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2014 Defense Forecast: Many Decisions, More Uncertainty

Jan. 4, 2014 - 03:45AM   |  
By DEFENSE NEWS STAFF   |   Comments
House And Senate Budget Chairs Unveil New Governme
House Budget Committee Chairman Paul Ryan, R-Wis., left, and Senate Budget Committee Chairman Patty Murray, D-Wash., announce the compromise Bipartisan Budget Act of 2013 on Dec. 10. President Barack Obama signed the budget bill and a massive defense bill on Dec. 26. (Getty Images)
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WASHINGTON — For the first time in nearly three years, the US Defense Department has some near-term budget certainty, but 2014 and beyond is still murky.

Thanks to a compromise budget passed by Congress and signed by President Barack Obama in late December, the Pentagon has about $30 billion more spread across 2014 and 2015 than it would have had under sequestration. But those sequestration cuts are set to re-emerge in 2016.

“Without a ramp to a reasonable future force structure that you could take us down in a graceful way, we were going to have a big problem in the first few years,” Frank Kendall, DoD undersecretary for acquisition, technology and logistics, said of the budget during a December interview. “Essentially, we’re having less of a problem but still a big problem in those years. And we don’t know where we’re going, which compounds the problem.”

The funding situation is just one of dozens of issues to watch in 2014, from battles in Congress to industry mergers to service program purchases — or cancellations.

DoD spending is capped at about $498 billion in 2014, $29 billion less than DoD requested but $21 billion above the original sequester cap. In 2015, DoD spending is capped at $521 billion, more than $9 billion above the previous $512 billion cap.

The Pentagon plans to submit the 2015 budget plan that it prepared for the sequester budget, and buy back items with the restored funding.

“We know what the bottom looks like; the money that’s coming back, we’re buying it back,” Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said during a Dec. 19 briefing at the Pentagon. “We’ll buy it up to the level we can buy it, and there will still be a delta. The work is done.”

Each service will still likely face a $7 billion to $8 billion cut in 2014, Jim McAleese, a defense contracting and budget expert who runs McAleese and Associates, said in a note to clients.

McAleese noted that the 2015 spending cut is still $42 billion below planned levels, lowering DoD’s purchasing power.

“We are still going to be in an environment ... with an enormous amount of uncertainty about ... what [DoD] is going to look like long term,” Kendall said. “Without that, it’s very hard for us to get on the path to a future generation, future posture for the department that we understand and we’re sure we can get to and execute.”

If DoD is forced to retain force structure, research and development and procurement will get hit the hardest.

“The money has to come from somewhere. It tends to come from partly readiness and partly investment accounts, modernization and R&D and procurement,” Kendall said.

DoD’s 2015 budget is expected to include major force structure changes to include end strength and equipment. Regardless of what the final proposal includes, expect a fight in Congress.

Speaking of Congress, DoD and lawmakers are about to start a project to rewrite Pentagon acquisition laws. Andrew Hunter, a former House Armed Services Committee staffer, will oversee the project for DoD.

“The idea is not to really change any of the intent behind the existing laws, but just to simplify that body of law, make it more comprehensible, make it easier to implement and make it something that is much more focused on results and not as confusing and complex for everybody,” Kendall said

The project is still in the early planning stages and does not have a formal name.

Congress

Congress did something before the holidays that it had failed to do the previous four years: It passed a bipartisan budget resolution.

With the Senate poised to pass the plan, Senate Appropriations Committee Chairwoman Sen. Barbara Mikulski, D-Md., declared it “gives us certainty for 2015 so we can return to a ‘regular order’ of actually knowing where we stand with our cap, holding our hearings and bringing bills to the [Appropriations] Committee.”

But getting there means moving past the partisan ill will that has stymied so much legislation since Obama took office in 2009 and the Republicans took over the House after the 2010 elections.

And that won’t be easy. Nor will it happen overnight.

“If this is Kumbaya, I don’t want to see dysfunction,” Sen. Lindsey Graham, R-S.C., who sits on two panels key to defense, told Defense News before Christmas.

Graham was referring to Senate Republicans’ ongoing anger at Majority Leader Sen. Harry Reid, D-Nev., and his handling of GOP amendments. Reid has shown no sign of changing his practice of choosing what amendments to include; Republicans want more of their amendments to get debates and votes.

The standoff has not been resolved and likely won’t be anytime soon. So don’t be fooled by the happy talk about a return to “regular order.”

Reid acknowledged as much just before Congress left for its holiday break, saying Dec. 13 on the Senate floor: “There is a lot of work we have to do to get back to regular order.”

While the next 12 months likely won’t yield a major improvement for Washington’s toxic political environment, voters will have a say in whether Washington’s dysfunction on things like defense spending and policy bills will finally end.

That’s because, in early November, the American public will head to the polls for the final mid-term elections of the Obama era. And the Senate is in play, with Democrats holding 54 seats — along with two independents who caucus with them.

