Pentagon And Contractors Will Feel Effects Of Sequestration Immediately

There is a mistaken notion floating around Washington that even if the super committee fails to arrive at a deficit reduction agreement this is no big deal because the reductions do not go into effect until January 2013. The theory goes that Congress will have plenty of time to undo the law or protect critical budget areas such as national security. In reality, most parts of the federal government will be impacted by sequestration from the movement it is triggered, and no department will be more severely impacted than the Pentagon. Half the deficit reduction must come from the national security accounts, most from the Department of Defense (DoD). By most calculations, the combination of the cuts already agreed to in the Deficit Control Act (approximately $480 billion over ten years) and the new mandatory reductions will require that defense spending be reduced by some $100 billion a year starting with Fiscal Year 2013.

But the impact of the cuts will begin immediately. Fiscal Year 2012 began on October 1; the administration is scheduled to submit its proposed Fiscal Year 2013 budget in early January. According to DoD officials the proposed budget does reflect the $480 billion in reduced spending but not the additional $600 billion or so. So, the department will have to scramble to create a new budget.

More significant, from this week forward unless and until the sequestration is reversed or modified, virtually every defense acquisition and personnel program will be thrown into utter chaos. Since it will be months at best before the decisions will be taken in the department regarding how to absorb the cuts, newly-awarded contracts will be frozen and competitions for contract awards halted. Existing contracts will fare no better, perhaps even worse. On most acquisition programs the lead companies have to buy long lead items and essentially front money to suppliers. These undefinitized contract actions are costs the companies incur on the expectation that they will be paid eventually. However, how can the Pentagon authorize expenditures even in the remainder of Fiscal Year 2012 for acquisition programs that may be terminated in Fiscal Year 2013? So, most acquisition programs will come to a screeching halt before January 2013, many possibly as early as next month.

The stocks of defense companies would go down and hundreds of thousands of individuals would be thrown out of work. In many instances, these are highly skilled workers, even uniquely so. The losses would not only be felt in the large defense companies. There are hundreds of small defense companies that could not survive even a year without cash flow. How could they get loans to tide them over? Thus, while the defense primes might survive until the situation is cleared up, their supply chains would be in disarray.

The DoD personnel system will be shattered. Civilian positions could not be filled, even if they had been offered, because the job might not be there in a year. How could the services conduct recruiting when they would have no idea what their end-strength would be and hence how many new inductees would be required?

Last year, the government operated under a continuing resolution for almost half a year. This had a serious negative impact on DoD programs even though there were no dramatic reductions in defense spending and everyone anticipated that eventually a defense bill would be passed. Funds were taken from some programs to ensure funding of others. New starts were delayed and costs for many defense items went up. The effects of a continuing resolution are nothing compared to what would happen to the Pentagon in the event of sequestration.

We can argue at length as to whether or not DoD can absorb an additional half a trillion in spending cuts and still maintain an effective military. The consensus among all senior DoD officials is no. However, even if it were possible to find a path to a stable force construct this will not be possible if the Pentagon has to take $100 billion out of the budget starting in January, 2013.