurement programs and research.

"Defense is an insurance policy," Hale said. "We have chosen to greatly increase the deductible. If you never have to use the policy, no problem. If you have to use the policy, you'll pay for it."

In the event of an emergency, the department would the face difficult choice of waiting to train its forces before sending them, or deploying them before they are fully trained, he said.

The GAO report did not draw conclusions about the effectiveness of the Pentagon's efforts to address the March cuts, which went into effect under a mechanism known as sequestration after a budgetary impasse in Congress. It just reported the steps the department took to implement the cuts and offset their impact.

The Pentagon is facing budget cuts totaling some $500 billion under sequestration over the next decade after Congress failed to reach a deal on an alternative package of spending reductions and new revenue. The military is facing a new round of cuts in January unless Congress takes action to eliminate them.

(Reporting by David Alexander; Editing by David Brunnstrom)

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