But there are enough competitive races to give Republicans a shot at taking Reid’s gavel. If the GOP controls both chambers, it could pass bills like annual spending measures that Obama would find difficult to veto.

Industry

Ever since the Budget Control Act was passed in 2011, the specter of sequestration has hung over the defense industry, causing concern about future prospects for defense companies and all but completely halting the merger and acquisition game. But with a new two-year budget deal that provided slight relief from the sequester and the prospect of short-term clarity, there are expectations that 2014 will be the year consolidation begins.

A clear majority of respondents in this week’s Defense News Leadership Poll, underwritten by United Technologies, said they anticipate the deals will start this year. The poll, which surveyed senior members of the defense community, both military and industry, found that 53.2 percent of respondents expect consolidation to begin in 2014.

That consolidation would occur is consistent with the 1990s industry reaction to squeezed defense dollars. During that decade, Lockheed merged with Martin Marietta, Boeing merged with McDonnell Douglass and Northrop merged with Grumman.

This time around, the mergers aren’t likely to include such big names, said Christian Maronne, the Aerospace Industries Association’s vice president for national security and acquisition policy.

“It’s nothing like in the 1990s when the last drawdown occurred,” he said. “Certainly the conditions are ripe. While the budgets aren’t great, you have some certainty for the next two years. The question is, where it will occur. There are only six or seven large primes. Will it occur there? I think the department has been pretty clear on their opinion on that.”

Senior Defense Department officials, while not directly ruling out particular mergers, have been direct in their assessment that there has been enough consolidation. Despite the big buildup following the attacks on 9/11, the industry never re-expanded from its 1990s concentration, leaving the same large primes at the top.

The poll also found that although a plurality of respondents expect defense stock prices to remain flat (46.5 percent), twice as many people expect values to drop (38.8 percent) than rise (14.7 percent) after a year that saw record highs.

Army

The biggest change coming for the Army in 2014 is the drawdown of its combat forces from Afghanistan, closing the door on 12 years of continuous combat in the country from which the 9/11 attacks were hatched. While an agreement between the US and Afghanistan is expected in 2015 to allow a few thousand US trainers to stay behind in order to continue to mentor the Afghan Army, the mission will be much different from the combat and counterinsurgency missions that have dominated and defined Army life since 2001.

The Army is focusing its energies on leader development and changing its training activities to prepare its soldiers and officers for life in a garrison Army, something that many enlisted — and even some officers — have never experienced.

Part of the Army’s postwar future will include an acceleration of the force drawdown. Originally slated to fall to 490,000 troops by the end of 2017, the service is now downsizing from the current 540,000 soldiers at a faster clip than planned, now setting a fiscal 2015 date as the goal to reach that number. How that plays out among the officers and noncommissioned officers is yet to be seen.

While out of Iraq and (mostly) leaving Afghanistan, the Army is going to great lengths to make sure that its soldiers continue to rotate to different locations around the globe. The Army’s first regionally aligned brigade, which spent months preparing for small deployments to Africa, recently saw action protecting the US Embassy in Joba, South Sudan, as violence continued to grip the new nation. The deployment in many ways is going exactly as the Army planned, and the soldiers from the 2nd Brigade 1st Infantry Division remain in country. The next brigade is slated to deploy to Europe in 2014, with rotating forces also headed for South Korea for the first time.

With budgets flattening and a huge chunk of the Army’s annual budget earmarked for benefits, health care and salaries, the service is looking for ways to save some cash while slowly modernizing its ground vehicles and helicopter fleets. Top among the programs to watch in the 2015 budget are the Ground Combat Vehicle, which by all indications is on the chopping block; the continued development of the Armored Multi-Purpose Vehicle; and modernization of the Stryker and Abrams platforms, all of which may very well be slowed down due to funding constraints.

Navy & Marine Corps

For the US Navy, one of the most significant developments should come by the end of January. That’s when the Government Accountability Office is expected to issue its ruling on Lockheed Martin’s protest of the Navy’s choice of Raytheon to develop and build a new radar for the Aegis combat system. The Oct. 10 announcement of Raytheon’s win shocked Lockheed, which has virtually owned the Aegis franchise since the 1970s.

The radar, known as the Air Missile Defense Radar (AMDR), is a dual-band system to replace the SPY-1 radars that are the electronic eyes for the Aegis system carried on all Navy destroyers and cruisers. The AMDR is to be fitted on new Arleigh Burke-class destroyers starting in 2016 and also is intended to be scaled up or down for use onboard larger or smaller warships. As such, it is expected to be in use for decades.

As with the rest of the Pentagon, the service’s choices in the face of sequestration and the continuing budget drawdown are being eagerly anticipated. Some of the key programs expected to be affected are littoral combat ships, the two-per-year building cycle of new destroyers and Virginia-class submarines, Virginia payload module develop­ment work to expand the capabilities of submarines ordered in 2019 and beyond, and replacement programs for a new LX(R) amphibious ship and T-AO(X) fleet oiler.

