New Warnings on Sequester: Serious Damage Has Yet to Come

Since the government spending cuts known as sequester went into effect March 1, Washington’s response has been a collective yawn.

But the sequester now appears to be in play as a bargaining chip in budget negotiations as Senate leaders scramble to work out a deal to end the federal government shutdown and avert a U.S.default on its national debt. While the White House, congressional Democrats and Republican defense hawks continue to push for a reversal or delay to the spending cuts, fiscal conservatives insist on keeping the sequester locked in place as an effective mechanism to reduce the federal deficit.

The sequester, which Congress passed during the 2011 debt-ceiling showdown, got a cool reaction because of the belief that the impact of the cuts had been exaggerated. New analysis by a group of former lawmakers contends that although the effects of the cuts were not felt immediately, the sequester will deeply damage the U.S. economy and many domestic programs, and will be particularly detrimental to the military and the defense industry.

Another perverse effect of sequestration is that the $1.2 trillion cut to federal agencies’ budgets across the board barely makes a dent in the deficit and detracts attention from needed reforms to domestic entitlement programs that are the primary drivers of the nation's $16.7 trillion debt, says a report published last week by the Bipartisan Policy Center, a non-profit founded by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell.

“It isn’t primarily the size of either the federal budget or the defense budget that poses problems. It is the dramatic change in the composition of those budgets over the decade — entitlements are pushing out investments. And sequester worsens that trend,says the BPC report.

Steve Bell, senior director of the economic policy project at the Bipartisan Policy Center, says he is hopeful that an 11th hour deal might include some relief from the automatic cuts.

“We believe this is getting traction” as more lawmakers begin to see the impact that the cuts are having on national security and the larger economy, says Bell. If the cuts are not reversed, at least they should be delayed, he adds.

Even though the sky did not fall when sequester went into effect six months ago, the cuts are now beginning to seriously hurt the military, civilian agencies and the nation’s economy, says BPC senior fellow and former U.S. senator Pete Domenici. “The damage to defense is far bigger and deeper than we were able to show heretofore,” he tells reporters during a conference call. “We're hopeful that there's a change in the attitude” about the impact of the cuts.

While the nation should reduce its budget deficit, says Domenici, the abruptness of sequestration causes more problems than it solves. Congress must “fix the sequester so it's more livable.”

Arnold L. Punaro, retired Marine Corps major general and a defense industry consultant who contributed to the BPC study, says the conventional wisdom about sequester “not being that bad” is flawed and ignores the economic data.

“Our study shows the very real harm that is being done by sequester … and that the worst is yet to come,” he says. For the Defense Department, the next sequester milepost comes in January, when it would have to cut $52 billion before the fiscal year ends Sept. 30.

The cuts imperil the modernization of the military, says Punaro. Military personnel are exempted from sequester, which puts a disproportionate burden on training, equipment maintenance, research and procurement of new technology. The Defense Department already spends more than half of its funding on payroll and benefits for troops and retirees. Projections show that, by the end of the decade, there personnel costs will crowd out investments in research, and procurement of new equipment, Punaro says. The sequester aggravates a trend that has been going “in the wrong direction.”

The BPC report notes that the impact of sequester on the defense industry thus far has been “reasonably muted because of the unusual nature of defense spending.” Funds that are appropriated in one year are spent over many years, especially in the areas of procurement and modernization. A case in point is the acquisition of a new submarine. Congress authorized $3.2 billion in fiscal year 2013 but the actual spending of that money will happen over seven years, most of it occurring between 2014 and 2016.

One reason why there hasn’t been an immediate and more visible impact on the defense industry is that the Budget Control Act’s sequestration mechanism cut budget authority, not outlays. Industry cut overhead early in anticipation of sequester, the report says, and large defense firms have backlogs of work under prior contract awards that are supporting 2013 sales and earnings.

Meanwhile, says Punaro, “force readiness is deteriorating, modernization has stalled, the decision-making process between national security interests and resources to meet those interests has been broken and the structural problems in defense spending have been exacerbated.”

There is a legitimate need to cut defense spending, he says, “but there's a responsible way” without arbitrarily shredding programs, Punaro adds. “Give the Defense Department some breathing room.”

One of the casualties of sequestration has been the Pentagon’s vaunted budget process, known as PPBE (planning, programming, budgeting and execution).

Three years of living under temporary budget measures, in addition to the sequester and the current shutdown, have effectively dismantled the PPBE process, says Air Force comptroller Jamie Morin, who was nominated to be the Defense Department’s director of cost assessment and program evaluation.

“The most helpful thing that could come to the Department of Defense right now would be greater certainty, an ability to plan,” Morin tells the Senate Armed Services Committee Oct. 10 during his confirmation hearing. If confirmed, Morin would take over the office that manages the Pentagon's long-term budget, called future years defense plan.

“One of the key reasons that our Department of Defense is the envy of the world, and our military establishment is the envy of the world, is the really robust planning, programming, budgeting, execution process that we use,” Morin says. Making spending projections is virtually impossible under current conditions, he says. “Right now we're in the midst of a 2015 to 2019 planning horizon with absolutely no idea what we're going to be doing in 2014, if and when we end the shutdown and get to start executing 2014.”

The instability, he adds, “really puts at risk that entire well- articulated, effective set of institutions that strive to squeeze that maximum amount of combat capability out of each taxpayer dollar. It's doing enormous and untold damage to the institution.”

For the defense industry, a debt deal that averts sequester and brings some stability into the Pentagon’s budget process would be a best-case scenario and a very long shot. Another possibility would be sequester staying in place, but the bulk of the cuts being delayed by several years, as the administration has suggested. “Doing so would buy time for the Pentagon to make the fundamental structural reforms that are required to keep research and development and procurement spending from being gutted to meet firm budget caps,” writes Roman Schweizer, defense industry analyst at

Guggenheim Securities. These reforms face political hurdles, however, as Congress has "stubbornly rejected any of the money-saving measures that have already been proposed,” Schweizer notes, such as another round of base closures, pay and compensation restrictions, and increases to military healthcare premiums and co-pays.

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