Military Update: DOD replaces plan it concedes put commissaries at risk
The Pentagon’s last two budget plans to “reform” the commissary benefit for military families and retirees were driven by a goal to save money, without due regard for preserving the benefit, said a senior defense official who claims to be leading commissary reforms on a less perilous path.
In a strikingly frank address Tuesday to commissary brokers, suppliers and product representatives at the annual convention of the American Logistics Association (ALA), Peter Levine, deputy chief management officer for the Department of Defense, confirmed what critics in Congress and industry, and advocates for commissary patrons, had charged for the past two years. That is that proposals in the fiscal 2015 and ’16 defense budgets to slash taxpayer support of the Defense Commissary Agency (DeCA) by as much as $1 billion a year, within two or three years, not only put commissaries at risk but also all discount shopping on base, including exchange operations.
The proposals were perceived “perhaps rightly,” Levine said, as “driven by the need for money rather than the need for reform.” In both years, the department had urged lawmakers to make deep cuts to DeCA’s annual appropriation, arguing stores still would survive, in some fashion, if forced to operate more efficiently, that is, more like commercial grocers.
Defenders of commissaries were aghast. They argued that the $1.4 billion commissary appropriation was the foundation of the shopping benefit and, if gutted, discounts would soon disappear. A new DOD leadership team now appears to concede the point, and promises a course change.
“By cutting the appropriation first and looking for efficiencies later, the result would be a significant cut in savings to patrons,” Levine said. With that approach, the “only way to make ends meet would be to raise prices.”
Given the adverse impact on military members, their families, retirees and “potentially on the exchanges because of the cross connection between the commissaries and the exchanges as businesses,” Levine said, Congress rejected these proposals two years straight and they won’t surface again.
Levine understands better than most what drove Congress to reject the funding cut. Until last February, he was staff director for the Senate Armed Services Committee. He only became deputy chief management officer last May after the Senate confirmed his nomination.
The DCMO is senior adviser on business transformation to the defense secretary and deputy defense secretary of defense. So Levine is leading department efforts to streamline business processes, including base stores.
Levine told ALA that substantial commissary reforms are still planned and necessary, but that the department is committed to preserving the current level of savings to commissary customers.
“We believe we have to do business better [and] find savings wherever we can,” Levine said. “But we are going to let efficiencies drive the budget rather than the other way around.”
DeCA Director Joseph Jeu described Levine’s commitment to protect current shopper savings as “huge” in light of recent proposals to cut DeCA funding, which threatened to reduce customer savings and store services.
The department has two new reports and sets of recommendations to consider in shaping new commissary reforms. In September the Boston Consulting Group (BCG) completed its review of ways to make commissaries more efficient, a study mandated by Congress. Last January, the Military Compensation and Retirement Modernization Commission completed its report on reforming pay and benefits, including on-base stores.
The department finds merit in many of the changes proposed to make commissaries operate more like businesses, Levine said, but it rejects their calls to merge or consolidate commissaries with the three exchange services.
“We believe we can get the savings that the military compensation commission and the BGC recommended without a merger or consolidation. We think we can do it by driving common business practices,” he said.
Commissaries and exchanges “already have a common owner. We don’t need to merge [or] consolidate to have a common direction. The secretary of defense, the Department of Defense, the taxpayers are already responsible for all those. So we can direct common back-office systems, financial systems” and take other cost-saving steps short of a merger.
By spring, Levine said, the department will propose commissary reform legislation to drive savings but also protect the benefit. It will seek new authority to convert commissaries to nonappropriated fund (NAF) activities, like for-profit exchanges, and to adopt flexible pricing, ending the requirement to sell groceries on base at cost plus a 5 percent surcharge.
Levine said a new Defense Retail Business Optimization Board (DRBOB) would be established to “drive efficiencies systematically,” overseeing common business practices across all stores and common systems for purchasing, payroll, personnel management and warehousing.
He said the plan likely would include authority to adopt “private label” or commissary brand products to be sold alongside national brands, as commercial grocers do to increase profits while offering more customer savings. DOD also will study ways to expand the commissary customer base.
If Congress agrees to these reforms, he said, DeCA should be able to cut costs by $300 million in fiscal 2018, and by more in subsequent years.
If commissary prices are allowed to vary, measuring and preserving customer savings will become more challenging. Levine said the department first would determine current patron savings, which DeCA claims is 30 percent versus commercial grocers but BCG said is closer to 17 percent.
After a baseline for average savings is established, Levine said, the department will strive to preserve it for customers regionally, by tracking prices for a market basket of goods in commissaries compared to prices overall off base.
Moment after his talk, Levine told us it would be “impossible” to achieve a goal laid out in its fiscal 2016 National Defense Authorization Act to both protect shopper savings and, over time, cut taxpayer support for commissaries to zero. Levine said he is confident Congress will agree with his assessment and opt to save the benefit through reasonable reforms.
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