The Fiscal Year 2017 NDAA: Dissecting and analyzing reports and changes to law affecting military resale programs

What the new law means for patrons, agencies and businesses supporting military programs


The Fiscal Year 2017 NDAA continued the efforts of the Senate and House Armed Services Committee to reform personnel programs of the DoD. This is part of a larger effort by the committees to examine all of the programs and structure of the Department of Defense to seek ways to trim funding and reform programs and processes in order to free-up resources for direct war-fighting capabilities.

ALA analysis — No one can take exception to the direction that we need to pursue all economies to keep our troops safe and effective on the battlefield. But, funding for resale programs, at 1/5 of a percent of the Defense budget, is not the reason that DoD — an organization that spends $80 million an hour — cannot keep but three of 58 Army combat brigade teams at peak readiness. Funding for resale programs, that receive less than one percent of the personnel compensation costs of DoD, is not the reason that the Navy cannot fly half of their jets. There is something more fundamentally wrong with Defense spending — and not the spending on a program that gives back to the Department more than it consumes.

When DoD targeted commissaries three years ago for elimination, we argued that the Department of Defense had not picked a worse target since the Little Big Horn.

We urge policymakers to be mindful that the commissary and exchange programs make a huge direct and indirect contribution to readiness. They consume less than 1 percent of the resources allocated to DoD's personnel programs and less than one-third of a percent of overall defense spending.

We have consistently advocated for spending levels for resale that allow the program to reform and land on its feet at the end of the day. DoD has made a conscious effort to put reforms ahead of cuts…a drastic departure from three years ago when they were prepared to take a meat axe to the appropriations supporting resale. However, the pace of reform, coupled with declining sales in commissaries threaten the ecology of resale and the ability to provide all of the benefits that it was structured to provide over the years. We continue to urge careful deliberation on any reforms, active and informed Congressional oversight, and truth and transparency of changes and their implications to resale employees, patrons and the industry that is so heavily invested in the success of these programs.

Over the next few weeks, we will dissect and analyze the many laws, reviews and reports that are affecting resale program to assist ALA members in understanding the origin of changes and thereby enable an understanding of where the resale programs are headed.

This week, we analyze the Fiscal Year 2017 National Defense Authorization Act that built on the Fiscal Year 2016 Act, and dismantled and replaced the laws governing military resale programs.



New law —

Subtitle E—Commissary and Nonappropriated Fund Instrumentality Benefits and Operations

SEC. 661. PROTECTION AND ENHANCEMENT OF ACCESS TO AND SAVINGS AT COMMISSARIES AND EXCHANGES.


(a) OPTIMIZATION STRATEGY.—Section 2481(c) of title 10, United States Code, is amended by adding at the end the following paragraph:

"(3)(A) The Secretary of Defense shall develop and implement a comprehensive strategy to optimize management practices across the defense commissary system and the exchange system that reduce reliance of those systems on appropriated funding without reducing benefits to the patrons of those systems or the revenue generated by nonappropriated fund entities or instrumentalities of the Department of Defense for the morale, welfare, and recreation of members of the armed forces.


Status: DoD has established the Defense Resale Business Optimization Board (DRBOB) that works in concert with the Executive Resale Board at DoD. This board is charged with the impetus and facilitation of reforms to the resale programs to achieve the goals set forth in the Act. Out of this group and a report by the Boston Consulting Group, the DoD issued a report on Achieving Budget Neutrality for resale programs of the DoD. The General Accounting Office, in turn, reviewed the DoD report and found that it was severely lacking in analytical basis. New DeCA patron savings numbers released in January 2017. Wave 1 of category reviews completed in February. Four more waves to follow. Store-based variable pricing to start in March. Category-based variable pricing pilot to begin in April. Shelf resets begin in April. Private label launched in May.

Plusses: The DRBOB allows the resale entities to collaborate and find efficiencies.

Minuses: Still unclear whether efficiencies can be achieved without affecting the savings levels for patrons. The consulting firm hired by DoD gets a percent of any funds that are captured from manufacturers. Some estimates place this percentage at over 50 percent. Also, DeCA has not said whether what’s left after BCG gets its money will be used to reduce patron prices or used to offset the appropriation. The commissary budget has been hit $80 million in fiscal year 2017. If the reforms don’t yield the needed funds, it will affect DeCA operations.

