🔷 Colors of Money

Colors of Money

The Pentagon doesn’t have one big piggybank of money…it has 5.

Often referred to as the colors of money, they are the 5 distinct budget appropriation categories mandated by Congress to ensure funds are used as intended.

How It Works

The system is divided into five main buckets governed by purpose, time, and amount (not to exceed). Here they are:

• O&M (Operations & Maintenance): costs like fuel, parts, and training courses. This is 1-year money (only spent in the fiscal year appropriated)

• RDT&E: 2-year obligation window (and 5-year spend period) for the research, development, testing, and evaluation of equipment, software, and other technological advancements

• Procurement: 3-year obligation window (and 5-year spend period) for buying equipment and major systems

• MILPERS: 1-year money for military personnel pay and healthcare

• MILCON: 5-year money for military construction

It might seem obvious that you should not use O&M money to buy a fighter jet or MILPERS money to buy spare parts, but in practice, it's much more nuanced.

Most of the issues live between RTD&E, O&M, and Procurement.

Take Operational Test & Evaluation, for example. Though it exists in statute to validate the suitability and effectiveness of equipment before it reaches the warfighter, it is illegal to fund it with RDT&E. Instead, it must compete for budget in the O&M category.

Another example: a program advances into production on a timeline that wasn't predicted and planned 3 years earlier. Legally, RTD&E funding can’t be used for production, but because no procurement funding was budgeted, the program is delayed. The money is often there, but it’s the wrong color.

More Slicing & Dicing

Those colors of money are further divided into subcategories called “budget activities.” Each budget activity (BA) is unique to the appropriation in which it resides.

For example, Procurement has about 45 BAs that are very explicit.

There isn’t just aircraft money—there is fighter aircraft money, airlift aircraft money, trainer aircraft money, etc. There isn’t ‘missile money,’ there is tactical missile money, strategic missile money, missile modification money, missile spares money, etc. (yes, it keeps going).

Within RDT&E, there are 8 BAs, which is where the most BA consternation lives. (We’ll unpack this in an upcoming feature.)

The Red Tape Rainbow

To move funds from one category to another, the Pentagon must seek a reprogramming action and approval from Congress—a process that requires committee consensus and can take months.

You can see all of the reprogramming actions here.

Fixing this issue has been a long-standing part of PPBE reform (Planning, Programming, Budgeting, and Execution), and the FY2026 budget request included some of the proposed changes.

But Congress maintains the power of the purse and oversight responsibility, so it’s generally a game of inches, year after year.

None (or almost none) of those proposed changes were embraced and implemented by Congress this year.

But there are things the Pentagon can do—and they are—but that’s a topic for next week.

ICYDK: the phrase ‘colors of money’ likely originated in the post-WWII era of physical ledgers and colored inks. In the 1990s, Red (O&M), Green (RDT&E), and Blue (procurement) emerged as mnemonic devices for teaching. Red is urgent spending in the year appropriated (use it or lose it); green is for growth; blue is cold, hard, procurement cash. At least, that’s the way we heard it.

In That Number

$40B

Taiwan’s legislature is currently locked in a political stalemate that has stalled a $40B special defense budget intended for weapons procurement over the next 8 years.

If left unaddressed, this domestic issue is likely to spill over internationally, given calls for Taiwan to increase its own defenses.

TRIVIA

On this day in 1957, the first test launch of the first operational U.S. ballistic missile occurred. Though it served only 4 years as an intermediate-range ballistic missile (IRBM), direct derivatives continued to be used to launch satellites until 2018.

What was its name?

A) Jupiter
B) Titan
C) Thor

On the Radar

2026 NDS. The new National Defense Strategy is out on the streets.

• The Merge’s Take: The ends (homeland, China, etc.) remain largely unchanged from the 2018 and 2022 documents, but there are some notable call-outs in the ways and means. 1) ‘burden-sharing’ with Allies is mentioned 3X as much, and now has its own line of effort; and 2) ‘industrial base’ is mentioned 2X more times than before, with a line of effort to supercharge it.

