[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-142]
SEQUESTRATION IMPLEMENTATION
OPTIONS AND THE EFFECTS
ON NATIONAL DEFENSE:
INDUSTRY PERSPECTIVES
__________
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JULY 18, 2012
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HOUSE COMMITTEE ON ARMED SERVICES
One Hundred Twelfth Congress
HOWARD P. ``BUCK'' McKEON, California, Chairman
ROSCOE G. BARTLETT, Maryland ADAM SMITH, Washington
MAC THORNBERRY, Texas SILVESTRE REYES, Texas
WALTER B. JONES, North Carolina LORETTA SANCHEZ, California
W. TODD AKIN, Missouri MIKE McINTYRE, North Carolina
J. RANDY FORBES, Virginia ROBERT A. BRADY, Pennsylvania
JEFF MILLER, Florida ROBERT ANDREWS, New Jersey
JOE WILSON, South Carolina SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey JAMES R. LANGEVIN, Rhode Island
MICHAEL TURNER, Ohio RICK LARSEN, Washington
JOHN KLINE, Minnesota JIM COOPER, Tennessee
MIKE ROGERS, Alabama MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania DAVE LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas NIKI TSONGAS, Massachusetts
DOUG LAMBORN, Colorado CHELLIE PINGREE, Maine
ROB WITTMAN, Virginia LARRY KISSELL, North Carolina
DUNCAN HUNTER, California MARTIN HEINRICH, New Mexico
JOHN C. FLEMING, M.D., Louisiana BILL OWENS, New York
MIKE COFFMAN, Colorado JOHN R. GARAMENDI, California
TOM ROONEY, Florida MARK S. CRITZ, Pennsylvania
TODD RUSSELL PLATTS, Pennsylvania TIM RYAN, Ohio
SCOTT RIGELL, Virginia C.A. DUTCH RUPPERSBERGER, Maryland
CHRIS GIBSON, New York HANK JOHNSON, Georgia
VICKY HARTZLER, Missouri BETTY SUTTON, Ohio
JOE HECK, Nevada COLLEEN HANABUSA, Hawaii
BOBBY SCHILLING, Illinois KATHLEEN C. HOCHUL, New York
JON RUNYAN, New Jersey JACKIE SPEIER, California
AUSTIN SCOTT, Georgia RON BARBER, Arizona
TIM GRIFFIN, Arkansas
STEVEN PALAZZO, Mississippi
ALLEN B. WEST, Florida
MARTHA ROBY, Alabama
MO BROOKS, Alabama
TODD YOUNG, Indiana
Robert L. Simmons II, Staff Director
Jack Schuler, Professional Staff Member
William (Spencer) Johnson, Professional Staff Member
Lauren Hauhn, Research Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2012
Page
Hearing:
Wednesday, July 18, 2012, Sequestration Implementation Options
and the Effects on National Defense: Industry Perspectives..... 1
Appendix:
Wednesday, July 18, 2012......................................... 43
----------
WEDNESDAY, JULY 18, 2012
SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL
DEFENSE: INDUSTRY PERSPECTIVES
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
McKeon, Hon. Howard P. ``Buck,'' a Representative from
California, Chairman, Committee on Armed Services.............. 1
Smith, Hon. Adam, a Representative from Washington, Ranking
Member, Committee on Armed Services............................ 3
WITNESSES
Hess, David P., President, Pratt & Whitney, and Chairman,
Aerospace Industries Association............................... 9
O'Keefe, Sean, Chairman and Chief Executive Officer, EADS North
America, and Chairman, National Defense Industrial Association. 6
Stevens, Robert J., Chairman and Chief Executive Officer,
Lockheed Martin................................................ 5
Williams, Della, President and Chief Executive Officer, Williams-
Pyro........................................................... 12
APPENDIX
Prepared Statements:
Hess, David P................................................ 85
McKeon, Hon. Howard P. ``Buck''.............................. 47
O'Keefe, Sean................................................ 68
Smith, Hon. Adam............................................. 49
Stevens, Robert J............................................ 51
Williams, Della.............................................. 90
Documents Submitted for the Record:
Letter from NDIA (National Defense Industrial Association)
and AIA (Aerospace Industries Association) to Chairman
McKeon and Ranking Member Smith............................ 101
Defense Industrial Base Task Force Report of Sequestration
Effects.................................................... 103
``The Economic Impact of the Budget Control Act of 2011 on
DOD and non-DOD Agencies,'' by Dr. Stephen S. Fuller of
George Mason University.................................... 111
Letter from AIA to Jeffrey Zients, Acting Director of the
Office of Management and Budget............................ 136
Witness Responses to Questions Asked During the Hearing:
Mr. McKeon................................................... 141
Mr. Ryan..................................................... 141
Questions Submitted by Members Post Hearing:
[There were no Questions submitted post hearing.]
SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL
DEFENSE: INDUSTRY PERSPECTIVES
----------
House of Representatives,
Committee on Armed Services,
Washington, DC, Wednesday, July 18, 2012.
The committee met, pursuant to call, at 10:22 a.m. in room
2118, Rayburn House Office Building, Hon. Howard P. ``Buck''
McKeon (chairman of the committee) presiding.
OPENING STATEMENT OF HON. HOWARD P. ``BUCK'' MCKEON, A
REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED
SERVICES
The Chairman. The hearing will come to order. Good morning,
ladies and gentlemen. The House Armed Services Committee meets
today to receive testimony from our industry partners on the
challenges of planning for sequestration. Since we began this
hearing series back in September of last year, we have held
seven hearings and one briefing on sequestration, the bulk of
which have delved into the impact of sequestration on our
military capabilities and national defense.
Today we are holding our second hearing that is focused on
the economic impact of sequestration, this time focused on the
implications for the defense industrial base that enables and
supports our warfighters. Joining us today are Mr. Bob Stevens,
Chairman and CEO [Chief Executive Officer] of Lockheed Martin;
Mr. Sean O'Keefe, Chairman and CEO of EADS North America; Mr.
David Hess, President of Pratt & Whitney; and Ms. Della
Williams, President and CEO of Williams-Pyro. In addition to
their own companies' perspectives, I should note that Mr.
O'Keefe also chairs the National Defense Industrial Association
and Mr. Hess chairs the Aerospace Industries Association. Ms.
Williams is on the board of the National Association of
Manufacturers.
Barring a new agreement between Congress and the White
House on deficit reduction, over a trillion dollars in
automatic cuts, known as sequestration, will take effect.
Although the House has passed a measure that would achieve the
necessary deficit reduction to avoid sequestration for a year,
the Senate has yet to consider legislation, and the President's
budget submission, which sought $1.2 trillion in alternative
deficit reduction through increased tax revenue, was defeated
in a bipartisan and bicameral manner.
This impasse and lack of a clear way forward has created a
chaotic and uncertain budget environment for industry and
defense planners. While the cuts are scheduled for
implementation January 2nd, companies are required to assess
and plan according to the law, and sequestration is the law
right now.
We have all heard the growing number of estimates.
Secretary Panetta has warned sequestration would be
catastrophic to our military and result in the loss of one-and-
a-half million jobs and a 1-percent increase in the
unemployment rate. This would send 200,000 of our men and women
in uniform from the frontline to the unemployment line. It
would, as the Secretary has said, result in the smallest ground
force since 1940, the smallest number of ships since 1915, and
the smallest Air Force in its history.
The National Association of Manufacturers warned that
dramatic cuts in defense spending under the Budget Control Act
of 2011 will have a significant negative impact on U.S. jobs
and economic growth. The manufacturers' forecast and one by Dr.
Stephen Fuller, on behalf of the Aerospace Industries
Association, have estimated private sector job losses at over a
million.
Faced with the prospect of being forced to lay off workers,
renegotiate contracts, disrupt production, and give bad news to
the shareholders, industry leaders have been attempting to get
more guidance from the Administration on how they will
interpret and implement the law. To date, the guidance has been
piecemeal. For example, last fall the Pentagon stated that war
funding would not be sequestered. Then in May the OMB [Office
of Management and Budget] overruled the Department and declared
that while veterans' benefits would be exempt, funding for the
troops on the frontline would not be exempt. In June 2012,
Secretary Panetta met with various defense industries
executives to discuss the impact of sequestration on their
operations and to gauge the current state of the industry in
general. In addition, press reports indicate that the Director
of the Office of Management and Budget met separately with
heads of several major defense companies.
Unfortunately, it doesn't sound like industry learned much
from those meetings. Reports indicate OMB made it clear that it
does not plan to issue implementation guidance until at least
November, less than 2 months before sequestration is scheduled
to take effect. My fear is that the guidance will come much too
late. Industry faces a host of planning challenges and
requirements to be met this summer, not the least of which is
the WARN [Worker Adjustment and Retraining Notification] Act,
which requires most employers to provide notification at least
60 calendar days in advance of mass layoffs and plant closings.
In some States the requirement is 90 days. That means, as we
will hear today, defense companies are currently grappling with
whether to send pink slips by November 3rd to their employees.
In addition to the issue of jobs, I worry that the
cavernous silence from the President will lead many to exit the
industry or to walk away from capital investments that are in
the best interests of our troops. As I have said many times
before, the men and women on the front lines have our backs.
Who is going to have theirs if we allow the impending threat of
sequestration to shutter the American industrial machine that
enables them to fight, win, and return home safely?
This overdue guidance from the Administration on how they
intend to interpret the law and implement sequester
mechanically is critical to employers, not to mention Congress,
and I look forward to our follow-on panel with the Director of
the OMB on August 1st.
We all believe there is strong, bipartisan agreement that
sequester is bad policy and should be replaced. My hope is this
hearing will provide additional incentives for the
Administration to provide more information to employers and for
all parties to resolve this impasse, and I look forward to your
insights today.
Mr. Smith.
[The prepared statement of Mr. McKeon can be found in the
Appendix on page 47.]
STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON,
RANKING MEMBER, COMMITTEE ON ARMED SERVICES
Mr. Smith. Thank you, Mr. Chairman. I thank our witnesses
for being here to discuss this very important subject and to
give their perspectives on it. As some of our leading employers
in the defense industry, their perspectives are critically
important as we go forward, both in terms of the industrial
base issues and in terms of the impact on our broader national
security, and I completely agree with the chairman that
sequestration is not a good idea. It would be bad for our
economy, bad for defense. I always hasten to point out not just
defense, it is, you know, a sort of mindless across-the-board
cut in all discretionary spending. So education,
transportation, infrastructure, on down the line--it would have
a devastating impact, and part of the problem in addition to
that is that the Budget Control Act was not particularly well
drafted. I have heard dozens of different opinions about what
it means and what exact effect it would have, what is exempt,
what isn't exempt, how would you implement it. Nobody knows for
sure until we actually do it. That is part of what the
Administration is wrestling with.
So I don't think there is any dispute that it is bad. I
have not heard the White House dispute that. Secretary Panetta,
in particular, has been very forceful on explaining how awful
sequestration will be. The problem is, it is not like you can
really come up with a plan that is going to make it anything
other than awful. The burden, the real burden of this
committee, this House, and the Senate, and the President is to
get rid of it one way or the other, to make sure that it
doesn't happen. If it happens, it will have a very profound and
negative impact. And it is also worth pointing out and I think
the chairman has done an excellent job of this, this is a
problem right now. We tend to look at it and say, well,
sequestration kicks in on January 1st and people begin to
imagine that that is the deadline. But all of you and thousands
of other employers are making decisions right now based on what
they reasonably project will happen in the next fiscal year,
and those decisions are leading to people hiring less people
and in some cases laying them off in anticipation that cuts
will come one way or the other. So it definitely needs to be
avoided.
But we also need to look at the larger problem in terms of
what got us into this and why we are having such a devil of a
time getting out of it. There seems to be this opinion that
while this is a terrible, terrible thing and it is just sort of
fundamental incompetence that is preventing us from dealing
with it, it is really not. It is more denial about the fiscal
situation we are in. Let's go back to the fact that we are only
here because of the refusal of the majority of people in the
House to raise the debt ceiling. This deal was done as the only
way to raise the debt ceiling and stop the United States of
America from defaulting on its obligations for the first time.
It was only that sort of blind notion that somehow not raising
the debt ceiling was a solution to our fiscal problems that
forced us into this awful, awful decision, an awful decision
which I didn't support, mainly because it put all of the burden
on the discretionary budget.
We unquestionably have a budget problem, we have a $1.2
trillion deficit, actually 1.3 last year, a 38-percent deficit,
and it needs to be addressed. Thus far we have put all of the
burden of that on the backs of 38 percent of the budget, which
is the discretionary spending budget, and we have refused to
talk about revenue. So the solution going forward, the thing
that will help us come together and come up with the deficit
control steps necessary to avoid sequestration is, number one,
admit that we are not balancing the budget anytime soon. We
would all love to have a balanced budget, but there isn't an
economist out there that won't tell you doing that in the near
term would be devastating to the economy. We are going to have
structural deficits for a while. Our role is to get those
deficits under control so that they are manageable, but we
can't hold hostage steps that will do that to the notion that
we have to have a balanced budget right now or even in the next
3, 4, 5, 6 years. So admit that. And then, second, everything
has to be on the table. We are going to need more revenue. We
have cut taxes across the board over the course of the last 10
or 12 years. If we are truly, truly committed to providing for
the men and women who serve us and providing for our national
security, then we absolutely have to be willing to raise the
revenue to pay for that. That is a critical, critical piece of
it. And, yes, we also have to look at the other 62 percent of
the budget, the mandatory spending, and find savings there as
well. So that sort of a sort of realistic discussion is needed.
Right now there seems to be this desire for a balanced budget.
Also a desire to not raise revenue and a desire not to cut any
spending that is important. Those numbers don't add up.
So I hope this committee can begin to be part of the
process of starting a realistic debate that can avoid the truly
awful outcome that would come with sequestration and the awful
outcome that is coming every day, every day that we delay in
making it clear that we are not going to do sequestration.
So I think this hearing is very appropriate. I thank the
chairman for having it. I look forward to the testimony and the
discussion. Thank you.
[The prepared statement of Mr. Smith can be found in the
Appendix on page 49.]
The Chairman. Thank you, Mr. Smith. And thank you again,
each of you, for being here today. This is probably one of the
most important hearings I can remember attending, and we really
appreciate your willingness to be here. Your--Mr. Stevens, if
you will begin, please.
STATEMENT OF ROBERT J. STEVENS, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, LOCKHEED MARTIN
Mr. Stevens. Thank you, Mr. Chairman. Good morning.