Implications for patrons: Patron groups are watching closely to see if these initiates yield pure efficiencies or whether they directly or indirectly affect the benefits. So far, BCG is getting paid, prices have not been affected, and it is unknown whether funding will be used for to offset the appropriation.

Implications for agencies: DeCA is undergoing a major transformation while it is operating a $5.3 billion business. There have been three successive years of sales declines, and alarm bells are ringing on impact on the DeCA model and on exchange traffic that is partly commissary based.

Implications for industry: BCG and DeCA are negotiating with suppliers to gain price concessions. At their February 17 briefing to the House Armed Services Committee, DoD claimed that it had achieved over $25 million in savings through “Reduced cost of goods and increased promotions.” Industry is saying that they are not adding funding to DeCA but merely transferring funding from promotions and other patron programs. DeCA is launching private label products in May. We are watching to see if these initiatives inhibit or increase sales.


New law —

"(B) The Secretary shall ensure that savings generated due to such optimization practices are shared by the defense commissary system and the exchange system through contracts or agreements that appropriately reflect the participation of the systems in the development and implementation of such practices.

Status: No shared savings initiatives evident yet.

Plusses: Allows for contract and agreements between resale entities.

Minuses: Blurs funding lines and risks taxpayer and appropriated funds be used for purposes other than intended at inception.

Implications for patrons: Funding could be used for purposes other than intended, i.e., exchange earnings used to underwrite DeCA.

Implications for agencies: Funding could be used for purposes other than intended, i.e., exchange earnings used to underwrite DeCA.

Implications for industry: Could alter agreements with industry as common agreements between DeCA and exchanges are struck.



New law —

"(C) If the Secretary determines that the reduced reliance on appropriated funding pursuant to subparagraph (A) is insufficient to maintain the benefits to the patrons of the defense commissary system, and if the Secretary converts the defense commissary system to a nonappropriated fund entity or instrumentality pursuant to paragraph (1) of section 2484(j) of this title, the Secretary shall transfer appropriated funds pursuant to paragraph (2) of such section to ensure the maintenance of such benefits.

Status: Programs are in their infancy. Not tangible appropriations savings yet.

Plusses: For the first time, Congress is guaranteeing the benefit, albeit at a level that has been recalculated by an altered patron savings model.

Minuses: It hasn’t been explained how any shortfall would be measured, and, if it exists, what the mechanism would be to augment the appropriation or refund the patron for savings lost.

Implications for patrons: If it works, they will have a guaranteed benefit.

Implications for agencies: Provides a safety net if DeCA efficiencies fall short.

Implications for industry: If the funding mechanism works, it can help stabilize funding for DeCA and industry likes any stability in this environment.



New law —

(4) On not less than a quarterly basis, the Secretary shall provide to the congressional defense committees a briefing on the defense commissary system, including —

(A) an assessment of the savings the system provides patrons;

(B) the status of implementing section 2484(i) of this title;

(C) the status of implementing section 2484(j) of this title, including whether the system requires any appropriated funds pursuant to paragraph (2) of such section;

(D) the status of carrying out a program for such system to sell private label merchandise; and

(E) any other matters the Secretary considers appropriate.'


Status: The first briefing was provided on February 17.

Plusses: Provides for regular Congressional oversight.

Minuses: DoD has no incentive to say the reforms are not working. GAO has already cast doubt on the Defense Department plan.

Implications for patrons: Congress is getting briefed but it is unclear what mechanisms are in place to restore the benefits or verify claims made by DoD. GAO has already cast doubt on metrics being used.

Implications for agencies: DeCA must document savings.

Implications for industry: If shortfalls are not made whole, sales will continue to suffer.



New law —

(b) AUTHORIZATION TO SUPPLEMENT APPROPRIATIONS THROUGH BUSINESS OPTIMIZATION.—Section 2483(c) of such title is amended by adding at the end the following new sentence: "Such appropriated amounts may also be supplemented with additional funds derived from improved management practices implemented pursuant to sections 2481(c)(3) and 2487(c) of this title and the variable pricing program implemented pursuant to section 2484(i) of this title."

Status: DeCA briefed that $25 million had been achieved through reduced cost of goods and increased promotions.

Plusses: May have manufacturers sharpen their pencils. Indications are that no new funding is being applied and that the funds accruing are a cost shifting exercise from other patron support areas.

Minuses: Indications are that no new funding is being applied and that the funds accruing are a cost shifting exercise from other patron support areas.

