Discussion of Sequestration Effects Heats Up
Filed under: Boeing, Business Line, Companies, Congress, Department of Defense, development program, Events, Federal Budget Process, logistics, medicine, Military Aviation, production program, Proposal, Restructuring, Services, U.S. Air Force
As part of the Budget Control Act last year that emerged after a failed consensus between President Obama and Congress to deal with the U.S. government’s budget issues a plan was put in place for automatic cuts to spending. This sequestration of funds requires about $1 Trillion in cuts over the next 10 years. In FY13 this would amount to just under $100 billion with half coming out of the defense budget.
The way the Pentagon is approaching this is to apply the cuts evenly across all appropriations and spending which amounts to a 9.4% reduction in spending. This may be adjusted as they get closer to the actual implementation to fully fund some critical items such as personnel and medical costs which would mean some investment programs may see bigger cuts.
For some programs a 9.4% reduction would not be that significant. You buy less of an item, you maybe drive, fly or sail it less, you don’t have as much training supplies as in the past. For others it might be much worse. A 10% cut in R&D for a program could cause multi-year delays in completing development or testing meaning the system wouldn’t get into service as soon. It may be that a program would be cancelled as it wouldn’t be executable without that level of funding.
There are concerns with some of the big acquisition programs that utilize multi-year production contracts. These rely on a 5 year deal with the OEM providing for a specific number of items to be delivered each year. If the 9.4% cut happens and this number is reduced below the minimum the contract may have to be renegotiated leading to cost increases. The KC-46A tanker contract also faces some issues as it is a Firm Fixed Price (FFP) contract and the cut may reduce its funding below what was negotiated with Boeing (BA) when the contract was awarded which also could lead to a need to renegotiate.
As expected pretty much every one is against sequestration and have lately spoken up about dealing with it. Primarily by transferring the spending reductions from the Pentagon to other parts of the Federal government. This includes legislators, Pentagon officials, industry, local governments and employees. All would expect to see some hardship as the spending cuts are implemented.
The media is full of articles such as this, Sequestration threatens Portsmouth Naval Shipyard jobs, workload, from Seacoastonline.com.
Congressman Connelly (D-VA), who has a lot of defense contractors and civil servants in his district, wants Congress to stop campaigning and stay in DC to work out a resolution.
Studies are being done to calculate how many jobs will be lost due to the budget cuts and what industries will be affected the most.
There is also discussion of the effect beyond defense as the rest of the government would lose $50 billion in funding which would cause programs to be cut, eliminated and people laid off.
Overall the issue will continue to be there through the November elections. Most likely no attempt will be made to deal with this until after that when the lame duck Congress will have to also deal with the expiration of the Bush tax cuts and other budget issues. There probably will be a big omnibus bill that addresses all of this.
Will sequestration actually happen for defense? It is hard to say right now. Everyone should be planning for it and calculating how to implement it. This includes the Services, acquisition program managers, and contractors. The U.s. should be expecting reduced defense spending as the fighting in Afghanistan and Iraq winds down and wartime requirements are eliminated. It would be better if it was done in a more planned fashion.