Chairman McKeon, Ranking Member Smith, distinguished Members of
the committee, I thank you very much for this opportunity to
express our industry perspectives on the impact of
sequestration. With your permission, I will submit a prepared
statement for the record and offer now a brief summary.
The Chairman. With no objection, so ordered. And that would
go for each of you.
Mr. Stevens. Thank you, sir. As Chairman and Chief
Executive Officer of Lockheed Martin, I am enormously proud to
represent 120,000 hard-working, patriotic women and men who are
the foundation of our business. We are a global security
company operating in 50 States and 75 countries. Our workforce
includes 61,000 scientists and engineers and 26,000 military
veterans. Year in and year out our company consistently hires
the largest number of graduating engineers from U.S.
universities compared to any other company. We receive more
than a million resumes each year from highly talented people
who have a strong desire to deliver the next generation of
technology that will help keep our Nation safe and secure and
ensure the United States leads the world.
Lockheed Martin is also the largest provider of information
technology services to the Federal Government, and we have a
business presence in virtually every Federal department or
agency, including the Social Security Administration, the
National Institutes of Health, the Veterans Administration, the
Department of Homeland Security, and the Federal Aviation
Administration, just to name a few. So the men and women of our
company play an important role in America's future, and we all
take that responsibility seriously.
Sequestration jeopardizes that future. From a national
security perspective, Defense Secretary Leon Panetta has spoken
in the strongest possible terms against sequestration. He said
this process will have catastrophic consequences for our
Nation's defense, and he described it as a meat ax. It is.
Sequestration's automatic trigger and across-the-board cuts
were developed independent of any correlation with national
security strategy, force structure, technology needs or
operational reality, and those cuts will be detrimental.
From an industry perspective, our near-term horizon is
completely obscured by a fog of uncertainty. With just 167 days
remaining until it takes effect, we have little insight as to
how sequestration will be implemented and no insight into which
programs will be curtailed, which sites will be closed, which
technologies will be discontinued, which contracts will be
reformed, and which suppliers, particularly small businesses
who are so vital to our supply chain, will be shut down or
severely crippled. Most tragically, we fear we will be unable
to provide the equipment and support needed by our military
forces, and we are unable to reliably estimate how many
employees are going to lose their jobs and how many families
are going to be disrupted.
It might be flattering to believe that our industry is so
robust and so durable that it could absorb the impact of
sequestration without breaking stride, but that is a fiction.
The impact on our industry would be devastating, with a
significant disruption in ongoing programs and initiatives
leading to facility closures and personnel reductions that
would severely disrupt advanced manufacturing operations, erode
engineering expertise, and accelerate the loss of skills and
knowledge. In short, it will undermine our aerospace and
defense industrial base, which I believe is one of the crown
jewels of the American economy and is strategically vital to
our country.
Beyond defense, I think the broader consequences of
sequestration also are not well understood. The abruptness and
across-the-board nature of the cuts will hit hard virtually all
domestic discretionary accounts as well, and since most of our
domestic departments and agencies don't have substantial
capital acquisition accounts like the Department of Defense,
that means the cuts will come from people, through significant
work furloughs and personnel reductions that will likely
constrain agencies from providing essential support and
services and fulfilling their missions.
In short, sequestration constitutes blunt-force trauma. It
is likely to tear the fabric of our industry, adversely affect
our national security, and impair our domestic agencies.
Mr. Chairman, I don't profess to have the wisdom or
expertise to give counsel to this committee or to Congress on
the precise path forward to resolve all the fiscal challenges
that our Nation is facing, but I have spent decades of my
professional working life in the national security arena, and I
have never been as concerned over the risk to the health of our
industry and our Government enterprise.
Sequestration has been described many times to me as a
doomsday device, as a threat that was designed never to happen,
but the effects of sequestration are being felt right now
throughout our industry. Every month that goes by without a
solution is a month of additional uncertainty, deferred
investment, lost talent, and ultimately increased costs.
Respectfully, I urge you to take action to stop the
sequestration process and ask that you do so soon. Thank you,
sir.
[The prepared statement of Mr. Stevens can be found in the
Appendix on page 51.]
The Chairman. Thank you very much.
Mr. O'Keefe.
STATEMENT OF SEAN O'KEEFE, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, EADS NORTH AMERICA, AND CHAIRMAN, NATIONAL DEFENSE
INDUSTRIAL ASSOCIATION
Mr. O'Keefe. Thank you, Mr. Chairman, Members of the
committee, I appreciate the opportunity to appear here today on
behalf of the 90,000 members of the National Defense Industrial
Association, which I serve as chair, in addition to
representing EADS, which is the world's largest aerospace and
defense company.
I am particularly cursed by a memory of how this particular
provision of public finance was first introduced into the
Federal process as a mechanism to enforcing some measure of
discipline, given my prior public service experience. Gramm-
Rudman-Hollings, when it was enacted in the mid-1980s, was
intended particularly to be indiscriminate by its precision to
be exacting. Across the board by precisely the same amounts,
the logic was, 25 years ago when it was enacted was that the
method was a substitute for rational judgment and choice of
priorities because the process had failed to reach consensus on
what those priorities would be, and so therefore an exacting
precise amount with an indiscriminate application was enacted.
The logic was also that this method was devoid of any priority
selection and that nothing would be more affected and so
therefore there were no priorities. If everything is the same
priority, there are no priorities of any substance. And
finally, the logic was this resource management mechanism was
so stupid that the threat of it would be a prompt all by itself
to public leaders to avoid it at any cost.
That was the logic, quaint as it sounds, 25 years ago. But
it has been adopted a year and a half ago or a year ago, excuse
me, as a mechanism now of enforcement following the debt limit
extension provisions that were then subsequently enacted in
order to force this again. The consequences of this are
serious. Bob Stevens has talked through a variety of very
particular reference that would be applicable, but the
percentage that is to be applied, while it ranges anywhere in
the single digits to very low double digits, may sound like
that is not going to be much of an impact masks the real
consequence of this. The most severe is the administrative
disruption that will likely cost almost as much as what this
mechanism is designed to save. So by however much is
sequestered, taken across the board without priority, without
particular application to any sense of its value one way or the
other in which body armor contracts are valued at exactly the
same value as cutting grass at military bases, that the
consequence of that may sound like it is going to be exacting
in its precision, but indeed the administrative effort to
implement it will be much more disruptive than anything else.
It is going to force inefficiencies, as it has in the past in
much smaller applications of this provision, and that has been
demonstrated and documented in terms of its extent. It is going
to implement and force any number of contract penalties. It
will terminate a variety of different programs because there
are some efforts to select within the amounts that are
identified by the very wonkish-sounding program, project, and
activity definitions, and even those definitions I think as
Congressman Smith highlighted are still in dispute and argument
over exactly how they would be applied. So that will extend
this even further. Unit costs will certainly increase as there
is a change in quantities by contract. The cost of capital for
smaller second- and third-tier suppliers will almost certainly
go up as financing expenses just to meet the cash flow
requirements as progress payments are disrupted, and then once
that is settled, Prompt Pay Act penalties will then be applied
as well. Bob Stevens spoke to the, as well as the chairman
spoke to the WARN Act provisions, that is going to be an
across-the-board disruptive effort, and indeed that has already
started in some cases by notification to many of you and your
colleagues as well as Governors in 50 States that indeed this
provision may, in fact, have to be implemented. So it has
already begun.
The impact on second- and third-tier suppliers, of which
the National Defense Industrial Association, most of its
members represent or are a part of that, is going to be very,
very significant in that regard, and the disruption in that
particular market is going to be one that may not sound like,
again, the percentage sounds like a very big deal. But just
take, for example, some of the suppliers to my company, EADS,
which does purchases $15 billion worth of commercial and other
activities in the United States every year on an annual basis.
Seventy percent of what we do is commercial, 30 percent is
related to public contracts. And yet many of the suppliers are
much the same for aerospace articles that apply in some
circumstances to defense equipment and in other cases of which
again we do roughly 30 percent, the other bulk of it is towards
the commercial side of the equation. The cost of doing business
for many of the second- and third-tier providers is going to go
up significantly because some of those providers will elect to
either exit one element of the market, defense in particular or
public spending in particular, and as a consequence the options
for competition to maintain cost competitiveness is going to
become much stiffer in the $15 billion a year that my company
invests every year to purchase goods and services in the United
States. Some of those subtier providers will exit the market,
and when they do there will be less choice and the cost of
doing business will go up.
In the defense market that is particularly true since those
same products, identical in many respects in a commercial or
military sale, costs in a public market at least on the order
of 20 percent more to do business. Those suppliers who are
providing in both markets will exit the public defense market
faster than any other, just to shed that 20 percent overhead
that it costs to do business there. And so as a consequence, it
becomes an easy choice or one that they are driven to in order
just to survive in many cases. And that is an opportunity at
the same time to examine what that cost of doing business is
uniquely to the public sector. If every article or most require
roughly the same comparability of its application in a
commercial or defense context, why does it cost that much more
just to sell to the public? And that has an opportunity for
reexamination.
The Defense Business Board has advocated what is now called
a regulatory holiday. During the 1990s in the post-Cold War
period the Administration at that time referred to this as a
procurement holiday. Let's just stop buying things, we have got
enough of an inventory, no need to buy more. Well, the same
could be applied in these particular cases, in which 20 percent
of the cost that is applied just to do business with the public
could be reexamined on a case-by-case basis. But to demonstrate
why it ought to stay there as opposed to be just accepted and
therefore be justified on each occasion, they have come up
with--the business board has come up, the Defense Business
Board has come up with a very creative method to do that, and
that is to be advanced as one method in the alternative to
looking at a mindless across-the-board application of no-
priority, everything-is-a-priority kind of reduction. And that
is an overhead that I would encourage as an opportunity to
really look at what those expenses could be to yield a lower
cost and ultimately the kind of savings that are to be accrued.
Lost in all this, though, and maybe this is the most
important element, is that while there will be, there is no
doubt, almost to equal proportion a reduction in this area of
the domestic discretionary appropriations, as again Congressman
Smith described, it nonetheless is going to resonate in a
different way. We are looking at dominantly public servants or
delivery of public services that require personnel, and as a
result how the Federal Government goes about the process of
determining how those reductions will be made is something yet
to be heard from. So while there may be a prospect of fewer TSA
[Transportation Security Administration] agents at the airports
on any given day or flight disruptions as a consequence of the
FAA [Federal Aviation Administration] air traffic controllers
not being asked to report for duty that day, and there will be
fewer research grants because the NIH [National Institutes of
Health] or the National Science Foundation is withholding the
grant that was required through a university for some research
activity. All those are severe impacts. But by comparison to
the impact that will be particularly on the Armed Forces of the
United States, men and women in service who voluntarily are
there in order to defend us, that impact is going to be
particularly profound on them and their families. And it is
worthy, therefore, of consideration of what that consequence
will be that is far greater than anything we are talking about
here this morning on the industry.
The Chairman. Mr. O'Keefe, are you close to----
Mr. O'Keefe. I am done. I simply would want to add, I
commend the committee for seeking some resolution to this
issue, and I very much appreciate the opportunity to testify.
Thank you.
[The prepared statement of Mr. O'Keefe can be found in the
Appendix on page 68.]
The Chairman. Thank you very much.
Mr. Hess.
STATEMENT OF DAVID P. HESS, PRESIDENT, PRATT & WHITNEY, AND
CHAIRMAN, AEROSPACE INDUSTRIES ASSOCIATION
Mr. Hess. Chairman McKeon, Ranking Member Smith, and
Members of the committee----
The Chairman. Is your mike on?
Mr. Hess. I believe it is, sir. Is that better?
The Chairman. You have to get it right close.
Mr. Hess. Thank you, sir.
Chairman McKeon, Ranking Member Smith, and other Members of
the committee, I appreciate the opportunity to testify before
you today regarding the serious matter of the potential for
sequestration and the implications it has to our defense
industry.
As you know, I wear two hats currently. One is the
President of a $13 billion company that employs more than
36,000 employees worldwide, and second as the Chairman of the
Aerospace Industries Association, which represents 300
aerospace companies across the United States which collectively
account for about 90 percent of the revenues for the entire--
for the aerospace and defense industry. I commend the committee
on assembling such a representative group of witnesses to
provide diverse answers based on the different challenges faced
by each of us in the coming months.
As chairman of AIA [Aerospace Industries Association], it
has been my privilege to visit Capitol Hill on numerous
occasions to outline what we see with regard to sequestration,
the potential to affect over one million highly skilled, highly
compensated aerospace and defense-related jobs. AIA's second-
to-none advocacy campaign has been spreading throughout the
country with grassroots rallies highlighting the importance of
fixing sequestration versus suffering its consequences.
As an industry, we are already seeing the impacts of
potential sequestration budget cuts today. Companies are
limiting hiring and halting investments largely due to the
uncertainty about how sequestration cuts would be applied. At
our UTC [United Technologies] sister division, Sikorsky, the
leadership has already indicated that given this environment,
if they had to choose right now between investing an internal
R&D [Research & Development] dollar between a commercial and
defense program, they would choose commercial programs because
of the uncertainty in the defense budget, and that is
considering there is a fair amount of uncertainty in the
commercial environment right now. Equally concerning are the
impacts of sequestration on the domestic side as it relates to
Homeland Security, border security, air traffic control, TSA,
and other agencies. The sequestration threats facing other
Government agencies' contracts and workforce affects our member
companies' ability to do business safely and effectively. In
the near term some clarity from the Office of Management and
Budget about how sequestration cuts would be implemented would
be helpful in terms of avoiding some of these impacts.
Regardless of how the cuts are implemented, the
consequences for the industry would be dire. The Defense
Industrial Base Task Force commissioned by Secretary of Defense
Panetta has reported that sequestration level cuts would result
in the closure of production lines, a layoff of skilled
workers, severe curtailment of research and development
investments, and a reduced ability to respond to the emergent
needs of the U.S. military.
However, today I am here as the President of Pratt &
Whitney to offer my view on how sequestration will affect us
directly and share with you how the effects Secretary Panetta
mentioned are becoming a reality for us.
At Pratt & Whitney we build jet engines for both the
commercial and military marketplace. As you know, our future
military base market consists primarily of the F135 engine for
the F-35 Joint Strike Fighter. While we are also proud of our
engine chosen to power the next generation KC-46 aerial
refueling tanker for the U.S. Air Force, these engines will not
really add to our production business until 2016 or later. With
the end of the production run of the F-22 engine this year and
potentially the end of the production run for our engine for
the C-17 next year, the F135 engine is our future for our
military business.
