WSJ l Pentagon, Industry Brace for Big Cuts

The Pentagon has told congressional leaders it will start planning this summer to make the sharp reductions in military spending set to begin in January if lawmakers don’t reach a broad deal to reduce the federal budget deficit.

Several major defense contractors already have begun contingency planning, anticipating they may have to lay off employees, close facilities and reduce other costs if the spending cuts take effect.

Many lawmakers on Capitol Hill don’t expect to start serious negotiations over how to avoid the defense cuts until after the November elections. They realize that alternative deficit-reducing measures that would be needed to compensate for restoring the defense funds—such as cutting other programs or raising taxes—are likely to be politically unpopular.

But the Pentagon has warned it can’t wait that long to begin preparations for the possible layoffs of tens of thousands of federal workers and other fallout from major cuts in spending.

Some defense contractors worry the Pentagon could begin delaying certain decisions on new projects as it tries to reprioritize its spending.

The potential Pentagon cuts would be one of the first material manifestations of the acrimonious debate in Washington over how to deal with the government’s growing debt.

The military spending cuts—which both Democrats and Republicans say they want to avoid—were an outgrowth of last August’s deal to raise the federal debt ceiling. Since Congress was unable to follow that deal with a deficit-reduction agreement, the Pentagon cuts and other spending reductions— known as the “sequester”—will take effect automatically unless lawmakers vote to override them by the end of the year.

“It’s become clear to the companies that sequestration is a real possibility,” said Stan Soloway, chief executive of the Professional Services Council, a trade association for government contractors.

The Pentagon declined to comment for this article.

If no deficit-reduction deal is reached, the law calls for the defense budget to be cut by more than $50 billion a year, or roughly 10% of the agency’s $531 billion base budget. The cut would last for 10 years, and Defense Secretary Leon Panetta has said the impact would be disastrous.

Several senior Republicans, including House Armed Services Committee Chairman Howard “Buck” McKeon of California, have proposed delaying the cuts in the first year.

While Democrats and Republicans have offered different proposals to replace the reductions with other budget changes, they mostly have staked out positions to appeal to their political bases. They appear to be making no progress toward a compromise.

The uncertainty has alarmed government officials and defense companies, which now have less than eight months to prepare for cuts and possible layoffs.

At issue is more than just a post-war drop in defense spending, which President Barack Obama has proposed as the interventions in Iraq and Afghanistan wind down.

And while Republicans have criticized the administration’s efforts to trim Pentagon spending, both parties generally agree the sequestration cuts would be jarring both to defense manufacturers and the military.

Frank Kendall, the Pentagon’s acting under secretary for acquisition, technology and logistics, told Congress last week that the automatic cuts were “intended to be so crazy that nobody would ever do it.”

Mr. Panetta would have little discretion to direct where the cuts would occur, meaning virtually every defense program would be hit.

The aerospace and defense industry is pleading with Congress to reach a deal soon to avert the cuts. The industry employs about one million workers. Last year, the Aerospace Industries Association, a trade group, released a study that projected the sector would lose in the neighborhood of 350,000 direct and supplier jobs under the automatic cuts.

Robert J. Stevens, chairman and CEO of Lockheed Martin Corp., told lawmakers and congressional aides last month that the spending cuts’ impact on the defense industry would be “devastating.”

“We ask that we not let an automatic budget trigger, a default position, become the dominant force for allocating resources that will shape our nation’s security posture and our industry, and we strongly urge action to stop this process,” Mr. Stevens said at a Senate Aerospace Caucus luncheon.

Dan Beck, a Boeing Co. spokesman, said his company already had begun to prepare for the impact of a possible “worst-case scenario” of Pentagon cuts.

Credit-rating agencies have raised questions about the effect of cuts on defense companies’ finances.

Fitch Ratings said last week that the “threat of across-the-board defense cuts” was a concern and could affect Northrop Grumman Corp., a large defense contractor, but Fitch said it “expects a legislative resolution could reduce this risk, particularly with the respect to the timing of the cuts.”

By Damian Paletta and Nathan Hodge

April 4th, 2012

WSJ l Pentagon, Industry Brace for Big Cuts

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