Dec. 22 (Bloomberg) -- The U.S. Congress approved legislation that would keep the government funded through March 4, setting up a budget fight early next year between the administration and Republicans.
By a 193-165 vote, the House yesterday backed a stripped-down measure that would freeze pay for federal employees, provide $160 billion for the wars in Iraq and Afghanistan, and head off cuts in Pell grants for college tuition. The Senate approved the bill hours earlier, 79-16.
President Barack Obama signed the package this morning.
Excluded from the bill were thousands of proposed pet projects known as earmarks, as well as provisions opposed by the White House that would have prevented a trial on U.S. soil of Khalid Sheikh Mohammed, the alleged mastermind of the Sept. 11 attacks who is being held at the U.S. detention facility at Guantanamo Bay, Cuba.
The 36-page bill replaces a $1.2 trillion, 1,924-page “omnibus” spending measure loaded with earmarks that Republicans, under pressure from Tea Party activists who seek significantly limited government, blocked last week.
The result is that federal agencies will go roughly halfway through their 2011 fiscal year, which began Oct. 1, without updated budgets.
The temporary spending bill will make it easier for House Republicans, who have promised to slash spending by $100 billion when they take over the chamber next year, to force Senate Democrats to accept cuts, because legislation will be needed to prevent the government from shutting down. Democrats wanted a continuing resolution that lasted the duration of the government’s 2011 fiscal year. Senate Majority Leader Harry Reid, a Nevada Democrat, didn’t have the votes for that.
The measure before the Senate includes approval of a Navy proposal allowing it to award contracts, for up to 10 vessels each, of the new Littoral Combat Ship to teams led by Lockheed Martin Corp. and the U.S. unit of Australia’s Austal Ltd.
The Navy needs congressional approval to proceed with plans to buy ships from each team in a newly proposed dual-design approach, instead of choosing one supplier as originally announced in September.
If Congress hadn’t authorized the dual-team strategy by Dec. 30, the Navy would have awarded the contract to one team. Both teams submitted prices that expired Dec. 14, then agreed last week to extend them through Dec. 30. The proposal is opposed by Senator John McCain of Arizona, the ranking Republican on the Armed Services Committee who has questioned whether having two ship designs will result in excessive long-term maintenance costs.
Littoral Combat Ships are designed to operate closer to coastlines than existing surface vessels, such as destroyers, in missions such as clearing mines, hunting submarines and providing humanitarian relief. The Navy projects buying 55 ships under the program. Bethesda, Maryland-based Lockheed and Marinette Marine Corp. worked together on one model, while the other was developed by Austal’s U.S. subsidiary and General Dynamics Corp.
For most weapons programs, the spending measure temporarily stops the increase in production planned for this fiscal year, said a Pentagon spokeswoman, Navy Lieutenant Commander Kathy Kesler.
The bill doesn’t contain language that allows the military services to request congressional permission to shift funds from non-weapons accounts into weapons production, so that will preclude “new starts or rate increases,” Kesler said.
Among the biggest plans on hold is doubling the construction, from one to two, of the Virginia-class submarine made by General Dynamics and Northrop Grumman Corp. The procurement request was to increase to $5.2 billion for fiscal 2011 from $4 billion in fiscal 2010.
The continuing resolution also temporarily prevents the Pentagon from increasing from 30 to 42 the number of Lockheed Martin F-35s it planned to put on contract. Procurement funding is scheduled to increase to $8.4 billion this fiscal year from $6.8 billion last year.
On a smaller scale, the budget measures delay the Army’s planned increase -- from eight to 16 -- in purchases of advanced Boeing Co. AH-64 Apache helicopters, according to Pentagon budget documents.
The funding limits in the short term shouldn’t affect defense stocks, said Byron Callan, a defense markets analyst with Capital Alpha Partners LLC.
“Most companies assumed that a continuing resolution through early 2011 so the action today is consistent with that view,” he said in an e-mail.
Still, earnings estimates for defense contractors will be at risk “and that will affect stock prices” if Congress doesn’t pass the fiscal 2011 appropriations bill by late February, Callan said.
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