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Aerospace and Defense Channel

DOD Spending and the Prospects for Defense Budget Sequestration

October 10, 2012
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Are many Defense Program and Policy issues dangerously converging to create the circumstances for a real “DOD Perfect Storm” exaggerated by a politically charged fiscal and budgetary environment?  Will this situation hurt the Military Services, our National Security Strategy, and the Defense Industrial Base or is this “Sequestration Skirmish“just one more chapter in the Washington ”Game of  Budgetary Chicken”?  Most people believe it is just another round in the ongoing political Tug-of-War we have all come to expect out of our elected officials.  But could it be something more serious this time?  Rest assured, however, the political lines have been drawn on sequestration and defense cuts --and everybody has an opinion how it should be handled. And it is going to be a battle.  Are we stuck in partisan gridlock, or can we come together as a nation and “Do the right thing” here?  And, just what is the right thing given the National Security situation we face? Here's a view on what issues are, and what Microwave Companies need to know ---to understand what's at stake in the Defense Sequestration debate and how we all need to be prepared to ride-out the pending storm.

Sequestration- The DOD Budget Challenges on the Table
The Budget Control Act of 2011 mandated that baseline defense spending be reduced from $6.5 trillion over the next decade to about $6.0 trillion. If sequestration, the second part of the Act, takes effect, defense spending will drop to about $5.5 trillion. What does this mean to the Defense Industry in general and the Microwave Industry in particular?  Is this a real turning point in the way we look at Defense spending as part of our Fiscal and Economic Policy, or is it as some have suggested, just more fodder for political bickering during a highly charged presidential campaign.  Let's put on the table some of the key issues in the debate so we can establish the facts of what is really going on here, and then try to make some “...sense out of the non-sense”.

What is it and why should we care?
Sequestration is a package of automatic spending cuts that’s part of the Budget Control Act (BCA) that was passed in August 2011. The cuts, which are projected to total $1.2 trillion, are scheduled to begin in 2013 and end in 2021.  They are evenly divided over the nine-year period. The cuts are also evenly split between defense spending and discretionary domestic spending.  DOD spending on fighting wars is basically off-limits.  And most spending on entitlements like Social Security and Medicaid are also exempt.  The total cuts for 2013 will be $109 billion, according to the Administration.  Under the Budget Control Act the cuts were triggered to take effect beginning Jan. 1, 2013 if the super-committee didn’t to agree to a $1.2 trillion deficit-reduction package by Nov. 23, 2011. Well, surprise!  The group failed to reach a deal, so the cuts were triggered. Welcome to the brave new world of being stuck between a fiscal rock and an economic hard place.

Lawmakers don’t have any flexibility with the flat line across the board cuts, and they are mad about the political box they find themselves in. Cuts are designed to hit all affected government programs with roughly the same severity, with detailed cuts ranging from most 7.6 percent to 9.6 percent and there is a 2 percent cut to Medicare providers. The flat cuts, when equally applied across the board, is clearly meant to force reluctant legislators into coming to terms on a Deficit reduction deal to avoid the indiscriminate cuts.  DOD leadership has stated that the budget cuts envisioned will lead the military to be greatly handicapped and it will be very difficult to carry out its mission.  Phrasing such as “returning to a hollow force,” reminiscent of drastic prior military draw downs, is being entered into the dialogue. Democratic legislators have warned about the impact of Sequestration on vital social programs. And Republicans are fighting hard to figure out a way to shore up Defense spending in light of the sequestration threat. Many industries, including Defense that are significantly dependent on federal spending, say that major job losses will happen if the cuts end up taking effect. If legislators try to avoid these cuts and postpone real deficit reduction, the US will likely face another substantial hit to our credit rating by the different agencies and banks, and nobody wants that.

How did we get into this mess?
The federal government was quickly approaching its debt ceiling limit, which needed to be raised through a congressional vote or else the country would default in early August 2011. While Democrats were in favor of a clean vote without strings attached, Republicans were demanding substantial domestic spending cuts in exchange for raising the debt limit. President Obama and congressional leaders ultimately agreed to the legislation which would allow the debt ceiling to be raised by $2.1 trillion in exchange for the establishment of the super committee tied to the fall-back sequester.  The deal also includes mandatory spending reductions on top of the sequester by putting caps on non-entitlement discretionary spending that will reduce funding by $1 trillion by 2021. Both party leaders, the White House and most members of Congress supported the debt-ceiling deal. The legislation passed on a 268-161 vote in the House, with about one-third of House Republicans and half of House Democrats opposing it. It passed in the Senate, 74-26, with six Democratic senators and 19 Republican senators against it.