Implications for patrons: If DoD chooses to apply any “savings” to the price, patrons will benefit. So far, the consulting firm is being paid and there is no indication of appropriations offsets being affected.

Implications for agencies: Has potential to offset DeCA operating costs but no evidence yet of this happening.

Implications for industry: With DeCA moving to a cost-plus model, implementing private label, and with chronic sales declines, manufacturers may pull back from the marketplace and place their promotion dollars off base or at the exchanges where they believe they get more return on their investment.



New law —

(c) VARIABLE PRICING PILOT PROGRAM.—Section 2484 of such title is amended by adding at the end the following new subsections: "(i) VARIABLE PRICING PROGRAM.—(1) Notwithstanding subsection (e), and subject to subsection (k), the Secretary of Defense may establish a variable pricing program pursuant to which prices may be established in response to market conditions and customer demand, in accordance with the requirements of this subsection. Notwithstanding the amount of the uniform surcharge assessed in subsection (d), the Secretary may provide for an alternative surcharge of not more than five percent of sales proceeds under the variable pricing program to be made available for the purposes specified in subsection (h).

Status: Store-based variable pricing to begin in March. Category-based variable pricing to begin. No additional surcharge being announced yet.

Plusses: DoD says it could allow more market responsive pricing.

Minuses: Can be confusing for patrons. If purpose is to recover costs, unlikely that prices will drop.

Implications for patrons: Confusing for patrons used to at-cost model. If purpose to recover costs, unlikely that prices will drop.

Implications for agencies: If not communicated properly, may exacerbate sales declines and patron confidence dwindles.

Implications for industry: More difficult for military reps to compete within corporate for funding if DeCA is viewed as a profit making entity and not a benefit.



New law —

(2) Subject to subsection (k), before establishing a variable pricing program under this subsection, the Secretary shall establish the following:

(A) Specific, measurable benchmarks for success in the provision of high quality grocery merchandise, discount savings to patrons, and levels of customer satisfaction while achieving savings for the Department of Defense.

(B) A baseline of overall savings to patrons achieved by commissary stores prior to the initiation of the variable pricing program, based on a comparison of prices charged by those stores on a regional basis with prices charged by relevant local competitors for a representative market basket of goods. "(3) The Secretary shall ensure that the defense commissary system implements the variable pricing program by conducting price comparisons using the methodology established for paragraph (2)(B) and adjusting pricing as necessary to ensure that pricing in the variable pricing program achieves overall savings to patrons that are consistent with the baseline savings established for the relevant region pursuant to such paragraph.


Status: Savings survey completed. Global average 23.7 percent.

Plusses: If accurate, provides a more solid picture of actual savings. There are a number of questions being raised on the methodology such as how they could measure private label on the outside against a non-existent private label in the commissaries, and the methodology for measuring savings in overseas areas.

Minuses: Perception of reduced savings may impact sales. Patron savings under this new model are now lower than the appropriation. Savings levels almost equal to exchange savings levels, calling into doubt value of appropriation. Skepticism as to why savings measurement model changes now that DoD is seeking to reduce the appropriation.

Implications for patrons: Savings do not decline but may perceive a diminished benefit value.

Implications for agencies: Sales declines as patrons do not believe they are saving as much as they thought.

Implications for industry: Could exacerbate sales declines and diminish ability for military to compete for funding versus commercial stores.



New law —

(j) CONVERSION TO NONAPPROPRIATED FUND ENTITY OR INSTRUMENTALITY.—(1) Subject to subsection (k), if the Secretary of Defense determines that the variable pricing program has met the benchmarks for success established pursuant to paragraph (2)(A) of subsection (i) and the savings requirements established pursuant to paragraph (3) of such subsection over a period of at least six months, the Secretary may convert the defense commissary system to a nonappropriated fund entity or instrumentality, with operating expenses financed in whole or in part by receipts from the sale of products and the sale of services. Upon such conversion, appropriated funds shall be transferred to the defense commissary system only in accordance with paragraph (2) or section 2491 of this title. The requirements of section 2483 of this title shall not apply to the defense commissary system operating as a nonappropriated fund entity or instrumentality.

(2) If the Secretary determines that the defense commissary system operating as a nonappropriated fund entity or instrumentality is likely to incur a loss in any fiscal year as a result of compliance with the savings requirement established in subsection (i), the Secretary shall authorize a transfer of appropriated funds available for such purpose to the commissary system in an amount sufficient to offset the anticipated loss. Any funds so transferred shall be considered to be nonappropriated funds for such purpose.