Already the decline in defense spending is negatively
affecting the F-35 production ramp and subsequently affecting
our engine production. As you know, $487 billion in defense
budget cuts already announced has pushed out 179 F-35 Joint
Strike Fighter aircraft between 2012 and 2020. Original
projections just a few years ago had us building over a hundred
F135 engines per year. This year we will build just over 50, so
about half of that number. Next year our F135 production will
actually decrease, and if sequestration were to take effect,
that number would decline dramatically. It is not just new
engine deliveries that are impacted at Pratt. Spare parts are
the key to keeping our manufacturing base healthy and
sustainable, but as a result of the announced $487 billion
defense budget cuts, flight hours have already been cut back,
and sequestration would result in still further reductions.
This undercuts demand for our spare parts and overhaul work.
For my company this situation poses both a workforce and a
supply base problem. As the F-22 program winds down, I am
currently transitioning many of these workers to the F135
production, but this is extremely difficult given the near-term
production decline I described earlier. With sequestration it
will be even more difficult to retain those highly skilled
employees, and quite simply my workforce is aging, specialized,
and highly compensated. If and when we do ramp back up
production, the learning curve for new employees is steep and
will affect production quality and training, all of which adds
time and costs.
Pratt & Whitney is somewhat unique because from a
production standpoint a jet engine is a jet engine, whether it
goes in a military aircraft or a commercial aircraft. This
allows us to absorb some of the disruptions better than small
companies in the supply base. For a short time I may be able to
move employees between military and commercial programs,
assuming I have an increase in demand for the commercial area.
I can, if forced to, take some risks if there is to be a reward
at the end of the day, but this is like putting a proverbial
Band-Aid on a bullet wound.
In terms of our supply base they, too, are currently
struggling with volume. Many of them are small businesses,
making specialized parts for military engines that simply
cannot survive another production decline or disruption. We
continue to hear from our suppliers that if further cuts take
place, we would be--they would be forced to lay off employees,
curtail investment, and pursue other businesses.
One large supplier has told us, quite frankly, they don't
believe the DOD [Department of Defense] will ever produce the
number of engines in the Joint Strike Fighter program. This
uncertainty makes suppliers less willing to enter long-term
agreements and drives our costs up today.
If sequestration were to go in effect, no amount of
juggling is going to preserve my workforce or help me maintain
our supply base. A step down in the current production ramp for
the F-35 means some people will lose their jobs. It also means
reduced volume for suppliers, and that means costs go up. More
importantly, it puts a good program in a very tenuous position,
a program that we cannot afford to lose.
To reiterate, Mr. Chairman, we at Pratt & Whitney are
better able than smaller companies to deal with short-term
implications of sequestration, but make no mistake, it is
dangerous to the warfighter, for us as a business, for our
supply chain companies, and for us as a Nation.
Again, I appreciate your perseverance on this important
topic and for your allowing me to be here today. Thank you,
sir.
[The prepared statement of Mr. Hess can be found in the
Appendix on page 85.]
The Chairman. Thank you.
Ms. Williams.
STATEMENT OF DELLA WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, WILLIAMS-PYRO
Ms. Williams. Thank you. Mr. Chairman, Ranking Member
Smith, and Members of the committee, thank you for the
opportunity to testify on sequestration implementation options
and the effects on national defense industry perspectives. My
name is Della Williams, and I am the President and CEO of
Williams-Pyro in Fort Worth, Texas.
Williams-Pyro is a woman-owned small business that designs
and manufactures innovative products, including custom cables,
connectors, adapters, automated test equipment, and intelligent
power management systems. Our products have improved the safety
of flight line maintainers, reduced aircraft downtime, boosted
the buying power of the defense and procurement dollar. We
currently have 89 employees who continue to amaze me every day.
I have been here since day one.
As a manufacturer and part of the defense industry chain,
defense supply chain, I very much appreciate your focus on
defense industry and the impact of the impending cuts in
defense spending set to begin on January 1, 2013. While I wish
I were here under better circumstances, and the impending
threat of these wholesale budget cuts is of deep concern to me,
my goal today is to put a face and a name to what is rather
cavalierly discussed in the press as sequestration.
Most people would associate defense cuts with big Tier I
defense contractors which are represented by several of my
colleagues here today. Supporting every one of these large
integrators on dozens of programs are thousands of Tier II and
Tier III suppliers, most small and medium-sized businesses who
design and manufacture what seems like small parts. Moreover,
the defense supply chain companies collectively employ millions
of hard-working people who each support spouses and children
and communities.
So these cuts will not just impact a few companies, these
cuts will flow down the supply chain and through the broader
economy. They will impact companies like mine and threaten the
jobs of thousands of skilled workers who work at them. In fact,
a report released last month by the National Association of
Manufacturers concludes that by 2014 the cuts in defense
spending enacted last year combined with the cuts set for
January 1, 2013, will result in the loss of more than one
million jobs, increasing the unemployment rate by almost 1
percent. Just in Texas alone this means a loss of more than
100,000 jobs. If small business, and I would submit even
further manufacturing, is an engine of economic growth, why are
we making decisions that will inevitably stall that engine? The
budgetary issues the Federal Government is facing are the same
ones that I, as a small manufacturer and a taxpayer, deal with
every day in my own business.
Analysts say the defense industry is faced with several
choices, either exit the market, double down on defense by
buying your competitors or weather the storm. At Williams-Pyro,
however, we have chosen to invest in product development. These
are major investments for a small business, but we are
committed to developing products that will meet the military's
operational and procurement requirements. I believe that this
dedication to providing innovative products for the defense
industry helps to illustrate the potential impact sequestration
will have on my business and many others.
Sequestration, as is being discussed, will create a mass
exodus of talent and skills to other industries. Williams-Pyro
presently has almost 90 employees, including machinists,
assemblers, and R&D engineers experienced in mechanical,
electrical, software, firmware, hardware, and manufacturing.
These jobs are in jeopardy.
What is being billed as a stopgap budget fix will have
lasting effects on our defense capabilities for years to come.
The switch will just not get flipped back on to reverse that
trend. Moreover, the deep personnel and program cuts will
threaten our national security. Indeed, the United States could
lose our technological and strategic advantage and never get it
back.
In conclusion, I urge Members of Congress to go back and
sharpen your pencils. Sequestration is cosmetic surgery with a
chainsaw. Working together we can solve this, but we need to do
it smartly and strategically while keeping the economy moving
and defending this great land.
Thank you again for inviting me to appear before you to
talk about this very important issue. I would be pleased to
answer any questions you might have. Thank you.
[The prepared statement of Ms. Williams can be found in the
Appendix on page 90.]
The Chairman. Thank you very much. I think we on this
committee probably all understand more than perhaps the rest of
Congress how serious these impacts will be on our military and
on our industrial base, but you have laid out even further
these problems. I have a series of questions that probably
could be answered very briefly. I would encourage you to do
that so that we get these things on the record, which will help
us as we go forward.
Based on your testimony, it appears to me that you believe
if sequestration goes into effect January 2nd there will be job
losses. Can you each confirm at this time that layoffs are
reasonably foreseeable?
Mr. Stevens. Yes, sir.
Mr. O'Keefe. Yes, sir.
Mr. Hess. Yes, sir.
Ms. Williams. Yes, sir.
The Chairman. Thank you very much.
Do you believe that you are obligated by either the spirit
of the letter of the Worker Adjustment and Retraining
Notification, known as the WARN Act, to give conditional
notices to your employees that may be laid off as a result of
sequestration in advance of making a final determination
regarding which specific employees will be let go?
Mr. Stevens. Sir, given the uncertainty in this environment
today, yes, we do.
The Chairman. May I--I would like that answer from each of
you, but you have a specific history regarding the presidential
helicopter that is very important. Could you just expand on
that a little bit as to your history there?
Mr. Stevens. I can, sir. With respect to the termination of
the VH-71 helicopter where we knew there would be layoffs at a
particular site in Owego, New York, but we didn't know which
employees would be laid off, we did not issue WARN notices at
the time of that termination, opting rather to do internal
planning to see if we could replace the worker in another
assignment either in that location or another location, look at
dimensions of the business we might have to provide some
flexibility here. That process took about 45 days. In the
subsequent evaluation of the termination claim that is typical
in a termination for convenience environment, we have an
opinion from the Defense Contract Audit Agency that said we
should have acted more timely and that the costs associated
with that 45 days may well not be allowable and viewed, I
believe, in their draft opinion that our actions were
unreasonable, that we waited an unreasonably long period of
time.
So experiences like that inform us in an odd way of the
compelling requirement to take timely action and not allow the
ambiguity of the situation to accrue against the interests of
the company even though in that case our preference was in our
judgment to act prudently and see if we could move the
employees around.
The Chairman. And you are still in litigation on that
issue, as I understand it?
Mr. Stevens. It is a negotiation over the termination, yes,
sir. It has not been concluded yet.
The Chairman. Thank you. Mr. O'Keefe.
Mr. O'Keefe. Yes, sir, no, I concur entirely with your
question that yes, indeed, we will be as a matter of the spirit
of the law compelled to do something in that regard, yes.
The Chairman. Mr. Hess.
Mr. Hess. We would certainly abide by the requirements of
the WARN Act. Now we have certain advantages in our business
that Mr. Stevens doesn't have, Mr. Stevens' business, roughly
80 percent of it is defense. At Pratt & Whitney roughly 25
percent of our business is defense, so depending on what is
happening in the other elements of the business, the commercial
environment, we might have the potential, the opportunity to
redeploy people, but it is far from certain, and certainly when
you are looking at budget cuts of the order of magnitude that
sequestration would involve, potentially another 10 to 14
percent on top of the 10-percent budget reduction that is
already being implemented today, certainly there would be
scenarios where we would be looking at proportional head count
reductions.
The Chairman. Thank you. Ms. Williams.
Ms. Williams. I don't believe we are covered under the WARN
Act because we are less than 100 employees. However, if that
changes, absolutely. And even if it doesn't change, if we don't
get some contracts soon, and I don't see how we will be able to
get, keep our employees, and this sequestration is going to cut
drastically in our contracts.
The Chairman. Thank you.
Barring additional guidance from the Office of Management
and Budget and the Department of Defense on the application of
sequestration, do you believe that conditional notices will
have to be issued this fall prior to January 2 to comply with
the WARN Act? How many employees do you estimate will receive
those conditional notices? And if you will not have to issue
conditional notices this fall, what extenuating factors affect
your decision?
Mr. Stevens. Yes, sir. I think that we will be compelled to
issue notices. There is an ongoing discussion about how many
WARN notices will need to be issued and exactly when. There is
so much uncertainty in this environment. I think that will be a
capstone comment that I know the committee wrestles with all
the time in your deliberations. But we do know several things.
We do know sequestration is the law. We know that law takes
effect January 2. We believe any reasonable modeling around
that law will require significant reductions in force with
double-digit reductions in the budget.
In the past, when we have had budget reductions, we look
internally at a strategic assessment of our company because if
we just cut the cloth uniformly, it would be terribly
uneconomical and inefficient, and those costs would flow back
in the future. That restructuring likely means we will have
plant closings. Plant closings and significant reductions in
force will trigger the WARN Act.
The question then becomes, when? Our best judgment, as we
have tried to put pencil to paper with all this uncertainty
about planning, is that agencies will actually move closer to
January 2 because the act requires a $55 billion reduction in
fiscal 2013. But the act takes effect after the first quarter.
So the $55 billion has to be reduced over 9 months, not a year.
Every day it is delayed after January 2 makes the magnitude of
the reduction to accumulate $55 billion in the year more. If 3
more months go by, the equivalent of $110 billion would have to
be taken out of the agency, which would be more and more
disruptive.
So I think as people come to terms with their
responsibilities in that sequestration is the law and we must
prepare for it, there will be an impetus to move closer to
January 2. We need to be prepared to enable agencies to make
those determinations. Because of that preparedness, we will set
back 60 days or, in the case of New York, 90 days from that.
The question is, which employees would be terminated? We don't
really know. We would have to broaden the notification under
WARN appropriately. We are very hungry for more guidance, very
hungry for more information so we can narrow this and behave
responsibly.
The Chairman. And yet when we held one of our hearings in
September, and we asked the Assistant Secretary, Dr. Carter,
what they were doing to prepare, his comment was rather
flippant, ``We don't have to do anything to prepare. We just
take the budget out, take the percentage off of every line
item. So it takes no planning.'' I just think that is totally
irresponsible.
Mr. O'Keefe.
Mr. O'Keefe. Again, I think as much as you have heard from
others here, absent any specific guidance on how this should be
applied, we will be compelled as a matter of compliance with
the spirit of the law following through on the WARN Act
provisions.
Now we have already begun that process. Again, we have
notified many Members of Congress that represent constituencies
and districts in which we operate in as well as the Governors
of those States that this provision will have applicability. We
are assessing at what point we have to make that determination.
And as much as you just heard from Bob Stevens, we are going to
have to make that choice. As we see the time unfold here,
absent any guidance, that is going to have to be sooner or
later. And again, the determination from the Office of
Management and Budget and DOD would prescribe that.
But much as what you heard as well from Dave Hess, 70
percent of what we do is commercial related. We are going to
have options and alternatives. But there are going to be very
specific contracts and programs that will be affected that are
Federal contracts across the board. And once we get those more
specifically targeted, that will be the focus on where the WARN
Act applications and notifications will have to occur.
The Chairman. Thank you.
Mr. Hess.
Mr. Hess. We will certainly abide by the regulations in the
WARN Act. But as you have heard from my colleagues, given the
amount of uncertainty in terms of how these budget reductions
play out, also given the opportunity maybe to redeploy people
to other parts of the business, it is not clear to us today
that we would trip the thresholds involving implementation of
the WARN Act. With respect to your question about conditional
notification, we are still considering that possibility.
The Chairman. Thank you.
I understand you are not affected by this. But please
explain whether any of the exemptions to the 60-day notice WARN
Act requirements are applicable in this situation. For example,
could your company claim that layoffs resulting from
sequestration were sudden, dramatic, and unexpected?
Mr. Stevens. We don't believe so.
Mr. O'Keefe. No. They are well forecasted and anticipated.
We knew months in advance and you could see it coming.
Mr. Hess. I would agree with my colleagues. The law on the
books today says that sequestration will occur on January 2,
not conditional or contingent on anything; that it is the law
of the land, and we are obligated to plan on it.
The Chairman. Even though some in the Administration say,
it is not going to happen, don't worry about it, you feel you
are bound by the law?
Mr. Hess. We have a fiduciary responsibility to our boards,
to our shareholders and our employees to plan based on the laws
that are on the books today.
The Chairman. And my final question, aside from issuing
notices to your current employees, how has the possibility of
sequestration impacted your current hiring practices or that of
your industry partners?