Is sequestration inevitable?  Sequestration can be avoided if Congress passes another budget deal that would achieve at least $1.2 trillion in deficit reduction. Both Democrats and Republicans have offered proposals to do so, but there still isn’t much progress on a deal. The political obstacles are the same as during the super committee negotiations.  The Republicans don’t want to raise taxes to generate revenue, while Democrats are reluctant to make dramatic changes to entitlement programs to achieve savings.  No one in the House or Senate on Capitol Hill thinks any deal will happen before Election Day. After Nov. 6, Congress will have just a few weeks to come up with an alternative to the sequester. The challenge is further complicated by the fact that the Bush tax cuts, the payroll tax, unemployment benefits and a host of other tax breaks are all scheduled to expire Dec. 31. The cumulative effect of all of these scheduled cuts and policy changes is what’s be dubbed in the press as approaching “the Fiscal Cliff.” I would describe it more akin to a disaster just waiting to happen.  Yes, there are rumors in the press about passage of some magic short-term stop gap budget plan during the lame-duck session.  This would be designed to buy legislators more time to come up with a grand bargain.

Specific Impacts on Defense Budget Issues
So, at the macro level, sequestration would trigger an additional $500 billion in across-the-board defense spending cuts over the next decade.  This is on top of $487 billion in cuts already programmed under the leadership of former Defense Secretary Gates on that I have written about in some of my previous columns.   DOD leadership hopes that sequestration won't happen, and believes there's a reasonable chance it will not. However, sequestration would cut around $52 billion (in fiscal 2013), and the cuts continue and recur every year through fiscal 2021.  President Barack Obama has said he would exempt service member pay and benefits from sequestration cuts. That means, the rest of the defense budget would take about a 9.5 percent cut.  DOD has said that it believes all these cuts would lead to serious adverse consequences.  Areas such as overseas contingency operations may be subject to serious cuts, and protecting war fighters'operating budgets is now a high priority.  But protecting wartime budgets will lead to cuts in training budgets in the event of a future contingency; delay the military's ability to respond.  Civilian personnel spending also would face cuts.  So here comes a hiring freeze, unpaid furloughs and probably more drastic personnel actions.  This would yield fewer civilians to do important jobs.  In addition, military families and retirees also will be affected if sequestration takes effect, with reductions in funding for services from family housing and maintenance, to TRICARE, the health care program for service members, retirees and their eligible family members.

Sequestration would also force officials to go back to the drawing board and reconsider the defense strategy that had taken into account the $487 billion in spending cuts over the next decade already programmed.  DOD believes the revised Defense Strategy recently advocated by the Administration, embodied in the Pentagon's fiscal 2013 spending request, is consistent with the national security challenges the United States faces with Iran, Syria, North Korea and "longer-term threats in the Pacific" as significant concerns.  President Obama and Defense Secretary Leon E. Panetta have both said sequestration would have devastating effects not just on DOD, but across all government agencies. And it never was meant to be implemented, but used as a mechanism for Congress to enact deficit reduction.  “Be careful what you wish for, as it may just come true” says an old saying.  And now we are facing Sequestration square in the eye.  

