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Defense Industry Hatches New Plot to Kill the Sequester

The defense industry is plotting a new attempt to do away with the budget cuts on tap for the Pentagon in 2014.

Defense firms have fought for two years to reverse the cuts from sequestration, warning that they would be devastating to national security and do irreversible harm to the defense industrial base.

But their efforts have mostly failed, leading many in the industry to harbor doubts about the chances for success this time around.

Cord Sterling, vice president of legislative affairs for the Aerospace Industries Association (AIA), said his group is working to articulate the damage from the cuts that are now beginning to take hold. They remain hopeful that a fix is on the horizon.

Sterling said that the defense industry will have an easier time making their case to lawmakers because they now have examples of grounded planes, idled ships and layoffs to point to, rather than just hypothetical damages.

“There a general consensus, that sequestration is bad and that what’s being done — even though they’ve been able to do certain budget maneuvers in short term — those are one time things, and it won’t stem the long term damage,” Sterling said.

“People on both sides are really anxious to come up with a solution. They know there’s a lot of damage.”

Some are skeptical that the Pentagon’s budget cuts will actually prompt lawmakers to act, however.

“The problem with sequester is it’s all about pain, and nobody’s feeling it,” said one senior defense lobbyist. “Nobody feels military readiness. We know it’s diminished dramatically, but nobody cares until all of a sudden those forces are called upon to fight.”

The Pentagon’s budget request for the 2014 fiscal year was $52 billion above the sequester caps set in the 2011 Budget Control Act. If that budget is passed and sequester is not averted, the Pentagon would be cut across-the-board again in 2014.

There is some precedent for Congress to stop the cuts. When sequestration threatened to delay flights across the country due to FAA furloughs, lawmakers rapidly passed a bill reversing the furloughs.

Many in the industry have been frustrated at an inability to create a similar movement for defense spending, even though the Pentagon faces the largest cuts under sequestration.

Defense hawks in Congress are trying to change that. The leaders of the Senate Armed Services Committee asked the Pentagon to lay out in detail how it would cut $52 billion from its budgets in an attempt to create some political will to reverse the cuts.

“The feeling in the defense industry is that the budget walls are closing in, but at a glacial pace,” said Loren Thompson, an analyst at the Lexington Institute who consults with several defense firms.

“Many industry strategists feel like up to this point it was hard to tell the story because the pain was hard to detect, but that’s now going to change,” he said.

Defense firms are hoping for the best but preparing for the worst. Major contractors are restructuring, downsizing and focusing on international sales in order to save their bottom lines.

In assessing he difficulty of reversing the sequestration cuts, defense analysts say that much of the industry’s trouble is self-inflicted — because the apocalyptic predictions their leaders made about the sequester have not come to pass.

“The reluctance of members of Congress to allow sequestration to go into effect, I think that’s evaporated,” said Todd Harrison, a budget analyst at the Center for Strategic and Budgetary Assessments. “They’re not scared of it anymore. Anything else DOD can try to say about how horrible the consequences will be, it’s going to fall on deaf ears.”

The other problem for the industry is that sequestration is bigger than the Pentagon budget. Most lawmakers in both parties agree that the cuts are a bad idea, but they have been deadlocked for over a year on how to end them due to deep disagreements about tax increases and mandatory spending.

The industry’s public case is also hampered by the share prices of its biggest firms. The stocks of Lockheed Martin, Boeing, Northrop Grumman and other top contractors have all jumped since sequestration took effect in March.

Thompson said that many defense firms have managed to keep their share price up by making internal restructuring changes, as they have anticipated a slowdown in the U.S. defense market for years with the end of the wars in Iraq and Afghanistan.

“Their internal strategy is to try to organize their finances so that although demand goes down, earnings per share do not,” he said.

Still, industry analysts say restructuring will only go so far if sequester is a long-term budget reality. In all, the automatic budget cuts would reduce Pentagon budgets by $500 billion over the next decade.

Sequester opponents are looking to the continuing resolution that will be needed in September and the upcoming debt ceiling debate as opportunities to fight against the automatic budget cuts.

In particular, the debt ceiling fight is seen once again as an opportunity to reach the ever-elusive “grand bargain.” Most don’t expect the country’s debt limit to be reached until late in 2013.

But the senior defense lobbyist said that any optimism over the debt ceiling debate fixing sequester is premature.

“The debt ceiling is kind of becoming everybody’s holy grail,” the lobbyist said.

“That’s what everybody is holding out hope for that it’s dealt with part of debt-ceiling discussions. But leadership has no idea yet how they’re going to deal with the debt ceiling.”

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