Mr. Stevens. Well, sir, we have slowed down on I think the
very simple and logical premise that if we are going to engage
in significant reductions in the workforce in January, it is
imprudent to bring people on for 6 months.
What struck me as more interesting and maybe more telling
about the future, we recruit heavily on college campuses. We do
get a million resumes a year from very talented young people.
And I know you interact and the Members of the committee
interact with these young people all the time. And it really
gives you optimism about the future of America when you have
the ability to see the talent, the energy, and the vision
possessed by these young graduates. For the very first time in
my tenure as CEO, they have started to ask whether they want to
come into the industry or specifically with our company, even
though they love the technology and they love the mission.
Because they question, if I join you now, will I have a job
next year? These are very smart kids. We want them because they
are smart young people. And they are smart enough to realize
that this uncertainty may cause them to look at other options
for their career.
We want the best and brightest talent in the defense
industry so we can continue to innovate the products and
services that our women and men in the Armed Forces rely on to
keep themselves safe.
The Chairman. Mr. O'Keefe.
Mr. O'Keefe. Mr. Chairman, I would say that we have slowed
down hiring as a consequence indirectly of sequestration. What
is occurring now is requests for proposals, a range of
different contractual activities. We are all shifting to the
right in the Federal activity. It has all been delayed. So as a
consequence, that really refocuses your attention. We are not
going to hire folks in anticipation of what we think is going
to be market opportunities coming down the road that we think
we can compete for successfully. We have slowed that down
significantly.
The Chairman. So even though you have been told that it is
probably not going to happen, don't worry about it, the
department is already slowing down in anticipation of it
happening?
Mr. O'Keefe. Absolutely. There is no question.
The Chairman. Thank you.
Mr. Hess.
Mr. Hess. Clearly the threat of sequestration is tempering
our decisions today with respect to hiring and capital
investments. And quite honestly, we have seen companies in the
past that have made decisions to invest and are suffering the
consequences today. For example, in the Joint Strike Fighter
program, I mentioned the fact that the volumes that we are
looking at today--production volumes--are about half of what
they were forecasted to be. Companies that had invested based
on the prospects of a much higher volume are now struggling. In
fact, some of them--we have examples, small businesses, like
Williams, that have gone chapter 11 or chapter 7 because they
can't support the cash flow. They made decisions based on
forecasted growth. They haven't occurred. Sequestration would
only exacerbate that.
The Chairman. Ms. Williams.
Ms. Williams. I feel that I owe an obligation to my
employees to explain this as well as I can to them. I mean,
they get very nervous about this word ``sequestration.'' They
were like, what does this mean? But I owe it to them so that
they know what might be happening and whether they should go
look for another job. And believe me, I don't want to lose
those people because they are long-time employees. But this
consumes about 50 percent of our business, a little over 50
percent. And I think my hands are going to be tied if all of
this happens.
The Chairman. Thank you very much.
Mr. Smith.
Mr. Smith. Thank you. First of all, just out of curiosity,
have any of you been told that it is not going to happen, don't
worry about it?
Mr. Stevens. In my case, sir, there is lots of discussion
when we engage in a dialogue about what we should prepare for.
And there are suggestions that a remedy will be developed.
Mr. Smith. Sure.
Mr. Stevens. I would say and I think your comments earlier
certainly reflected this, sir, that there are lots of opinions,
and there are a lot of points of view. But we hold ourselves to
a set of standards that I know you and the committee expect
business leaders to hold themselves to.
Mr. Smith. I understand that. I have further questions.
The chair has said a couple of times the Administration's
position is, it is not going to happen, don't worry about it. I
don't think that is accurate.
Mr. Stevens. We are preparing for the implementation of
sequestration.
Mr. Smith. Right. The Administration is aware of the fact
that this is the law. And until we change it, it is potential.
They don't want it to happen. Nobody on this committee or in
this room wants it to happen. The problem isn't so much a
matter of preparation. The problem is that the law is,
regrettably, on the books and coming. And we have to find a way
to change it.
And toward that end--and I do have a question at the end of
this. But I think what we have learned here is that Government
spending kind of matters. You can't just blindly cut it and
assume that there is no problem, which is sort of what led us
to this horrible deal and the Budget Control Act last time was,
well, you don't raise the debt ceiling. It is no big deal. That
will get us to a balanced budget. That will work.
Government spending matters. So does private sector, so
does keeping taxes low, I will grant you all of that. But we
can't simply blindly say, whatever you cut from Government, it
will be fine because they are not really doing anything that
important anyway. And it is that attitude that led us to where
we are sitting here, the notion that you didn't have to raise
the debt ceiling and then if you put in place mandatory cuts,
it really isn't that big a deal. So I hope that lesson will be
learned.
And as we go forward, looking at our budget situation with
a $1.3 trillion deficit, as I mentioned, even if, let's say,
tomorrow we just say, never mind, we are not going to do
sequestration, I am curious, as all of you look at the next 10
years--the defense budget doubled since 2002. It was a boom
time for defense contractors. No matter what happens--
sequestration or no sequestration--we have got a pretty tight
fiscal situation for the next 10 years. How are you looking at
that? How are you anticipating the impact of simply the reality
of, you know, revenue being in one place and spending being in
another and the need to reconcile that and the reality that the
defense budget right now is 20 percent of our budget? How are
you planning for that over the course of the next 10 years?
Mr. Stevens. Well, the way we are focusing our business now
is to accommodate the reductions already in the Budget Control
Act of $487 billion that Defense Secretary Panetta has spoken
about, that is embedded in our national security strategy. A
number of our programs have been capped, terminated, canceled.
We have slowed down those programs. Our workforce is 18 percent
smaller today than it was 3 years ago. We are hitting the
brakes there. We have taken out 1.5 million square feet of
facilities. We will take out another 2.9 million square feet
before the end of 2014. We have cut our capital investments. We
have cut our research and development, sizing the cloth of the
business to meet the market reality.
We are also looking to work with the Administration and the
leadership in the Pentagon at international work because our
Nation has asked others to step up as security cooperation
partners. As good security cooperation partners, if we have
interoperable systems, we are able to do more effectively well
together. They burden-share some of the expense. And any
incremental work flowing into our businesses stabilizes our
businesses, stabilizes the workforce. And it lowers the cost of
every bit of equipment that the U.S. buys for U.S. purposes. So
that is how we focus the strategy and the business.
Mr. Smith. But if I could--Mr. O'Keefe, you can take a stab
at this one. How worried are you that, again, looking at the
budget realities, that that reduction number is going to wind
up above the $487 billion that is currently projected? And
also, if I could piggyback on that question, there are a number
of studies coming out now that the Pentagon's plans to, quote,
``reduce debt spending over the course of the next 10 years''
don't really quite add up. What they say gets them savings
doesn't. The programs they have started actually are going to
wind up costing more than that. So do you think it could be
more than what has currently been talked about?
Mr. Stevens. I think it is possible. We have watched the
reductions associated with the Budget Control Act. If there are
reductions, we will do the best that we can to accommodate our
business. We have done it historically. And we will continue to
do our very level best to size the business so that we can
deliver against these commitments.
I think the greater concern we have is that the resources
that are available for national security align with a strategy
for national security as an objective set of outcomes.
Thank you, sir.
Mr. Smith. Does anybody else want to comment on any of
those?
Mr. O'Keefe. I will just pick up on that last point. And
that has yet to be mentioned. This is the first time we have
seen in the course of better than 40 years in which every
change and reduction in national security spending in that span
of time has been precipitated by a change in strategy to
accommodate or to recognize a different threat level. This
hasn't happened in this case. This is purely exclusively driven
by the financial realities of----
Mr. Smith. If I may--exclusively--I mean, we just took
175,000 troops out of Iraq. We are drawing down in Afghanistan.
There are national security changes that have precipitated some
of it. I think it is certainly the budget part of it. But I
wouldn't say it is exclusive. There have been, just like in
those previous cases, changes in our national security needs,
at least based on Iraq and Afghanistan.
Mr. O'Keefe. To this point, certainly there has been
accommodation to that. But I think you would also suggest, as
you have in your opening statements as well, that much of what
we are seeing going forward here is going to be a consequence
of the fiscal uncertainty and less about the threat.
So it is very difficult, it is near impossible, from where
we sit, to anticipate exactly what kind of market changes that
will involve. And I think very realistically, there is a
pairing back of expectations of what the market will look like
in the future and what demand will look like. And what we are
already seeing is a gravitation toward--from second- and third-
tier suppliers towards different activities that are far more
commercially oriented.
Mr. Smith. And the last thing, I imagine it would help if
the Government had more revenue so it wasn't forced into as bad
of a budget situation. Would any of you disagree with that
assessment?
Mr. O'Keefe. I think the choice of exactly what spending
and revenue balance is, is more dominantly of your portfolio.
So, as a consequence, I would defer to you on the answer to
that one, sir.
Mr. Smith. That is true.
I yield back. Thank you.
The Chairman. Thank you.
Mr. Bartlett.
Mr. Bartlett. Thank you.
Twenty years ago, I sat in the most junior seat on this
committee and was frequently frustrated particularly in
important hearings like this that time is going to run out
before I came up in the queue.
Sensitive to that frustration, I would like to yield my
time to the most junior Member of our committee here at gavel
fall today, and that is Mr. West.
Mr. West. Thank you, Mr. Bartlett.
And thank you, Mr. Chairman and Mr. Ranking Member.
I would like to try to get a little bit more specific. I
would like to know from each of you what are your four major
weapons systems programs or developments that you have the most
concern about being affected by sequestration and, of course,
the corresponding workforce concerns as well. So if you could
give us that idea of kind of your top four.
Mr. Stevens. I want to be responsive to your question, sir.
When you align the top four with sequestration, one of the
challenges we have is, our understanding of sequestration is
across the board.
Mr. West. Yes. But irregardless of sequestration, what are
the top four that you think would cause you concerns if they
were affected by sequestration?
Mr. Stevens. Undoubtedly, the Joint Strike Fighter program.
Undoubtedly programs in missile defense. And there is a
portfolio associated with missile defense. Without question,
programs like the Littoral Combat Ship, which are accelerating
capabilities. And then we have an array of what I would
describe as classified or intelligence-oriented programs, all
of which is, as I understand the environment, would not be
immune so the support service we provide to the intelligence
community would be adversely impacted.
Mr. West. How about workforce effects from those four
programs? Just an estimation.
Mr. Stevens. Our best estimate, which I will admit is
sufficiently crude, that I am a little embarrassed to offer it,
across the board, 10,000 people. But we have done it on the
back of the envelope where we have made up most of the
assumptions of 120,000 people, in the neighborhood of 10,000.
That neighborhood could be more or less, depending upon, will
there be accounts that are excluded? As the chairman and
ranking member said, there is still yet information to be
determined. We will shape our outcome there, I think 10,000
across the board is about the best answer I can offer.
Mr. West. Thank you.
Mr. O'Keefe. Well, sir, the three that I would highlight in
particular are, first and foremost, the UH-72 Lakota
helicopter, the program that is frequently recognized by every
audit service and the Defense Department overall as on time, on
budget for over 225 aircraft thus far without any exception to
that whatsoever. That could be compromised. As the changes in
production rates alter, that will almost certainly motivate
cost increases per unit. And that would be the first time in
the entire experience of that program that we would see a cost
increase or a failure on delivery. I really would hate to see
that record of absolute achievement compromised or blemished
even for a moment.
The second is one which, as Bob Stevens described, is the
Littoral Combat Ship. We have a very strong interest in a lot
of the systems that are engaged there, for radar and a variety
of other activities, all of which will turn on whether or not
the number of vessels commissioned for production and
contracted will be engaged. That is going to be an uncertainty
for a period of time which, therefore, takes whole units and
defers them until such time as there is certainty.
And the third would be for the United States Coast Guard,
often recognized as a very strong support element of the
defense establishment and national security overall. We produce
most of their helicopters and a good number of their cargo
aircraft, all of which by contract at this point have a
prospect of being deferred, given the very small
maneuverability that particular agency has towards capital
accounts. We don't know what that would be.
So, all in sum, trying to estimate the numbers of people
would be nearly impossible to figure out what would be involved
here, until we see what those exemptions are as well as which
programs in specific may ultimately have to deal with that, if
they are all going to be applied across the board evenly.
Mr. Hess. For Pratt & Whitney, we are already seeing
significant engine delivery reductions in our legacy engine
programs. Certainly our sole source engine on the F-22, now
that that program has been terminated, engine deliveries for
that program will cease this year. We are finishing up some
spare engine deliveries.
Similarly, for the C-17 and the F-16 where we deliver
military engines both of those program delivery rates are
declining as well as they shift largely to international sales.
We are counting on the ramp-up and the increase in the Joint
Strike Fighter program that Bob talked about with our sole
source engine there to offset those declines and really kind of
stabilize our operation and enable us to maintain our
industrial base. But again, as we see that program continue to
be delayed, the last reductions that support the $487 billion
in reductions took 179 airplanes out of the schedule in the
next 5 years. So that is 179 engines for us. So that has
impacted our delivery rates. And we were also counting on the
ramp-up in the Air Force tanker program. But deliveries there
don't start until 2016 and beyond. So really, Joint Strike
Fighter and to a lesser degree the tanker would be the
important programs for us.
Ms. Williams. The weapons systems test equipment that we
manufacture for all aircraft that we do currently for F-16, F-
15, F-18, the A-10 program and the F-35 and some on the F-22.
But this concerns me because we go to the Air Force bases, and
recently we saw 1969 technology still being used.
Do you remember 1969? Rabbit ears and transistors and
diodes.
Mr. West. I was only 8 years old.
The Chairman. The gentleman's time has expired.
Mr. West. Thank you, Mr. Chairman.
My time has expired.
The Chairman. Thank you. Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman.
Thank you, ladies and gentlemen for your testimony this
morning.
I agree with you completely that I favor repeal of the
sequester as soon as we can possibly do it for many of the
reasons you very well articulated here this morning.
But I also acknowledge the responsibility to understand the
comments that Admiral Mullen gave us when he was chair of the
Joint Chiefs of Staff, in which he recognized that a country
that borrows 40 percent of its operating funds can no longer be
a strong country. Inevitably, the national debt is a national
security issue.
The way we got into this mess is that for five decades,
people on this side of the aisle and people on that side of the
aisle have gone through the following exercise: Whenever
anybody brought up a reduction in spending, we had hearings
about how bad that was and who it would hurt. And whenever
anyone brought up an increase in revenues, we had hearings
about how bad that was and who it would hurt.