The Continuing Resolution – A Short Term Legislative Step in Long and Difficult Road
To avoid a rancorous political debate prior to the fall US elections regarding the Congress passing (or more likely not passing)  the 13 individual Appropriations bill required to fund the entire US Government, the Congress in Washington did what they usually do in difficult situations—the punted the ball. They recently passed what's called a Continuing Resolution (CR) to fund the US Government.  The Omnibus Continuing Resolution for the US Government's FY 2013 Appropriations, which the Senate and House approved and President Obama signed, will last for six months.  However it clearly affects both short and long term Defense Department spending.  The Defense Department' is doing their best to support the Military mission, meet war fighters needs, and do this with basically one hand tied behind their backs.  It’s being done in a piecemeal fashion, requiring substantial efforts with increased administrative tasking, in a constrained funding environment.  The Continuing Resolution will keep most DOD spending at fiscal 2012 levels, which are slightly higher than in the fiscal 2013 defense budget request. Overseas contingency operations funding, the so called “War Fighting” dollars, will be at the fiscal 2013 level requested.   However, because it's a six month funding bill --not a full fiscal-year budget the stop-gap measure causes serious operational problems in running the Defense Department.   It doesn’t allow for the assistance mission in Iraq or funding for ongoing aircraft carrier overhauls.   There are likely ways to work around these obstacles but it means we are creating work to live within self imposed barriers. The CR also hinders contracting and production processes, usually limiting funding to 85% of a prior year’s level and there will be no new starts (New Budget Line items) allowed.

Views of DOD Leadership Leon Panetta and Ashton Carter
Secretary of Defense Leon Panetta (SECDEF) has recently said he'd take any deal that would avoid across-the-board cuts to defense spending.  Lawmakers have begun floating short-term agreements to stop the $500 billion in defense cuts based on concerns they won't be able to strike the so called grand bargain on taxes and spending.   SECEDF Panetta has been quoted as saying “I'll take whatever the hell deal they can make right now to deal with sequestration.” Wow, some frank talk out of an Administration official.  From the SECDEF's perspective, the problem now was that Congress had basically left town until after the elections.  And it appears to have Sequestration now shoved into the lame-duck session.  Sequestration, which would begin next year with that $55 billion cut in 2013 to defense spending, has become increasingly politicized in the presidential race.  Mitt Romney and his running mate Paul Ryan have blamed President Obama for Sequestration. Romney has been campaigning and attacking the President in his stump speech for these defense cuts.  SECDEF Panetta has stressed that it was Congress that had to fix the problem, a line most Democrats have used to counter GOP attacks on the president. A majority of both parties passed the Budget Control Act last year that set Sequestration in motion, so there is plenty of blame lying around for everyone.  The biggest issue continually raised by DOD leadership is the need for stability in the DOD funding cycle.  Fits and starts are very inefficient ways to conduct the business of National Defense.  Both Democrats and Republicans want to avoid Sequestration and the across-the-board cuts, but they are divided over alternatives.  The defense cuts have been rolled into a larger debate over taxes, with Democrats saying that Republicans must include tax increases for the wealthy in any deal. Republicans have resisted that, saying that more cuts are needed to mandatory spending programs. Has everybody forgotten we are one country here?

Deputy Secretary of Defense Ashton Carter (DEPSECDEF)has been the most out spoken of the DOD leadership on Sequestration, and I'd like to share some of his “no nonsense” thoughts on the matter of Sequestration.   DEPSECDEF Carter has said it would lead to inefficiencies, saying it would amount to a hidden tax to the DOD on its operations.   He believes it forces DOD to be uneconomical, and then industry contractors are forced to be uneconomical, by being inefficient in the way they are obligated to meet DOD needs.  He has said he cannot say anything good about Sequestration, and he called its size and the manner in which it was applied, basically senseless.  He believes Sequestration makes the jobs of people who lead the DOD—to manage our national security needs to a reasonable result –basically impossible.  He believes that all Defense Department managers work to get our programs just so, including all the things they must do for service members and their families, and the pending Sequestration cuts are prohibitive - pretty sobering observations from the Chief Operating Officer at the Pentagon.  He went on to say that when it comes to Sequestration, that it makes “orderly disposition of the public's business impossible." However, he still retains a bit of optimism, hoping some way can be found over the next few months to stop it.   Carter has said he'd be open to Congress enacting a delay in the January deadline to allow more time for a solution, with a delay better far better than facing sequestration right away.  “And if through some magic, a delay leads to ultimately to dispelling this cloud, that's all the better”, according to DEPSECDEF.

