Budget uncertainty leaves defense industry in limbo
By Bill Bartel | The Virginian-Pilot | Published: January 19, 2013
Tom Epley's schedule for maintaining and repairing Navy ships on Norfolk's waterfront was supposed to be steady through all of 2013.
But as of this week, he doesn't have any Navy work beyond April.
The budget stalemate in Washington is forcing the Navy to delay approving new work for businesses like Epley's company, MHI Ship Repair & Services, which employs 450 people and uses 750 subcontracted workers.
"The whole process is exasperating when it comes to business planning," said Epley, the company's president and CEO.
The long-threatened cutbacks in defense spending largely driven by political feuding on Capitol Hill are becoming real in Hampton Roads. Congressional action or inaction will determine whether significant cutbacks will begin in six weeks.
If the budget issues are left unresolved, spending cuts will reverberate throughout the local economy, which gets almost half its income from defense-related work.
With little time left to prepare, the Department of Defense is imposing a civilian hiring freeze, getting rid of temporary workers and holding off on contracts for future ship maintenance - like the work done by Epley's firm. It's also delaying ship decommissionings, cutting back base remodeling and maintenance, and canceling demolition projects.
Pay and benefits for military personnel wouldn't be affected, but the military's civilian workforce - including many of the Defense Department's 39,000 civilian employees in Hampton Roads - could be ordered to stay home for up to a month. The furloughs wouldn't apply to jobs critical to national security that can't be done by military personnel.
The Navy, like other service branches, must "enact prudent, but stringent belt-tightening measures now" because its leaders don't know for certain how much money they will have for the remainder of the year, Rear Adm. John Kirby, the Navy's top spokesman, said this week.
Those actions are spurred by three separate but related fiscal deadlines in Washington that Congress and the White House have yet to resolve because of ideological differences.
For starters, Congress pushed back by two months the Jan. 1 start of about $1 trillion in automatic spending cuts spread over 10 years. Just over half the money is to come from defense, and the remainder from other federal programs. The automatic cuts, known as sequestration, were set in motion by legislators in 2011 as a doomsday threat to provoke them to find a more acceptable way to reduce deficit spending. The government borrows about $1 trillion every year.
If no deal is struck, the cuts are to begin on March 1.
Separately, lawmakers have been unable to agree on a budget for federal fiscal year 2013, which runs from Oct. 1, 2012, to Sept. 30. Instead, they approved a continuing resolution that pays for government operations until March 27 - but at the same level as 2012. The military had been anticipating billions of dollars more in 2013 to cover planned projects and operations.
If Congress doesn't approve a new budget - or another continuing resolution - by March 27, the government will run out of money and be forced to shut down all but essential operations. If lawmakers approve a short-term resolution that keeps funding the government at last year's level, cuts will be necessary, defense officials say.
At the same time, Congress must decide how to address the legal debt limit.
House Republicans reached a tentative agreement Friday on a plan to lift the limit for three months, and a vote is planned for next week. Failure to adopt a long-term solution, experts argue, would have disastrous effects on the markets and the government's ability to function.
Defense Department leaders have indicated they're not assuming that deep cuts are imminent. While they are telling service leaders to rein in spending, they want the changes to be reversible in case some or all of the money is restored and automatic cuts are avoided.
Epley and others are expecting that ship maintenance and other defense-related contracts will pick up in the coming months. But interruptions and reductions in work can be costly for smaller contractors who operate on tight budgets - and in the end, the military could wind up paying more for work that was delayed.
"There's a great sense of frustration because there is no clarity on the way ahead," said Craig Quigley, executive director of the Hampton Roads Military and Federal Facilities Alliance. "If you're a company, large or small, chances are, you're not hiring or investing. You're just kind of in paralysis for another two months.... You're going to have to sit tight. You just don't know what the future looks like."
The uncertainty over how Capitol Hill will address the fiscal issues also makes it tricky for Navy leaders who want to keep their people informed without alarming them.
In a recent video broadcast, Adm. Jonathan Greenert, the chief of naval operations, both warned and reassured his sailors, telling them "we need to kind of ratchet down or slow down on some of the operations, some of the less critical operations. And you'll see us taking those actions in the future."
"But, again, if you're on deployment... or you're getting ready for deployment, you'll receive the support and the resources that you need."
In the meantime, Pentagon leaders are preparing for the worst by slowing the "burn rate" of the dollars they have.
Navy Secretary Ray Mabus warned recently that the impact of sustaining the fleet through 2013 with the 2012 budget will lead to a $4.6 billion shortfall in operations and maintenance. He estimated that the automatic cuts, if not stopped, would require cuts of equal size.
In Hampton Roads, fleet and regional commanders have yet to publicize specific plans for cuts, and they deferred questions to the Pentagon.
But to many observers, the message is that there's rough sailing ahead in southeast Virginia.
"To me, it was clear that the secretary was telling the Navy community that the situation was serious," said recently retired Adm. John C. Harvey Jr., who served as Fleet Forces commander in Norfolk until September.
"For a while, we haven't been able to match our strategic global appetite with the means to sustain that appetite," Harvey said. "To carry out those operations while modernizing for the future in a growing maritime world, you've got to provide resources. The worst-case scenario - the appetite stays and the resources slowly go away. Then you've got stresses on people, ships are not adequately maintained, and you've got that descending spiral."
Harvey predicted the most serious impact could be on career officers who no longer trust their futures to the Navy and leave. That could drain qualified future leaders from the force.
"I think that uncertainty is really the issue that can do the most damage over the long term," Harvey said.
Vice Adm. Thomas Copeman, commander of the Naval Surface Force, warned this week that it's getting more difficult to maintain readiness as demands on the Navy grow while budgets shrink.
Deploying ships are pilfering parts and manpower from other ships that are then left unready back in port, Copeman said in a keynote speech this week at the Surface Navy Association's annual symposium.
To safeguard the fleet's integrity, he said, the Navy needs to shrink the size of its force, which numbers 288 ships.
"You can't have 167 ships that don't have enough people, and don't have enough training, and don't have enough parts and don't have enough time to get ready to deploy," Copeman said. "If it were my choice, I would give up force structure to get whole."
But while Navy leaders are sounding alarms, some observers say that after a decade of continuous rise in defense spending, the cuts are long overdue.
Putting the war budget aside and accounting for inflation, defense spending is at its highest rate since World War II said Lawrence Korb, a senior fellow at the Center for American Progress. He said Pentagon officials have gotten used to an open spigot.
The automatic, across-the-board cuts, he said, would be disastrous for the armed forces. But intelligent budget cuts make sense, said Korb, who served as director of national security studies at the Council on Foreign Relations and was an assistant secretary of defense under Ronald Reagan, managing much of the Pentagon's budget.
"They don't have a money problem, they have a management problem," Korb said. "And any of these claims about a hollow force and all that are completely exaggerated across the board."
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