Defense Department won’t decide which contractors get paid if US defaults

Decisions about which bills the Pentagon would pay if the nation were to default next week would be made by other federal entities, Defense Department officials said Wednesday.

White House Budget and Treasury officials will decide which Defense contractors get paid and when, but Pentagon acquisition officials are still waiting for guidance on how to proceed during a default.

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“I don’t believe we’re going to be the masters of our own destiny,” said Dick Ginman, the director of defense procurement and acquisition. “Those are decisions that have not been shared with us.”

One industry official was more blunt. 

“I think no one has any real idea” about what happens, the industry official said Wednesday. “I think people in the government don't know how to manage with a reduced cash flow.”

“We have appropriations, so we have money to put contracts in place. The issue is cash flow — whether or not the cash will be there,” Ginman told reporters during a Center for Media and Security-sponsored breakfast session. “So as revenues come in, the issue will be for Treasury — not Defense — to determine what is the sequence in which we pay bills.”

Should the White House and congressional leaders fail to raise the nation’s borrowing limit by Tuesday, the Pentagon is expected to issue some kind of guidance to its many contractors on what they should anticipate.

Ginman said he is “not at liberty” to describe what the Pentagon might tell contractors about receiving payments should the government default on its obligations, because options are still being discussed internally.

“To my knowledge, nothing has come out of the Department of Defense” on what payments would and would not be made, Ginman said.

The Pentagon’s first move would be to resist any attempt by the Treasury Department or the Office of Management and Budget to stop or limit payments to contractors for equipment or services related to the wars in Iraq and Afghanistan, several Defense sources said.

Dov Zakheim, Pentagon comptroller under former President George W. Bush, said Wednesday a government default would mean "a slowdown in progress payments and other payments to industry for equipment not directly related to Iraq and Afghanistan."

A default would slow the flow of Pentagon cash into industry coffers.

“The defense industry only has one customer — the government — so if that customer has a cash-flow problem, then the industry inevitably will suffer,” said insider Loren Thompson, chief operating officer of the Lexington Institute. 

Industry officials expect the Pentagon would "stop signing contracts, or substantially reduce the number of contracts that get signed," said Cord Sterling, vice president for legislative affairs at the Aerospace Industries Association.

That could include a contract for everything from design work on a new bomber to a batch of new laptop computers.

Major defense firms are bracing for a default, but officials say they have no concrete precedent on which to base default operating strategies.

“Where my mind goes to is much like 2011,” Boeing Military Aircraft chief Chris Chadwick told The Hill last week. “I think what you’ll see is a continuing resolution-like line saying, ‘We’re going to flat-line it at this level until we figure out what we’re going to do.’ Beyond that, I can’t venture a guess because it’s going to be so unprecedented.”

That was the same view of Sterling, who said in a telephone interview that “the question is what don't they pay for?”

“That tells us we don't know what's going to happen,” Sterling said. “We've never been in this environment before — we're trying to figure out how to operate in an environment where the government can't borrow.”

“How much [industry] suffers depends on the way political leaders prioritize allocation of whatever funds they still have,” Thompson said.

Pentagon officials also will press Treasury and White House budget officials to keep the cash flowing to military personnel, Zakheim and Thompson said.

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“Politicians typically find it easier to cut payments to companies rather than to individual benefit recipients,” Thompson said. “Because companies decide how to absorb cuts in payments, that diminishes the accountability of politicians, whereas when Medicare and Social Security payments are cut, there is nobody to blame but Washington.”

If a default strains the Pentagon’s cash flow to the extent that some personnel payments are halted or slowed, Zakheim said Reserve troops “not related to our ongoing contingencies” might not get some checks.

DOD also likely would have to furlough some of its civilian workers, Zakheim said. “Training and exercises will be also delayed, as will most [military construction].”

The former Pentagon comptroller said a default would give Pentagon officials an opportunity to “slow down or halt payments” for service contractors for which Zakheim believes DOD is overpaying.

As the default clock continues ticking down, many industry officials remain optimistic White House and congressional leaders will strike a debt-ceiling deal, Sterling said.

He recalled one defense sector CEO’s response to a lawmaker’s comment that the Hill was hearing little from America’s titans of industry about a default.

“The CEO said back, ‘We manage our companies and we expect you guys to get this done,’ ” Sterling recalled. “It’s the same as the CEO expecting his [business] sector leaders to get this or that done. … But, as we get closer, people are starting to wonder.”