Bloomberg News

Pentagon Budget-Cut Moves Risk Higher Costs Later, GAO Says (2)

November 07, 2013

The Pentagon weathered the first year of automatic budget cuts through a “short-term response,” including delays in modifying and developing weapons that may cost more later, the Government Accountability Office found.

The Pentagon “was able to protect or minimize disruptions in certain key areas, such as maintaining support for ongoing operations and adhering to plans for major weapons systems acquisitions,” the watchdog agency said in a report released tonight on how Defense Department officials finessed, at least initially, their own worst-case scenarios on the cuts known as sequestration.

Among steps taken, the GAO said, the department “made adjustments to some of its procurement programs, such as deferring modifications or delaying system development and testing.” Defense officials said “that some of these decisions may result in increased costs over the next few years,” according to the report.

The Pentagon program office for the $391.2 billion F-35 fighter made by Lockheed Martin Corp. (LMT:US), the costliest weapons program, absorbed part of the $806 million cut it took “by delayed research and development work on software.” The plane’s software has been among its most troubled features, according to the Pentagon’s testing office.

The Air Force covered reductions for Boeing Co. (BA:US)’s KC-46 tanker by using $143 million “set aside for possible engineering changes,” according to the draft report.

The Pentagon’s decisions on weapons “generally did not appear to be arbitrary or overly severe,” and “many programs reported minor or no impacts.”

Managing Cuts

“As it turned out, they were able to manage sequestration a lot better than they said they would,” Todd Harrison, a defense budget analyst with the Washington-based Center for Strategic and Budgetary Assessments, said in an e-mail.

The biggest U.S. contractors have soared this year in New York trading. Bethesda, Maryland-based Lockheed, the biggest, is up 48 percent, while General Dynamics Corp. (GD:US), based in Falls Church, Virginia, has risen 25 percent.

Unless Congress and President Barack Obama agree to modify or repeal sequestration, the Pentagon will have to cut about $52 billion in the current fiscal year. After absorbing $37 billion in reductions in the year that ended Sept. 30, Defense Secretary Chuck Hagel and chiefs of the military services are warning that they’ll have to cut more deeply into procurement and readiness to deliver on about $500 billion in scheduled reductions over nine years.

Procurement, Research

“In some cases we will make a shift, for example, by prioritizing a smaller, modern, and capable military over a larger force with older equipment,” Hagel said Nov. 5 in a policy speech in Washington. He called for preserving funding for cyberdefense, special operations, space and intelligence, surveillance and reconnaissance systems.

Pentagon Comptroller Robert Hale said in an interview that procurement and research accounts may be cut 15 percent this year, compared with a 6.7 percent reduction in procurement and an 8.1 percent cut in research in fiscal 2013.

The findings by the GAO, an independent auditing agency that reports to Congress, also documented the Pentagon’s use of about $6 billion out of about $63 billion in uncommitted funds from previous years to cushion the blow of sequestration.

‘Unobligated Funds’

The “unobligated funds” replaced $4.8 billion of almost $16 billion in cuts that would have been imposed on procurement and research accounts, according to the auditors.

The funds made up for 65 percent of the automatic reductions in vehicle procurement, 51 percent of aircraft purchases, 51 percent of shipbuilding acquisition and 38 percent of ammunition purchases.

For the current fiscal year, the Pentagon again plans to tap into that stash of funds not already under contract.

Hale said “our best estimate” is that program managers may have access to a pool of as much of $70 billion, part of which could be used to buffer weapons cuts.

Navy Commander Bill Urban, a spokesman for Hale, said the GAO report “generally seems technically correct.”

“Sequestration did have serious adverse effects on DoD,” Urban said. “Coupled with wartime funding shortfalls,” the cuts “led to significant cutbacks in training funding that sharply reduced military readiness. These reductions would be problematic in a major wartime contingency,” Urban said.

In congressional testimony today, General Raymond Odierno, the Army chief of staff, said the service will be largely unprepared for war if the budget cuts proceed this year, with 85 percent of brigade combat teams failing to meet readiness requirements.

South Korea

“If something happens and we’re required to send soldiers, they might not be prepared,” he said at a Senate Armed Services Committee hearing, invoking the potential need to defend South Korea or secure chemical weapons in Syria.

The Air Force would have to cut about 25,000 airmen and 550 aircraft over the next five years, while reducing flying hours for pilots this year by as much as 15 percent, said General Mark Welsh, the Air Force chief of staff, in written testimony.

The Marine Corps, which already plans to shrink to 182,100 Marines by fiscal 2016 from a current force of about 194,000, could afford to keep only 174,000 if the cuts stay in effect, according to General James Amos, the Marine commandant.

For the Navy, the cuts would require canceling plans to buy a Virginia-class attack submarine and a Littoral Combat Ship this year, while delaying by two years the delivery of the USS Gerald R. Ford aircraft carrier, said Admiral Jonathan Greenert, the chief of naval operations.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

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


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