Defense Industry Remains in the Dark on Budget Decisions

Just weeks before the beginning of a new budget year, there is no clarity on the 2014 spending plan for the Defense Department, or any other agency for that matter.

For defense industry, such utter lack of insight into how the Pentagon will spend its funding over the coming months and years is unprecedented.

This appears to be the new normal since the passage of the Budget Control Act of 2011, which set off a chaotic federal budget process where the traditional rules of the game no longer apply.

For the Pentagon and defense industry, this means getting used to the huge disparities between President Obama's budget proposals and the spending caps set by the BCA. The president requested $525 billion for the Defense Department in fiscal year 2014, while the alternative BCA-compliant budget would allow $475 billion.

The fiscal debate will inhabit parallel universes for the foreseeable future. Defense Secretary Chuck Hagel said the Pentagon is building two sets of budgets for the 2015-2019 defense plan. One at the level proposed by the president, and another that lops off $52 billion per year in accordance to the Budget Control Act. The spending cuts continue until 2021, unless Congress passes another law that replaces the BCA.

Hagel recently completed aStrategic Choices and Management Review, which had been highly anticipated by defense industry as it was expected to provide clues on future spending decisions. The SCMR offered a menu of options, but no definitive answers, other than a recognition by defense leaders that they must make tough choices.

"DoD strongly supports the president's fiscal year 2014 request and long-term budget plan for the entire federal government," Hagel said July 31. But the "deep and abrupt spending cuts under sequestration that began on March 1, are, as you all know, the law of the land."

In the first year of BCA-mandated sequestration, fiscal 2013, the Pentagon had to cut $37 billion across the board, or about 10 percent off every account except military payroll and benefits. How sequestration will be carried out in 2014 is yet unknown, according to senior defense officials who briefed reporters last week.

Defense officials still do not know whether the $52 billion reduction will be applied across the board. "That's still to be determined,” one official said, although he noted that Hagel has asked Congress for flexibility to distribute the cuts. Another unknown is whether personnel accounts will be spared. If they are, the cuts would fall disproportionately on equipment modernization, training and other programs that heavily rely on contractors.

Pentagon budget officials and military leaders have been scrambling to figure out how sequestration will be implemented, the official said. "A lot depends on what the rule sets are, which we don't know yet. ... There's still tremendous amount of uncertainty."

In the pre-BCA world, defense contractors at this time of the year would have been canvassing early hints of the 2015-2019 budget plan in order to line up corporate investments and business strategy. Now they can only aspire to set short-term goals and weather the storm by slashing costs and consolidating.

Deputy Defense Secretary Ashton Carter said the impact of fiscal instability on the industrial base — both in the government and private sector — will be significant. “I worry about it a great deal,” he told the House Armed Services Committee Aug. 1.

How long the budget fog will stay is up to the political system, which is now gearing up for a debt-ceiling showdown that could result in a government shutdown and derail budget bills for most federal agencies. This chaos bodes badly for the Pentagon and defense contractors, analysts said. “Congress is still in denial” about the damage that the fiscal churn and indecision are causing the military, said Steven Grundman, fellow for emerging defense challenges at the Atlantic Council.

Grundman, a former Pentagon official during the Clinton administration, witnessed first-hand the post-Cold War drawdown. The Defense Department at the time suffered through the “five stages of grief,” he said, referring to the Kübler-Ross model of emotional stages a person experiences following deep loss: denial, anger, depression bargaining and acceptance.

The Pentagon as an institution is now moving from depression to bargaining, Grundman said. Congress, on the other hand, has been stuck in denial for more than two years. “This is beyond a problem,” he said. “It's a strategic fault in U.S. national security.”

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