Fiscal Cliff Watch: Running Out of Time to Fix the Mess

If the House and Senate fail to act in the coming weeks, massive federal spending cuts will kick in Jan. 2. That is when the automatic sequester — scheduled by law to implement phase two of the Budget Control Act of 2011 — becomes effective.

Sequester would pull approximately $50 billion per year from the Defense Department. As the president has exempted military personnel accounts from the equation, all other portions of the budget will be hit by more than 10 percent.

Because of the way federal budget outlays are allocated, the initial hit to procurement will be somewhat smaller, but will grow over time.

In previous defense drawdowns that did not exempt military personnel, procurement tumbled by 50 to 75 percent. Personnel, operations, maintenance and research-and-development spending came down anywhere from 10 to 35 percent — much less than procurement.

Earlier obligated funds won’t be touched, making the 2013 landing a bit easier, but this approach will make the out years much tougher, especially for unexercised options and new procurement runs of existing programs. The real hurt will be the adjustments to schedules and acquisition numbers which will affect the per-unit price of weapon systems. 

The result will be fewer numbers at a higher price. Even if sequester were to be subsequently adjusted back to the original basis, the resulting instability for programs and industry will still end up adding cost.

That is the primary reason why the issue should be settled sooner, rather than later. 

But it doesn’t look like it is going to happen. The best hope is for the lame duck Congress to postpone the mix of tax increases and spending cuts that are scheduled to happen — the so-called fiscal cliff — to some future time.  That time could be February 2013, when there will be a new round of debt ceiling negotiations, or the expiration of the fiscal year 2013 continuing resolution at the end of March.

Pentagon officials repeatedly have said that they are not planning for sequester at this time. Lawmakers, meanwhile, have hinted that sequester won’t happen, but still have no idea how to make it go away.

So maybe there is still some reason to be optimistic. Of course, all will eventually be resolved one way or the other. One can only hope that the administration and Congress choose a rational path with a real plan rather than leave it on automatic pilot.

In these difficult times, the need for government and industry to talk early and comprehensively has never been greater.

One of the National Defense Industrial Association’s top issues deals with the need to increase collaboration between industry and government. A recent wave of tight restrictions on conferences and meetings where industry and government can interact has greatly hindered the opportunities to discuss defense needs, technological options, industry capability and potential solutions.

The armed services, meanwhile, ought to have the flexibility to make necessary adjustments to their force structure, trading off and balancing as appropriate to sustain a strong, but affordable, force. Along with this is the recognition that as forces continue to decline in size, the infrastructure for defense is too large and costly for future budgets. The military services and the Defense Department truly require flexibility to downsize and right size the infrastructure.

One final hurdle in all of this is how to transition the OCO (overseas contingency operations) funding to baseline budgets. OCO is not programmed by the administration beyond 2013. If 2013 is the last year for OCO, many essential programs will be severely affected.

If sequester is the first cliff, then the termination of OCO is the second one that follows.

A measure of OCO funding beyond the termination of hostilities is required to allow the services to reset and recapitalize their inventories. In the absence of resources to modernize and refurbish fleets, the nation will witness a long-term decline in defense capability.

We need to recognize and account for the aging of some of our major platforms. The Air Force’s average age for aircraft is a real problem. Delayed introduction of the new tanker, slippages in the F-35 Joint Strike Fighter and long-range bomber exacerbate this problem. And while Navy aircraft age is not nearly as severe, the low rate of shipbuilding is a problem. The Army and Marine Corps have also pushed Ground Combat Vehicle and Expeditionary Fighting Vehicle developments to the right. If these critical pieces of equipment are either not producible or affordable now, they will be even less so in a future with fewer dollars.

So while sequester and phase two of the Budget Control Act are problems, solving this will still leave a host of intractable challenges for the services. Sequester, if it happens for real, will turn these considerable challenges into a disaster. If the military has to get smaller, it must be nonetheless more capable, superbly trained and equipped with advanced weaponry.

Industry and government should have the means to sort this out in a collaborative manner and the services need the flexibility to mold and balance their forces and infrastructure.

Even if sequester is to be avoided, there are still many tough issues to deal with.

Topics: Defense Department, DOD Budget, DOD Policy, Procurement