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US Debt Deal Won't Solve Industry Woes

Oct. 12, 2013 - 03:45AM   |  
By JOHN T. BENNETT   |   Comments
Senate Intelligence Committee Holds Closed Hearing
Sequester Flexibility: Sen. Susan Collins, R-Maine, is working with senior Democrats to craft a bill that would give the Pentagon authority to decide what gets cut under sequestration. (Getty Images)
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WASHINGTON — A last-minute accord to avoid the first-ever US debt default would be good news for the intertwined US and global economies. But the temporary crisis-averting deal is mostly bad news for the US defense sector.

Congressional Republicans and the White House on Friday were in talks about raising the nation’s borrowing limit through late November, an imperfect solution that financial experts and economists say would avoid a devastating American debt default.

But it would do little to give Pentagon brass and industry executives long-term relief from budgetary pressures with which they have been wrestling for months — and new budgetary spending cuts loom on the horizon. An emerging bipartisan Senate plan, however, would provide Defense Department brass more say over what gets cut under sequestration.

But as they lurch from crisis to crisis — and delaying action each time — lawmakers and Obama administration officials have left in place deep, decade-spanning Pentagon cuts. And fiscal conservatives want to further slash federal spending.

That means a temporary debt-ceiling deal is mostly bad news for the defense sector. Here is why:

Bad news: Sequestration would go untouched. House Republicans leaders have opened debt-ceiling talks with President Barack Obama — but, at press time, they still would only deal with that issue.

“We’re hopeful that this is the beginning of a meaningful dialogue with the president about the important issues that face this country,” Washington Rep. Cathy McMorris Rodgers, House GOP conference chairwoman, told reporters Oct. 10. “We are hopeful that these will be good-faith negotiations over the long-term ... drivers of our debt, over our security that we need for this country as well as the pressing need to open up this government again.”

Republicans cast their debt proposal as only the beginning of what promises to be the elusive “grand bargain” package of federal spending cuts, entitlement program changes, revenues and other measures to replace the sequester cuts.

“That’s why we’re going to offer legislation that will offer a temporary increase in the debt ceiling to allow us some time to continue this conversation,” McMorris Rodgers said. That means sequestration would not be lessened or voided by a temporary debt bill. The next round of defense sequester cuts is slated to kick in on Jan. 15, meaning lawmakers will be cutting it close as they seek a grand bargain in December — especially if they merely delay negotiations into early January.

Bad news: Conservatives want more cuts. A short debt-ceiling delay would give congressional Republicans and Democrats, as well as Obama administration officials, more time to seek a longer-term borrowing limit and deficit-cutting deal. More ominously for the defense sector, it also would give more time for fiscal conservatives in both chambers to demand federal spending cuts that go deeper than those mandated under sequestration.

Sen. Bob Corker, R-Tenn., a member of the Senate GOP group that was in talks with the White House until late August, told reporters last week that he and other fiscal conservatives want to lock in the sequester rates — and cut some more. The same is true for House GOP deficit hawks.

“I’m not going to sign off on [a debt deal] that doesn’t address the deficit,” Oklahoma Rep. Tom Cole, House Republican deputy whip, said following a closed-door GOP caucus meeting. “That’s a pretty uniform Republican position. It doesn’t have to have everything we want.”

“Neither side likes the sequester cuts,” Cole said. “But those are going to stay in place until we come to a larger deal. Let’s start the negotiation.”

Bad news: The government could remain closed. While the Pentagon called back many of its civilian employees this month, uncertainty remains surrounding contractors. An end to the government shutdown would remove that uncertainty and allow contractors on a range of things, including weapon programs, to get back to work.

Pentagon Comptroller Bob Hale told lawmakers last week that Pentagon officials are “still trying to figure out” things like how to pay contractors. The department’s top money man also said he is unsure how long companies will take the Pentagon’s IOUs, which are being handed out due to the shutdown.

Reopening all parts of the Defense Department and the federal government entities with which the defense sector does business likely will take a while.

At press time, it was unclear if House Republicans would attach a shutdown-ending measure to their debt-ceiling deal.

“You know, the president is fond of saying that no one gets everything they want in a negotiation and, frankly, I agree with that,” House Speaker John Boehner, R-Ohio, said on Oct. 10.

“Nobody gets everything they want,” Boehner said. “So what we want to do is … move a temporary increase in the debt ceiling in agreement to go to conference on the budget [resolution for 2014], and for his willingness to sit down and discuss with us a way forward to reopen the government and to start to deal with America’s pressing problems.”

Good news: Possible sequester flexibility. Sen. Susan Collins, R-Maine, late last week was working with senior Democrats on legislation to raise the debt ceiling and end a government shutdown. Importantly for the Pentagon and industry, the bill would grant Defense Department officials authority to decide what gets cut under sequestration.

A senior Senate aide told Defense News that the Senate’s emerging measure, as of Oct. 11, to end one Washington-made crisis and head off another would include “flexibility” that “would be government-wide and include DoD.”

Pentagon officials and congressional hawks continue warning that across-the-board cuts to only non-exempt accounts are creating a “hollow military.”

Defense officials, analysts and pro-military lawmakers say granting Pentagon officials the flexibility to implement the $50 billion annual reduction to planned spending would help ease that alleged “hollowing” effect.

Good news: No near-term cuts. There are, however, several silver linings for the Pentagon and defense sector in another can-kicking debt deal.

One is rather obvious: As bad as defense officials and industry executives say sequestration is, a six-week borrowing limit increase would not feature more cuts.

When the microphones are turned off, many congressional defense hawks acknowledge they are fearful of deeper Pentagon budget cuts. On the record, they are back to making the case against new cuts that would go deeper than sequestration’s $500 billion.

“The military chiefs told us they could take the $487 billion cut” set in motion by the Obama administration in 2009, House Armed Services Committee Chairman Rep. Buck McKeon, R-Calif., told Defense News. “But when you have sequestration on top of that, that just wipes us out. It just hollows out the military.”

Good news: No market chaos. US and world stock markets have behaved “nervously” to Washington’s flirtation with a debt default, USA Today reported last week.

As hopes for even a short-term deal rose Oct. 10, US markets responded with an uptick.

That is good news for defense firms if a default is avoided before Treasury Secretary Jack Lew’s Oct. 17 date. Weapon makers would not have to deal with any chaotic market panic that might break out if America, for the first time, cannot pay its creditors.

Industry executives have been fairly staid in their predictions of budgetary pain lately, emphasizing that 2014 would be a particularly bad year because obligated funds that have helped the industry and have not been subject to cuts will run out.

But the cumulative effect of cuts is building, meaning 2015 and beyond will also be painful, said Christian Marrone, the Aerospace Industries Association’s vice president for national security and acquisition policy.

“I don’t see how ’15 can be any better, when you’re going through all this trauma in ’13 and it’s going to be exasperated in ’14,” he said.

The notion of further cuts as part of budget talks has industry concerned, he said.

“Absolutely fearful of what may occur out of these discussions,” Marrone said. “Defense has taken enough of a hit, it’s taken half of the hit from sequestration, on top of what was already in place from the [2011 Budget Control Act]. The fraud, waste, and abuse line only has so much in it.”

Zachary Fryer-Biggs and Rick Maze contributed to this report.

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