$839B defense budget compromise. U.S. lawmakers unveiled their $839B FY2026 defense spending compromise, $17B above the Pentagon’s topline request. Wavetop items include $900M to save the E-7 Wedgetail program, $897M to keep the Navy’s F/A-XX fighter alive, an extra $500M for the F-47, as well as 6 more C-130s, 2 more EA-37, 1 more F-15EX, and a partridge in a pear tree.

• The Merge’s Take: Beyond the $$$ figures, this budget pumps the brakes on some acquisition reforms—namely the “portfolio” budgeting. Congress has blocked the collapsing of individual program lines into portfolios until the Pentagon proves it can manage current funds transparently for Congressional oversight.

Ukraine tech is coming. 2026 is the year Ukraine's defense exports start happening. The Ukrainian Council of Defence Industry announced a major export push for the second half of 2026, beginning with export offices in Germany and Denmark.

• The Merge’s Take: There will be 3 ways for Ukrainian companies to get tech out of the country: 1) work with one of 7 approved exporters; 2) get direct approval from the government; or 3) join the Defence City program. Here is a great breakdown on the deets.

Patent Holiday. To accelerate tech transition, the Pentagon has launched a "Patent Holiday," offering industry free access to 400 curated defense patents for a two-year evaluation period. This is the first step in a broader plan to centralize all non-classified defense patents into a single AI-searchable database.

• The Merge’s Take: Tens of thousands of archived R&D projects are sitting idle in storage. Though hard to quantify and depending on how you count it, the transition rate from the 200+ government labs is roughly 5%. We’re not saying it’s all commercialization material (it’s definitely not), but beyond the Bayh-Dole Act, none of this R&D has been structured to even explore transition (or have continuity) possibilities. By opening the filing cabinets and removing the barriers, this seems like a way to incentivize some good from it. Finally, you would think there is a database to catalog all of these. Nope. This effort is fixing that, too. Here is the list of patents.

The U.S. loses in any conflict with China that exceeds 40 days, according to a new Heritage Foundation effort. TIDALWAVE, an AI-driven simulation of a 6-month+ protracted conflict, showed that the U.S. would reach an operational breaking point in less than half the time as the PLA. Key points: preferred munitions last about a week, and by day 40, the U.S. is unable to continue due to a lack of platforms, ammunition, and fuel.    

• The Merge’s Take: If you are surprised by this, you have been living under a rock for the past 15 years. Most wargames and simulations from the Pentagon and think tanks arrive at similar conclusions, though this is one of the most in-depth public analyses we’ve seen (check out the chapters and appendices). Deterrence requires credibility, and you cannot credibly deter conflict with capability and capacity that does not exist.

• The Merge’s Spicy Take: Where are the excursions? One example: incorporate long-range ground-launched one-way attack drones that operate outside the U.S. munitions logistics network….something that will absolutely be picked apart by the PLA’s doctrine of system-destruction warfare.

They Said It

“We have to have that delivered this summer and demonstrate the C2 capability in front of the president.” 

— Gen. Michael Guetlein, Golden Dome Director, outlining the urgent two-year roadmap for establishing the "glue layer" command-and-control system of the U.S. missile defense shield.

Knowledge Bombs

• Auterion executed a live-fire drone swarm strike using 3 drones and 1 operator, reportedly a first for small drones

• Lockheed Martin & GE tested a liquid-fueled rotating detonation ramjet engine

• Dominion Dynamics closed a $21M seed round for Arctic autonomous sensing networks

• JetZero raised a $175M Series B funding round for its blended-wing body aircraft

• Starfish won a $52.5M SDA contract for a first-of-its-kind satellite de-orbit disposal service

• Renault (French carmaker) won a $1.2B contract to mass-produce long-range drones using its factories

• Beacon AI was awarded a $4M Air Force TACFI contract to put its AI copilot on mobility aircraft

• The Army is looking for acoustic detection systems to counter small drones

• AIM won a $4.9M Air Force contract for autonomous airfield repair

• Ukraine & Palantir partnered to test AI models using sensitive military data

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ANSWER C). Thor was a rapid program to build and deploy a nuclear-tipped IRBM in the U.K. that could strike Moscow. After they were removed from IRBM service, they served as the basis for the Thor/Delta space launch vehicles for 50+years.