The Budget Edition: Countdown to Dec. 8, nuke spending, rocket motors, and a lot more.
Thirty-six. That’s the number of days until Dec. 8, when the current government funding measure, known as the continuing resolution, runs out. Is it panic time yet?
Remember the fiscal cliff of 2012? I spent the last day of the year in a Manhattan sushi joint checking my phone and keeping an eye on cable news, whose dual-purpose clocks were ticking down until midnight. Compared to that year’s brinksmanship — and with this year’s House and Senate largely in session — a month and change to strike a deal is an eternity.
As usual, Byron Callan at Capital Alpha Partners is running the numbers. In a Nov. 1 note to investors, he projected a 60 percent probability that Congress reaches a budget deal in December. If that doesn’t happen, he expects another continuing resolution to keep the government funded. And no matter whether a budget deal arrives before or after the new (calendar) year, he thinks there’s an 85 percent chance “that Congress will suspend or postpone sequestration mandated by the Budget Control Act” for fiscal 2018.
With that in mind, here’s how defense CEOs have reacted to the continued budget uncertainty on third-quarter earnings calls in recent days.
Lockheed Martin’s Marillyn Hewson: “Should the continuing resolution and its associated budget constraints be extended beyond Dec. 8, we would anticipate some level of impact against our 2018 orders profile and corresponding backlog level, with the potential of other impacts depending on the duration of the CR.”
Asked by a Wall Street analyst how she’s managing uncertainty, Hewson noted broad support for Lockheed programs in both the House and Senate defense funding measures.
“Even with the CR, we're not going to see any immediate impact,” she said. “What it affects is if it extends into next year and I'm actually feeling pretty optimistic that it's not going to do that. I think when I look at where the bipartisan support for defense and the move to try to get through this budget so they can move on to tax reform and other things, I feel pretty good about that.”
Northrop Grumman’s Wes Bush: “We have yet to get to a place where Congress has been able to figure out how to move past the Budget Control Act, which it needs to do. Consequently, that imposes all source of challenges from a planning perspective not only for our company, but even more importantly for our customer community, and inherently, that drives risk. It drives risk into current operations and it drives risk into future acquisitions. So, that's an area that we pay very close attention to.
Raytheon’s Thomas Kennedy: “We are cautiously optimistic that a final defense appropriations bill will be completed by the end of December or shortly thereafter. We continue to see strong support for the fiscal year 2018 defense spending in congressional committee markups.”
You’ve reached the Defense One Global Business Brief by Marcus Weisgerber. We have a big budget focus this week as the calendar inches toward Dec. 8, the date the current government funding measure expires. As always, send your tips, feedback and random thoughts to firstname.lastname@example.org or @MarcusReports. Check out the Global Business Brief archive here, and tell your friends to subscribe!
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CBO's Nuke Numbers
How much will it cost to operate, maintain, and upgrade the Pentagon’s nuclear forces over the next 30 years? An eye-popping $1.2 trillion, the Congressional Budget Office estimates. The report lays out nine options for lowering the costs, but none get the price tag under $1 trillion.
How do we pay for it, particularly in the current budget climate? Should the government create some sort of budget outside the Defense and Energy departments? On a September flight to Minot Air Force Base (home of 150 intercontinental ballistic missiles and B-52 bombers), I put the question to Defense Secretary Jim Mattis. “This is something we'll have to go to Congress and see how they want to go forward, and the president's OMB people will work with us to propose what we think is the best idea. Then Congress in their coequal status, holding the purse strings, they'll have to determine, you know, what's the best way to go about doing this,” Mattis responded, adding, “There's a way to do cost-saving within even a triad.”
Want more ICBM options? Todd Harrison of the Center for Strategic and International Studies gamed some out in his own report. “While the total lifecycle costs of these programs are important, a more pressing concern is the magnitude and timing of the peak years for annual funding,” Harrison writes. “In the annual appropriations bills, policymakers must continually balance the funding demands of programs year by year.”
How the CBO report was received by some in of the non-proliferation community:
Derek Johnson, executive director of Global Zero: “This $1.2 trillion price tag balloons to $1.7 trillion when adjusted for inflation. That’s money we don’t have for an arsenal we don’t need.”
Kingston Reif, director for disarmament and threat reduction policy at the Arms Control Association: “If the forthcoming Nuclear Posture Review by the administration does not scale-back current nuclear weapons spending plans – or worse, accelerates or expands upon them – expenditures on nuclear weapons will endanger other high priority national security programs.”
John Tierney, executive director of the Center for Arms Control and Non-Proliferation: “With this report, the Congressional Budget Office has exposed a dangerous problem — the current nuclear modernization budget is growing at an unsustainable rate.”
Rocket Industrial Base Report
We spend a lot of time talking about North Korean nuclear missiles and rockets that could possibly intercept them, so here’s some interesting information: Since 1995, the number of U.S. companies that make solid rocket motors has shrunk from six to two: Aerojet Rocketdyne and Orbital ATK. (Worth noting that Norway’s Nammo has set up a solid rocket motor shop in the U.S.) Moreover the number of suppliers for these rocket motors has fallen from an estimated 5,000 to 1,000 over the last 20 years, according to the Government Accountability Office. “In its annual industrial capabilities reports to Congress, DOD has consistently stated that the limited number of new missile development programs inhibits its ability to provide opportunities to help SRM manufacturers maintain their workforce capabilities,” GAO said. Why does this all matter? Because missile defense is a high priority at the Pentagon right now. Oh, and the Air Force is about to replace its 400-plus Minuteman III ICBMs with new — yes — solid-fueled missiles.
More Catnip for Defense Wonks
The Center for Strategic and Budgetary Assessments has released its annual Weapon Systems Factbook, one of those numbers reports that Pentagon budget wonks love. It looks at every Pentagon project and charts spending levels into the future for each one. Enjoy all 128 pages of pure budgetary bliss, here.
Intelligence Budget Bonus: The Pentagon said it spent $18.4 billion on intelligence activities in fiscal 2017, which ended on Sept. 31. That’s roughly $100 million less than the $18.5 billion it disclosed it had requested for the year (We don’t know how those numbers are rounded since the exact figures are classified). The Federation of American Scientists — which tracks military and civilian intelligence spending — says military intel spending crested in fiscal 2010 at $27 billion. Spending hit a low point of $16.5 billion in fiscal 2015.
F-35 Sustainment Report: The same week news broke that Lockheed Martin temporarily halted deliveries of Marine Corps F-35B fighter jets, the Government Accountability Office released its new look at how the Pentagon plans to take care of the hundreds of jets it plans to buy in the coming years.
- The White House said President Trump would soon nominate Michael Griffin — a former NASA administrator — to be principal deputy undersecretary of defense for acquisition, technology and logistics. Griffin most recently served as chairman and CEO of the Schafer Corporation, “a provider of scientific, engineering, and technical services and products in the national security sector,” according to an Oct. 27 White House Statement.
- Former U.S. Army Chief Information Officer Susan Lawrence, retired Army lieutenant general, has been named a managing director of Accenture Federal Services’ national security practice. Lawrence helped develop the U.S. Army Cyber Command. She was previously a senior vice president at Booz Allen Hamilton’s Defense Market Group.
- Northrop Grumman appointed Dong Ha — a retired U.S. Army colonel —as its chief executive for South Korea. “In this position he will be responsible for coordinating the corporation's relationship with South Korea, supporting current programs and growing the company’s in-country presence,” the firm said in an Oct. 26 statement.
- Frederick Terrell, vice chairman of investment banking and capital markets at Credit Suisse, has been elected to the Center for a New American Security board.