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The San Diego Union-Tribune September 10, 2006

In defense we trust

Pentagon spending has zoomed - and San Diego has benefited

By Bruce V. Bigelow

If a rising tide lifts all boats, then government spending since Sept. 11 has created a deep harbor for defense contractors, with plenty of clearance for homeland security as well.

In the five years after the hijacked airliner attacks, the United States has spent about $430 billion – give or take $10 billion – on the wars in Iraq, Afghanistan and elsewhere.

Spending on the war, however, has been mostly apart from the annual Pentagon budget, which has increased by nearly 40 percent over the past five years.

In the fiscal year that ended a few weeks after the hijacked-airliner attacks, Pentagon spending was almost $364 billion, according to Pentagon budget documents that account for inflation.

By fiscal 2006, which ends this month, the Pentagon's ordinary budget was about $500 billion.

None of this includes the Department of Homeland Security, or DHS, which was created in 2003 with the consolidation of 22 agencies. Its current budget is more than $41 billion. Defense analysts estimate an additional $50 billion was spent on intelligence.

The point is that many government agencies have been spending at unprecedented levels.

Lockheed Martin, the world's biggest military contractor, got more than $20 billion in defense contract awards in fiscal 2005, with an additional $6.3 billion from U.S. civilian agencies, according to an annual review of government contracting done by Government Executive magazine.

Lockheed Martin, based in Bethesda, Md., is the government's biggest information technology vendor, in addition to making fighter jets and missiles.

Of the top 10 on the magazine's list of government contractors, four have significant operations or headquarters in San Diego:

  • Northrop Grumman has close to 5,000 employees in San Diego who specialize in developing unmanned systems, airborne radar and military communications, and provide warship maintenance and repairs.

  • General Dynamics has more than 4,000 workers at the former NASSCO shipyard, which ranks as the largest manufacturing business in the region.

  • L-3 Communications gained about 1,000 workers in San Diego with last year's acquisition of defense contractor Titan Corp., which held Pentagon contracts to provide translators in Iraq and provide a host of information technology services.

  • SAIC, the research and engineering conglomerate also known as Science Applications International Corp., has about 4,600 employees in San Diego. It has been deeply involved in the global war on terror, developing new combat systems and eavesdropping networks and providing extensive technical support.

Not far behind was the University of California system, which got nearly $4.4 billion in research contracts and other monies.

Other companies in the top 25 that have local business units are Computer Sciences Corp., BAE Systems, General Electric and Booz Allen Hamilton.

With the government writing so many checks, many defense experts say they are almost as dismayed by the scale of federal spending as they are by the lack of congressional oversight.

“The Pentagon, companies and Congress sort of felt like we could still have it all,” said Bill Hartung of the World Policy Institute. “They wanted to build big systems and fund the war and develop all these force transformation programs.”

Hartung says he is now seeing moves to reduce defense spending that could affect some major defense programs, such as the F-22 fighter, the Virginia-class submarines and the DDX destroyer.

Still, the side effects of such massive defense spending have been remaking the nation's capital, said John Pike, a longtime defense analyst in suburban Washington, D.C.

“The prosperity that has come to this town just defies belief,” said Pike, who oversees GlobalSecurity.org, a Web site devoted to defense and national security affairs.

“There's so much new construction. There are so many new condos and fine restaurants, and this hasn't happened because people want to be closer to the monuments. It has happened because the defense budget has ballooned.”

Determining how so many billions of defense dollars are being spent, however, is far more difficult.

For one thing, delays in funding for war operations in Iraq and Afghanistan have prompted the Pentagon to divert spending from “discretionary” programs, such as military equipment maintenance and repair accounts.

Reticent on pacts

Defense contractors are also reluctant to discuss details of their business, for national security reasons and matters of public perception.

In San Diego, no current information on the local share of defense spending is available, although the San Diego Regional Chamber of Commerce has a study under way.

One of the biggest sources of defense funding in San Diego is the Navy's Space and Naval Warfare Command, or SPAWAR, which moved its headquarters here in 1997. Contracts awarded by the command are focused mostly on communications, computers and information technologies related to what the Navy calls “network centric” warfare.

In fiscal 2005, SPAWAR awarded $806 million in contracts, a 68 percent increase over the $479 million spent in fiscal 2001, according to SPAWAR spokesman Steven A. Davis.

While the trend cannot be directly attributed to 9/11, Davis said the terrorist attacks significantly increased demand for capabilities in anti-terrorism/force protection and “maritime domain awareness.”

By most accounts, though, the bellwether of San Diego's defense industry for the past decade has been SAIC, which has 43,000 employees around the world.

Government contracts account for roughly 92 percent of the $7.8 billion in revenue that SAIC reported for the fiscal year ended Jan. 31.

