WASHINGTON — Pentagon leaders need “around $10 billion” in the next pandemic aid package to cover defense contractors’ coronavirus-related costs, according to a top defense leader.
But it’s unclear how the hefty funding handout will square with Republican skepticism of new deficit spending after already approving aid packages worth trillions.
On Monday, Deputy Under Secretary of Defense for Acquisition & Sustainment Alan Shaffer said the money is needed to cover a host of defense contractors’ coronavirus-related expenses. Without it, the Department of Defense will have to dip into modernization and readiness funds, potentially jeopardizing smaller firms in the defense industrial base waiting for the cash.
“If there is another supplemental or stimulus package for realistic economic adjustment, we could be looking at somewhere around $10 billion in additional program costs,” Shaffer said on the Government Matters television show that aired Monday.
Last week, the leaders of Lockheed Martin, General Dynamics, Boeing, Raytheon, BAE Systems, Huntington Ingalls, Textron, and L3Harris Technologies sent letters to Pentagon acquisition chief Ellen Lord and acting White House budget chief Russell Vought, worried about the health of their smaller subcontractors without additional aid.
The CEOs, noting their sector employs 2 million people, warned such a defense budget disruption “would create a ripple effect throughout the defense industrial base, leading to less investment in new technologies and significant job losses in pivotal states just as we are trying to recover from the pandemic,” they wrote in the letter to Vought.
It’s potentially a potent message for the White House as recent polls show President Donald Trump faces a rockier path to reelection. Trump is trailing Democratic challenger Joe Biden in six battleground states he won in 2015, according to a New York Times survey, and a Real Clear Politics average of polls showed Biden leading Trump by nine points Tuesday.
Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act allows defense firms to seek reimbursement for pandemic-related expenses, for which Lord has said DoD would request in the “lower end” of “tens of billions of dollars.” But the Democrat-led House Appropriations committee passed a fiscal 2021 defense spending bill Tuesday that included far less: $758 million.
“We need to do something,” the subpanel’s ranking member Ken Calvert, R-Calif., told Defense News. “The defense industry is not immune to what’s happening from COVID-19, like every other sector of the economy, and they’ve suffered the last few months, just like any business. They’ve had slowdowns, cost increases, they’ve had to acquire a lot of [personal protective equipment], and implement new safety guidelines.”
Loren Thompson, a defense-industry consultant and analyst with the Lexington Institute, estimates the sector’s pandemic-related expenses could total more than $20 billion.
Additional emergency money is thought to not only help major firms, but small and medium-sized firms whose slim profit margins and minimal cash reserves mean they’re more apt to furlough employees in a pinch — potentially triggering production breaks for major programs.
“As far as I know, the big system integrators have not been furloughing defense workers, but at the subcontractor level, some of those shops just don’t have a choice,” he said.
Still, many GOP lawmakers under pressure from conservative groups have been lukewarm about President Donald Trump’s push for tax cuts and infrastructure spending on top of the $3 trillion in funds approved so far.
Senate Majority Leader Mitch McConnell, R-Ky., — who has been in weeks-long discussions with Treasury Secretary Steve Mnuchin on the next phase of coronavirus relief — outlined a proposal last week that emphasized a liability shield for companies operating during the pandemic, but with no mention of defense industry aid.
In a recent appearance in Kentucky, McConnell acknowledged the concerns of GOP colleagues who are worried about the mounting deficit.
“It does raise a good deal of concern because we now have a debt, a cumulative debt, the size of our economy for the first time since World War II,” he said. “Believe me, we would not have done that under any circumstances.”
Some lawmakers from both parties have been wary of new spending that favors a specific industry, particularly after the Pentagon won a timely budget at record levels, said an industry source.
Defense firms pleading their case are being asked whether they have tapped other provisions in the CARES Act, like payroll tax deferrals, the employee retention tax credit or a $17 billion emergency loan fund. (Many defense firms have resisted applying for the loans, which allow the government an equity stake.)
“You talk to some Democratic offices, and some Republican, and they say the defense bill is already one big stimulus for the defense industry,” said the industry source. “I think that’s a mischaracterization because the taxpayer dollars aren’t spent to make Lockheed Martin more profitable, it’s for planes, ships and submarines that you need, but it’s really hard.”
In May, Democratic lawmakers questioned Pentagon leaders sharply about why they had spent just 23 percent of the $10.5 billion DoD had received under the CARES Act. The Pentagon responded with with its spending plan for the aid, which allocated $688 million to aid suppliers of aircraft engine parts, shipbuilding, electronics and space launch.
This June, the country incurred its biggest monthly deficit ever, $864 billion, which topped the previous single month deficit record, $738 billion in April. With the long-term debt totaling more than $26 trillion and the Congressional Budget Office predicting the deficit will reach $3.7 trillion for the year, some Republicans have voiced concern about the unpredictable effect adding more could have on the economy.
“If we’re spending a lot of money, we have to be careful that we don’t break the country,” Senate Appropriations Committee Chairman Richard Shelby, R-Ala., recently told the Wall Street Journal.
Fiscally conservative groups have stepped up their lobbying of Republican lawmakers, many of whom consider themselves fiscal hawks but voted to lift budget caps for roughly $1.5 trillion in defense spending in 2019′s two-year budget deal. A coalition of conservative leaders sent a letter to Trump and McConnell last month warning Congress’s coronavirus spending must stop because the total is approaching $10 trillion.
FreedomWorks Vice President of Legislative Affairs Jason Pye said Republican lawmakers are justifiably concerned about alienating deficit-conscious conservatives ahead of the next election, but they’re also genuinely wary.
“Most of the members I’ve talked to are saying they want to either limit the size of the next phase or they don’t want to spend any more money,” he said.
Joe Gould is the Congress and industry reporter at Defense News, covering defense budget and policy matters on Capitol Hill as well as industry news.