Under the threat of a budget sequestration and a push for general deficit reduction, the Defense Department is entering a period of a defense build down that will have a large impact on procurement accounts, according to defense experts who were part of a panel discussion hosted by the Center for Strategic and International Studies on Friday.
Although Defense Secretary Leon Panetta is not planning for a sequestration at the Pentagon, given that President Obama has stated that sequestration is a real given that a congressional panel last month failed to agree on a $1 trillion-plus package to trim the federal deficit over the next decade, expect program managers to be “prudent” with how they move forward amid this budget uncertainty, David Berteau, a senior vice president and director with CSIS, said on the panel, which was entitled “Deficits, Defense, and the Industrial Base—What’s Next?”
The way program managers may go about nursing their scarcer-than-planned-for resources is by slowing down solicitations and awards, introducing more competition, and being “careful” about exercising contract options, Berteau said.
While there will likely be “a lot of slowing down on the procurement side” beginning in FY ’12, Berteau said that services contracts won’t be affected as much given how their managed, which is from the bottom up. There are thousands of decisions on “individual tasks by individual activities” throughout DoD that makes it harder to slow spending here, he said.
Even if a cap is put on spending, “you don’t know you’ve reached that cap until after you’re past it,” Berteau said.
As for how the build down will affect the defense industry, Berteau said profits will suffer. Even though the Pentagon will say it is going after costs, not profits, “day to day management of the contracts is more consistent” with a policy that goes after profits to cut costs, he said.
Gordon Adams, a professor of International Relations at American Univ. and a former White House official for national security and foreign policy budgets, said sequester or not, the defense budget is headed down. Historically, over a 10-year period there has been a 30 percent reduction in “defense resources” from the first year to the last, Adams said.
Adams believes that the coming cuts to the DoD budget will go well beyond the $450 billion over 10 years that the department is planning for. These additional reductions will just come year-by-year, he said.
Build downs are nothing new to the DoD and the results are not necessarily dire, Adams said. The last build down, which began in the administration of former President George H. Bush in 1989 and continued into the Clinton years, resulted in “the force that used Saddam Hussein as a speed bump in 2003,” he said.
If there is a sequestration, Berteau doesn’t expect there to be much in the way of central guidance for how to manage the impact on procurement programs. Instead, it will be on a program by program basis, he said.
Based on historical precedent, spending on research and development won’t come down as fast as procurement funding, Berteau said, adding that development funding will fare better than research.
“But I don’t think we have any basis for saying which programs go and which programs survive in this point in time,” Berteau said.
Adams said that procurement will bear a “heavy burden” as part of a build down, and he agreed with Berteau that it will be program-by-program rather than through a central policy. However, based on historical examples, Adams expects major defense programs to be stretched out so that units are purchased at lower rates over a longer time but not canceled.
“We have so many programs right now that the price of termination exceeds the amount you save,” Adams said. “That’s likely to be the case for MDAPs (major defense acquisition programs).
It’s the “non-MDAPs,” which represent 60 percent of the procurement budget, where Adams expects the big cuts to fall. That’s things like trucks, front-end loaders and ammunition supplies, which are not as visible and don’t have the “same level of visibility and constituency in Washington and the Congress,” he said.
A budget sequestration would take effect in January 2013. Berteau said this means to expect cuts to civilian personnel at DoD to begin being implemented in July 2012 because it takes five months to plan for the actual job terminations.