Never Mind about Those Jobs Cuts

The defense industry has a Gilda Radner moment.

For months now the defense industry has been making an impressive effort, in the midst of a general election campaign, to exempt the defense budget from going over the fiscal cliff -- sequestration -- set to take effect on January 2, 2013. At the heart of their advocacy has been the argument that a defense sequester would be devastating to employment, forcing the layoff of hundreds of thousands, if not millions, of workers.

The Aerospace Industries Association funded an impressive series of studies by economist Steven Fuller of George Mason University, purporting to show that more than a million jobs would be lost as a result of defense sequester.

And industry leaders lined up behind this message, announcing that they would have to let their workers know, just before the election, that their jobs were in jeopardy. Several, including Lockheed and European giant EADS threatened to send their entire workforces notifications, under the Worker Adjustment and Retraining Notification (WARN) Act, that they were at risk of layoffs.

Politicians have piled on, starting with Republican defense stalwarts like Senate Armed Services Committee members Sen. John McCain, Sen. Lindsey Graham, and Sen. Kelly Ayotte, and House Armed Services Committee Chairman Rep. Buck McKeon, who has been running this theme for more than a year. Democrats, perhaps in self-defense, have joined the call, including Armed Services Chairman Sen. Carl Levin, Sen. Jeanne Shaheen, and Sen. Sheldon Whitehouse.

Now they all face the Emily Litella moment. Emily was Gilda Radner's character on Saturday Night Live, who would run through reams of erroneous commentary until someone told her that she had misunderstood the subject she was riffing on. Like talking about the "deaf penalty" when the subject was the "death penalty." "Never mind," Emily would say, ending the monologue.

The industry has now totally undercut the AIA and the politicians, because the government has explained the subject and the industry has said: "Never mind."

Although industry has said that the WARN Act requires it to issue layoff notices 60 days before sequestration takes effect -- i.e., on November 2, just days before the election -- in reality, no such notification is necessary. As the Department of Labor explained in a July 30, 2012 advisory guidance, such notices are not required because it is not certain that sequestration will actually happen and because there is no certainty that existing contracts will be affected if it does.

That was not enough for the industry; Lockheed President Robert Stevens continued to argue that he would send WARN Act notices. Then the Department of Defense and the Office of Management and Budget weighed in. On September 28, Richard Ginman, the Pentagon's director of defense procurement and acquisition policy, replied to an earlier letter from Lawrence P. Farrell, Jr., the head of the National Defense Industrial Association ,saying that sequester was very unlikely to have a serious, near-term impact on the industry.

Ginman's letter was very clear: "The Department does not anticipate having to terminate or significantly modify any contracts on or about January 2, 2013." He noted that most contracts are fully funded by previously appropriated funds, which are not affected by sequestration. Moreover, any impact of sequestration on "incrementally funded" contracts would occur several months after sequestration took effect and contract officers at DOD would have latitude to work out how that took place, including reprogramming funds to fix problems. That letter went to straight to the source of the lobbying campaign.

The same day, OMB weighed in with significant reassurance. The heads of the Office of Federal Financial Management and the Office of Federal Procurement Policy said that any legal costs contractors may incur as a result of layoffs caused by a sequester would likely be "allowable costs" under their defense contracts.

Seems like that was enough reassurance to the industry, or perhaps defense contractor CEOs realized they were a bit "out over their skis" in threatening layoffs before the election. The retreat on jobs turned into an instant rout. As the spokesman for General Dynamics put it: "We will not issue notices to our employees unless we have specific information about what the impact of sequestration will be on our programs, and we determine that we need to lay off employees as a result of the changes to our programs." And the leader of the layoff charge, Robert Stevens, announced that Lockheed no longer had any plans to distribute such notices to their employees before the election.

Undercut in their "prevent a defense sequester" campaign, the politicians went ballistic. In an interview with Charles C.W. Cooke of National Review, Sen. Graham attacked the administration's interpretation of the law as "exhibit A in the march toward an imperial presidency," and attacked Lockheed for caving: "Lockheed Martin will give into the administration and ignore the law at their peril."

