Deal ‘in sight,’ fear remains it would leave out defense

Philip Ewing and Tim Mak, POLITICO
12/31/12 2:48 PM EST

As the White House and congressional leaders inched toward an 11th-hour compromise on the fiscal cliff that seemed as likely as not to leave out sequestration, parts of the defense establishment slowly began to accept that the saga is moving into a new phase.

If sequester takes effect on Wednesday as mandated by law, the Pentagon, the defense industry and their allies in Congress must begin to act as quickly as they can to convince Congress to undo it before it begins to take its bite.

Even lawmakers outside the defense sphere appeared resigned to the need for the new 113th Congress to add another chapter to the fiscal cliff melodrama, telling reporters on Monday that so long as another solution appears relatively quickly, Washington could minimize the effects if it tumbled off the edge.

And although President Barack Obama joined the Defense Department officials and other leaders who have criticized sequester, calling it “an ax instead of a scalpel,” he repeated his stance that any proposal to “turn it off” must be “balanced” — i.e. include “revenues” as well as spending cuts to offset the cost to delay or deactivate it. That position has been such a roadblock for negotiators that they are said to have considered just leaving out sequestration as part of a deal this week.

Sen. Sheldon Whitehouse (D-R.I.), who was asked whether it would be better to run out the clock on the current Congress, said that “as long as we get a decision at a reasonable time in January and we make it retroactive, there’s no real long term harm in that, and that may be the best way to get a good, fair, sensible deal for the middle class.”

He was talking about the marquee dispute — tax rates — which has sucked all the oxygen out of the roomful of other issues, including sequester, tied together as part of the cliff, but defense insiders hope his colleagues agree.
Several defense industry lobbyists seemed resigned to accepting the sequester, but they also appeared to hope the 113th Congress would blunt it somehow.

“I have no confidence that all of the sequester cuts will be retroactively reversed,” said one lobbyist for a large defense firm. However, he said he was “relatively confident” that there would be a deal in February or March tied to the debt ceiling. “I fear the action will be minimal or a partial fix; meaning there will be some [change to the] sequester but not the whole $500 billion.”

The lobbyist predicted that defense cuts that resulted from a 2013 deal would lead to between $100 billion and $200 billion above the cuts already outlined in the Budget Control Act — but less than the $500 billion over 10 years ordered by sequester.

A second lobbyist concurred, telling POLITICO, “I remain fairly confident that Congress will act to at least partially avert sequestration, but am also convinced defense companies should be prepared for at least $10 billion in additional cuts in fiscal year 2013 — in addition to [the Budget Control Act] cuts.”

Even if a deal is reached to offset some of the cuts, the defense industry realizes that a degree of damage is simply irreversible. A future patch to reduce cuts would not, for example, be able to repair fissures in the supply chain already created by threatened cuts.

“Damage has already been done on the defense side to the second- and third-tier suppliers. Many of them have not received contract awards that they rely on from the prime contractors because the primes have been waiting to see what happens with the sequester,” noted Michael Herson, a defense lobbyist and CEO of American Defense International.

“If the sequester hits on Jan. 2, that will only get worse, resulting in more layoffs,” he said. “If we get into March with no deal, then [the Pentagon] will have to start announcing program cancellations. The ripple effects will be hard to reverse and will cost money.”

Once Obama ordered the sequester, as he is bound to by the Budget Control Act, the key Hill question would change from whether Congress could get the votes to avert it to whether Congress could get the votes to reverse it — a major difference in a legislature that has spent the past two years paralyzed.

“I’m not confident about anything,” said a third defense lobbyist. “I’m not sure House and Senate leaders have the votes to pass anything at this point.”

Bill McQuillen, vice president of public affairs for the consulting group JDA Frontline, warned that, “While retroactively reversing sequestration would seem like a no-brainer, I don’t think anyone can be confident that Congress will agree on anything. Formalities like raising the debt ceiling have turned into the showdown at the OK Corral, so figuring that they will come together to agree on this — even if it is a no-brainer — is far from a certainty.”

Sen. John McCain (R-Ariz.), speaking before Obama’s statement Monday, said he wondered if the president even has the political desire to reach a deficit deal and stop sequestration from hitting the Pentagon.

“I think there is some progress. I think there’s also beginning to be, honestly, a question as to whether the president really wants us to resolve this issue or not or feels that it’s to his political benefit not to,” McCain told a Phoenix talk radio station.

“One of the things that’s kind of lost in this is the effect it would have on this so-called sequestration, this $500 billion of automatic cuts on top of $460 billion we’re already cutting in defense,” he said. “I’ll tell you, that would affect the state of Arizona, but more importantly you shouldn’t cut defense or make cuts to defense based on economic reasons. We live in a very dangerous world and even the secretary of Defense has said if this sequestration takes place it would be devastating to our security,” he said.

McCain’s outgoing colleague, Connecticut Sen. Joe Lieberman, was among those Monday who continued to press for avoiding sequester now rather than letting it take effect and then attempting to reverse it — a decision for a Congress of which Lieberman would not be a member.

“If sequestration really goes into effect and the Defense Department is cut as much as required under sequestration, our country will be accepting unacceptable risks on our security because we will not be funding the military enough,” Lieberman told POLITICO. “There will actually be layoffs of military personnel. Defense companies will begin laying off employees because they won’t have as much money coming in and that will be terrible for the economy, and of course for the individuals involved.”

Still, Lieberman said that it was “hard to be optimistic” that a fix to avoid the sequester might be included in a last-minute fiscal cliff deal, and that things wouldn’t get easier after Jan. 1.

“This job, this challenge of working in a bipartisan way to reduce the debt, it’s not going to get easier after the first of 2013. It’s going to take the same courage, political courage to do what’s right for the country, so I hope it happens soon.”

Obama, for his part, said that although he thought a deal was “within sight,” he expected lawmakers to go right up until the last minute.

“Democrats and Republicans in Congress have to get this done,” he said. “They’re close, but they’re not there yet. And if there’s one thing we’ve learned about this Congress, it’s that if there’s even one second left before you have to do before what you’re supposed to do, they will use that last second.”

Juana Summers, Manu Raju and John Bresnahan contributed to this report.