Senate Panel Cuts $6.4 Billion From Obama 2012 Defense Plan

The U.S. Senate Armed Services Committee approved a $664.5 billion defense budget for fiscal year 2012, $6.4 billion less than President Barack Obama proposed for the Pentagon and the wars in Iraq and Afghanistan.

The measure, which sets military policy and spending targets for the fiscal year starting Oct. 1, fully funds 32 Lockheed Martin Corp. (LMT) F-35 fighter jets and authorizes $10.4 billion for U.S. Special Operations Command, an increase of 6 percent from this year. In May, U.S. Navy SEALs killed al-Qaeda leader Osama bin Laden in a compound in Pakistan.

The bill was completed in a closed-door session yesterday. Details were made public today. The committee’s bill also included $18.1 billion for Department of Energy programs under the panel’s jurisdiction, to a total of $682.5 billion for 2012.

The Senate panel cut $5.9 billion from the Pentagon’s base budget request of $553 billion and $537 million from the $118 billion requested for war operations.

Even as the panel agreed to fully fund the production of Lockheed’s F-35 jet, lawmakers inserted a provision that requires the Secretary of Defense to ensure that the low-rate initial production contract for the fifth F-35 lot is a fixed- price contract. The provision also mandates that Lockheed absorb 100 percent of costs “above the target cost.”

Contracting Overhaul

“This is really an overhaul of how we acquire large items” such as the F-35, Michigan Democrat Carl Levin, the committee chairman, said in a telephone conference with reporters today.

For the fourth F-35 production lot, the $3.9 billion Lockheed contract sets a “target cost” of $3.46 billion for 32 aircraft plus a “target profit” for Lockheed of $440.9 million, or nearly 13 percent, according to the Pentagon’s program office.

Lockheed and the Pentagon would share equally any savings if the jets cost less to build than the target cost. Similarly, they would share cost overruns up to 120 percent of that figure. The full burden would fall on Lockheed for overruns of more than 120 percent.

For the fifth lot, the Senate provision would put the full burden on Lockheed for cost overruns.

F-35 Second Engine

The Senate panel’s version of the defense bill prohibits any government funds to be spent on the development of a second engine for the F-35. The Pentagon in April terminated the alternative engine program. General Electric Co. (GE) and Rolls-Royce Group Plc. (RR/), the makers of the second engine, proposed to self- fund the development this year and next. The House’s version of the defense bill backs that proposal. The primary F-35 engine is built by Pratt & Whitney, a unit of United Technologies Corp. (UTX)

The Senate bill adds $322 million for continued production of General Dynamics Corp. (GD)’s enhanced Abrams battle tank and backs the Army’s $884.4 million request for the development of the new armored Ground Combat Vehicle.

The committee agreed to eliminate the $406.6 million requested for Lockheed Martin’s anti-missile system Medium Extended Air Defense System, or Meads. The Pentagon in February said it would terminate Meads when the current contract ends in 2013.

The $4.2 billion development program is managed from Orlando, Florida, by Meads International LLC, a joint venture of Bethesda, Maryland-based Lockheed Martin, Lfk- Lenkflugkorpersysteme Gmbh of Germany and MBDA of Italy.

House Version

The House’s version of the 2012 defense authorization bill, approved in May, would cut $149.5 million from the request. The House Appropriations panel this week approved that same cut in its version of the defense-spending bill.

The Senate Armed Services Committee also proposed a cut of $451.9 million for the Army’s delayed Enhanced Medium Altitude Reconnaissance and Surveillance System.

As it reduced funding for some weapons systems, the Senate panel also cut more than $1 billion from the Pentagon’s request for military construction and family housing projects. The committee also would cut $1.1 billion by freezing spending at 2010 levels for operations and maintenance contract services.

The bill goes next to the full Senate. The Senate and House will have to negotiate differences before the final bill goes to the president for his signature. The House in May approved a defense bill that authorizes $553 billion for the Pentagon’s base budget and $119 billion for war operations.

-- With assistance from Tony Capaccio in Washington. Editors: Steven Komarow, Ann Hughey.

To contact the reporter on this story: Roxana Tiron in Washington at rtiron@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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