(3)(A) The Secretary may identify positions of employees in the defense commissary system who are paid with appropriated funds whose status may be converted to the status of an employee of a nonappropriated fund entity or instrumentality.

(B) The status and conversion of employees in a position identified by the Secretary under subparagraph (A) shall be addressed as provided in section 2491(c) of this title for employees in morale, welfare, and recreation programs, including with respect to requiring the consent of such employee to be so converted.

(C) No individual who is an employee of the defense commissary system as of the date of the enactment of this subsection shall suffer any loss of or decrease in pay as a result of a conversion made under this paragraph.


Status: Awaiting determination of whether variable pricing generates funding to justify converting DeCA to a nonappropriated fund activity.
Plusses: NAF workers cost less. Makes it easier to unify commissaries and exchanges if DoD decides to do so.

Minuses: Raises anxiety among DeCA workers who fear loss of status and benefits. Anxiety that already is high with a threatened $1 billion DoD cut three years ago and efforts in Congress to privatize DeCA.

Implications for patrons: Minimal impact.

Implications for agencies: Sets up the resale system for unification if workers are of the same type.

Implications for industry: Minimal impact.



New law —

(k) OVERSIGHT REQUIRED TO ENSURE CONTINUED BENEFIT TO PATRONS.—(1) With respect to each action described in paragraph (2), the Secretary of Defense may not carry out such action until — (A) the Secretary provides to the congressional defense committees a briefing on such action, including a justification for such action; and

(B) a period of 30 days has elapsed following such briefing. "(2) The actions described in this paragraph are the following: "(A) Establishing the representative market basket of goods pursuant to subsection (i)(2)(B).

(B) Establishing the variable pricing program under subsection (i)(1).

(C) Converting the defense commissary system to a nonappropriated fund entity or instrumentality under subsection (j)(1).


Status: First briefing provided February 17 and reported in this Executive Bulletin.

Plusses: Allows for Congress to know what is happening.

Minuses: Unclear how Congress can undo the changes.

Implications for patrons: Patron groups will need to contact their Congressmen with concerns.

Implications for agencies: DeCA/BCG will be required to prepare briefings.

Implications for industry: Industry will have the opportunity to express concerns with Congress and question DoD assertions.



New law —

(d) ESTABLISHMENT OF COMMON BUSINESS PRACTICES.—Section 2487 of such title is amended —

(1) by redesignating subsection (c) as subsection (d); and (2) by inserting after subsection (b) the following new subsection (c):

"(c) COMMON BUSINESS PRACTICES.—(1) Notwithstanding sub- sections (a) and (b), the Secretary of Defense may establish common business processes, practices, and systems—

"(A) to exploit synergies between the defense commissary system and the exchange system; and

"(B) to optimize the operations of the defense retail systems as a whole and the benefits provided by the commissaries and exchanges.

"(2) The Secretary may authorize the defense commissary system and the exchange system to enter into contracts or other agreements—

(A) for products and services that are shared by the defense commissary system and the exchange system; and

(B) for the acquisition of supplies, resale goods, and services on behalf of both the defense commissary system and the exchange system.


Status: Defense Resale Business Optimization Board is reviewing areas of cooperation.

Plusses: Increased cooperation that does not affect benefit levels and increases efficiencies is better than raising prices on patrons to cover operating costs.

Minuses: Minimal negative potential.

Implications for patrons: Cooperation efficiencies better than price increases.

Implications for agencies: Agencies can leverage respective strengths.

Implications for industry: More efficient operations reduce appropriations reliance and provide stability. May have the potential to disrupt existing contracts.



New law —

(3) For the purpose of a contract or agreement authorized under paragraph (2), the Secretary may—

(A) use funds appropriated pursuant to section 2483 of this title to reimburse a nonappropriated fund entity or instrumentality for the portion of the cost of a contract or agreement entered by the nonappropriated fund entity or instrumentality that is attributable to the defense commissary system; and

(B) authorize the defense commissary system to accept reimbursement from a nonappropriated fund entity or instrumentality for the portion of the cost of a contract or agreement entered by the defense commissary system that is attributable to the nonappropriated fund entity or instrumentality.


Status: Under consideration by the DRBOB.

Plusses: Allows the flow of resources to provide optimal management across the resale entities.

Minuses: Has the potential to blur lines that protect sources and application of nonappropriated and appropriated funds for from the purposes that they were originally intended.

