Pentagon: No way to operate commissaries without taxpayer funds

The only way to entirely eliminate taxpayer funding for commissaries is to shut them all down, according to Pentagon officials who have explored a number of alternatives.

But that's not an option, nor is drastically increasing prices, Pentagon officials said in a report to Congress. "Either action would significantly reduce the benefit available to commissary patrons, and would adversely impact the customer base of the military exchange system, reducing the availability of dividends for morale, welfare, and recreation activities as well.”

And those eligible are using their benefit: 80 percent of eligible active-duty households shopped at least once at a commissary in the 12 months ending Jan. 31, the report noted. More than 50 percent of those who shopped in commissaries during that period were active-duty households, according to the report.
Defense officials were tasked by Congress last year to develop a plan to achieve “budget neutrality” for the commissary and exchange systems by Oct. 1, 2018 — without diminishing commissary and exchange benefits. That task came after increased efforts within DoD to drastically reduce the taxpayer subsidy in the face of continuing budget pressures. DoD proposed in 2014 and 2015 to gradually cut $1 billion from the commissary annual operating budget.

“Budget neutrality” would mean eliminating the commissary taxpayer subsidy of $1.4 billion and the $400 million taxpayer subsidy received by the three military exchange services. The commissary subsidy allows stores to sell groceries at cost, plus a 5 percent surcharge used for construction. The exchanges are mostly self-supporting, deriving their operating costs by marking up the prices of goods and services. But they receive taxpayer dollars to pay for shipping merchandise overseas, so that prices there are comparable to those at exchanges in the continental U.S.
In their report, defense officials said various initiatives they explored would fall $1.5 billion short of the $1.8 billion in savings to eliminate the taxpayer subsidy, without affecting customer savings, contributions to morale, welfare and recreation programs, or customer service. Instead, DoD predicts it could achieve $300 million per year in savings for the fiscal year beginning Oct. 1, 2018.

To get rid of the entire taxpayer subsidy, prices would have to increase by 27 percent, officials said. That would essentially eliminate the existing commissary savings benefit, which is an average of 30 percent compared with local stores. The downward spiral caused by the increases would continue until the commissary system priced itself out of existence, the report noted.

While the taxpayer cost is $1.4 billion a year, the patron savings equates to $2.35 billion a year, DoD officials stated. And there are a number of second- and third-order effects of the commissary benefit, including qualify of life, military readiness and cost avoidance. For example, in the areas of cost avoidance and military readiness, the loss of transportation volume of commissaries and exchanges would increase U.S. Transportation Command fees for the remaining users, increasing the taxpayer funding requirements for military transport across the board. And the commissary prices are a factor in the formula used to compute Cost of Living Allowance rates; the absence of commissary savings could cause the rates to increase for the government.

“The Department believes that, with some legislative relief, it will be possible to maintain current benefits and still achieve efficiencies that result in meaningful savings for the taxpayer,” the report noted.

The variable pricing program is among the initiatives DoD is planning to get some savings. Legislation giving DoD that authority passed the House and is being considered in the Senate. This breaks from the decades-old model of commissaries selling groceries at cost plus a 5 percent surcharge. Officials will test variable pricing concepts that will raise or lower prices on individual products.

Another initiative is developing commissary private label brands.

DoD officials have also explored other alternatives, including privatization of the commissary system; and using discount saving agreements with local grocery stores. However, the report noted, “the Department does not believe that either approach could replicate the range of benefits, level of savings, and geographic reach provided by the Defense commissary system and achieve budget neutrality.”







MILITARYTIMES

Senators renew attempt to privatize commissaries — and one vows to stop it


In spite of this determination, officials stated, DoD is continuing to seek more information on the feasibility of privatizing all or part of the commissary system, based on interest from the private sector.

Defense officials contacted chief executive officers of 10 major private-sector grocery chains earlier this year, and three expressed interest in pursuing the matter in greater depth, according to the report. Thus, DoD is continuing its research on privatization through a request for information posted on FedBizOpps.gov on May 27. Information is due back to DoD by July 15.

The request makes clear it is not a solicitation for proposals, but states “the information gained will assist in developing a plan to privatize all or portions of the Defense Commissary Agency and Defense Commissary System … The result of this market research will contribute to determining the method of procurement (if any).”

Some senators are once again pushing this privatization concept, as they attempted last year. The Senate Armed Services Committee has included a provision in its version of the fiscal 2017 defense policy bill that would require a pilot program testing privatization at no more than five commissaries on major military bases.

But other senators, led by Sen. Jim Inhofe, R-Okla., and Sen. Barbara Mikulski, D-Md., are pushing back, trying to get an amendment considered that would instead require DoD to study the idea and submit a report to Congress by Feb. 1.