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‘Sequestration’ — A Dirty Word in the Eyes of Industry

Weighing the potential (and real) impacts of automatic budget cuts on the aerospace industry and the U.S. economy at large.

BY REGINALD TUCKER

Webster’s New College Dictionary defines “sequestration” as follows: to give up for safekeeping…seizure of property…the inhibition or stoppage of normal ion behaviour by combination with added materials... But for those with ties to the commercial and military aircraft manufacturing and maintenance industry, the term sequestration has an entirely different connotation—and it’s not a positive one.

In its simplest terms, sequestration entails U.S. government budget cuts of more than $1 trillion that automatically kicked in earlier this year as a result of the failure of the U.S. Congress to introduce legislation aimed at addressing the country’s long-term debt crisis.1 (Federal law required the Obama Administration impose $85 billion in across-the-board spending cuts—the first of $1 trillion in such decreases over the next decade.) The cuts—which are divided equally between defense and various domestic spending programs—stand to hit the aerospace sector particularly hard, as reduced government funding for both military and civilian aircraft projects translates into less business for virtually all participants across the supply chain. In the worst-case scenario—sequestration opponents decry—the military-readiness of the United States could be negatively impacted.

Perhaps the most vocal critic of sequestration is the Aerospace Industries Association (AIA).2 Marion C. Blakey, the association’s president and CEO, recently called on Congress and President Obama to use the opportunity of extending the “Continuing Resolution” to reverse sequestration budget cuts as quickly as possible. As she sees it, sequestration cuts were never supposed to happen; rather, they were intended to “hold the discretionary budget as a hostage” to ensure a balanced solution to our nation’s fiscal challenges.

“Well, they’ve shot the hostage and the American people will take the hit,” Blakey noted. “When the Joint Chiefs of Staff say sequestration will have a swift and severe impact on military readiness, when the Secretary of Transportation says it will result in airport delays for millions of travelers (already, airports around the country are experiencing lengthy delays due to furloughs on air traffic control workers), and when the Federal Reserve Chairman warns that it could place a “significant” burden on the economy, our leaders should listen and resolve to act. There is still time to obtain a balanced bipartisan solution to our nation’s debt and deficit problem before the full effects of these drastic budget cuts are felt.”

Other prominent figures are chiming in on the issue of sequestration—particularly how the cuts are being executed. During the recent 2013 NASF Washington Forum, Mark Brunner, senior advisor for National Security & Energy, Office of Senator Mark Warner (D-VA), summed it up forcefully. “We think sequestering is ridiculous, especially the way we’re going about the cuts,” he said. Military and private contractors, specifically, will feel the brunt. “Companies are not going to hire if their contract budgets are being slashed—or if they only receive a small portion of the contract funds.”

For those with oversight responsibility for military contracts, the mandate is clear. “No new projects and no multi-year procurement,” Brunner noted. “Even ship repair projects have been canceled.”

The sentiments and concerns of the manufacturing community is much the same, as illustrated by the following comment that defense contractor Lockheed Martin issued to its customers in March: “We are working closely with our customers to understand how sequestration will impact our programs. We know that any significant delay in funding for any production program could threaten the stability of our supply chains, increase costs, prolong delivery schedules and ultimately weaken our national security posture. Even though sequestration has now taken effect, we will continue to urge our government leaders to reverse this action and establish a more rational fiscal strategy that better addresses our nation’s challenges.”

THE WAY FORWARD

Industry watchers sum up the matter of sequestration as a string of missed opportunities. So it came as little surprise when the deadline of March 27 came and went—and along with it a chance to put in place a “Continuing Resolution.” This provision, experts note, would have allowed Congress and President Obama to mitigate the immediate impact of the cuts by postponing further spending reductions. While there are other options on the table, skeptics are not convinced those in Washington will be able to break the political gridlock.

“The way out of sequester is a bipartisan deal that entails ‘responsible’ cuts and revenue increases—new revenue and prudent cuts,” said Brunner, the national security and energy advisor.

Problem is, Republicans and Democrats remain at polar opposites on a solution. In his easily digestible “primer” on sequestration,3 New York Times writer Jonathan Weisman laid out the scenario:

“Mr. Obama wants a 50-50 mix of spending cuts and tax increases to replace the sequester. Congressional Republicans say they are willing to shift the cuts to ‘mandatory’ programs not subject to Congress’s annual discretion—like food stamps, children’s health insurance and Medicaid—and spread them out over 10 years. Republicans say they will not raise taxes. Democrats hope to force Republicans to the negotiating table with a pressure campaign aimed at the public, but even they concede that is not likely to work until the pain of the cuts becomes apparent this spring…Mr. Obama wants the mini-deal that pushed the sequester from January to March to be the precedent: Half revenues, one-quarter military cuts, one-quarter domestic cuts. He also wants it to be large enough to put off the sequester until Sept. 30. That delay could give the White House and Congress time to negotiate a larger budget deal that included both cuts to Social Security and Medicare and tax increases. Republicans say they will not accept any additional tax revenue. Any deal is likely to fall somewhere between the two parties’ current positions.”

Despite the airline industry’s disappointment that sequestration was not averted, its leading association says it’s not giving up the fight. “We urge our elected leaders to use this period to put a stop to the damage that sequestration is doing to our country,” AIA’s Blakey stated. To that end, she said AIA will continue—in keeping with its mission—to provide a forum for government and industry representatives to exchange views and resolve problems on non-competitive matters related to the aerospace and defense industry.

 

REFERENCES

1. On August 2, 2011, Congress passed the Budget Control Act (BCA), which raised the debt limit, cut $917 billion in federal spending over 10 years, and established the Joint Select Committee on Deficit Reduction (the “super committee”). The super committee was supposed to produce legislation by November 23, 2011 to further reduce spending by at least $1.5 trillion over 10 years. If the super committee failed to propose legislation reducing federal spending by the minimum amount, $1.2 trillion in automatic cuts would be divided equally between defense and various domestic spending programs. According to Citizens Against Government Waste, this sequestration process was intended to serve as a poison pill to force the committee to present a reasonable plan to Congress. When Congress failed to pass $1.2 trillion in cuts by the end of 2012, the automatic sequestration cuts automatically took effect on January 2, 2013.

2. The Aerospace Industries Association, founded in 1919, is the premier trade association representing the nation's major aerospace and defense manufacturers. A hallmark of AIA is that it receives its policy guidance from the direct involvement of CEO-level officers of the country's major aerospace and defense companies. Today, more than 300 major aerospace and defense companies and their suppliers are members of the association, embodying every high-technology manufacturing segment of the U.S. aerospace and defense industry from commercial aviation and avionics, to manned and unmanned defense systems, to space technologies and satellite communications.

3. “Answers to Questions on Capital’s Top Topic,” by Jonathan Weisman, New York Times, Feb. 21, 2013.
 

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