tv [untitled] June 26, 2012 3:30pm-4:00pm EDT
tax increases aren't going to pay down sequestration. that's just to get everyone at the table to talk about sequestration. there's no dollar for dollar offset here. same thing with obamacare, potentially. money is freeing up from the supreme court, for example. that fedepending on how they ru. the president's commission. that's become a favorite position for a lot of members because there was a lot of work and thought that went into it. what it gives us on the defense side is the exact recipe senator levin has outlined, which is there are significantly more defense budget reductions beyond the $487 billion as part of the budget act. if to you break down just the defense side, and i think it's always great to look at these in mass. it's important because it looks at the whole budget. that's key one. i'm glad that if we're going to dust off any plans, it's a plan to look across the federal government and federal spending at large. but if i'm just breaking down
the defense piece, this plan centered around roughly $850 billion in reductions. the baselines have changed, but you get the rough idea. focus primarily on modernization. f-35, v-22. pick your program. it's probably in there for reduction or cancellation altogether. but there were some ground breaking changes on a bipartisan level to talk about defense entitlements. it's something i know a lot of our colleagues up here and at brookings and around town are thinking about and have looked at. the way you pay those, not today's force. i don't want to go there. it's not the conversation we're going to have about how you pay tomorrow's force. and changes to tri-care, should d.o.d. operate commissaries? should we let the private sector do that? interesting ideas up for debate. doesn't mean we're going to take
this plan and enact it whole cloth. very quickly. their proposal, slightly different defense number. came in around roughly the same amount, however. basically would freeze the defense budget for five years and grow it at the rate of inflation. seems reasonable, if you do it the right way, of course. but still, pretty big bogey. you're looking at doubling the 487 roughly. you know, senator mccain referenced one other plan we're all going to dust off, or at least those policymakers and politicians are going to dust off as they think about how to come up with a deal big or small in the lame duck and beyond for figuring this out. the other one is the super committee. yes, it failed. there was a lot of work done on the super committee. there were a lot of negotiations. a lot of these members have already come to agreement in theory. they just haven't take than vote. people's hearts and minds are already there. in large part, there's a large
center already there are to do any number of these kinds of things. so senator mccain referenced, for example, the proposal put forth by senator thume. it's a big, vague phrase. it means a lot of different things to different people. tax increases are at the eye of the beholder. for example, eliminating ethanol subsidies, which congress is doing anyway right now. some people consider that tax reform, closing a loophole, generates additional revenue by detault. things like that, those are the things that were on the table. i think the super committee is -- deliberations and various packages they put together is also a place to look. the super committee was looking at more defense budget cuts. don't fool yourself. it was not, we'll take the 487 and go home. they were looking at it as a starting point. but there was a special emphasis on trying to protect the
short-term acquisition cycle, not to break programs that end up costing more money in the long run, not to break rnd. that ultimately breaks programs in the future. if you have a net increase in unemployment benefit request, have you saved a dollar? there was a lot of work in the super committee. this is where congress is going to start from when they have these conversations in the lame duck. >> okay. thanks. tom. >> thanks, peter. peter mentioned i was a tank commander in desert storm in the third army division and our officer was this little known colonel named dempsey. we had him to a dinner not too long ago. he looked out over all of us and said, it's just a great thrill to be here with all these old, familiar faces.
