A Final, Last-Ditch Effort to Stop Sequestration
As the deadline for the “sequester” draws near, the noise is deafening. But nobody seems to hear.
Even defense industry executives are worried that “we are beating this to death,” according to one insider. The lobbying clearly hasn’t worked, and “running around like chickens with their heads cut off” is not going to propel any budget deal any time soon, he said.
A recurring theme in conversations with several industry representatives over the past several weeks is that everyone is tired of the political theater. “People realize that the budgets will be cut,” an industry official said. “We are just waiting to see what it means to individual companies.”
The Aerospace Industries Association has spearheaded a stop-sequestration campaign for the past 18 months. This week it joined non-defense groups to put up a joint front against sequestration. During a Feb. 11 news conference to urge lawmakers to call off the spending cuts, AIA officials stood along representatives of the Association of American Universities, the Association of Public and Land-grant Universities, the Task Force on American Innovation — an alliance of research universities and scientific societies — and NDD United — a coalition of education and job training, public health and safety, law enforcement, science, natural resources, housing, social services, and infrastructure organizations.
The groups each sent letters to every member of Congress and to President Obama asking for the spending cuts to be stopped. AIA President and CEO Marion Blakey said the solutions should be “bipartisan” and consider reductions to domestic entitlement programs to help avoid cuts to discretionary accounts.
Lawrence Korb, a defense analyst at the left-leaning Center for American Progress, said it was probably a smart move by the defense sector to show solidarity with its nondefense counterparts, which would be bearing half of the $110 billion in automatic cuts that would go in to effect for fiscal year 2013.
“The AIA push on defense jobs hasn’t stopped the cuts,” said Korb. “Joining with the nondefense groups gives them more credibility.”
Defense spending reductions already have shown their impact on the U.S. economy, which contracted in the last quarter of 2012 partly because of reductions in military spending. But if sequestration falls on nondefense agencies, the pain would be felt far more dramatically, Korb said. “If you don't send another aircraft carrier to the Persian Gulf, most people will not care. But if you start laying off law enforcement, air traffic controllers and teachers,” the public will react, he said.
In the defense sector, there is a growing recognition that the odds are in favor of the cuts taking place, and that companies will have to adapt. “The professionals, both military and civilians, who are handling requirements and budgeting need to figure out how to deal with reduced budgets,” an executive said. “Industry needs to be heard about the impacts, which do need to be taken into account, but the associations are making a lot of noise right now without, in my opinion, accomplishing anything.”
All the arguments have been made and heard, he said. “It is truly a political issue. The politicians know what is up and what is at stake, but the screams are not loud enough yet for them to act.”
Another industry insider pointed out that sequestration is a lesser problem for the Defense Department than having to operate under stopgap funding, or a continuing resolution, instead of a full-year appropriation for fiscal year 2013. Spending is frozen at the 2012 level, no new program starts are possible and the money is not aligned to the military’s needs. “The CR is severely crimping the operations and maintenance accounts to the point that the services, particularly the Navy, are taking severe actions now to avoid completely shutting down by August,” he said. Cutting operations and canceling depot maintenance for ships, aircraft and ground vehicles is detrimental to both the government and industry, he said. “The CR is having operational impacts that are so unacceptable that they will eventually lead to reprogramming from investment into O&M. … The impact of the lack of a proper appropriation is not on sufficient radar screens.”
There is speculation that a $48 billion defense sequester will occur March 1 and become a hostage in the fiscal fight. By March 27 the CR must be extended or replaced with an appropriation, and the sequester could last into May.
Senior defense analyst Anthony Cordesman, of the Center for Strategic and International Studies, estimates that defense spending, including both base funding and war costs, will drop by about 22 percent from its peak in 2010, after accounting for inflation. By comparison, the seven years following the Vietnam and Cold War peak budgets saw a similar level of decline on the order of 20 to 25 percent.
Clark Murdock, senior fellow at CSIS, calculated that the defense budget top line, including war spending, would drop from $660 billion to $520 billion by 2021, in 2013 dollars.
Cordesman said Congress should stop sequestration because it would hurt the economy without substantially putting a dent on the national debt. “Sequestration does not adequately address growth in mandatory spending, but rather forces disproportionate cuts to discretionary spending,” he said in a CSIS presentation. “By the same token, sequestration will trigger significant damage to the American economy without making a considerable impact on shrinking the deficit.”
Pentagon contractors already have begun to absorb the effects of a defense slowdown that began in 2010, according to Tom Captain, vice chairman and aerospace and defense leader for Deloitte LLP.
“Defense revenues were flat through the first nine months of 2012 at the global level, but in the U.S., revenues continued to decline at negative .5 percent,” Captain said in a Deloitte report. “Indeed, only three out of the top 13 defense contractors doing business with the Defense Department experienced revenue growth.”
Watchdog groups, meanwhile, worry that the defense sector will be spared from cuts at the expense of civilian agencies and other domestic priorities.
"The meat-cleaver approach of sequestration is by no means ideal, but it’s clear that the amount of sequestration can be found in the Pentagon’s budget,” said Ben Freeman, of the Project on Government Oversight. “The Center for Strategic and International Studies recently found that the spending reductions under sequestration would still leave the Pentagon with a larger budget than it had through most of the Cold War,” he said.
During a Feb. 8 presentation at CSIS, Murdock said the Defense Department’s biggest budget problem is not sequestration but its own spiraling inflation. Personnel costs in the base budget increased by nearly 90 percent, or about 30 percent above inflation, since 2001, while the number of military personnel has increased by only 3 percent. “Declining purchasing power is measured in how much military capability it can ‘buy’ per dollar,” said Murdock. “Although the projected defense top line in 2021 would be about $100 billion higher than after past draw-downs, it would buy an active-duty force that is 34 percent smaller than in 1978.”
For weapons manufacturers, rising personnel costs should be cause for alarm, said Murdock. Historical spending on modernization — including research, development and procurement of new equipment — is about 32 percent of the defense budget. To be able to stay at that level in 2021, the Pentagon would have to cut 455,000 people, he said.
Todd Harrison, senior defense analyst at the Center for Strategic and Budgetary Assessments, warned that Murdock’s numbers might be “too darn optimistic. A $500 billion base budget in 2021 represents only a 5 percent reduction in a decade, he said. “I think we could very well go deeper than that. With sequestration, we’ll go down to $486 billion in the 2013 base budget.”
The Pentagon historically underestimates its costs and its inflation rates, Harrison said. To cope with the coming cutbacks, the Defense Department will have to curtail the generals’ appetites for people and hardware, he said. U.S. regional “combatant commanders” continually request troops and equipment without considerations of budget constraints, Harrison said. “Sometimes we have to tell co-coms they can’t have everything,” he said. “You don’t want them to be padding their estimates.”
With regard to the defense industry, Harrison predicts that the Pentagon will have to open up the market to nontraditional firms if it wants to lower its costs and increase innovation. The current core of defense suppliers is small, and there is not a lot of room for additional consolidations, said Harrison. “The Defense Department will have to relax [acquisition] processes and standards to open up the market to new entrants,” he said. There could be opportunities for “companies that don’t have the legacy costs, that can innovate and come up with products that are fundamentally different.”
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Topics: Defense Department, Defense Watch, DOD Budget, DOD Leadership