A key element to look for in the 2015 budget submission will be early funding for the nuclear-powered aircraft carrier George Washington’s refueling overhaul. Although the ship won’t begin the overhaul until 2016, whether long- lead funding is included in 2015 could indicate the Navy’s commitment to maintain an 11-ship carrier force.

Perhaps the most significant ship delivery for the year will be the destroyer Zumwalt, a ship that leads the DDG 1000 class and will introduce dozens of major new features to the fleet. Under construction at General Dynamics Bath Iron Works, Zumwalt is scheduled for delivery before the end of 2014. Outfitting and development will continue for some time, however, and it’s expected to take at least two more years before the ship is considered operationally capable.

Development and testing of the LCS mission modules will continue, in particular as the mine countermeasures package advances. Developmental testing of the full module should begin in the summer aboard the class-leading Independence. The Fort Worth is expected to deploy to the western Pacific late in the year, following the 10-month cruise in 2013 of its sister ship and leader of the other LCS class, Freedom.

The initial deployment of a joint high speed vessel (JHSV) should be an early 2014 highlight, as the Spearhead is preparing for a multimonth cruise in the 4th Fleet operating area, which covers Central and Latin America. The civilian-manned JHSV, operated by the Military Sealift Command, is the first of 10 such ships expected to bring a new dimension to sealift capabilities.

At issue also will be the fleet’s deployment cycles and funding for repairs and upkeep. Per directives from Adm. Jonathan Greenert, chief of naval operations, fewer ships have been deploying for longer cruises, throwing off previously predictable cycles of maintenance, training and overseas deployments. Maintenance availabilities have been put off to save money, creating imbalances in the condition of ships within a type. Even if funding were to be restored in 2014, it is likely to be some years before the effects that have already taken place are dealt with.

A key highlight for the aviation community will be the first operational experience with the P-8A Poseidon maritime multimission aircraft. The first two aircraft from Patrol Squadron 16 deployed to Japan in December, and more aircraft will follow as the jet-powered Boeing aircraft replaces older P-3 Orion planes.

The big news for the Marine Corps this year will be the naming of a new commandant, who will oversee the redeployment of the last Marines out of southern Afghanistan, and the continued shift of attention to the Pacific region and Africa.

Much like the Army, the Corps is readjusting to life after a decade spent in Iraq and Afghanistan, which for the Marines means getting back to the sea and spending months at a time aboard Navy ships. The Corps has recently increased jungle warfare training with units in Hawaii, conducted several joint exercises with Japanese forces and had a Marine expeditionary unit stationed off the coast of Syria this past summer.

More recently, Marines have deployed from Spain to South Sudan to help secure the US Embassy there, further underscoring the rapid deployability that the Corps is working to regain after operating out of static positions for the past decade.

The new commandant is also going to have to make some hard acquisition decisions, including whether to buy 5,500 joint light tactical vehicles developed along with the Army, and what to do with its amphibious capability as the decades-old amphibious assault vehicle continues to age.

Air Force

During 2013, Air Force officials were clear that the three modernization priorities are the KC-46 tanker replacement program, the F-35 Joint Strike Fighter and the new long-range strike bomber. Those three remain the priorities for the service going forward. Expect more milestones to be hit on both the KC-46 and F-35, while new details will emerge on the bomber program — along with a heating up of the competition between Northrop Grumman and the team of Lockheed Martin and Boeing for the right to develop the next-generation bomber.

In order to afford those programs, platform cuts are likely. The battle has already begun over the A-10 close-air support plane, one of the likely cuts from the service. Congress inserted language into the recent National Defense Authorization Act to protect against attempts at cutting the A-10 during 2014, but with the service insisting it needs to cut platforms, this is a fight to keep an eye on. The KC-10 tanker also faces potential retirement due to budget woes.

Meanwhile, new programs, like the Combat Rescue Helicopter, will face uphill struggles in 2014. In November, the service selected Sikorsky to supply the 100-plus helicopters that will operate in the next-generation combat search-and-rescue role, but service officials indicate those funds may not come this year.

Programs aside, the service is entering a key part of its history. The budget battles of 2012 left a series of scarred relationships between the active, reserve and Guard components of the service. As a result, Congress mandated the creation of the National Commission on the Structure of the Air Force, whose findings are expected in early 2014. While non-binding, the commission’s recommendations will help inform the Hill — and members of the commission have been clear that everything, including a massive reworking of how the three components work, are on the table.

This year will also be the first for the recently sworn-in secretary of the Air Force, Deborah Lee James. Chief of Staff Gen. Mark Welsh has expressed confidence that he will work well with James, but with shaky ground for so many Air Force interests, how quickly she grows in that role and can represent the service on the Hill could define how the year unfolds. ■

Marcus Weisgerber, John T. Bennett, Zachary Fryer-Biggs, Christopher P. Cavas, Paul McLeary and Aaron Mehta in Washington contributed to this report.

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