Defense Fights Sequestration Eisenhower Couldn’t Predict

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A U.S. Army medevac helicopter is refuelled in Helmand province, Afghanistan. The mandated defense spending cuts will take about $52 billion from the Pentagon’s request of $526.6 billion, excluding war costs, for the current fiscal year. Close

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Photographer: Behrouz Mehri/AFP via Getty Images

A U.S. Army medevac helicopter is refuelled in Helmand province, Afghanistan. The mandated defense spending cuts will take about $52 billion from the Pentagon’s request of $526.6 billion, excluding war costs, for the current fiscal year.

Defense industry lobbyists are bearing down on members of Congress in a bid to avert $52 billion in automatic spending cuts, part of a series of reductions that threaten to reshape military programs and contractors’ profits for years.

U.S. lawmakers have been barraged with phone calls, letters and visits in the biggest lobbying campaign by military contractors in recent history, as a special congressional committee begins meeting today in an effort to produce a budget accord replacing cuts approved in 2011, known as sequestration.

For the defense industry, this is a potentially transformational moment in its relationship with Congress, where defense spending long was accorded special status as a matter of national security and hometown jobs -- reinforced by campaign contributions. John McCain of Arizona, a leading Senate voice on defense, said military spending is no longer sacrosanct, even among fellow Republicans.

“It’s a new generation of conservatives that may not have the same concern for national security as previously,” McCain said yesterday. “A lot of them have never served, many of them are new in the Congress and many of them campaigned committed to cutting spending.”

The Aerospace Industries Association, a trade group that counts top contractors Lockheed Martin Corp. (LMT) and Raytheon Co. (RTN) as members, said it is waging its largest campaign in years against sequestration.

Source: Underwood Archives via Getty Images

In his 1961 farewell address, President Dwight D. Eisenhower warned Americans to “guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” Close

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Source: Underwood Archives via Getty Images

In his 1961 farewell address, President Dwight D. Eisenhower warned Americans to “guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”

‘New Normal’

The mandated defense spending cuts will take about $52 billion from the Pentagon’s request of $526.6 billion, excluding war costs, for the current fiscal year. A key deadline is Dec. 13, when congressional negotiators are to propose a budget before a temporary spending bill expires a month later.

While the contractors want to avoid the next round of cuts, they also want to avoid a “new normal where lower defense spending is acceptable,” said Julian Zelizer, a professor of history and public affairs at Princeton University in New Jersey. Defense programs would be reduced by about $500 billion over nine years from planned levels if sequestration stays in place.

“They want to counteract the perception that lower spending won’t actually endanger the nation,” Zelizer said.

That’s proving to be a tougher sell than when the U.S. was confronted with the demands imposed by the Cold War or the post-9/11 wars in Afghanistan and Iraq. The emergence of the Tea Party movement within Republican Party ranks has altered what has been a reliable bloc of support for defense spending.

Pentagon Protection

In his 1961 farewell address, President Dwight D. Eisenhower warned Americans to “guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”

While the complex that arose hasn’t threatened personal liberties in the way that Eisenhower cautioned, it has become a sophisticated and voracious recipient of government spending. The military, for example, accounts for more than two-thirds of the roughly $500 billion federal contracting market.

McCain, Senator Lindsey Graham and Representative Howard “Buck” McKeon, chairman of the House Armed Services Committee, are among Republicans who have protected the Pentagon, said Robert Levinson, a senior defense analyst with Bloomberg Government in Washington.

The Tea Party movement has “figured out that the Pentagon is also part of the big government that they don’t like and they certainly aren’t losing any sleep over additional cuts” for the Defense Department, Levinson said. “They see the sequester as the one spending-reduction victory that they can hang on their wall and aren’t about to give it up.”

Cold War

While the defense industry has faced deep budget cuts after every major war, this time is different, said an official from a major contractor who requested anonymity to discuss the situation. Now, the nature of warfare itself is shifting away from state-on-state conflicts that require expensive weapons to cyberwarfare and special operations that rely on technology rather than large-scale force, the official said.

In addition, the official said, there no longer is an enemy like the Soviet Union. The end of the Cold War, along with the departure of some key legislators such as former Missouri Democratic Representative Ike Skelton, who died this week, also has eroded bipartisan political support for defense spending in Congress, the official said.

So far, the military’s top contractors have cut their way to profitability as sales have declined. That strategy may not last. Profits may begin to fall in a year, as the Defense Department begins targeting larger programs, said Brian Ruttenbur, an analyst with CRT Capital Group LLC in Stamford, Connecticut.

