By Sandra I. Erwin
Defense industry groups are asking Secretary Leon Panetta to provide direction for how the Pentagon might cope with a possible $52 billion cut to its fiscal year 2013 budget, which would take effect in January if Congress fails to pass a deficit-reduction deal by year’s end.
A letter sent to Panetta this week by three industry associations reflects rising anxiety in corporate boardrooms as the deadline looms.
Industry leaders have requested a meeting with Panetta in the next several weeks to discuss possible budget scenarios that might unfold between now and January. Executives contend that while government agencies sit tight and wait for Congress to act during the lame duck session after the November elections, the private sector has to begin taking actions over the summer to prepare for possible program cancellations or delays. Industry analysts believe that having the budget hanging in limbo is worse for companies' bottom line in the short term than actual budget cuts as investors do not like uncertainty.
Under the debt-reduction deal that Congress passed in August, the Pentagon would be subject to a $500 billion to $600 billion cut over the next decade, or half of the $1.2 trillion overall federal spending reduction mandated by the law. Analysts estimated that if sequestration goes into effect as currently scheduled, the Defense Department’s $525 billion budget for 2013 would have to be reduced by $52 billion.
“Private sector impacts related to sequestration span fiscal, legal, and operational domains,” says the letter, which was signed by the CEOs of the Aerospace Industries Association, National Defense Industrial Association and Professional Services Council.
Specifically, industry is asking Panetta to consider four issues:
• Companies need to be able to lay off workers in response to budget cuts. Under the 1988 WARN Act (Worker Adjustment and Retraining Notification), employers must provide unionized workers notice 60 days in advance of plant closings and mass layoffs. Defense firms need Office of Management and Budget guidance to cope with the legal implications of the WARN Act.
• The Pentagon should be aware that it could be saddled with additional costs as a result of sequestration, the letter says. So-called “requests for equitable adjustments” represent unbudgeted and large potential costs that could more than offset intended savings from sequestration. Industry might seek such adjustments in the future depending on the outcome of the budget process. Another concern, the letter says, is that the “acquisition system will grind to a halt as it is deluged with this process.”
• Contractors would like to see the Defense Department come up with contingency policies for how to do business before the sequestration endgame is reached.
• The military services and defense agencies each has different planning methods to deal with budget cuts, which complicates the picture for companies that do business with multiple organizations. “In the absence of DoD-wide guidance, the potential exists for program offices to pursue independent approaches to a ‘run-up’ to sequestration,” says the letter. It would be “constructive for DoD to issue clear guidance for program offices and contracting officers, and to share that guidance with industry.”
Nobody expects any resolution to sequestration until after the elections, officials say. Even the defense industry’s staunchest allies on Capitol Hill — led by the chairman of the House Armed Services Committee Rep. Buck McKeon, R-Calif. — remain relatively powerless to roll back defense cuts. Any deal to cancel sequestration would have to include some compromise on tax hikes, which is the course favored by Democrats such as Ranking HASC member Rep. Adam Smith. GOP leaders have proposed offsetting defense cuts with reductions to social programs, a course opposed by Democrats. McKeon has hinted that he would support a tax increase to avert sequestration.
National security advocacy groups have called on Congress and the Obama administration to stop playing political football with the military budget.
“As the sequester deadline nears and lawmakers are pressed to make decisions that will have long-term impact on our national security, some realism is in order,” said a statement by the National Security Network, an advocacy group that supports spending cuts based on a long-term strategy.
“Realism demands, as a few conservatives have acknowledged, the need to include revenue as part of any deal to avoid sequester,” the NSN said. There should be a “factually informed conversation about the role of military spending in creating and keeping jobs. … The current budget impasse imposes painful choices – but when watchdog groups are still identifying hundreds of billions of dollars in waste and fraud, and some members of Congress are funding systems our military leadership does not want, taking Pentagon spending off the table is a failure of national security leadership.”