Such funding has driven most, if not all, of the company's growth. Its revenue has climbed 78 percent since fiscal 2002, when SAIC posted sales of nearly $4.4 billion.

But like most defense contractors, SAIC does not disclose details about specific programs, and the company declined to discuss changes in its defense and homeland security business since Sept. 11.

In documents related to its pending initial public stock offering, SAIC said it has about 9,000 active contracts with the government. It also identified its 20 biggest.

For example, the company set the value of its work on the Army's Future Combat System at nearly $2.2 billion. SAIC also provides information technology and support services to the Department of Homeland Security under a $446 million contract, and listed a $362 million contract for “EXECUTELOCUS,” a technical development program for electronic eavesdropping previously known as the National Security Agency's “Trailblazer” program.

Another homegrown San Diego defense contractor, Cubic Corp., has seen growth in its defense business that provides military training and battle simulation technologies.

Cubic's most significant growth came from its biggest contract, with the Pentagon's Joint Readiness Training Center in Fort Polk, La., said Gerald Dinkel, president of Cubic's defense business.

Revenue at Cubic, which also makes automatic fare collection equipment for mass transit agencies, has grown by 60 percent over the past four years, from $501.7 million in fiscal 2001 to $804.4 million last year.

Less spending

But Dinkel, like some defense analysts, expects a downturn in defense spending.

“What we're trying to do from a strategic point of view is figure out not only what to do when the cutbacks come, but how to grow within our existing businesses,” Dinkel said.

One idea under development is including explosive detection sensors developed in San Diego by GE Security for use in Cubic's mass transit fare collection equipment.

GE has created a $2 billion security infrastructure business in recent years by consolidating its own expertise and acquiring other companies, including InVision and that company's San Diego research and development center.

“We're looking at something around a $16 billion market for security in the next few years,” said Steve Hill, a GE business development executive in Newark, Calif. GE formed the business specifically in response to the Sept. 11 attacks, he added.

Among other things, GE Security has been selling its baggage-scanning equipment for use in airports around the world, including San Diego's Lindbergh Field. The company specializes in a variety of video surveillance, sensor and security technologies for residential, commercial and government customers.

For San Diego's Qualcomm, the aftermath of the Sept. 11 attacks in New York, along with the devastation wrought by Hurricane Katrina, has created new demand for the company's mobile emergency wireless communications system.

“We certainly have seen a mind-shift in what kind of things the government customers are interested in,” said Gary W. Garland, vice president of Qualcomm Government Technologies.

One of the biggest changes in San Diego's defense technologies has been the advent of robotic surveillance aircraft called Unmanned Aerial Vehicles, or UAVs.

Military demand for reconnaissance drones such as Northrop Grumman's Global Hawk and General Atomics Aeronautical Systems' Predator soared after the Sept. 11 terrorist attacks. Both businesses are based in San Diego.

The Global Hawk can survey an area the size of Illinois with enough accuracy to spot a milk carton from an altitude of 65,000 feet.

Integrating data

The most significant change, though, has come with the integration of data collected by the Global Hawk and other UAVs with battlefield operations, said Ed Walby of Northrop Grumman's unmanned systems business in Rancho Bernardo.

“The revolution in information technology, information merging and unmanned systems (is) a direct outgrowth of 9/11,” Walby said.

Perhaps as a result, overall sales of unmanned spy planes are projected to triple – to $8.3 billion a year – over the next decade, according to a recent study by the Teal Group, a defense and aerospace consulting firm.

The DHS also plans to acquire more Predator aircraft for use by the U.S. Customs and Border Protection agency, according to a presentation DHS Secretary Michael Chertoff made to Congress in July.

Such unmanned surveillance aircraft are also expected to be a key element in the $2.1 billion contract known as the “Secure Border Initiative” that the department is expected to award in coming weeks.

But for all the advances brought by the flood in government spending, several vocal defense analysts say there also has been tremendous waste and precious little congressional oversight.

“How come nobody is doing anything about it?” asked Winslow Wheeler, a former Senate defense analyst now with the Center for Defense Information in Washington.

“In the FY 2006 defense bill that currently pays for the war in Iraq, the largest modification Congress made was to add $9.3 billion in spending for items like a Memorial Day celebration, Hawaiian Islands health care, Alaskan fisheries, breast cancer research and much more,” Wheeler said.

Wheeler also contends that the reforms Congress enacted to restrain budget “earmarks” for spending on pet programs are a sham.

At the time of the Sept. 11 attacks, the Congressional Research Service found that Congress spent $7.2 billion for 1,409 earmarks. Wheeler noted that since then, the number of earmarks has doubled, with 2,847 earmarks that he calls “pork” accounting for $9.3 billion in 2006 alone.

Bloomberg News contributed to this report.

Copyright 2006, Union-Tribune Publishing Co. . A Copley Newspaper