House Passes Defense Appropriations, Speculation Continues on End Game as Aerospace Industry Worries

The House passed the FY2013 defense appropriations bill (H.R. 5856) yesterday, approving $606 billion — a core budget of $518 billion plus $88 billion for Overseas Contingency Operations including the war in Afghanistan.

The total for the core budget is $1.1 billion less than what the Republican leadership wanted.   Many House Republicans are seeking to exempt defense spending from budget cuts and want to add money above the President’s request despite their fervor to reduce the deficit. House Democrats largely support the President’s position that defense must shoulder its share of budget cuts along with non-defense programs.  Politico called Republican support for cutting the $1.1 billion from what their Republican colleagues initially sought “a modest but still important turning point in the budget wars.”

Congress continues to wrangle over how to deal with government funding for FY2013 and deficit reduction in general.  

Discretionary government spending remains under threat of substantial cuts on January 2, 2013 according to the terms of last year’s Budget Control Act (BCA).  Referred to as a “sequester,” if Congress does not change that law or reach a compromise on how to reduce government spending by $1.2 trillion over the next 9 years, an approximately 8 percent cut will go into effect for all government agencies categorized as discretionary spending, including defense, NASA, NOAA and most other government agencies familiar to the public.  The estimated $109 billion in cuts would be split equally between defense and non-defense spending and implemented on an across-the-board basis.  Often called a “meat axe” approach to budget cutting, that means every discretionary government activity would be cut by that percentage rather than allowing agencies to prioritize which programs are most important and allocating funding accordingly.  The cuts also would have to be absorbed within 9 months instead of 12, since FY2013 will already be 3 months old by then.

Mandatory government programs including Social Security and Medicare, as well as veterans benefits, would not be affected by the sequester, although a 2 percent cut to Medicare payments to physicians is part of the package.

The sequester was included in the BCA as a “poison pill” to force Congress to reach a compromise on reducing the deficit on the premise that its effect would be so dire that Congress would do anything to avoid it.  That did not work.  Republicans remain intransigent that deficit reduction be accomplished through spending cuts alone, while Democrats remain intransigent that tax increases must be part of the solution.  White House officials say the impact of a sequester would be catastrophic to the nation’s economy and insist that Congress must find a solution.  

The Aerospace Industries Association (AIA) has been hammering home in many venues what a sequester would mean to the aerospace industry.  Most recently, it released a report from George Mason University (GMU) on the expected economic impact of the sequester on the country.  The report does not contain specific numbers for how much DOD or NASA or NOAA would be cut or how many aerospace industry jobs specifically might be lost, but concludes that it would cost 2.14 million jobs overall.  AIA President Marion Blakey stated that the report shows “sequestration is not just a defense problem, it’s an American problem” and called upon “our leaders in Washington” to fix it.

At a House Armed Services Committee (HASC) hearing this week, Lockheed Martin President Robert Stevens, Pratt & Whitney President David Hess (who also is chairman of AIA), EADS North America Chairman and CEO Sean O’Keefe, and Williams-Pyro President Della Williams warned about the impact of the sequester on their defense-related businesses.  Stevens said the impact would be “devastating” and the “very prospect of sequestration is already having a chilling effect on the industry.”  He gave a “seat of the pants” estimate that Lockheed Martin might have to lay off 10,000 workers, but stressed that he had no idea which workers they might be since he has no details on what programs would be cut by how much.  He and other witnesses stressed that companies must comply with the Worker Adjustment and Retraining Notification (WARN) Act to provide 60 days advance notice of plant closings or mass layoffs, so must know very soon what to expect.  Otherwise those notices will have to be sent even though Congress ultimately might reach a deal to avert the sequester.

FY2013 begins on October 1 and despite House passage of the defense appropriations bill, final action on that and the other 11 appropriations bills is unlikely before then.  Conventional wisdom is that agreement on FY2013 appropriations and deficit reduction will have to wait until a lame-duck session after the November 6 elections to see who wins the House, Senate and White House.   Typically agencies are funded by Continuing Resolutions (CRs) at their previous year’s levels until agreement is reached.  In a politically charged environment amid sharp disagreement on where and how much to cut, a rancorous standoff over a potential government shutdown this fall is a definite possibility.

Some conservative House Republicans reportedly are sufficiently opposed to a shutdown standoff for fear of political backlash, and to a lame duck session at all, that they are suggesting passage of a 6-month CR to kick FY2013 funding decisions into next spring.  House and Senate Republicans and Democrats and the White House agreed to cap government spending at $1.047 trillion for FY2013 in the BCA last year, but House Republicans reneged on that agreement in March, passing a Budget Resolution setting a lower cap of $1.028 trillion instead.  To get agreement on a 6-month CR, these concerned House Republicans apparently are now willing to support the $1.047 trillion figure instead of their lower cap at least for the duration of the CR.   What would happen after that is anyone’s guess.

For that reason, a 6-month CR is not good news for government agencies.  A Damoclean sword would hang over their FY2013 spending plans until final agreement was reached in spring, half way through the fiscal year, adding yet more uncertainty.