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Hearing of the House Armed Services Committee - Sequestration Implementation Options and the Effects on National Defense: Industry Perspectives

Statement

By:
Date:
Location: Washington, DC

The House Armed Services Committee met today for a hearing on Sequestration Implementation Options and the Effects on National Defense: Industry Perspectives. Chairman Howard P. "Buck" McKeon made the following statement available as prepared for delivery:

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 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 E-A-D-S North America; Mr. David Hess, President of Pratt and 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 bi-partisan, bi-cameral 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 two 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.


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