i know why you're old, and i'm trying to figure out why you're familiar. i feel very much in marty's shoes in that. i think i'm batting clean-up on this, where i get to practice that old washington adage where nobody says anything new, but everybody has to be allowed to say it. i had a whole bunch of very pithy comments, but i'm going to restrict it to a couple. i saw a comment in the "economist" magazine. the editorial page had a comment that said it would be an extraordinary event if america sacrificed its position as the world's leading military power as a result of a legislative accident. this would be an accident. nobody intended the provisions of the budget control act to actually be enacted. i think that's really where we are. we're looking at a very catastrophic legislative accident that will happen unless there's a great degree of leadership and a great degree of
attention paid to this sometime between now and january 2nd. everybody needs to recognize -- and i think everyone does. you've heard it on the panel time and time again. those of us in the defense industry certainly do. the looming problem with debt has to be addressed. it's going to have to be an addressment that comes in a multi-dimensional, detailed, and time-phrased approach. that's not what we're looking at right now. i think mackenzie has laid out several reasons why that's a major challenge, as has rebecca. there's two ways to get an airplane on the runway. a landing or a crash landing. this one is going to be a crash landing unless something is done about it. i get asked all the time, you're the strategic planner for general dynamicdynamics, so whao doing to plan to get ready for sequestration, should it happen? my boss has made the comment a couple times. i don't know, what do you do to get ready when you hear an
asteroid is hitting the planet? it's a hard thing to do. despite the length of the legislation, there are an awful lot of unknowns out there that make plans rather difficult. just, for example, what's the baseline that's going to be used for this? is it going to be a continuing resolution of fy-12, or some sort of enactment of an fy-13 budget. will military personnel be exempted? one must assume they will be because not doing so has the effect of essentially firing people as they're returning from multiple tours overseas in an economy that's perhaps not prepared to take them. i think all of you have seen the statistics that unemployment figures among people who are former veterans are higher than the general population. will overseas don't see operations be exempted? it's not an fy-13. will it be politically prudent not to fund that full account? i think it probably would not be a very popular thing. how will they be treated in the
following years? michel mentioned there is a bit of a place holder, but will that be rolled into anything that would happen in the future or not? unobligated balances. how much are the unobligated balances? one reports says $65 billion. one says $85 billion. that's a $20 billion swing, which is 40% of the amount of the sequester impact on the defense budget. if these accounts are exempted, and many of them would have to be, then that puts a bigger burden on the modernization accounts that people in my industry are most concerned about and the accounts associated with those projects, programs, activities. despite steve bell's comment earli earlier, what are projects, programs, and activities anyway? there's not a uniform view on that. omb has a responsibility of coming out with the rules on enacting this, and so far they have not done that.
we can just assume that after you make some prudent a assumptions on how this thing would go, we're looking between a 12 and 15% cut. some have argued that even if sequester happens and it's full flower, that's just going to return top-line defense spending back to essentially where it was in 2006. and that's basically true. but that's not really the problem. the industry, the defense industry has shown over the years that given time, given guidance, and given the ability to do so, we can adjust under new circumstances. the problem here is the repidty of the dissent. let me talk just a little bit about the warren act to make
sure everybody understands this. you've heard it mentioned two or three times. it stands for the worker adjustment and training renotification act. that requires, by federal law, those of us who have people working for us in our work force, if they're going to lose their job, that they have to be notified 60 days out where employees may reasonably be expected to be terminated. interesting wording here. may reasonably be expected to be terminated. the federal requirement is 60 days. there are some states that have 90-day requirements. california and new york among them. there are some labor agreements that have a date that pushes out even further. this gets you out into the time frame of potentially mid-september for when notification will have to go out. the only thing that's really known about sequestration right now is that something happens to january. what does that mean for specific
contracts, specific programs, specific locations, specific facilities? that's not known. we do know this. from past practices, the government tends to be rather broad in its interpretation of what the words may reasonably be expected to lose their job means. if they believe we reasonably, as employers, should have seen this coming, then we have a certain obligation and wind up with certain financial burdens if those warning notices don't go out. my supposition is that a lot of these warning notices will go out. they will go out in advance of november 2nd. some of them will go out about that date. i think they will no doubt get somehow or another into the political dialogue. we may be seeing about that right now. this is simply compliance with federal and state and sometimes labor agreements. it was mentioned up here, and it went by quickly. i wanted to mention it one more
time. that is, when it comes -- in fact, general dynamics was mentioned specifically. when it comes to meeting a certain objective in terms of savings, inevitably because of termination costs and other fees associated with contracts, you may wind up terminating more than $1 a program to get $1 of savings. in other words, even though you cancel this and it's $1, yes, but you owe me 20 cents back or whatever it is. this compounds the implications of terminating contracts. prime contractors will have to make adjustments to the contracts that they have with the government based upon economic adjustment rates, and we will also have to redo contracts with our suppliers. a lot of us are still trying to find out exactly what the dimension of that readjustment is going to be, both with the government and own suppliers.
