Bloomberg News

Defense Cut’s Full Effect Years Away, Analyst Finds

August 24, 2012

Defense contractors wouldn’t feel the full effect of automatic budget cuts for three or four years as weapons programs are facing only a 3.5 percent reduction next year, according to an independent research group.

While most defense programs would be reduced by 10.3 percent under the cuts, known as sequestration, they would take time to implement, budget analyst Todd Harrison said in a report released today by the Center for Strategic and Budgetary Assessments.

“It will be three or four years before defense companies feel the full impact of sequestration,” Harrison said. “This gives industry more time to adjust employment levels through natural attrition and early retirements, rather than forcing immediate layoffs.”

The delayed impact is the result of the “natural lag time” from when money is authorized by Congress to when it’s scheduled to be spent, Harrison said yesterday in an interview with Mark Crumpton on Bloomberg Television’s “Bottom Line.” Cuts in “budget authority,” or authorized spending levels, may not show up on industry accounting books until years later.

Most money authorized for weapons procurement takes several years to be spent because of the time required to award contracts, obligate funding and pay vendors. Only 22 percent of defense procurement money is spent in the same year it is authorized by Congress, according to the report.

By contrast, almost all funding for military personnel -- about 94 percent next year -- is paid out the same year it is appropriated.

Few Layoffs

Harrison’s analysis indicates that sequestration may be less dire, at least in the short term, than some industry groups are predicting as they lobby Congress to avert the cuts. The Aerospace Industries Association, which represents major defense contractors, issued a study estimating a loss of 1 million defense-related jobs if the automatic cuts take place.

Robert Stevens, the chairman and chief executive officer of Bethesda, Maryland-based Lockheed Martin Corp. (LMT:US), the world’s largest defense contractor, has said that federal law may compel his company to send layoff notices soon to thousands of workers because of uncertainty about how many of them would have to be let go in January.

“Few immediate layoffs, if any, are likely to occur as a result of sequestration going into effect on January 2nd because on January 3rd virtually all contractors will be working on projects and activities where funding has already been obligated and thus is not subject to sequestration,” Harrison said in the report.

Civilian Workers

The most immediate effect may be on civilian Defense Department employees, Harrison said. According to the report, as many as 108,000 of them “could lose their jobs in the weeks immediately after sequestration goes into effect” if Congress fails to come up with an alternative deficit-reduction plan.

The Obama administration has exempted military personnel from the cuts. Sequestration wouldn’t eliminate any uniformed military jobs, cut military pay, eliminate any programs immediately or close any military bases, Harrison said.

Harrison’s conclusions are similar to those in a Bloomberg Government report by defense analyst Kevin Brancato. In the BGOV Insight published yesterday, Brancato said almost half of next year’s sequestration cuts in defense spending will occur in 2014 and beyond.

The actual cut in spending, or budget outlays, next year would amount to 4.6 percent for defense programs on average, according to Harrison’s report. Procurement programs would be cut by 3.5 percent, research and development by 5.9 percent and operations and maintenance by 6.9 percent.

The defense reductions are part of $1.2 trillion in automatic, across-the-board cuts to domestic and national- security programs over a decade that will start in January unless Congress and President Barack Obama act to block them.

The cuts were imposed after talks failed last year on a bipartisan plan to curb the nation’s increasing debt.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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