Nathan Hodge
Wall Street Journal
WASHINGTON—U.S. defense contractors are preparing to disclose mass job cutbacks ahead of November elections if Congress fails to reach a deficit-reduction deal by then, industry officials said.
Firms including Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp. may idle thousands of workers at the beginning of the year, they said, when more than $50 billion in new defense cuts could take effect—along with similar reductions across federal agencies.
The layoff threat promises to put a spotlight back on the federal budget impasse and signals the start of a campaign by contractors to get Congress to rescind the requirement for mandatory cuts. It also comes as U.S. job gains have slowed, pushing up the unemployment rate.
"It is quite possible that we will need to notify employees in the September and October time frame that they may or may not have a job in January, depending upon whether sequestration does or doesn't take effect," Robert Stevens, chairman of Lockheed Martin, the Pentagon's biggest supplier with operations in California, Georgia and Texas, said last week. He said the industry plans a "full-throated voice" to draw attention to the possible cuts.
Defense manufacturers and their suppliers employ around 1 million workers combined, and their facilities are found in congressional districts around the country. Adding to the political impact, some of the industry's biggest employers have facilities in election battleground states. Ohio, for instance, is home to a General Dynamics Corp. tank-manufacturing plant while BAE Systems PLC makes armored vehicles in York, Pa.
Defense industry officials said that they will have to notify employees of potential layoffs 60 or 90 days ahead of time, in line with state and federal plant-closing laws.
The Worker Adjustment and Retraining and Notification Act, a federal law also known as the WARN act, requires companies to notify employees in advance of mass layoffs and plant closings. Requirements vary, but the shutdown must affect 50 or more employees, or more than a third of the employer's active workforce at a facility.
Lockheed's Mr. Stevens said the across-the-board cuts would also hit suppliers, which may have to be notified in advance that they may not have subcontracts early next year.
An industry representative said "hundreds of thousands of notices" could go out to employees, unless there is clear guidance from the government about what specific jobs and programs might be affected.
As part of last year's Budget Control Act, the defense industry is already planning for an initial round of defense cuts that reduce defense outlays by around $487 billion over the next decade.
But the failure last year of a special congressional panel to hash out a deficit-reduction deal triggers a provision in the law that calls for the defense budget to be cut by more than $50 billion a year, or roughly 10% of the agency's $531 billion base budget, over 10 years.
Unless Congress changes the law, those cuts take effect at the beginning of January.
"Sequestration is already here," said an industry official, noting a recent slowdown in military spending with military services delaying the award of new contracts or reducing the quantity of orders in anticipation of deeper spending cuts.
Defense Secretary Leon Panetta has urged Congress to reverse the cuts, but industry observers say they don't expect lawmakers to begin serious discussions over how to avoid the defense cuts until after the November elections. Restoring defense funding would require cuts to other government programs or a tax increase.
"I think most people agree that it is unlikely that sequestration or the tax cuts get dealt with prior to the election," said Northrop Grumman CEO Wes Bush. "The window isn't that long between the 6th of November and the end of the year."
Republican lawmakers have proposed alternatives to the sweeping military cuts, including partially offsetting defense cuts with increases in domestic-spending reductions. Sen. Harry Reid (D., Nev.) has countered that he would prefer sequestration unless Republicans agree to include tax increases in any deal.
Adding to the uncertainty over the budget cuts is how, exactly, the Pentagon will impose the cuts. Most in the industry believe that the cuts will affect all programs across-the-board, meaning that military services will have less discretion to spare higher-priority programs from the budget ax.
"The Department of Defense is not currently planning for sequestration," said Lt. Col. Elizabeth Robbins, a Pentagon spokeswoman. "The Office of Management and Budget has not directed agencies, including DoD, to initiate any plans for sequestration."
Automatic cuts may hit separate wartime spending accounts, once believed to be exempt from sequestration. Congress funds the war in Afghanistan and other military operations through an account called "overseas contingency operations," which is separate from the Pentagon's base budget. The administration requested $88 billion in fiscal 2013 to cover wartime costs.
In a May 25 letter to Rep. Paul Ryan (R., Wis.), chairman of the House budget committee, acting White House budget director Jeffrey Zients said the war funding would be "subject to sequester," although the president could exempt military personnel costs.
Rep. Howard McKeon (R., Calif.) the chairman of the House Armed Services Committee, said he was disappointed in the administration's interpretation of the law. "Of course now more than ever, it is the troops on the front lines in Afghanistan who will bear the brunt of sequestration," he said.