we don't quite yet have a grasp on what that number is. bob stevens at lockheed martin has mentioned the number 40,000 contracts. that would have to be dealt with by him. as was mentioned before, a lot of the reductions on the non-defense side will have to be applied in some form or another against personnel. that presents a serious challenge. i want to take just a minute here to drag you all into the weeds as if you haven't been there long enough already. i, for many years, as peter mentioned, was a program budget official for the army in the pentagon. there are a few things that come down to the practicalities of how the pentagon is going to have to deal with this. i wanted to just share with you a few of them. i've had some discussions with my old community over there. most of those discussions are reasonably brief and sometimes
rather harsh on their part and generally end with someone throwing their hands in the air and running for the door. here are some things you need to keep in mind first of all, none of the offices that work in the empire going down to the service reflections that they have have any experience in doing this. they don't have established s.o.p.s. they don't have what we in the army would call t.t.p.s, tactics, techniques, and procedures, for actually implementing something like a sequester. second, compounding this issue over the past several years, these offers have been managed and run by people who are accustomed to taking big infusions of budget authority and distributing it around to meet immediate requirements and needs. this is the opposite of that. this is the opposite of that. this is taking money away. this is establishing priorities. this is saying you're the winner and you're the loser. i first went to the pentagon in
this capacity in 1986 as a young major. we didn't know it at the time, but we were just then on the cusp of the reagan build up. we were just then having to change how we actually handed out money and how we actually managed it as we went through our programming and budgeting processes. it was a long, at least two-year, learning process. many assume this is a relatively easy issue. one just takes every line item in the pentagon, multiplies it by whatever percentage is determined to be allocated to the various accounts, pushes the sort button, and you get new numbers and you're done. the pentagon database, so far as i'm aware, unless there's been some major change, is not configured by ppas. on the programming side, it's built around things called programming elements which contain all colors of money. each service has its own
versions of this. but for something like an apache helicopter, it has procurement money. it has military personnel money in it. it has onm money in it. it may have construction money in it. digging all that out and sorting all that out is no small task. and it will take the pentagon a long time to do it. so however the sequester cut is mechanically applied, some programs are going to be cut that should otherwise increase because that is what the plan would be. some will have to be cut that would otherwise be cut further. you're going to winds up, in some cases, after you've managed to sort through all this, with a situation where some programs actually, if this is built off the continuing resolution from fy-12, will have more money in them than they otherwise would have had, had fy-13 merely gone forward. all this is going to take a lot
of time, and depending upon the time frames, depending upon congressional action or inaction, i think the probability is quite high after you've done all the data sorting that has to be done. the department will be faced with the prospect of producing the mother of all reprogramming requests followed by the mother of all reports. this is going to completely paralyze the system for some amount of time. so i think as harlan said back there, this is not going to be dealt with quickly. it's going to take a long time. it's going to drag into the middle of next year. meanwhile, all of us are going to be setting around wondering exactly what programs are going to be adjusted and which ones we're going to have to adjust. i wanted to pick up just two things, peter. a question came up, a young gentleman sitting here on the row about exports and moving into services. i think the question was, you
know, if all this happens and if you have a diminishment in the buying power, won't you guys just go and do overseas sales, and that'll pick up some of the difference or move into services because services should be a growth industry. well, the answer to both those questions is probably not. if you take a look around the world and the condition of the world currently, you're going to have to look pretty hard to find a place where there is a great passion and a great amount of money for buying the type of equipment that this country produces. the market internationally for selling the things that are produced on the manufacturing side of the fence industry is a very challenged market right now. we heard a comment here a few moments ago about euro and europe and the eurozone. nobody in the eurozone, except for one country, spends anywhere near what the amount is supposed to be. there's some money to be spent
in the middle east. some capability there. we have, for many years, had a co-production contract with egyptians for m-1 tanks. the announcement yesterday about the results of the egyptian presidential election creates a high degree of uncertainty. we'll have to see how that all plays out. in terms of services, many of us have already moved into services. we have one major component. in fact, it's our biggest component. many people think we still build f-16 fighters. we exited that market. our biggest group is the informations and technologies group, which has a major part that does government services. a lot of that business is very mature. i would suggest to you -- a lot of people are probably going to be pulling back from government services because those are also government expenditures. peter, i think with that cheery assessment, i'll pass it over to you. >> all right. so it seems both generally from the past panel and this panel
there's a fair amount of consensus that sequestration is not the smartest thing to do. tom, i was waiting for sequestr not the smartest thing to do. the movies that have been thrown out there have been "spinal tap", "rebel without a cause", "sophie's choice." these are not situations you want to be in, but that's where we're at. it cuts muscle and fat by the same percentages. it cuts the innovative and the wasteful. it doesn't reflect a strategy. okay, i hear that amount of consensus. i seem to hear general discussion around some kind of support for a grand bargain that doesn't just focus on defense, but brings in these other elements of other parts of discretionary spending, but the bigger parts eating up the budget. we're in the realm of thinking
about national security. so we do things like contingency planning. in turn, canada maintained a plan to invade the united states, all the way up to world war ii. so we do contingency planning for things that aren't likely. i will put sequestration not in the category of invasion of canada, but in a potential likelihood, because the other thing that we've heard consensus is dysfunctional leadership. let's say we go down the path. we agree we don't like it. then we get to the point where something does not happen. what should happen.