But the battle is over, even if the jobs war, writ large, continues. In reality, this is another indication that, while the sequester would be a miserable way to manage the budget, its impact may be a lot less significant than the rhetoric from all sides suggests.

As one defense program manager put it to me the other day: "You're telling me that if there is a sequester, I have to manage my program with 9.4 percent fewer resources than I thought I would have when I put in the budget request? I can do that; that's what they pay me to do, and I can do it without damage to the program."

Certainly, it can be done without a bundle of layoffs on January 2.

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National Security

Budgeteers to the Rescue

Can accountants save the Pentagon?

Will the fiscal cliff turn into a mere step off the curb for the Pentagon? It may depend on the definition that the administration's accountants use in applying the Budget Control Act to defense -- a definition about which there seems to be disagreement.

The Office of Management and Budget put out its sequester report ten days ago, saying it could not provide details on how the budget sequester would affect government "programs, projects, and activities (PPA)," the way last year's Budget Control Act requires, because Congress only gave the agency 30 days to complete the report. The number-crunchers just didn't have time to get their institutional arms around the definition of PPA and wrestle the details to the ground, according to OMB.

So their report only assessed the impact of sequestration at the level of "accounts," of which there are about 50 in the Pentagon budget -- Air Force aircraft procurement, Navy operations and maintenance, etc. Every one of these accounts has multiple programs tucked inside -- specific weapons systems, for example -- and OMB implied that each of those programs would be hit in a sequester with a 9.4 percent cut.

OMB is still working on exactly what PPA means across the government, but yesterday in an offhand comment Pentagon Comptroller Bob Hale was reported as saying that the OMB document "would give us more flexibility" because it might allow DOD "accounts" to be defined as the PPA.

If Hale's interpretation survives the day, DOD would have an early holiday present. And it would put out the firestorm being whipped up both by the secretary of defense and by such Republican stalwarts as John McCain, Lindsey Graham, and Buck McKeon, who have been running a high-volume mini-campaign about the fiscal cliff, warning about job losses, plant closures, and layoff notices -- all backed up by the Aerospace Industries Association's warning about a million defense jobs being lost in the event of sequestration.

Not reporting out data on specific programs ten days ago allowed the Obama administration to escape the politically-charged damage of identifying specific programs and locations that would be hit by the automatic cuts in the middle of the election campaign. That makes a smaller political target for defenders of the F-35, like Lockheed Martin, which integrates the plane, and whose CEO, Bob Stevens, has loudly warned that he will have to send layoff notices to his workers before the election because of the impact of the sequester.

But the Hale interpretation also breaks with past precedent. In the sequesters under the old Gramm Rudman Hollings Act of 1985 (incorporated into the Budget Control Act), OMB defined "PPA" as "program elements" in the defense budget, which means individual programs, like the F-35. This time around, that interpretation would lead to a 9.4 percent cut in resources for each and every specific program; a tough management task. (Though perhaps not that tough: As an Air Force program manager told me last week: "You're telling me I have to manage my program this year with 9.4 percent fewer dollars than I asked for. Heck, that's my job; I do it all the time inside my overall program account. I could do it with no harm to the program at all.")

For DOD, the "accounts as PPAs" interpretation would provide a gift if there is a sequester: flexibility. If a 9.4 percent budget cut hit "Air Force procurement," the Pentagon would have greater flexibility to find those dollars, trading off between various aircraft programs. Defense officials could reduce the funding for additional work on the troubled F-22; they could slow the buy of the new tanker; they could protect the F-35 from the cuts. The budget request for Air Force Aircraft Procurement is $11.3 billion, leaving lots of room for "in flight" budgetary maneuvers. Not so rigid, and good news for Pentagon managers looking for space to maneuver.

Hale's comment may be more wish than reality; it may not last for long. There is no sign from OMB that it agrees, and it is very easy (and probably right, I understand) to read the OMB report the other way. But it tells us the sequester "shadow play" is not over. Flexible or not, though, DOD is in for budget discipline it has not seen over the past decade, something I will be writing about in the coming weeks.

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