Defense industry concerned about appropriations delay

As industry and lobbyists are waiting on the sidelines for the defense appropriations process to start in the Senate, confusion and tension are rising.

While defense giants may not take a significant hit from the delay, smaller defense contractors could see problems with cash flow and the delivery of much-needed equipment in Iraq, financial analysts predict.

A decision from Senate Majority Leader Bill Frist (R-Tenn.), aggravated by the disaster response to Hurricane Katrina, has been slow in coming. No date is assigned yet for bringing the defense authorization bill back to the floor.

“They are in a jam over there. They are going to have a hard time getting appropriations done,” an industry source said.

Frist pulled the defense authorization bill from the floor before the August recess amid administration threats to veto the bill if it contained amendments related to the treatment of military detainees and the delay of the 2005 base realignment and closure process.

Frist, after pulling the bill, made room for votes on gun-liability legislation.

Sens. John Warner (R-Va.), chairman of the Armed Services Committee, Thad Cochran (R-Miss), Appropriations Committee chairman, and Ted Stevens (R-Alaska), Defense Appropriations Subcommittee chairman, have agreed that defense authorization needs to move soon. Warner has said on multiple occasions that he is committed to bringing the defense authorization bill to the floor this fall.

If authorization is not done, appropriators are likely to inherit at least some of the 200-plus amendments from the defense authorization bill. And Sen. John McCain (R-Ariz.) has already threatened that he would attach his detainee-treatment amendment to the appropriations bill.

“It has always been our practice to put the defense appropriations bill on the floor after [authorization]. Sen. Stevens has the same policy,” said Rep. Bill Young (R-Fla.), Stevens’s counterpart in the House.

By all accounts, the defense appropriations bill will not hit the floor before the week of Oct. 1, and most likely it will be after that, which is prompting defense appropriations staff members to predict that there will be a continuing resolution. The fiscal year ends Sept. 30.

“On October 1, the Department of Defense will operate at a continuing resolution, which caps their spending at the 2005 rate of expenditure,” said a defense lobbyist. It would be the first time since the wars in Afghanistan and Iraq started that Congress went to a continuing resolution for defense appropriations.

“That limits some of the things that they can do and pushes a lot of the decisions later into the year, which they do not like,” the lobbyist said.

Funding decreases will be taken from pay raises scheduled for the beginning of the year and any new program, he explained. “It puts everybody in a holding pattern in terms of executing dynamic programs,” he said.

The longer the continuing resolution lasts, the larger the problems are likely to become, especially in times of war, he said.

“Even though we are going to start with a continuing resolution, that will release a lot of pressure to get the bill done,” he added.

The resolution may have to allow for higher spending, the lobbyist said.

However, several defense lobbyists have said that they received indication that the defense appropriation bill is already done but still has to go through the official markup channels.

But a stopgap spending resolution is not something the Senate likes to do with the defense bill, the industry official said. “They do not want a continuing resolution for defense because a lot of people are going to try to add a lot of things,” the source added. “A continuing resolution is supposed to be nice and clean, but it is a vehicle going down the road.”

“Once you go into a continuing resolution, there is no immediate pressure” to get things done, said another lobbyist, who works with defense giants Boeing and Northrop Grumman, among others.

With a continuing resolution, some companies have concerns that could affect their fourth-quarter earnings if payments from the government are delayed for a certain amount of time, said a financial analyst at a large investment bank who asked not to be quoted by name. And if the government cannot pay, that could have a negative impact on the company’s performance, the analyst added.

Deployment timelines on technologies such as vehicle armor and jamming equipment for improvised explosive devices, more commonly known as roadside bombs, could hurt, he said. “There has been quite a bit of money allocated in the baseline budget, and that would affect their delivery,” he explained.

But larger programs also come into play. The Air Force’s C-17 program and the Army’s Future Combat Systems, to name a few, depend on the appropriations markup. Research and development money also is in the balance.

Meanwhile, the Pentagon is pleading with the Senate to get appropriations done before Oct. 1.

“We urge Congress to complete work on the defense appropriations bill for FY 2006 before the end of September, which will mark the end of the current fiscal year,” said Lt. Col. Roseann Lynch, a Pentagon spokeswoman. “We are a nation at war. Our first priority is to ensure the men and women in uniform have all they need to fight and win.”