Supply Chain

“They’re going to have to cut some of these big platforms,” Ruttenbur said in a phone interview. “It’s going to show up first in decreasing backlogs.”

Sequestration’s “impact on the industrial base and national supply chain has eroded our ability, not only to create new jobs, but to maintain our current intellectual human capital,” Marion Blakey, the aerospace association’s president, and the chief executive officers of Northrop Grumman Corp. (NOC) and L-3 Communications Holdings Inc. (LLL) said in Oct. 23 letters to lawmakers including Senator Patty Murray, chairwoman of the Senate Budget Committee.

“The impact on national security is dangerous, and the net effect on our national economic growth rate is negative,” they wrote.

Both McCain and Graham, of South Carolina, said the defense industry is facing an uphill fight to escape sequestration. Gordon Adams, professor of foreign policy at the American University School of International Service, calls defense spending “a drive-by shooting victim of budget politics.”

‘Political Turf’

“Jobs, the economy, debt and deficit have become the issues,” said Adams, a former White House budget official. “Once you’re in that political turf, you’re not on the defense turf any more. Defense just becomes another part of the puzzle.”

The Aerospace Industries Association, based in Arlington, Virginia, is drafting letters to all 50 governors, letting them know how many jobs in their states are tied to the defense aerospace industry and how many are at risk under sequestration. The group plans to bring small business owners to the Capitol for a day of lobbying next month.

Defense Secretary Chuck Hagel has warned that the budget cuts, if implemented, would force the Pentagon to buy “fewer ships, planes, ground vehicles, satellites and other weapons” and result in “serious damage to our military capabilities.”

Budget Debate

Appeals by Hagel and top military leaders, along with warnings from defense companies about a shrinking industrial base, haven’t proven strong enough to shift the partisan budget debate. Senate Majority Leader Harry Reid, a Nevada Democrat, said yesterday that any deal for a rollback in defense cuts would need to include revenue increases.

“The issue is going to be that Republicans don’t want to replace spending cuts with revenue,” Graham said. “Sequestration was a bipartisan agreement to cut spending.”

While the Defense Department has tried to shelter its costliest weapons systems, led by Lockheed’s F-35 jet, pressure is growing for reductions in weapons accounts.

“Our modernization forecasts are bleak” if sequestration continues into fiscal 2015, William LaPlante, the Air Force’s principal deputy assistant secretary for acquisition and management, told a House defense subcommittee last week.

Spending Caps

The U.S. Budget Control Act of 2011 set discretionary spending caps and created a process that resulted in automatic cuts known as sequestration. The reductions began March 1, and if no action is taken, they will cut $1.2 trillion in defense and non-defense spending over nine years.

The first round of defense cuts under sequestration sliced $37 billion from planned spending in fiscal 2013.

Those initial cuts had mainly affected short-term contracts and areas such as services, analyst Ruttenbur said. That will change over time, he said.

“We owe it to our customers to have it understood what capability goes away when funding goes away,” Ellen Lord, CEO of Textron Systems, the defense subsidiary of Providence, Rhode Island-based Textron Inc. (TXT), said in an interview.

Nine of the 10 biggest U.S. contractors boosted their political action committee contributions to $8.3 million in the first nine months of the year, almost one-third higher than the $6.3 million during the same period two years ago, Federal Election Commission filings show. Defense industry employees made $27.6 million in campaign donations for the 2012 elections, with 60 percent going to Republicans, according to the Center for Responsive Politics.

Business ‘Uncertainty’

On Oct. 15, the aerospace association held a conference call with about 100 chief executive officers who were asked to reach out to U.S. lawmakers.

“I spend a lot of time on Capitol Hill talking to lawmakers about the uncertainty of our business,” Lockheed CEO Marillyn Hewson told reporters Oct. 22 after the company released third-quarter earnings.

One of the association’s letters went to Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee and one of the budget negotiators. Lockheed, based in Bethesda, is in his district.

“Last year, you saw a lot of the subcontractors being squeezed,” Van Hollen said in an interview. “But the longer this goes on, the greater impact up and down the contracting tiers. You’re going to see not just the subcontractors feeling the pressure but prime contractors.”

Industry representatives have stepped up visit and calls, said Representative Tom Cole, an Oklahoma Republican and Budget Committee member.

“They’re in the office all the time,” said Cole, whose district includes Fort Sill and Tinker Air Force Base.

To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net; Terry Atlas in Washington at tatlas@bloomberg.net

To contact the editors responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net; Jodi Schneider at jschneider50@bloomberg.net

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