So we made a series of decisions that you would never make
in your fiduciary responsibility. We made a series of stovepipe
decisions about those spending programs and those revenue
increases in isolation. That is how you create a $17 trillion
debt.
How you get out of it is to do things that people do not
like. I think most of you would agree that since nearly half of
our budget--I guess more than half of our budget soon is Social
Security, Medicare, and Medicaid, that we have to do something
about restraining the growth of those programs in an equitable
way. I agree. That is why I am one of the fewer than three
dozen people who voted for the Simpson-Bowles budget proposal
Mr. Cooper put on the House floor in March. I will stipulate
that most of you I think would agree with that.
Let me ask you another question. It has become an article
of almost religious faith around here for some Members that any
revenue increase at any time on anyone should be taken off the
table. Who here agrees with that proposition?
Mr. Hess. Let me speak. I don't think you will hear any of
us here today arguing against the need for fiscal
responsibility. I mean, we all have our jobs to do running the
companies that we run. But I would say--and I can look honestly
at my colleagues here and know that we are first and foremost
Americans. And as Bob talked about, we are all making decisions
today to deal with the 10-percent budget reduction that has
already been enacted and being planned on and implemented now.
We are making decisions in terms of head count reductions. We
are right-sizing our companies. We are closing facilities,
consolidating our footprint, making the tough decisions, and
taking the tough actions to deal with the need for fiscal
responsibility. We, I think, are supportive of that and
understand that.
Mr. Andrews. But, Mr. Hess, if I may, the specific question
I asked was, who here would advise Congress to rule out under
all circumstances any revenue increase on anyone at any time?
Would any of you make that recommendation to us?
Mr. Hess. I would say that I don't think any of us are
sitting here today presuming that we have the wisdom to
recommend a solution here.
Mr. Andrews. No. I don't think it is a matter of wisdom. I
think you have a lot of wisdom. Do you have an opinion though?
You are an American citizen. You are a leader of a major
institution. Do you or do you not think it is wise for Congress
to rule out all revenues on all people at all times forever? Do
you think that is a wise course?
Mr. Hess. I think everything has got to be on the table at
this point. This is a personal opinion. I am not speaking for
the employees for United Technologies or for UTC.
Mr. Andrews. I think you are right, Mr. Hess, and I agree
with you.
How about the rest of you? What do you think of that.
Mr. Stevens. I know when we face challenges in our
business--and I don't intend to imply that the challenges that
we face come close to the magnitude of the challenges you face
on this committee or Congress faces at large--it really makes
ours look pale--we tried to put into the recipe every possible
ingredient that might lend itself to the formation not just of
a solution but, in a perfect world, a flexible array of
solutions.
Mr. Andrews. A balanced solution.
Mr. Stevens. Comprehensive, integrated, thorough that
allows us the flexibility to run the business.
Philosophically, I think you will see that in our actions.
I think we are held accountable for that kind of behavior from
our board and our shareholders. I think our employees expect
it.
Mr. Andrews. I appreciate that. Since my time is running, I
will just give you this context: Social Security was truly
imperiled in the early 1980s. And a President named Ronald
Reagan stepped forward and, on two occasions, agreed to raise
more revenue for it. It is the reason Social Security still
exists today. And I think that our friends on the other side
would be wise to follow President Reagan's example in this time
of national emergency.
I yield back.
The Chairman. Oh, that we had President Reagan.
Mr. Forbes.
Mr. Forbes. Thank you, Mr. Chairman.
Gentlemen and lady, thank you for being here.
Mr. Chairman, I want to first thank you, not just for
holding this hearing but for being across the country, alerting
the public to the dangers of sequestration long before anybody
else was doing it and also for actually putting a solution on
the table. We are not going to change this by press
conferences. Unfortunately, the House, as you mentioned, has
passed a solution. It may not be the perfect one. But at least
they have passed a solution. The second thing I have to do is
take issue with something the ranking member said at the
beginning because I just believe it to be blatantly inaccurate.
We did not get here because a majority of Members of the
House of Representatives or a majority of individuals across
the country realized the insanity of continuing to allow an
irresponsible and uncontrolled massive increase and the
smothering debt our Nation is mounting. We got here very
easily--a picture is worth a thousand words.
If you look, this Administration decided that they would
spend $825 billion on a stimulus package, $347 billion of
interest. And if you look at these charts, if they look
identical, it is identical because what actually happened was
they decided to spend in 1 year on a stimulus package almost
the entire amount they are now taking out of defense for 10
years. And even though this package has no measurable
significant increase in jobs, we know this is going to cost us
between 1.5 million and 2 million jobs.
So I think it is important, we want to know how we got
here. But this committee is not the Ways and Means Committee.
We are not here to talk about tax increases and anything else.
We are not even a ``jobs creation'' committee. What we are here
for is looking at the national defense of this country. And
that is what you guys do, and you do it very, very well.
My big concern is, as I go back to the 1990s and look at
all the cuts that are taking place, and I am concerned about
the $487 billion we have already taken, much less the $500
billion that is coming. It is my understanding that we started
that decade with 50 major defense firms, and we ended up with
six prime contractors. We started that decade and at the end of
it, our major surface combatant shipbuilders and our fixed-wing
aircraft developers fell from eight to three. Our tactical
missile producers fell from 13 to 3. And the number of track to
combat vehicle developers fell from three to two. Today there
are just two companies, Boeing and Lockheed Martin, that build
U.S. fighter aircraft. My question for you is, What impact do
you think sequestration may have that might be similar to the
1990s in terms of weeding out our industrial base and the
impact it may have on that over a long-term period of time?
Mr. Stevens. Yes, sir. Well, having lived through the
1990s, I think the consolidation you described was an effort to
size supply to the likely demand that has to equilibrate
somehow. In a consolidated environment, that we are in today,
another round of significant reductions on the demand side of
this will adversely affect supply. The question will be, should
we try another round of consolidation in the industrial base?
Right now that is viewed as unfavorable and undesirable so as
not to limit competition. But there has to be a healthy
relationship between the demand for the products and services
that we have and our ability to supply them. So the supply
chain in some form or fashion will equilibrate over time. It
will either be graceful and focused and have a good
architecture or it won't be. But it will size and shape itself
differently to meet the level of demand that exists.
Mr. O'Keefe. I think that the shakeout in the market we are
seeing right now in second- and third-tier suppliers is already
a manifestation of that point. We are seeing either companies
consolidate, be bought by larger primes, as I have seen in the
last few years, or they have just simply exited the public
market and have consolidated much more toward the vagaries of
some of the commercial trends that occur but at the same time
much more reliable than what we are seeing as forecast for the
next decade in the public spending market. So I think that is
already occurring. It is happening right now.
Mr. Hess. I guess I would have to agree with you. I think
we are getting to a very critical point with respect to the
industrial base. And quite honestly, it is not just the big
companies that you reference, people like Lockheed and Boeing.
But honestly, where we see a greater concern is with the
smaller companies, such as represented by Ms. Williams today,
where we are down to one company that maybe has a unique skill
set or technology or capability that is at the point where they
are considering exiting the business. It is not worth their
trouble. They will go pursue commercial or other markets. And
that is quite honestly where we are really starting to see some
concern.
Ms. Williams. I would agree with the gentleman here, that
this is going to affect us greatly.
Mr. Forbes. Mr. Chairman, thank you.
I yield back.
The Chairman. Thank you very much.
Mrs. Davis.
Mrs. Davis. Thank you, Mr. Chairman. And thank you all for
being here.
I just want to say, as someone representing San Diego that
I want to thank you for your work on behalf of your employees
and certainly their families. And I really relate to what you
are saying about people being affected.
But as we know, it is not just in the defense industry that
we see tremendous effect on families today, uncertainty. And I
know that you have to be concerned about that. How young people
are educated today is critically important to our national
security. So that is a concern as well.
I want to just identify myself with some of the comments
and the questions of my colleague Mr. Andrews because I think
we do want to see this in a balanced way. And I call upon you--
and I hope that you are considering that you obviously need to
be very strong advocates, which you are, for the industry that
you represent. But I would hope that you would extend that, as
we work into these very, very difficult issues that we are
facing. And I wonder if I could count on you to do that, to
include those kinds of comments as well and the need that we
have to balance out and put everything on the table, as you
suggested. I hope that we can count on you to do that. Thank
you.
What I wanted to ask you about is, as you think about and
you are asking, let's be strategic about this. I don't support
sequestration. As we said, nobody here does in terms of those
kind of across-the-board cuts. But the reality is you have had
to deal with cuts and different ways of really analyzing the
work that you do in the Budget Control Act and some of that
extends to additional changes that may be made in the industry.
Are you in a position today to suggest to us, are there
some reforms in contracting that you think are critically
important to make? We know that multiyear contracts--perhaps
that can spread out some of the sacrifices, if you will that,
that might be made in terms of looking at the strategy that is
put in place, the targeted kinds of cuts. And I know that, Ms.
Williams, you spoke about that as well.
What is it that we should and could be looking at that is--
I really don't want to say a next generation of reform but
something that perhaps you talk about but we don't necessarily
acknowledge as part of this whole discussion?
Mr. Stevens. Thank you. I will try first, ma'am. And I will
say this probably won't sound inventive or innovative in any
way because it is interesting about acquisition reform. The
fundamentals that seem to keep resurfacing are the same
observations we have across the industry. I will tell you first
is stability. Whether that stability is the funding environment
or the requirements environment or industry's ability to hire,
train, get the right people in the right place at the right
time, do those fundamentals, those fundamentals drive this
process substantially.
Secondly, if we could look at shortening the cycle times.
Cycle times in the industry are getting longer and longer and
longer from the formation of a proposal, the early test phases;
it is getting longer. And time is money. Anything we can do to
streamline, simplify, and shorten that process, certainly would
accrue to a portfolio of efficiency initiatives that I think
would result in good savings.
Mr. O'Keefe. I would simply offer that the recommendations
of the Defense Business Board that reports to the Secretary of
Defense, take them up on their suggestion: What they are
proposing is simply suspend a regulatory environment in which
every regulation then has to justify the reasons for its
application, as is being sought to be applied. Otherwise,
suspend it; just dispense with it.
That is an approach that will sort out this question--not
our recommendations, one that the Business Board made to the
Secretary of Defense in that regard. It is not an unreasonable
proposition. It is a documented proposition that it costs for
precisely the same articles at least 20 percent more to sell to
the public than it does in any other commercial activity. So
sorting out what causes that 20 percent is one matter that the
Defense Business Board has recommended. I would take them up on
their suggestion and do it.
Mrs. Davis. What do you think keeps us from doing that now?
Mr. O'Keefe. I don't know. Resolve. Commitment. Suggestion,
whatever. And it has just been put forward. But it is one that
would be worthy I think of inquiring of the Defense Department
and of the Office of Management and Budget. What is errant
about the logic that this group has recommended forward to be
implemented, which doesn't suspend regulations? It simply says,
justify in every term why it needs to be there or else it is
dismissed. It is a fairly reasonable proposition, one we would
love to contribute in on every effort because of the additional
cost of doing business.
Mrs. Davis. Thank you, Mr. Chairman.
The Chairman. The gentlelady's time has expired.
Mr. Wilson.
Mr. Wilson. Thank you, Mr. Chairman. And thank you for your
leadership. You have proposed legislation that would address
sequestration. In fact, Chairman McKeon has led three times in
the House. We voted to address sequestration. But sadly, the
President has threatened a veto. The Senate has not taken up
the legislation. But the more the American people learn about
the consequence--I want to thank all of you for bringing this
issue up----
Also, I am really grateful that Bloomberg Government has
done a study of every State which indicates defense spending. A
State near and dear to me--and this is available to the
American people--is Virginia. My mother was born in Richmond. I
am a very proud graduate of Washington Lee University of
Lexington. And I have a son who is Active Duty Navy at Norfolk.
So we cover the State. And it is very revealing, particularly
in Northern Virginia, as you look at the consequence of defense
spending, it is just not Northern Virginia. It is by community.
And there are communities which have over $1 billion which
could be affected by sequestration, which include McLean,
Sterling, Arlington, Falls Church, Alexandria, Fort Belvoir,
Quantico. Each one, over $1 billion. Northern Virginia would be
such a State affected--or a district, communities affected.
Jobs. Military families truly are put at risk. As we approach
this--it has already been addressed--but there has been some
confusion about the WARN Act. The notices of layoffs. 60 days,
90 days. State law. What is it? And with a minimum of 60 days,
when would persons anticipate to receive the notice of layoff?
If each of you could give your point of view.
Mr. Stevens. I am certainly no attorney or WARN Act
specialist. But I seem to surround myself with a lot of
attorneys who claim to be WARN Act specialists, particularly as
we look at sequestration. Our sense is, 60 days from January 2
with timely notification puts the notice, end of October/early
November for 60-day notification States. New York is a 90-day
notification State. I think we would set that back obviously 30
days in time. It would be the end of September/early October.
Mr. O'Keefe. As I testified a little bit earlier, we have
already begun to notify Members of Congress that represent
districts in which we operate and do business as well as
Governors of those respective States that we may be compelled
to do this once we--in the absence of guidance from the Office
of Management and Budget or the Defense Department. Now that
will have to occur some time prior to that 60-day notification
stage. And exactly when is going to be very much contract-
dependent, depending on what advice or the guidance we receive
from the Administration.
Mr. Hess. I think Mr. Stevens clearly defined the
requirements of the WARN Act. And again, we are certainly
prepared to comply with the law. Again, given the uncertainty
and how sequestration will play out, it is not clear to us that
UTC would trigger the WARN Act thresholds. But it certainly is
a concern that we have.
Ms. Williams. As I said earlier, I don't think this applies
to me because I am less than 100 people. But I still want to
give my employees an update and bring them up to speed on this
because they don't understand what is happening.
Mr. Wilson. And it is an extraordinary coincidence, each of
you have identified a date prior to November 6, which is
Election Day. So this is something the American people need to
know.
Ms. Williams, has your company stopped or slowed down
capital investment in an effort to conserve funds in
anticipation of sequestration?
Ms. Williams. What we have done previously is--the way we
got a lot of our business was that we would make prototypes.
And that is how we developed all these years. But recently, as
I was talking earlier, we went to an Air Force base, saw the
1969 technology. We personally invested lots of dollars in
order to bring this up to current technology. We have done
that. We are not through by any means. But we have done that.
What concerns me is, will I be able to continue to finish that
project? And if this happens, I will lose those engineers.
Mr. Wilson. Well, I just want you to know, I particularly
appreciate it. I represent the communities of Fort Jackson,
Fort Gordon. I currently represent Parris Island. I want the
best for our troops, for their health and safety. We do have
the best in the world, but it really is dependent on your
efforts. And I want to thank you for your prototype efforts and
however we can help.