The potential for government shutdowns and the prospect of the government operating on a series of continuing resolutions in place of a budget is also affecting defense industry partners and contractors who are trying to do their jobs.  Carter has said, “You're working on contingencies at the same time you're trying to do the bedrock business that we're supposed to do, that is to support the war fighter and deliver value for the taxpayer.  So it's annoying, it's frustrating and it's counterproductive."   Carter has said that most Americans may not appreciate potential effects on operating accounts under Sequestration.  He has said that war fighting costs could require tapping into Army operations and maintenance funding, which in turn would affect training, which then would affect readiness.  “The force will not be as ready to do things elsewhere in the world. It really has an effect on security, as Sequestration's effect is far reaching.  It affects people, not only service members, civilian employees and their families, but also Defense Industry. They are the ones who build the things that make our military the greatest in the world,” Carter said. “It affects them, (and) it affects their employees. So across the board, it deserves the one word description....devastating.”

The Devil in the Details
The DOD will protect wartime operating budgets, supporting the day to day operations of the war fighters which are its highest priority area.  But that will drive greater cuts in the base budget segments, especially of the operations and maintenance accounts, and particularly in the Army and the Marine Corps.  Such cuts would mean reductions in training that would affect our Military's ability to respond to a new war fighting contingency.  Sequestration almost certainly would force DOD to reduce spending for civilian personnel; leading to hiring freezes and probably unpaid furloughs-- affecting weapons maintenance, contracting, financial management and audit efforts.  A sequester also would substantially affect DOD investment programs.  There will be no impact on prior-year funds which are already obligated on contracts.   There would be substantial adverse effects, with the 9.4 percent cut that would affect each of the budget accounts that fund procurement, military construction and research, development, test and evaluation.   Sequestration would also adversely affect military retirees and families, with cuts in family housing maintenance and base operating support.  Cuts would also be required in the Defense Health Program, including TRICARE.   As we can see there are real consequences that would come into play in fiscal 2013 as the sequestration law that would go into effect on Jan. 2, 2013.   This would double reductions already imposed by the Budget Control Act (added to the Gates Budget reductions- previously accounted for by DOD).  This would force the Defense Department to make substantial reductions in military personnel and operating units, thus giving the department fewer options for responding quickly to emerging crises.  This is serious business!

Impacts to the US Army, Navy and Marines
Without exception, all the leaders of the US Military Services believe the results of Sequestration would keep their forces from properly executing the requirements of the new defense strategy.  The US Air Force believes Sequestration would affect their ability to fulfill current wartime deployments, operational requirements and defense of the homeland.  But it would also significantly impact their ability to prepare for future operations and make appropriate investments in modernization. Sequestration cuts would also impact the future of vital aerospace technology development, one of our key competitive advantages in the battle spaces of the futures—Land, Sea, Air, Space and Cyberspace.

The cuts required by Sequestration would adversely affect just about every aspect of the Army, including that service's readiness and its ability to respond to contingencies.   The US Navy believes that Sequestration would translate over time to a smaller force with less presence, longer response times and reduced ability to provide surge forces in support of major operational plans and other emerging needs.   The Marine Corps believes Sequestration would have a chaotic effect on the force during what they see as a time of extraordinary challenges to our nation.  The Marines have great pride in their ability to get the job done, and see the competence, responsiveness and flexibility of our Marine Corps force based on the continued budgetary support of the Congress and American People.  General Joseph Dunford, Marine Corps Assistant Commandant, recently said it best for all the services, “Most of the young men and women in uniform are too busy doing their jobs to worry about the details of how the nation's leaders and legislators develop and pass budgets.  Frankly, given all they do for us, they have a right to expect that whatever it is we're supposed to be doing to properly support them, that we're actually doing it.  One of my greatest concerns about Sequestration is that we will lose the trust and confidence of the all-volunteer force that we have worked so hard to build.”  Along with impacts on the budget and the defense strategy, Sequestration also puts at risk "the intangible qualities that make our military the very best in the world."   This viewpoint certainly raises the stakes on this Sequestration debate.