Implications for patrons: Minimal impact.

Implications for agencies: Can increase efficiency. Sets the table for more cooperation and unification of exchange and commissary functions.

Implications for industry: May see larger joint-exchange and commissary contracts.



New law —

(e) AUTHORITY FOR EXPERT COMMERCIAL ADVICE.—Section 2485 of such title is amended by adding at the end the following new subsection:

(i) EXPERT COMMERCIAL ADVICE.—The Secretary of Defense may enter into a contract with an entity to obtain expert commercial advice, commercial assistance, or other similar services not otherwise carried out by the Defense Commissary Agency, to implement section 2481(c), subsections (i) and (j) of section 2484, and section 2487(c) of this title."


Status: Underway.

Plusses: Allows for industry expertise to be applied to DeCA.

Minuses: Currently, BCG is funded from proceeds of negotiations. Potential for misplaced incentives and conflict of interest.

Implications for patrons: Portion of funding received from suppliers used to pay for consultant instead of being passed to patrons in the form of savings or to the taxpayer in the form of reduced DeCA operating costs.

Implications for agencies: Allows agencies to access commercial advice (Authority that they already had).

Implications for industry: Commercial entities indirectly negotiating with DeCA suppliers with incentive payments. Potential for conflict of interest.



New law —

(f) CLARIFICATION OF REFERENCES TO ‘‘THE EXCHANGE SYSTEM’’.—Section 2481(a) of such title is amended by adding at the end the following new sentence: "Any reference in this chapter to 'the exchange system' shall be treated as referring to each separate administrative entity within the Department of Defense through which the Secretary has implemented the requirement under this subsection for a world-wide system of exchange stores."

(g) OPERATION OF DEFENSE COMMISSARY SYSTEM AS A NONAPPROPRIATED FUND ENTITY.—In the event that the defense commissary system is converted to a nonappropriated fund entity or instrumentality as authorized by section 2484(j)(1) of title 10, United States Code, as added by subsection (c) of this section, the Secretary of Defense may—

(1) provide for the transfer of commissary assets, including inventory and available funds, to the nonappropriated fund entity or instrumentality; and

(2) ensure that revenues accruing to the defense commissary system are appropriately credited to the nonappropriated fund entity or instrumentality.

(h) CONFORMING CHANGE.—Section 2643(b) of such title is amended by adding at the end the following new sentence: "Such appropriated funds may be supplemented with additional funds derived from improved management practices implemented pursuant to sections 2481(c)(3) and 2487(c) of this title.


Status: DRBOB using this authority to examine areas of cooperation unification and consolidation. In response to an RFI by DoD for interest in commissary privatization, the Army and Air Force Exchange Service submitted a proposal to unify the exchanges and commissaries as an alternative to privatization of DeCA. These options are under review.

Plusses: Allows for the movement of funds to facilitate leveraging the entire resale enterprise to the benefit of the patron and the taxpayer.

Minuses: Has the potential to blur lines of funding. Already, there have been proposals within DoD for the exchanges to contribute nearly $1 billion over five years to the resale enterprise. Nonappropriated funds are generated by mark-ups to exchange patrons and are not supposed to be used to underwrite legitimate taxpayer obligations.

Implications for patrons: Need to be diligent to ensure that their nonappropriated funds are not used for purposes other than they were generated, i.e., exchange capital investments and supporting MWR community programs.

Implications for agencies: DoD cold sweep up funding and apply to purposes other than for the purpose the funds were generated.

Implications for industry: Reduced capital expenditures would impact sales if nonappropriated funds were used to cover operating costs that should be paid with appropriations.


New law —

SEC. 662. ACCEPTANCE OF MILITARY STAR CARD AT COMMISSARIES.

(a) IN GENERAL.—The Secretary of Defense shall ensure that— (1) commissary stores accept as payment the Military Star Card; and

(2) any financial liability of the United States relating to such acceptance as payment be assumed by the Army and Air Force Exchange Service.

(b) MILITARY STAR CARD DEFINED.—In this section, the term

"Military Star Card" means a credit card administered under the Exchange Credit Program by the Army and Air Force Exchange Service.


Status: Implementation underway.

Plusses: Convenience for Star Card holders. More revenue for exchanges.

Minuses: Systems and funding flow disruptions for DeCA.

Implications for patrons: Patron convenience.

Implications for agencies: More revenue for exchanges.

Implications for industry: Minimal impact.