Ms. Williams. Thank you, sir.
The Chairman. Thank you.
Mr. Courtney.
Mr. Courtney. Thank you, Mr. Chairman. Thank you for
holding this hearing and the witnesses for your really
important testimony here today.
I want to also note, Mr. O'Keefe, your comments regarding
the sort of genealogy of sequestration, talking about the
Gramm-Rudman Act I think is very helpful because, frankly, it
is a concept which is now sort of lost in the midst of time a
little bit. And I think it is important for people to remember
that--again, it was a measure that was used at a time of
structural deficit. And one of the sponsors of it, then-
Congressman Gramm, was quoted at the time saying, it was never
the objective of Gramm-Rudman to trigger sequester. The
objective of Gramm-Rudman was to have the threat of a sequester
force compromise and action. And obviously those are the
critical two words that I think is our burden to satisfy here,
as Members, which is, A, to compromise and, B, to act.
And if you finish the story in terms of Gramm-Rudman, it
was a bumpy ride to get to the point where we started to
actually deal with the structural deficit that existed at that
time. It was really not until President George Herbert Walker
Bush negotiated the compromise at Andrews Air Force Base that
moved off some sort of sacred cows to get to a measure, but it
adopted the PAYGO rules which, again, put real discipline into
the proceedings of Congress and the budget that President
Clinton passed in 1993, which changed the tax rates that
finally intersected spending and revenue to a point where for
the first time in our lives, we actually had the Government's
public finances in balance. And by the way, we created 22
million jobs during that time period.
When I view the Budget Control Act, which, again, I joined
the majority of people in this committee supporting passage,
that is certainly the path that I think we voted for or should
have been thinking we were voting for, that compromise in
action was what we were looking for, not a chainsaw going
through the Government. So it is going to require people to
move off of pledges and some sacred positions to really fix the
problem.
And again, we have a historical precedent. We can do this.
Our country did it. And again, your testimony--all of you here
today--again, reinforces the fact that the stakes are huge if
we don't.
One issue, which you have mentioned, a number of you, is
the question of, again, having that horizon, that stability,
which really provides the basis for you to move forward and
plan and invest. Coming from a district where the construction
of nuclear submarines takes roughly 4 to 5 years, obviously a
1-year horizon is not enough in terms of really trying to, you
know, get to that sweet spot of efficiency and quality. One of
the measures that we have been voting on here is just a 1-year
fix to sequestration. And I was wondering if you could just
sort of comment whether or not that, in your mind, really fixes
the problem or just delays it and just, again, leaves the
challenge of trying to do intelligent planning sort of out
there for just a short period of time.
Mr. Stevens. Well, we are a long-cycle business. Our
products last 20, 30, 40 years. Right now, we don't have 6
months' visibility, which is unprecedentedly short. And we are
doing our planning for our business cycle in detail right now,
1-year, 3-year, 5-year. I do think--the best suggestion I can
give, recognizing how complex and difficult the actions will be
associated with this suggestion is a complete, a comprehensive,
a balanced and an integrated a durable approach is I think the
very best solution. When we look at the challenges in our
company, we think a lot about growth. The growth of our
business--and I think you could extrapolate the growth of our
country--is through competitiveness. That means getting the
best talent, investing in that talent, getting the best
innovation and investing in that. That investment cycle is
absolutely determined by how much visibility and how much
certainty or uncertainty is in the environment. Right now,
there is crushing uncertainty that is limiting all of that. So
the more comprehensive a solution that can be put together, the
longer duration of that would clear the deck chairs
considerably and I think open up degrees of freedom for
businesses to take actions that would lead to that kind of
growth that we are looking for in our business.
Mr. O'Keefe. I would simply offer to add to that, the
history that you describe--I think most accurately--is to the
extent that this particular mechanism is useful for the purpose
of prompting process reform and adherence within the
determination of public policy and public finance choices, that
is terrific. To the extent, though, that it also serves to
create unrest in the marketplace, a complete, you know, lack of
confidence and any stability down-phase because of the prospect
of this sort of Damocles, as it was called historically at its
point of origin, to the extent that it could be triggered, if
that creates the kind of market disruption that is seen to the
point of I think reaction a year ago. That does nothing to add
or contribute to the stability either. So this is a double-
edged sword. There is no question. It is in some respects
perhaps a Hobson's choice that is uniquely a challenge that you
confront. As Members of Congress who have to wrestle with this
question, I don't envy you at all.
The Chairman. Thank you. The gentleman's time has expired.
Mr. Wittman.
Mr. Wittman. Thank you, Mr. Chairman.
Ladies and gentlemen, thank you so much for joining us
today. We appreciate your perspective. It has been very telling
as to what may be looming out there if sequestration takes
place.
I want to summarize some of the comments that you all have
made. I think they are very telling. Some of the adjectives you
used, uncertainty, instability, unrest. Obviously as that
relates to what you all have pointed to as your greatest
asset--that is, your intellectual capital, your human capital--
that affects that significantly. I would argue that both in our
uniformed services and the U.S. supporters of those uniformed
services is those intellectual capacity assets that are most
valuable and that if we lose those or if those are weakened,
that we weakens us in the future. Even if we don't get to
sequestration, even if it is put off, as you are quoting us
today, that uncertainty is building. That affects your
workforce. That affects your capacity, your capability. Those
things are concerning to me.
What I do want to look at though is to try to define, if we
do get to this sort of Damocles, as it has been termed, of
sequestration, what effect will it have on your current
contracts? Will those contracts have to be terminated for
default? And if so, what does that mean for your employees, for
your partners, for your suppliers? I think that has a
significant effect. What would happen with the restructuring of
those contracts? I want to make sure we understand not only the
uncertainty that is leading up to that but what happens if--and
what does that mean for you all--and you talked about long
term. Obviously, the contractual agreements there are what is
going to affect you in the long term. So I would like to get
your perspective on what that scenario might hold.
Mr. Stevens. Well, we certainly think it will affect a lot
of contracts, broad-based, thousands perhaps. I don't believe
these terminations would be for default because it is not a
for-cause termination. It would be a convenience termination,
if the contract were terminated. Contracts can be reformed
without being terminated, which I rather suspect will be the
majority of the cases. We probably won't stop buying
everything. We will just buy fewer or less.
And that would require folks like us to go into the supply
chain and reschedule all the work that is being done to
accommodate a lower profile of resources available to put under
contract. It is our sense that our suppliers will look at that
environment, look at that action, and call that a business
disruption and will, as a result of that business disruption,
formulate a claim, a request for equitable adjustment or some
consideration under the contract.
So one of the areas we are still trying to explore in
greater depth is, if $55 billion is needed, that is a net
number. There is likely to be some business interruption or
disruption claims flowing back. Do the cuts actually have to be
deeper than $55 billion to achieve a net $55 billion outcome?
All of that will unfold very broadly, probably all at once when
we get agency guidance about either terminations or
reformations of contracts. And it will require a huge amount of
administrative and auditing effort to prepare these claims to
submit them and to deal with this administrative environment.
Mr. Wittman. Mr. O'Keefe.
Mr. O'Keefe. I agree entirely with the representation as
well as the process that Bob Stevens has walked through. I
think that is a certainty. Other than to simply add, this is
going to be a full employment act for auditors. And if you are
an attorney, this is going to be a great opportunity to do all
kinds of things in the future because everything now is going
to be subject to adjustment in these cases of review at the
levels he is talking about. It is just about impossible to
estimate what the consequence of that will be at this juncture.
Mr. Wittman. Mr. Hess.
Mr. Hess. I think your question is a very good one and one
that hasn't really been considered. There is clearly going to
be a cost to sequestration that hasn't been considered here.
And I think Bob described it well. But clearly, if you look at
the volume of contracts that would have to be repriced and
requests for equitable consideration, it is a huge task both
for the contractor as well as for the Department of Defense to
administer all of that. We don't know quite honestly how it
would be accomplished.
Mr. Wittman. Ms. Williams.
Ms. Williams. The effect I think that it is going to have
on us--I have already had five contracts put on hold. They have
not been stopped. In fact, I have been even asked by the
contractor, when could you finish this? Well, when you give me
the funds to finish it. You know, it is that simple. And they
are not forthcoming. And when you ask them where the funds are,
when we could expect it, you can't. So we are virtually shut
down on those five contracts right now.
The Chairman. The gentleman's time has expired.
Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chairman.
I have got to tell you, I had to pinch myself as I prepared
for this hearing today. I thought I might be dreaming. House
Republicans are holding hearings that talk about how cuts to
Government spending are going to hurt jobs and the economy. It
is really amazing.
Now no one thinks sequestration is a good idea. The meat-ax
approach to defense cuts is irrational, and it is obviously bad
policy. And it was designed by my colleagues on the other side
of the aisle, the Republicans, to be so bad that we would make
tough decisions about raising revenues and cutting spending so
that we could avoid it.
Nevertheless, here we are playing brinkmanship again. The
same folks who self-righteously opposed President Obama's $700
billion stimulus package, the same folks who sneered and said
Government never created a single job in America and never
would, they are now wringing their hands because the impact on
jobs of about $50 billion in defense cuts in 2013--of course,
it is $500 billion over 10 years, but $50 billion next year.
Now there is an easy way out of this: Make tough choices
and tough compromises to raise revenues, cut spending, and meet
our budget targets. The President is willing to do that. The
Democrats in the House are willing to do that.
What is the Republican solution? The Ryan budget: Cut
employment and training programs, cut food stamps, cut health
care for children, the sick and the poor, cut foreclosure
prevention, cut taxes for the rich, and lard up the defense
budget with an East Coast missile shield, nuclear facilities
that no one wants, and billions of dollars of waste, far in
excess of caps under the Budget Control Act.
With all due respect to our witnesses today, you won't see
House Republicans calling community leaders, church leaders,
the owners of mom-and-pop businesses or struggling homeowners
to testify on the impact of all of these cuts to help the poor
and the jobless and the sick.
Now to our witnesses today, each of you are highly
talented, highly sought-after executives. And I imagine that
you are pretty well compensated for the value that you add to
your companies, and I deeply respect that. As you have made
clear, you are also rightly concerned about the impact of
sequestration on your businesses, your employees, and our
country's national defense.
My first question is, would each of you be willing to forgo
the 4 to 5 percent of your annual income that you save under
the Bush tax cuts in order to avoid sequestration? Yes or no?
Mr. Stevens?
Mr. Stevens. I am afraid I am not going to be able to give
you a yes or no answer to your question, sir, and I offer that
to you respectfully.
Mr. Johnson. Okay.
Mr. Stevens. I have never----
Mr. Johnson. Good enough, good enough right there. Mr.
O'Keefe?
Mr. O'Keefe. Mr. Chairman, I think the choices over revenue
and spending is entirely the prerogative of the Government, the
Administration, and Congress.
Mr. Johnson. Would you be willing to forgo your savings if
the Bush tax cuts were made permanent in lieu of sequestration?
Would you rather have your 4 or 5 percent and undergo
sequestration or would you--you know, what is your position?
Mr. O'Keefe. My opinion of the priorities are far less
significant than yours.
Mr. Johnson. Okay.
Mr. O'Keefe. You are empowered----
Mr. Johnson. Well, you are not going to give me an answer
on that?
Mr. O'Keefe. No, sir. I think that is a prerogative, it
really is important for you to make those choices.
Mr. Johnson. All right. I have got you. How you about, Mr.
Hess?
Mr. Hess. I would echo Mr. Stevens' response.
Mr. Johnson. All right. And Ms. Williams?
Ms. Williams. I would do the same.
Mr. Johnson. Okay. Well, nobody wants to give up their 4 or
5 percent that they would save if the Bush tax cuts were made
permanent. That is exactly the sentiment that is being
represented by the Republicans here in Congress. They will not
impose any taxes, any tax increase on those who can afford to
bear it because of the Grover Norquist pledge, and my time has
expired.
The Chairman. The gentleman's time has expired. Just a
little update on history as to how we got here. We had last
year the opportunity to vote for the Budget Reconciliation Act
or shut down the Government. At the time a compromise was
worked out with the Administration, the Senate, and the House,
and Budget Reconciliation Act was passed and signed by the
President. So all three parties were involved.
Since then we have passed in the House a solution for this
that pays for the first year of the sequestration. There had
been a lot of talk about we will not support tax increases and
the Democrats want tax increases. We have taken action in the
House. The Senate has done nothing but talk. All they have to
do, according to the Constitution, is pass a bill in the
Senate. Then we would go to conference, and then we have real
negotiation. Then we will have real talk because plans have
been laid out and passed. But the Senate has refused to take
action, and the President has not given the leadership and the
direction to get us past this point. So that is just correcting
the history.
Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman, and ma'am and
gentlemen, thank you for being here today. We do have
fundamental differences, certainly. The Democrats believe that
higher tax rates lead to higher tax revenues. I fall into a
different camp. I believe that businesses embed the costs of
their taxes into the products that they sell, and the higher
the tax rate is, the more a product costs, and therefore the
less of that product they get to sell and therefore giving an
advantage to our industries' overseas competitors. If you
listened to the President's initial speech a couple of years
ago, he talked about the fact that we needed to actually reduce
the corporate income tax rate. We as Republicans embraced him
on that, and then he turned around and withdrew and never gave
us a specific proposal.
But 18 months ago I was a small business owner, Ms.
Williams, and so I will tell you what I found in my small
business was that my percentage of fixed costs were much higher
than larger competitors. I didn't have the ability to play with
variable costs the way the larger competitors do. Do you think
that--and so the last dollar's worth of revenue meant much more
to me as far as the end profit at the business and therefore
the amount that I paid income taxes on. Do you think that is--
have you found that to be true in your industry?
Ms. Williams. Yes, sir, that is true, very much so.
Mr. Scott. And that is where I am very concerned with kind
of this anti-profit mentality that some have in Washington
right now, that while our large industries, and I certainly
want all of our large industries that operate ethically to be
profitable, but my real fear with the economy today is what we
are doing to our small businesses and the suppliers to the
large guys, and if you lose 8 percent of your revenue, Mr.
Stevens, I think the impact on Ms. Williams of an 8-percent
revenue loss would be much greater on her business and her
employees therefore.
So I want to go, though, if I could to you, Mr. Stevens,
because you talked about back-of-the-envelope math, and you
have got approximately an 8-percent operating margin in your
business if I am correct; is that right?
Mr. Stevens. It is closer to 10. But yes, sir.
Mr. Scott. Closer to 10. And your profit margin on that is
somewhere in the 6 percent range, just above 6 percent if I am
not mistaken.
