Weapons Cancellations Not Expected Immediately, But They Are Coming

By Sandra I. Erwin
The fiscal year 2013 budget would not give the Defense Department any relief from the automatic cuts that went into effect last week, but would allow budget officials to shore up O&M accounts by $10 billion. That latitude would help the military avoid a “readiness crisis,” said Pentagon Comptroller Robert Hale. The downside, however, is that the Defense Department would have to rob the “investment” accounts to pay for O&M. Investments are funds dedicated to research, development and procurement of new equipment.
Hale said it is still too early to forecast the impact of the House bill, which will be debated as part of a broader measure to fund the government through the rest of fiscal year 2013. “I want to see in what form it passes,” he said March 5 at an industry conference organized by Aviation Week & Space Technology magazine. 
A boost in O&M funding would be welcome, but it would fall far short of what the Pentagon wants, which is relief from sequestration, Hale said. Readiness accounts for the remainder for the fiscal year are depleted, and even $10 billion would not be enough to cover a potential shortfall of $35 billion, Hale said. “There would still be several remaining problems,” he said. 
Under sequestration, approximately $43 billion in across-the-board reductions would have to be made from the Pentagon's $648 billion budget before Sept. 30. Defense officials are concerned that, because military personnel accounts are protected from sequestration, the cuts fall disproportionately on the rest of the budget, including not just O&M but also civilian payroll and equipment procurement. The House proposal would shift $10 billion mostly from research, development and procurement accounts to O&M. Additionally, Congress has yet to offer any options for how the Pentagon would deal with shortages in war funding for operations in Afghanistan through the end of the fiscal year, Hale said.
Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall, also speaking at the Aviation Week conference, warned that plugging O&M shortfalls in the near term is a positive first step, but doesn't come close to fixing numerous other budget problems that the Pentagon confronts. 
Not all the money that is currently in investment accounts is for high-priority programs, so those funds will be vulnerable, said Kendall. “We do have money in the wrong places,” he said. Under the continuing budget resolution that funds the Defense Department through March 27, there is “not nearly enough O&M money,” he said. “Fixing that would be helpful.”
Defense leaders are still holding out hope that Congress will agree to a deal that postpones or replaces the mandatory cuts, said Kendall. “It's really a nightmare,” he said. “We don't know if we'll get relief, how much relief or when we'll get it.”
Both Hale and Kendall voiced disappointment not only about the sequester but also the financial instability that has kept the Pentagon on edge for more than two years. Throughout their long government careers, both officials insisted, neither of them has ever seen such chaos in the defense budget process. 
The goal now is to “contain the damage,” Kendall said. 
Disruptions in budget planning will continue for some time, he said. The 2011 Budget Control Act mandates $1.2 trillion in deficit reduction over the next decade. That would lower the Pentagon's budget top line by $55 billion per year between 2014 and 2021. The Obama administration is now working on a revised fiscal year 2014 request that would reflect those lower funding caps. That means possibly canceling programs, reducing force size and contemplating other unpleasant decisions, said Kendall. “O&M relief could come at the expense of investment,” he said. “We are dealing with a very difficult execution environment.” As far as the long-term budget goes, he added, “We are going to have to present some tough choices to the president and to the Congress.”
Kendall said he is concerned about the possibility that program cuts could be damaging to Pentagon contractors. He said it is imperative that the Pentagon gets its procurement house in order after years of failed programs and cost overruns. The status quo is not going to be acceptable in the current budget climate, he said. “I have been watching programs get canceled because they weren't affordable. We have done too much of that.”
If budgets come down further, he said, the military's modernization plans would be at risk. Kendall suggested one way to protect key technologies and suppliers during the downturn would be to identify research-and-development programs that would merit extra funding. “We need to think the strategy for keeping the industrial base healthy,” he said. “We want to move technology forward to ensure the United States stays ahead of potential enemies.”
Kendall's plan is only an idea he has floated inside the Pentagon and does not reflect official policy. He acknowledged it is a long shot. “The problem is that it costs money. … But you have to think about options like that.”
To cope with the coming cuts, procurement officials have been directed to focus on how to make programs “affordable,” said Kendall. This will require a new mindset, he said. “Affordability is not just about controlling costs, but planning for affordable purchases,” he said. “We have to start programs that we can get through to production.”
Such analysis is commonplace in the private sector, but it is a steep climb for Pentagon buyers who became accustomed to growing budgets for more than a decade and had little incentive to be efficient. “We need better cost estimates and trade-offs,” Kendall said. “We can't just accept cost estimates as self fulfilling prophecies. … Spending the budget is not the goal.”
Kendall, despite the gloomy outlook, sought to reassure contractors that the Pentagon will continue to buy hardware, although he could not predict the scope of potential cuts. "Nobody knows," he said.
Photo Credit: Defense Dept.

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, DOD Budget, DOD Leadership

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