Views of Former SEC Def Gates and Former CJCS Adm. Mike Mullen
Two former top military leaders recently blasted Congress for failing to work together on a budget agreement, warning that it could imperil national security if large military cuts kick in next year.  Former chairman of the Joint Chiefs of Staff (Ret.) Adm. Mike Mullen and former Defense Department Secretary Bob Gatesdecried the political standoff.  Lawmakers from both parties have delayed substantive talks on how to deal with looming tax and spending issues until after the November election.  If no agreement is reached by the end of the year, tax rates are slated to increase (Bush Tax Cuts) and more than $900 billion in spending cuts over nine years are slated to begin. Half of those cuts will be coming in Pentagon spending.  Mullin said, “This virtually guarantees that we would end up with a hollow force.”  Admiral Mullen said it would lead to a force being unable to fund its training, unable to maintain its equipment, and a force unable to fight.

Mr. Gates, who served in both the Bush and Obama administrations, said “it is a catastrophic way to deal with the deficit issue.”  Their viewpoints are crystal clear. Congress should come up with a bipartisan, long-term plan for reducing the deficit and blunt, immediate cuts, which Adm. Mullen has referred to as a “meat axe cuts”  Both men have continually taken Congress to task for failing to reach a large-scale deal to reduce the deficit and putting off many of the decisions until after the election,.  This leaves the threat of immediate cuts looming over the Pentagon.  Mr. Gates has said that moderate lawmakers were being squeezed out of power by more partisan members of both parties through gerrymandered voting districts, the absence of congressional power brokers, and a media cycle that helps spread “extreme and vitriolic” opinions.   The “modern center is not holding,” he said.  “Too many of our politicians seem more concerned with winning elections and scoring ideological points than with saving the country,” Mr. Gates said. “My hope is that following the presidential election whatever adults remain in the two political parties will make the compromises necessary to put this country back in order.”  Mr. Mullen concurred.   “My intent is not to point a finger, for I don’t have enough fingers to point.” He said his “urgent appeal is to get to the higher ground, and to do so sooner rather than later, together.”  He added that he was not “optimistic” lawmakers would work out a deal before the end of the year. “I’m worried sick about it,” he said.  The insight and dedication to service and country—and to get the Congress to do the right thing-- is evident in the passion these former DOD leaders exhibit in this debate on Sequestration.

Impact to the Defense Industry
Most recently, defense industry leaders, lawmakers and the White House have been wrangling over whether defense firms should begin issuing layoff notices to their workers in anticipation of the Sequestration cuts. As it turns out companies are required by law to notify their workers two months in advance of any potential layoffs or plant closures, according to mandates in the Worker Adjustment and Retraining Notification (WARN) Act.  And that deadline falls a week before the November Presidential elections.  The Office of Management and Budget issued guidance last week advising defense contractors not to send out pink slips to their employees due to Sequestration, noting the federal government would cover any legal costs if contracts were canceled and layoffs did in fact occur.   Defense firms Lockheed Martin, BAE Systems and EADS North America took the White House's advice and backed off their plans to issue notices. Boeing had not threatened to send out notices, even before OMB issued its guidance. But Senators Lindsey Graham (R-SC) and John McCain (R-AZ) announced  they would block any effort by the government to compensate defense firms that didn't provide layoff notices to their workforces. “The law clearly states that workers must be notified at least 60 days in advance of a potential mass layoff or plant closure, and it is unclear to us how the Administration can guarantee that no sequester-related budget cuts or contract actions will occur on January 2 or shortly thereafter.”  This was in a letter sent to 15 defense firms.
 

The Aerospace Industries Association, an industry trade group, has touted industry surveys that say 1 million jobs could be at risk under Sequestration. Northrop CEO Wes Bush has told lawmakers that the company could not answer questions about the scope of the impact of sequestration due to a lack of guidance from the Government, but they have announced over 600 layoffs in the LA area. Lockheed Martin, which had warned it might send out layoff notices, expected to have time later to comply with the WARN Act the company said.  GE Aviation has said he doesn’t expect Sequestration-related layoffs among the company’s 2,600 employees. General Dynamics has said the company wouldn’t issue notices without specifics on contract reductions.  And the Pentagon’s budget crunch has pushed defense contractor Sikorsky to close a plant in upstate New York and cut about 570 jobs. And, it’s not just industry that’s affected. Wright-Patterson indirectly supports 35,800 jobs off-base with a payroll estimated at $1.5 billion. Cuts there at the levels envisioned would have a staggering impact in the Dayton area. So the potential loss of Engineering and Manufacturing jobs in the US Defense Sector is serious.

