/.../With $500 billion in cuts to U.S. defense programs over 10 years set to begin on Jan. 2, industry contractors and analysts say the challenge isn’t only the amount of the cuts, it’s how they’ll be managed. They are waiting to hear if the approach in Anderson’s era will apply -- the White House hasn’t said whether it’ll give the Pentagon the authority to make choices within broad categories of spending, or whether it’ll require rigid program-by-program cuts.
That lack of information is creating uncertainty for weapons makers and services contractors, who must proceed as though they won’t have/.../
The effects on defense contractors won’t be immediate. The process, known as sequestration, affects budget authority or how much Congress approves for various programs. Companies are affected by outlays, or government expenditures that take place when the Treasury Department sends out checks. Outlays change more slowly, said Todd Harrison, an analyst at the Center for Strategic and Budgetary Assessment in Washington.
“For the defense industry, it won’t be as sharp a downturn as it might appear at first because there’s a natural lag,” Harrison said. “If you’ve got something on contract, it’s not going to be a sudden shock. It will be a bit more gradual''/.../
The magnitude of the cuts also has yet to be determined. The first installment, almost $55 billion in 2013, amounts to about 10 percent of the Obama administration’s base defense budget request for the fiscal year that starts Oct. 1. President Barack Obama has the ability to exempt military pay and benefits, which totals about $135 billion, Harrison said. If he does so, a 13.5 percent reduction would apply to the rest of the defense budget, he said.
The Pentagon has made efforts to blunt the effects on defense programs. The Defense Department said the sequester process would apply to war funds and unobligated funds in defense accounts, broadening the pool of money subjected to the cuts. That means the final reduction would be 9.5 percent across affected programs, Harrison said.
Contractors worry about a lack of leeway if the full $55 billion in cuts goes into effect. Last year’s Budget Control Act, which established the sequestration process, said cuts should be made at the “programs, projects and activities” level.
“It’s not the depth of the cuts that’s the problem, Harrison said. “It’s the abruptness of the cuts and the lack of flexibility.”