Friday, December 7, 2012

Budget Sequestration & Defense Spending

The Federal Budget Sequestration & Defense Spending Repercussions
It’s Not the Fall that Will Kill You…It’s the Sudden Stop.
by James M. Terhune, President / CEO

While the highly-toted budgetary experts employed by the national news media and their Internet and Twitter based brethren continue to crank the warning siren of impending doom, the American public tries to sort out the truth from the hyperbole about our fiduciary woes.  From the perspective of this observer, there is one very significant budgetary segment that is being largely overlooked in this shrill and frantic reporting on the impending “fiscal cliff”. As the media maps out the road to the cliff, there are two drivers each behind the wheel; President Obama who will not compromise on raising the tax rates for those earning $250,000 and above and Speaker Boehner who insists on significant reductions in entitlement programs. But what about the drastic reductions in Defense spending that will result from sequestration? In the current reporting, if this topic is mentioned at all, it is but a footnote to the “headline” issues of tax rates and entitlement reform.

If your only conduit to the news is the main-stream media than you may not be aware that the Senate did pass a defense spending bill this past week. The Senate bill supports the budget request for many major investment programs including:  CH-47 and UH-60, and AH-64 Block III helicopters; Army’s Ground Combat Vehicle and STRYKER programs; and F-35 (JSF), F/A-18E/F, EA-18G, and C-130J aircraft.  The bill approves multiyear procurement authority for V-22, Virginia-class submarine, and Arleigh Burke-class destroyers.  But what about sequestration?

At the December 5th press briefing, Mr. George Little, spokesperson for the Department of Defense responded to a question about the approaching “cliff”. He revealed that, “We are consulting with the Office of Management and Budget and have been instructed to pursue internal planning on sequestration.”  So, does this directive from OMB signal the Defense Department’s budgetary Armageddon? Probably not. William Hartung from the Center for International Policy noted that while sequestration is bad management, the Pentagon – and the private industry supporting it – isn’t necessarily facing the drop-off in spending that some are painting it out to be. “Many of the Defense Department’s prime contractors have large backlogs; the Pentagon has $100 billion in unobligated dollars,” Hartung said. “There’s no fiscal cliff for the Pentagon. It’s more of a gradual slope.”

And what about the budgetary “cost savings” that typically occur at the end of military combat? Recent history verifies that the United States has cut its military expenditures by about 30% at the end of major conflicts. President Dwight Eisenhower cut defense spending by 27% after the end of the Korean War; President Richard Nixon reduced the budget by 29% as we withdrew from Vietnam, and Presidents Ronald Reagan, George H.W. Bush, and Bill Clinton combined to cut military spending by more than 35% as the Cold War came to a close. So is it reasonable to expect a 30% reduction in military spending as we bring our troops home from Iraq and Afghanistan?  Probably.

But what about the impact of the anticipated Defense Department budget cuts to weapons systems, aircraft, ships and troop levels on American business? From my vantage point as an owner of a small business that provides raw materials to the military and their prime contractors, here are my predictions. Reductions of uniformed troop levels will not be dramatic. Perhaps some reduction and/or consolidation in the number of high-ranking command officers. Some delays and/or cancellations of weapons programs will occur, but the strategy will focus on delays from development to production, or on reduction of quantities to be produced, verses outright cancellation. What I do believe will occur is a significant reduction in the military’s civilian support staffing, which will precipitate an increase in the demand on their supply chain vendors to provide more technical, administrative and logistical support for defense procurement.

Recognizing that it is inevitable that budgetary reductions will be made at the Pentagon, I believe the successful strategy for suppliers to the military is to insure that you are capable and prepared to shoulder more of the procurement support functions that are required. Those companies that demonstrate that they can successfully fill the void left by the civilian staffing reductions will be ones left standing after the sequestration storm makes landfall.