Future Defense Planning-Fitting Inside Sequestration
The future of America's military will likely be defined as a globally agile but highly dependent force, characterized by small, precision engagements that feature minimal violence applied with surgical precision.  This view was recently echoed by Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff.  The Vision for what the U.S. military will look like over the coming decades is what has been called a “pivot from the past and a turn to the future.”  The Pentagon's new vision document, the "Capstone Concept for Joint Operations: Joint Force 2020," represents a shift from the types of missions and forces that dominated the wars in Iraq and Afghanistan.   "The strength of any joint force has always been the combining of unique service capabilities into a coherent operational whole," the four-star general has said.   "Future joint forces will routinely employ more such combinations than ever before, with [international] partners as well within to achieve efficiencies and synergies not previously feasible."  As we all have been watching, DOD leaders have been aggressively pursuing new partnerships and bolstering existing ties with allies across the globe in recent years.   There have been many efforts to foster standing regional alliances, particularly in the Mideast and the Pacific.  These have helped the DOD set the stage for the pending American withdrawal from Afghanistan and the Pentagon's shift into the Asia-Pacific region.  Conversely, Pentagon officials have been busily building up partnerships in emerging global hot spots, such as Africa, to prevent terror groups from gaining footholds in those areas.   Under Dempsey's new strategy, those efforts will be put into overdrive and allow "expertise and resources existing outside the US military to be better integrated in a variety of operational contexts," according to the published guidance. Along with leaning more on allies' resources, the future US military will look to increase its "strategic flexibility" by leveraging more specialized, tailored capabilities, from cyber warfare tactics to special operations forces,  to achieve its goals.   “These methods will impart a precision strike-type approach, backed by allied support, to tackle global conflicts in the future,” said General Dempsey.  That approach will "add to our strategic flexibility and global responsiveness ... [and] perhaps most significantly, their use does not always constitute an irreversible policy commitment" as we have all seen in Iraq, Afghanistan and elsewhere.  Dempsey's approach to future conflicts should move DOD away from the massive engagements of American forces experienced in Iraq and Afghanistan.  But it could help military leaders cope with the looming fiscal pressures facing the Pentagon.    “The implications of adopting this capstone concept are potentially dramatic and wide-ranging, and will far exceed those noted by this paper," Dempsey wrote. "We offer it so that all of us can begin exploring its validity and what it might achieve for the Joint Force of 2020."

Defense Budgets and Political Positioning- Saying It Like It Is
The two political parties have taken very different positions on sequestration and the resulting massive defense cuts. Former Defense Secretary Gates recently issued a scathing criticism of lawmakers who he claimed are willing to cripple the US economically and strategically in the world to retain the votes and financial backing of the ideologues they’ve become beholden to. Gates recently made the following points:

  • “Too many are more concerned with winning elections and scoring ideological points than with saving the country.”

  • The across-the-board cuts dictated in the sequestration legislation that was passed by Congress and signed by President Obama is cowardly. “Across the board cuts are the worst possible way to exercise budget discipline.”

  • Sequestration was likened to a scene in the Mel Brooks Western spoof, Blazing Saddles. “The sheriff holds a gun to his own head and warns the crowd not to make him shoot.”

  • If the politicians are serious about getting the country’s spending under control, they have to look at Social Security and Medicare. “The United Sates must get its government finances in order….” “Doing so requires our country’s political class to show leadership and make decisions that may be unpopular in the short run but which will strengthen the country for the long haul…”“So far there appears to be little evidence this is taking place.”

  • Following the November elections, “whatever adults remain in the two political parties must make the compromises necessary to put this country back in order.”

The Democratic Party’s 2012 platform signals it would welcome additional Pentagon spending reductions, and targets for cuts “outdated Cold War-era systems” such as nuclear weapons. The set of policies endorsed at the party’s national convention calls for “tough budgetary decisions,” but it does not call for voiding $500 billion in national defense spending cuts that would kick in Jan. 2 if lawmakers fail to enact a broader $1.2 trillion deficit-reduction package.  Most Republicans want to prevent more defense cuts; their Democratic counterparts believe the Pentagon budget is inflated, and favor eliminating some weapon systems. The GOP platform adopted at that party’s convention makes a full court press to avoid the cuts to planned defense spending.   The platform calls the pending cuts “severe,” and warns they would be “a disaster for national security, imperiling the safety of our servicemen and women, accelerating the decline of our nation’s defense industrial base, and resulting in the layoff of more than 1 million skilled workers.”    Democrats and Republicans appear unlikely to find much common ground. Republicans favor keeping the existing nuclear fleet in place, while Democrats believe the arsenal — which is expensive to operate and maintain — is ripe for cuts.