Mr. Stevens. Yes.
Mr. Scott. And when you talk about your back-of-the-
envelope math, you take that 8 percent, and you have got
approximately 120,000 employees, you multiply that 8 percent,
which would be your approximate 10 percent, which is kind of
the number we are assuming will be your cut to revenue, 80
percent of your revenue is Government business, so that is an 8
percent loss, which happens to correlate, quite honestly,
pretty close with your operating margin, and it also correlates
pretty closely with what you say your reduction in employees
will be because if the company is not profitable, nobody gets a
paycheck. Is that a fair statement?
Mr. Stevens. Certainly we perform against a set of
objectives every year where profitability is an important
objective for every business. You extinguish your ability to
perform if you don't generate a profit, that would be correct.
Mr. Scott. So this is my question for those of you with
publicly held companies. What are your SEC [Securities and
Exchange Commission] obligations with regard to sequestration?
How has the impending threat of sequestration affected your
reporting to your shareholders and the fact that this is
currently the law, there are no plans to rescind this law other
than what the House has done, and what, again, obligations do
the three of you have to your shareholders to discuss
sequestration?
Mr. Stevens. As a result of being a publicly traded
company, but I would say it is true of every high integrity
business person we know, we have duties of loyalty, of
transparency in our disclosures, of not acting in a way that is
imprudent with respect to the business, not taking unnecessary
risks, but importantly conveying with honesty and accuracy
within our best professional judgment the status of the
business and the risks associated to the business certainly to
the equity investors in the company. We have a collateral
responsibility to the bondholders, the credit rating agencies,
certainly to our customers and our suppliers because they are
our partners in this enterprise. So we have been disclosing
under our SEC disclosures in 10-Qs and other correspondences
the nature of sequestration, including the discussion of the
WARN Act, and we will continue to do that.
Mr. Scott. Mr. Stevens, I am very short on time. If we
could get to Mr. O'Keefe and Mr. Hess.
Mr. O'Keefe. That is precisely the same debate we are
underway with right now in looking at what our various
obligations are.
Mr. Hess. Again, we clearly plan to adhere to the
requirements of the WARN Act, and we are looking at the
possible impacts and doing some scenario planning now.
Absolutely we have a fiduciary responsibility to our
shareholders and our boards to do exactly that.
The Chairman. The gentleman's time has expired. Mr. Ryan.
Mr. Ryan. Thank you, Mr. Chairman. Back when I was younger
I used to coach like 9th grade football or 9th grade
basketball, 7th and 8th grade, and there is a stunning dynamic
when you get into coaching and you are coaching kids. You could
be a coach and see a coach, and they could be the most
objective person in the world in analyzing their players and
their talent. Then their kid is on the team, and they lose all
objectivity, right? They think their kid is a little better
than they probably are, so their kid starts and all of this
other stuff. We all know that happens in the midst of Little
League season. And I feel like my friends on the other side,
and it is just stunning to watch this hearing, completely have
a blind spot when it comes to Government spending for the
military. Now, I represent Akron, Ohio, so I have Lockheed
facilities, we have lots of defense, we have got a lot of Tier
II, Tier III. I get it. This is Government spending, and it is
creating jobs, and the scenario that we are talking about right
now is that a cut in Government spending is going to cost jobs,
and that is why we are here, and we don't want to see that
happen. And to have my colleague from South Carolina talk
about, you know, the jobs in Virginia that are going to be lost
or the WARN notices, the WARN notice was put into law by an
Ohio Senator, Senator Metzenbaum, because of factories being
closed down in the 1980s. So we know that, you know, what could
potentially happen here in my district and in our State, and I
just find it stunning that we can sit here and have a
conversation about job loss because of these reductions, but
turn around in the same breath and say that the stimulus
package had absolutely no effect, didn't save any jobs when
numbers and every economist basically will tell us otherwise.
We need your help because there is a narrative in this
country right now that every dollar that the Government spends
is a waste of money, should be privatized, outsourced, done by
the private sector, so on, so forth. Transportation, education.
And I just--and I am not here to lecture anybody, but I just
find it stunning because I am on the Budget Committee, too, and
I have to listen to--you know, I just try to imagine if you
were energy companies, if you were alternative energy
companies, if you were a solar panel company, if you were a
windmill company, and there was Government funding, saying we
need to reduce our dependency on foreign oil, so we want to
contract with energy companies and put up windmills so we can
reduce our dependency and get out of all these entanglements
all over the world, you guys would be crucified right now,
crucified. And I am with you. I think this is a bad idea. I
think I like the chainsaw, you know, for cosmetic surgery
analogy. This is terrible what is going to happen, and it is
stupid. But we need your help to say, hey, all Government
funding isn't bad, you can't just be concerned with your one
little slice of the pie because you are getting bombarded by a
narrative, quite frankly, that has been created by the other
side, and we have all got to deal with this problem, I get it,
but it is overwhelming, and now we are all swimming upstream
trying to say, well, wait a minute, this funding is very
necessary because it has got all these jobs and here is the
Tier II and Tier III supply chain that is going to be affected
by this. And if a guy like me from Youngstown, Ohio, comes out
and says, well, maybe we need some Government funding for
security in our neighborhoods and we need to fund the COPS
[Community Oriented Policing Services] program or we need to
fund fire grants, I would be crucified. I am a liberal tree
hugger, Government doesn't have a responsibility to do that
stuff. Security is security. And it is just important for us,
we have got to get past this because this is ridiculous. This
is the end result of 20 or 30 years of bashing the Government,
and here we are, sequestration is all coming right to a head
right now.
So I just want to ask one question of all of you if you can
quickly give me an answer or one of you can speak for the group
because the time is short. We are going to have to go out and
borrow money to make sure that this sequestration doesn't go
online. We have got to borrow it. So I don't want it to go
online, I don't think it is a good idea. Help me make the
argument to my constituents that it is okay for us to go out
and borrow money to make sure that these cuts don't happen. Can
you help me make that argument why it is valuable at this point
in a deep financial crisis that we are in? Why it is important
for us to go out and maybe borrow it this time until the
economy recovers? Can any of you help me make that argument in
Ohio?
The Chairman. The gentleman's time has expired. He made
some beautiful, eloquent arguments, but you will have to answer
those for the record if you would.
Mr. Ryan. Could I get those for the record, Mr. Chairman?
The Chairman. I would be happy to ask the witnesses if they
will provide that for the record.
Mr. Ryan. Thank you.
[The information referred to can be found in the Appendix
on page 141.]
The Chairman. Also for the record, this committee is the
Armed Services Committee. We have the responsibility to look
after the defense of this Nation which is in our Constitution.
We have the responsibility to provide for that defense of the
Nation. So there is a difference between that and providing for
COPS.
Mr. Ryan. Will the gentleman yield?
The Chairman. I would be happy to.
Mr. Ryan. We also have a responsibility to provide for the
general welfare.
The Chairman. We do.
Mr. Ryan. I think when you look at the gentlemen that Mr.
Stevens was talking about, the young people that he wants to
hire, something----
The Chairman. Reclaiming my time.
Mr. Ryan [continuing]. Would tell me that those are----
The Chairman. This is not the general welfare committee,
this is the Armed Services Committee. We have the
responsibility to provide----
Mr. Ryan. But I would just add, Mr. Chairman, we have an
obligation to make sure that Mr. Stevens keeps getting those
bright, intelligent people that he wants to hire----
The Chairman. Reclaiming my time.
Mr. Ryan. Something tells me that they got a Pell grant,
they went through public education.
The Chairman. Reclaiming my time. We could go on, I am
sure, Mr. Ryan, for a long time.
Mr. Ryan. I am happy to, Mr. Chairman.
The Chairman. But we do not have the time at this moment.
And we will now turn the time to Mr. Garamendi, 5 minutes.
Mr. Garamendi. I almost want to give you time to answer the
question, but it probably won't----
The Chairman. Do you want to use your time for that?
Mr. Garamendi. No. We are going to have a written response
perhaps.
Gentlemen and ma'am, you are leaders in America. You really
are. You are the titans of industry, big and small, and you
have awesome responsibilities not just to your shareholders but
to your workers and really to this Nation. That responsibility
is very direct in the military and the defense of this Nation,
as the chairman just pointed out. But your responsibilities,
because of your position, go far beyond that. It really goes to
leading and providing leadership. We have had some discussion
from Mr. Johnson and now Mr. Ryan, and I think it is really
important. I don't want sequestration. I voted not to have
sequestration. But the real question underlying all of that is
about the deficit and about the financing of our Government,
and it is either going to be cuts, you have argued against cuts
in the defense industry, okay. And my question is then what do
we cut and/or, and/or do we raise revenue? And I want you to
answer this question as a leader in America that each of you
are.
Mr. Stevens, what do we do? Do we make cuts in other areas?
And if so, what? Do we raise revenue? If so, where?
Mr. Stevens. The very best answer I can give you, and I am
flattered that you regard me as a leader. I take my leadership
responsibilities seriously, my board holds me accountable,
investors, employees, members of the communities in which we
live and work. We look to you, sir, respectfully, the Members
of this committee and Congress, as leaders, you are our
leaders. We have a portfolio of responsibilities in our
company. That is my domain. I truly do look to you and others
to wrestle----
Mr. Garamendi. Let me ask----
Mr. Stevens [continuing]. With these incredibly complicated
circumstances.
Mr. Garamendi. Excuse me for interrupting. Does your
company contribute to political contributions, to political
action groups, and do those action groups express your opinion?
Mr. Stevens. We do contribute to them, yes, sir.
Mr. Garamendi. For example, do you contribute to the
Chamber of Commerce, the U.S. Chamber of Commerce?
Mr. Stevens. We do.
Mr. Garamendi. Okay, do you agree with their view that
there should be no taxes, no tax increases?
Mr. Stevens. We contribute to organizations that we think
in the main express the view that we have, which I believe is
the focus of the committee's attention today on a strong
national security, and my role here today is to communicate in
my best effort the disastrous effects of a sequestration that
will disable our ability to contribute to the national
security, sir.
Mr. Garamendi. I am going to just forgo the rest unless you
would like to answer my question. The reality is you have
twice, three times now you have been asked the question, and
then I would just ask you to take up your leadership role
beyond the narrow focus of your own company. You are leaders.
Mr. O'Keefe, you were the leader of a major university, a
very successful university. You have a different role today,
but you have not given up your leadership role in this Nation.
You were Secretary of the Navy. We have a very, very, very
difficult, very difficult situation, one that requires each of
you, all four of you and other leaders around this Nation to
really come to grips with the reality and put aside all the
political rhetoric, much of which you have heard here, and help
us. Yes, I do have a responsibility, I am more than willing to
take up that responsibility and have. But you also have a
responsibility. And I would ask you to ponder, if you would,
that responsibility to speak out on this issue. If you don't
want cuts in the military, then where do we cut? Social
Security? Medicare? Employment opportunities? Education? If we
don't want to cut there, then what revenues do you want to
increase and where do we do that? Or do we not do it at all?
I am going to let it go at that. I don't want to put you on
the hot seat anymore, but I really would ask you to take up
your larger responsibility as very, very influential men and
women. Thank you very much.
Mr. O'Keefe. Congressman and Mr. Chairman, if I could
respond for just one moment, I very much appreciate the spirit
and context of your commentary, and that is primarily what you
have offered here. And certainly I think we all accept the
leadership responsibilities we bear, and that is why we are
here. We were invited and requested to speak to a mechanism of
how to achieve these kinds of targeted reductions, not what the
alternatives are. Those are really complex challenges that
again you have observed the importance of really having an
opinion as citizens, and that is an entirely separate point. In
terms of institutional challenges, what you face is the
challenge of, again, revenue and spending objectives and how
that gets sorted out, there are methods to do it, and this is
one we are simply advising is more destructive than others, not
where it is applied. It is across-the-board on domestic and
defense, all discretionary spending, just as observed in the
very opening comments.
Thank you.
The Chairman. The gentleman's time has expired.
Mr. Wilson. Mr. Chairman?
The Chairman. Mr.----
Mr. Wilson. Mr. Chairman? As we conclude, we have just
received sad news of a terrorist attack on a bus in Burgas,
Bulgaria, and I want to express my sympathy for the tourists
from Israel and our NATO [North Atlantic Treaty Organization]
ally Bulgaria.
The Chairman. Thank you. Mr. Smith.
Mr. Smith. Thank you. I want to follow up on that point
because we have heard a number of times from all of you that,
you know, when we get down to the tough question of how to
actually avoid this that basically that is on us, that is up to
us as if, you know, everybody else in the country has no role
whatsoever to play in public policy decisions.
Let me tell you, that attitude that you expressed right
there is the number one biggest problem in solving the problem,
is the notion that you have no responsibility in solving the
problem. The only responsibility you have is to explain to us
how bad it is going to be in one given area because that is
exactly what public policy has come down to in this country,
everybody protects their own piece. And I will say this, you
are in no way unique in that regard. Everybody who comes back
here is concerned about what happens to Medicare and Social
Security or they are concerned about this tax going up or they
are concerned about defense being cut or concerned about
something else, and then when we come down to how to add it up
they say, oh, no, we can't, that is not us, we can't have
anything to do with that. So what happens is we divide and
destroy, and every little piece of our country protects
themselves and makes no argument whatsoever beyond that because
that is easy. It is much easier to say don't cut this, don't
raise that tax. The hard part of governing--and in a
representative democracy theoretically we all have some
responsibility for governing--is making choices, and everybody
does exactly what you did today. You flat refuse to say
anything about making those choices and dump it all on us.