if we get to this dangerous period that we all agree we don't want to happen, what are the things we should be doing stuck in the dark alleyway? we'll go to rebecca. i would love to hear from each of you on it. >> i'm sure we have a lot to say on what should happen. sequestration is -- is causing us to admire the problem, and to avoid the strategy discussion. we really must have. what we haven't done is decide what that is. we have not really collectively decided what's next, and what's too bad is countries like china have.
we either need to say we are going to follow our january 2012 strategy and invest more in sea power or air power, or we need to say, we're really a land power. let's take the money down there. but the main point is we need to have the discussion. we've had good draw downs that we've had. the steep ones. including the one after korea was done thoughtfully. there was a plan after the end of the cold war. maybe it wasn't what we all thought was perfect. there was a coherent bottom-up review. it gave a steep plan. it said, here's what we're going to do. that's what is missing right now. the more time we waste discussing sequestration, the less energy we have to get to those hard, strategic choices
that we must make. and i would add to your consensus list, peter, or emerging consensus, sequestration could ultimately cost more than you save. and the subcontract with the primes going back. the lawsuits from the civilian workforce and others. but then also, just the general process and the nature of it, i think we can agree, unemployment request benefits, if you do have it. any form of sequestration. even when you exempt certain accounts, still take an up tick in unemployment. it just doesn't save much money. so then why would you do it on that as well, in my opinion.
and what should happen. back to the three bigger plans that i referenced, like the super committee, or others, gang of six. it had a lot of things in there. senator coburn has a new budget to restore the american dream. there are lots of debt reduction plans out there. since we all know some -- any debt reduction plan will have to tackle something to do with taxes. however it turns out. all that work has to get done now. we should be doing the work on the the committee level in the congress now. other smart people on other panels, when we have talked about their experience on domestic spending and tax policy issues. when president reagan and the congress may cut multiple deal,
unto include major tax overhaul, but it doesn't happen overnight. there have been four years of ground work that have been laid before the final deal was done. there has to be oversight hearings. there has to be hearings of inquiry. there has to be so much leg work done to say we're going to perform the tax code, because it's the lame duck, and now we're ready. it just doesn't happen like that. sometimes you can muscle through something major like a new start treaty, but it's rare. if they want the grand bargain, they have to do the leg work now. senator mccain, i referenced his comments last week. he already said, we're there. speaker boehner said for the final deal, harry reid, barack obama and john boehner.
24 hours later we had the bca. and the speaker said it was an accurate article. the speaker signed up to $800 billion in tax increases, and he was going to get the house to vote with him on that. this house, the tea party house or whatever you want to call it. it's already happening, but the ground work isn't getting done. all the work that has to be done on the staffing level is overlapsed in so many areas in extra places. >> you still avoided the contingency i laid out. let's say the group of leaders
is not able to come to the agreement that we think is potential. we enter a world of something happens. maybe a shift of emphasis in i'm going to put words you said but in this contingency, in that contingency, which is not in the extremely unlikely. >> i'll quickly say how that would play out. i think they laid this out how this would happen over many months. congress would back into this. january 2 is now february 14th. for purposes of a the newest
consensus is a three-month delay. now we're talking mid-may. a new strategy, perhaps, but the tax and the entitlement work as well. so i've heard the speaker. and i've heard them all reference specifically a one-year delay. unfortunately while the right answer is rebecca's, and i completely agree, it's now how the town works. and it wouldn't be how we would back into sequestration. now we're in the fourth endless state of debilitating review. and the strategy is changing.