What Level of Defense Spending do we need?
To be clear, Sequestration, with its sudden, indiscriminate cuts, is not the best way to reduce the defense budget. But similarly sized cuts, made carefully and strategically, could reduce our deficit without harming national security.  Defense Department analysts are faced with a perennial question: what level of peacetime defense spending is needed to ensure the security of the nation? The 2013 budget proposed by President Obama includes $525 billion in funding for the peacetime costs of the Department of Defense, not including the amounts of veterans’ benefits or other defense-related spending.   In inflation-adjusted dollars, the proposed budget remains at a high level by historical standards, near the previous peak in defense spending under the Reagan administration of $547 billion (adjusting for inflation). Measured as a percentage of G.D.P., however, defense spending is relatively low at 3.4 percent of G.D.P. compared to the post-World War II average of 6.4 percent. Romney has proposed setting a floor for defense spending at 4.0 percent of G.D.P.   The proper level of defense spending, however, should not be determined by an arbitrary percentage of G.D.P in my opinion, or how much has been spent in the past.  Using a percentage of G.D.P. or past spending levels would set the budget with little regard for what is needed or what we can afford.  These approaches attempt to set the budget first with little regard for what is actually needed, how the money should be spent, or what the nation can afford. The proper level of defense spending should be determined by the threats we face as a nation, the strategy we pursue to meet those threats and the fiscal constraints we must confront. The debate over how much defense spending is enough should be about threats, strategy and fiscal constraints. Focusing on the specific amount of defense spending, whether measured in inflation-adjusted dollars or as a percentage of G.D.P., only serves to distract from the real strategic choices we face.

What Microwave Companies Need to Do?
The talk of impending doom is rampant within the Defense Community on the effects Sequestration on the horizon and the hope that Congress will prevent it at the last minute.  There are very real concerns here.  This isn’t a very reassuring scenario for companies with Stockholders, Boards of Directors and a large number of concerned employees.  And having a backlog and orders forecast that has a lot of military contracts is what a large number of Microwave Technology companies have on their books. I firmly believe something will get done, as no politician wants to risk the wrath at the ballot box of their constituents who would feel the direct effects of such draconian cuts seemingly overnight.  However, the situation does act as a reminder for most Microwave Technology companies to rethink some of their strategy, tactics and planning.  It should be looked upon as an opportunity to do a “sanity check” and prepare for such a contingency.  Companies can test your understanding of your business.

For the moment, don't panic about things.  Stay on course and be “steady as she goes” as our Navy colleagues would say.  Most defense contracts will stay as they are written and you need to keep your personnel on line and supporting existing customer commitments.  You customers are in the same boat as you are here.  They know as much or as little as you. Deal with each contract one at a time, as things will need to be strictly purchase order focused.  Keep your eye on your job budgets, cost to complete estimates, and R&D Investment plans.  Be agile, flexible and ready to deal with the uncertainty of job cancellations should they occur.  And make sure all your contract payment terms are solid and enforceable under those circumstances.  Keep looking for growth opportunities in Defense and Commercial markets by focusing on the technology trends and programs that will survive in the turbulent Defense Marketplace.  Look for Platform upgrades, Electronic Warfare Systems, Low Cost SATCOM terminals, and IP Based Tactical Radios to name a few applications.  Develop new customer relationships in emerging applications like UAV Data Links, Autonomous Vehicular Guidance, and Electronically Scanned Arrays.  I expect reason will ultimately win out at the (very) last minute and a Budget Deal will be struck.  But, having a Plan B (and maybe a Plan C) might be a good strategy in this budgetary environment where that perfect storm may just show up on your doorstep.

Recent Articles by Jim Fallon President and CEO, Fallon and Associates LLC

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