Meanwhile, not only do you flat refuse to say anything about
it, but you also take steps that systematically kick our legs
out from under us as we try to deal with it. Mr. Garamendi
pointed out some of that. But even if it isn't taxes, if
nobody, but nobody is advocating for the types of cuts or the
types of tax increases that are necessary to deal with our
deficit, then you are never going to be able to build the
political support necessary to get this Nation to support those
steps. It is just not going to happen, and everybody
conveniently hides behind that. And I know why. Because it is
brutal. And ultimately I will say this: We have a far, far
greater responsibility, there is no question. But that will
always play out because we are the only ones that ultimately
have to vote and will ultimately be held accountable for that
decision. That greater responsibility is baked in, and there is
no way for us to duck it one way or the other. But to the
extent that group after group, individual after individual
comes up here and says don't cut this, don't raise that tax and
balance the budget, and then refuses to move the needle at all
on a solution to that problem, refuses to take a leadership
role in moving the debate in the direction of getting the
country to acknowledge that choices have to be made, we are
dead. There is just no way we can get public opinion. That is
why you can take public opinion polls, I have this Pew research
poll, and I will close with this, from February 2011 that best
sums up the problem. It asked people if they were concerned
about the deficit. Eighty percent said we ought to basically
balance the budget. And then it listed every single area that
the Federal Government spends money and asked if you would like
to see the amount of spending there kept the same, cut or
increased. Over two-thirds of the people on every single
category save foreign aid, which still managed to get 50
percent, so 99 percent of where we spend our money, two-thirds
said increase it or keep it the same. Those exact same people
who expressed profound concern about the size of the deficit,
and then of course they asked them if they wanted to raise
taxes, and they all said no. Now where do these opinions come
from? How do people form these opinions? They form these
opinions because all they ever hear is people advocating for
spending and tax cuts. They never hear anybody advocating for
the ability to make that work. So that is why we get a little
vexed when people like you come up here and say you are going
to kill our industry if you fix this. Okay, well, we get that,
but the reason that you are in the position you are in is
because of the problems with our deficit, okay? Because they
are very real and necessary problems. So if you didn't say,
okay, well, what do we do to get out of it? Oh, we have got
nothing to say on that, except of course for all the ads we run
to say don't cut--don't raise taxes or in some cases don't
increase spending. So what you are doing isn't helping.
Certainly not solely responsible. There are many others, all of
us in many ways, you know, in Congress many times advocate for
things that don't add up either, but we have got to get past
this, look, I am only here to talk about my area, don't talk to
me about the rest because it is a budget, it all adds up and we
have to make those decisions, and we need help in getting the
public to support those decisions because if they don't, it
won't happen.
The Chairman. My good friend and I sometimes disagree.
Mr. O'Keefe. Mr. Chairman----
The Chairman. This is one of those, one of those times.
None of us was forced to run for this job. Each of us chose to
run for the House of Representatives, we understand that we
have the responsibility to make the final decisions. These
people are here today at our request to talk about the guidance
that they need to implement the laws that we have passed. I
have not heard them say, don't cut defense. That--maybe we
should have another hearing on that, but I haven't heard them
say that. What they have said is you already implemented $487.0
billion, we are implementing that, we are taking care of how we
can manage that. You have given, you have passed a law that is
going to cut another $500 [billion] to $600 billion out of
defense. We are just wanting to know how, as business people,
do you expect us to comply with the law that was passed and
carry out those instructions to the best of our ability? That
is what this hearing was for. That is what they have advocated,
that is what they have talked about.
You know, I come from a small business background, and it
wasn't anything like building ships or planes or boats. We sold
western wear, pretty simple little business, family business.
But even at that level we went to a market in January to buy
products that we were going to sell for the first half of the
year, and we would go to the different booths, and we would buy
shirts and boots and hats and jeans and the things that we
needed for our customers, and they would be shipped in a timely
manner so we would have inventory in February and March and
April and May, and customers would come in, and they would
expect we would have the size and the things that they needed.
Meanwhile, our suppliers, after we gave them orders in January,
they would go to their suppliers, and they would buy the things
they needed to make the jeans and the hats and the boots and
shirts, and it was done in an orderly method because we didn't
have the Government involved. They are trying to run their
business in an orderly manner, and they want to know what they
need to do in January and February and March so that our
warfighters that are over in Afghanistan right now going
outside the wire every day, putting their lives on the line
will have the things they need to protect themselves and to
carry out their mission at the direction of our Commander in
Chief. And I applaud them for the job that they do, I applaud
all of our workforce that is invested in that and gets up every
day, goes to work at the best of their ability trying to carry
out their mission to see that those warfighters over there
return home safely, and that is the responsibility of this
committee, and we will continue to carry out that
responsibility. There are other committees, I also sit on the
Education Committee, and I can go across to the Education
Committee and I can talk about things, but while I am here as
chairman of this committee, we will carry out that mission of
looking out for our warfighters who are putting their lives on
the line.
Thank you very much for being here today. I have one other
final question I would like you to submit for the record. We
have OMB coming up here the 1st of August to testify. You have
all talked about things that you would like to see, but I would
specifically ask, can you please describe, except for Ms.
Williams who doesn't have to deal with the WARN Act, guidance
from the OMB and the Department so that we can give them these
questions beforehand necessary for you to begin making
decisions related to the onset of sequestration. If you could
get that to us at the earliest possible so that we can get it
to them so that our hearing on August 1st will be productive.
[The information referred to can be found in the Appendix
on page 141.]
The Chairman. Thank you very much, and this hearing stands
adjourned.
[Whereupon, at 12:40 p.m., the committee was adjourned.]
=======================================================================
A P P E N D I X
July 18, 2012
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
July 18, 2012
=======================================================================
Statement of Hon. Howard P. ``Buck'' McKeon
Chairman, House Committee on Armed Services
Hearing on
Sequestration Implementation Options and the
Effects on National Defense: Industry Perspectives
July 18, 2012
The House Armed Services Committee meets today to receive
testimony from our industry partners on the challenges of
planning for sequestration. Since we began this hearing series
back in September we have held seven hearings and one briefing
on sequestration, the bulk of which have delved into the impact
of sequestration on our military capabilities and national
defense.
Today we are holding our second hearing that is focused on
the economic impact of sequestration, this time focused on the
implications for the defense industrial base that enables and
supports our warfighters. Joining us today are Mr. Bob Stevens,
Chairman and CEO of Lockheed Martin; Mr. Sean O'Keefe, Chairman
and CEO of EADS North America; Mr. David Hess, President of
Pratt & Whitney; and Ms. Della Williams, President and CEO of
Williams-Pyro. In addition to their own companies'
perspectives, I should note that Mr. O'Keefe also chairs the
National Defense Industrial Association and Mr. Hess chairs the
Aerospace Industries Association. Ms. Williams is on the Board
of the National Association of Manufacturers.
Barring a new agreement between Congress and the White
House on deficit reduction, over a trillion dollars in
automatic cuts--known as sequestration--will take effect.
Although the House has passed a measure that would achieve the
necessary deficit reduction to avoid sequestration for a year,
the Senate has yet to consider legislation. And the President's
Budget submission, which sought $1.2 trillion in alternative
deficit reduction through increased tax revenue, was defeated
in a bipartisan, bicameral manner.
This impasse, and lack of a clear way forward, has created
a chaotic and uncertain budget environment for industry and
defense planners. While the cuts are scheduled for
implementation January 2nd, companies are required to assess
and plan according to the law--and sequestration is the law
right now.
We've all heard the growing number of estimates. Secretary
Panetta has warned sequestration would be ``catastrophic'' to
our military and result in the loss of 1.5 million jobs and a
1-percent increase in the unemployment rate. This would send
200,000 of our men and women in uniform from the frontline to
the unemployment line. It would as the Secretary has said,
result in the smallest ground force since 1940, the smallest
number of ships since 1915, and the smallest Air Force in its
history.
The National Association of Manufacturers warned that
``dramatic cuts in defense spending under the Budget Control
Act of 2011 will have a significant, negative impact on U.S.
jobs and economic growth.'' The Manufacturers' forecast, and
one by Dr. Stephen Fuller on behalf of the Aerospace Industries
Association, have estimated private sector job losses at over a
million.
Faced with the prospect of being forced to lay off workers,
renegotiate contracts, disrupt production, and give bad news to
shareholders, industry leaders have been attempting to get more
guidance from the Administration on how they will interpret and
implement the law. To date the guidance has been piecemeal. For
example, last fall the Pentagon stated that war funding would
not be sequestered. Then in May, OMB overruled the Department
and declared that while Veterans benefits would be exempt,
funding for the troops on the front line would not be exempt.
In June 2012, Secretary Panetta met with various defense
industry executives to discuss the impact of sequestration on
their operations and to gauge the current state of the industry
in general. In addition, press reports indicate that the
Director of the Office of Management and Budget met separately
with heads of several major defense companies.
Unfortunately, it doesn't sound like industry learned much
from those meetings. Reports indicate OMB made it clear that it
does not plan to issue implementation guidance until at least
November, less than 2 months before sequestration is scheduled
to take effect. My fear is that guidance will come much too
late. Industry faces a host of planning challenges and
requirements to be met this summer, not the least of which is
the WARN Act, which requires most employers to provide
notification at least 60 calendar days in advance of mass
layoffs and plant closings. In some States, the requirement is
90 days. That means, as we'll hear today, defense companies are
currently grappling with whether to send pink slips by November
3rd to their employees.
In addition to the issue of jobs, I worry that the
cavernous silence from the President will lead many to exit the
industry or to walk away from capital investments that are in
the best interest of our troops. As I've said many times
before, the men and women on the front lines have our backs.
Who is going to have theirs if we allow the impending threat of
sequestration to shutter the American industrial machine that
enables them to fight, win, and return home?
This overdue guidance from the Administration on how they
intend to interpret the law and implement sequester
mechanically is critical to employers, not to mention Congress,
and I look forward to our follow-on panel with the Director of
the OMB on August 1st.
We all believe there is strong bipartisan agreement that
sequester is bad policy and should be replaced. My hope is this
hearing will provide additional incentives for the
Administration to provide more information to employers and for
all parties to resolve this impasse. I look forward to your
insights today.
Statement of Hon. Adam Smith
Ranking Member, House Committee on Armed Services
Hearing on
Sequestration Implementation Options and the
Effects on National Defense: Industry Perspectives
July 18, 2012
I thank our witnesses for being here to discuss this very
important subject and to give their perspectives on it. As some
of our leading employers in the defense industry, their
perspectives are critically important as we go forward, both in
terms of the industrial base issues and in terms of the impact
on our broader national security, and I completely agree with
the chairman that sequestration is not a good idea. It would be
bad for our economy, bad for defense. I always hasten to point
out not just defense, it is, you know, a sort of mindless
across-the-board cut in all discretionary spending. So
education, transportation, infrastructure, on down the line
that would have a devastating impact, and part of the problem
in addition to that is that the Budget Control Act was not
particularly well drafted. I have heard dozens of different
opinions about what it means and what exact effect it would
have, what is exempt, what isn't exempt, how would you
implement it. Nobody knows for sure until we actually do it.
That is part of what the Administration is wrestling with.
So I don't think there is any dispute that it is bad. I
have not heard the White House dispute that. Secretary Panetta,
in particular, has been very forceful on explaining how awful
sequestration will be. The problem is, it is not like you can
really come up with a plan that is going to make it anything
other than awful. The burden, the real burden of this
committee, this House, and the Senate, and the President is to
get rid of it one way or the other, to make sure that it
doesn't happen. If it happens, it will have a very profound and
negative impact. And it is also worth pointing out and I think
the chairman has done an excellent job of this, this is a
problem right now. We tend to look at it and say, well,
sequestration kicks in on January 1st and people begin to
imagine that that is the deadline. But all of you and thousands
of other employers are making decisions right now based on what
they reasonably project will happen in the next fiscal year,
and those decisions are leading to people hiring less people
and in some cases laying them off in anticipation that cuts
will come one way or the other. So it definitely needs to be
avoided.
But we also need to look at the larger problem in terms of
what got us into this and why we are having such a devil of a
time getting out of it. There seems to be this opinion that
while this is a terrible, terrible thing and it is just sort of
fundamental incompetence that is preventing us from dealing
with it, it is really not. It is more denial about the fiscal
situation we are in. Let's go back to the fact that we are only
here because of the refusal of the majority of people in the
House to raise the debt ceiling. This deal was done as the only
way to raise the debt ceiling and stop the United States of
America from defaulting on its obligations for the first time.
It was only that sort of blind notion that somehow not raising
the debt ceiling was a solution to our fiscal problems that
forced us into this awful, awful decision, an awful decision
which I didn't support, mainly because it put all of the burden
on the discretionary budget.
We unquestionably have a budget problem, we have a $1.2
trillion deficit, actually 1.3 last year, a 38-percent deficit,
and it needs to be addressed. Thus far we have put all of the
burden of that on the backs of 38 percent of the budget, which
is the discretionary spending budget, and we have refused to
talk about revenue. So the solution going forward, the thing
that will help us come together and come up with the deficit
control steps necessary to avoid sequestration is, number one,
admit that we are not balancing the budget any time soon. We
would all love to have a balanced budget, but there isn't an
economist out there that won't tell you doing that in the near
term would be devastating to the economy. We are going to have
structural deficits for a while. Our role is to get those
deficits under control so that they are manageable, but we
can't hold hostage steps that will do that to the notion that
we have to have a balanced budget right now or even in the next
3, 4, 5, 6 years. So admit that. And then, second, everything
has to be on the table. We are going to need more revenue. We
have cut taxes across the board over the course of the last 10
or 12 years. If we are truly, truly committed to providing for
the men and women who serve us and providing for our national
security, then we absolutely have to be willing to raise the
revenue to pay for that. That is a critical, critical piece of
it. And, yes, we also have to look at the other 62 percent of
the budget, the mandatory spending, and find savings there as
well. So that sort of realistic discussion is needed. Right now
there seems to be this desire for a balanced budget. Also a
desire to not raise revenue and a desire not to cut any
spending that is important. Those numbers don't add up.
So I hope this committee can begin to be part of the
process of starting a realistic debate that can avoid the truly
awful outcome that would come with sequestration and the awful
outcome that is coming every day, every day that we delay in
making it clear that we are not going to do sequestration.
So I think this hearing is very appropriate. I thank the
chairman for having it. I look forward to the testimony and the
discussion.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
DOCUMENTS SUBMITTED FOR THE RECORD
July 18, 2012
=======================================================================
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
July 18, 2012
=======================================================================
RESPONSES TO QUESTION SUBMITTED BY MR. MCKEON
Mr. Stevens, Mr. O'Keefe, and Mr. Hess. In response to Chairman
McKeon's request, we have included the recent letter sent by industry
to Acting OMB Director Zients (on page 136) that details the areas
where we need greater information and clarity in order to most
effectively manage the industrial base, and with the least disruption,
once sequestration is implemented. [See page 41.]
______
RESPONSES TO QUESTION SUBMITTED BY MR. RYAN
Mr. Stevens, Mr. O'Keefe, and Mr. Hess. In response to Congressman
Ryan's request, we have enclosed the report of the Defense Industrial
Base Task Force that we completed for the Secretary of Defense in
November of last year (on page 103), and the report recently released
by Dr. Stephen Fuller of George Mason University, ``The Economic Impact
of the Budget Control Act of 2011 on DOD and Non-DOD Agencies'' (on
page 111). These two reports contain detailed information on the
industrial and economic impacts of sequestration, which will help your
constituents in understanding the negative consequences if this measure
goes forward. [See page 36.]
Ms. Williams. [The information was not available at the time of
printing.] [See page 36.]
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