The Fiscal Slide

Five reasons the Pentagon will avoid the pain of sequestration.

We are in the middle of a political and rhetorical donnybrook about the threat that falling off the fiscal cliff poses for our national security (to say nothing of what it would do to domestic discretionary spending). There will be some attention to this "crisis" in the last two presidential debates.

It is a crisis carefully engineered by the Budget Control Act, passed in August 2011: If the Super Committee failed, which it did, automatic cuts, which legislative language dubbed a "sequester," would be imposed January 2, 2012.

In September of this year, the Office of Management and Budget solemnly certified that these cuts would take 8.2 percent of FY2013 appropriated funds away from every "program, project, and activity" (PPA) in domestic discretionary spending and a whopping 9.4 percent from the "non-exempt" parts of the defense budget.

But does this mean the end of our national security (and domestic well-being), as the political debate suggests? A little careful noodling about the impact of a sequester on the Defense Department suggests it might not be the end of the world. In fact, it might be exactly the fiscal discipline DOD needs.

Let me get technical for a moment, so we can actually see what might go on. First, the law made it clear that the administration could exempt funding for troops and their benefits (including retiree benefits) from the fiscal cliff. The administration has done that, so the troops will be okay. (Their number is coming down anyway as a result of the end of the wars in Iraq and Afghanistan.)

Then, there is the matter of procurement and what some see as the almost cataclysmic level of devastation that such harsh cuts would impose on the defense industry. Except they won't. It turns out the industry is pretty healthy, it has been for a decade, and it is working on contracts that have been funded in prior budget years, which are exempt from sequestration.

As the director of defense procurement put it: "The vast majority of our contracts are fully funded, so there's no need to terminate existing contracts unless the product is no longer needed." Lockheed treasurer Ken Possenriede agreed that sequestration was not a near-term problem: "If sequestration happens, just based on our normal business rhythm, we're comfortable from a cash-on-hand standpoint that we'll endure that."

How about military operations, including the war? Well, the war budget, which has never really been separate from the non-war budget -- that's a political fiction the executive branch and Congress set up, but the funds are, in reality, mixed -- is included in a sequester, which might sound terrible for the troops in Afghanistan.

But, the reality is that the funds for DOD operations (war and much else) are very "fungible," as we budget wonks like to put it, meaning the funds can be moved around among programs pretty flexibly -- from training to education to base operations to the costs of operating troops in the field. And OMB and the Pentagon agree that "PPAs," in operations land, means "accounts." And accounts are things like Army Operations and Maintenance, which can cover all of the above activities. So, the service managers would have 9.4 percent fewer funds than the Congress gave them, but significant flexibility to move them around, setting priorities and making choices. Let's say they have a scalpel to work with, not a bludgeon.

So what about research -- the investments in the future of defense technology? Well, here, too, there would be 9.4 percent fewer dollars than appropriated. But R&D is what they call a "level of effort" area of funding -- you buy as much R&D as the money allows, but you don't have to cut items out of a production contract. And the Pentagon would have some flexibility as well, since most R&D "program elements" cover a variety of R&D projects, so fewer resources means setting priorities and making choices.

Beyond these technical flexibilities, DOD, like other departments, would also have recourse to reprogramming funds and using its general transfer authority. The flexibility here is pretty great; over the past decades some reprogram and transfer totals have been in the tens of billions of dollars. What it takes is making the same tough choices, many of them internal. A few, the transfers, would have to be communicated to Congress, where the senior leadership of the key authorizing and appropriating committees (who don't want to devastate defense) would be likely to agree, especially as they were the most anxious to protect defense.

And OMB could alleviate the short-term urgency by agreeing to hold off on taking the cuts until later in the year, by approving overall funding ("apportionment") at a higher level early in the year, and delaying the cuts until later, when planning in DOD was complete.

It is not a pretty picture; no management expert would say this is the way to do defense (or any other) budgeting. But it is not doomsday. In fact, it might be discipline -- exactly the kind of budgetary discipline the Pentagon has not had for the past decade. Good management, priority-setting, and greater efficiency might be the result.

And since the sequester would be a one-off, setting a lower baseline for future defense growth, our national security might just be as safe as it ever was.

Isaac Brekken/Getty Images

National Security

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.

Saturday Night LIve