Fiscal Cliff Negotiations Injecting Uncertainty Into State's Defense Industry
By Brian Dowling
The Hartford Courant
November 21, 2012
The state's defense contractors are closely watching negotiations in Washington as the nation approaches the fiscal cliff, but many say the uncertainty about possible cuts have left them unable to plan properly for what might come next.
"The government has not given us any details on how sequestration would be implemented," said Paul Jackson, a spokesman for Sikorsky Aircraft Corp. "We therefore can't yet estimate its impact."
The punch of the fiscal cliff is a combination of the expiration of large tax cuts — including the Bush-era tax cuts and Obama's payroll tax cut — and steep reductions in domestic and defense spending. The cuts would be indiscriminate and across-the-board, hitting schools, hospitals and the like, leaving only a few programs untouched.
Absent firm commitments for stacks of pink slips, some defense companies are treading water, holding off decisions about hiring, capital investments, and orders from their long chains of suppliers.
In July, David P. Hess, president of Pratt & Whitney, said to the House Aerospace Caucus that the company would tread lightly until a deficit deal is reached. "While we wait and see if the ax is going to fall, we're going to be overly cautious about hiring. We're going to limit new investments in training and equipment."
Bryan Kidder, a Pratt spokesman, said this week that Hess's statement holds true and the company has, in fact, been hesitant in hiring and investment. Kidder declined to give examples.
In Milford, Spectrum Associates Inc. is carefully considering how to play its hand.
"The current uncertainty is making us concerned about the future and hesitant for expansion both in physical plant and personnel," said Richard Meisenheimer, president of Spectrum, a components manufacturer whose customers include Sikorsky.
New hires and an expansion are necessary to keep up with current orders, but knowing that long-term contracts could be cut short have convinced Meisenheimer to squeeze new operations into existing space rather than building a new structure. He said that the company is hiring almost reluctantly, knowing there's a chance that the positions could be filled only to be cut later.
"Everybody is ready for a bottom line," said Bob Ross, executive director of the state's Office of Military Affairs, whose mission in part is to advocate for the state's defense industry. "The sooner we can get to a bottom line the better."
While the automatic budget cuts slated to take effect Jan. 2 could prove damaging to companies, industry players say they expect some sort of a solution out of Washington before that happens.
Though early signs seem positive as Congress and President Obama work toward a compromise solution, U.S. Sen. Richard Blumenthal said that he begins every day ready to fight for the state's large defense operations as well as "the myriads of suppliers that are like blood vessels in a body, providing essential parts and materials."
If nothing is changed and the planned measures are enacted, the country could slip into recession, pushing unemployment nationwide to 9.1 percent by the end of 2013, according to the nonpartisan Congressional Budget Office. Avoiding the cliff would involve an agreement on $1.2 trillion in deficit reduction, which could still dip deep into the defense industry.
U.S. Rep. Joe Courtney watches Electric Boat employment listings like box scores, he said, and hasn't seen a pullback of the sort from the submarine manufacturer. He was confident that a deal to avoid the fiscal cliff can be found.
"The external pressure that's going to be brought to bear on Washington is going to be ferocious," he said. "That gives me hope that this pace is going to move."
Though an overall economic malaise is what's keeping Flanagan Industries from expanding onto land next to its Glastonbury location, the deficit talks and uncertainty aren't helping, according to Kevin Flanagan, director of sales and marketing.
"Everyone is on the sidelines," he said, adding with optimism that "you have to believe that in the next six weeks Congress can get their heads around the whole budget issue."
In the situation where the broadest defense cuts are avoided, its possible that all the waiting and uncertainty could still do damage to the economy. Ashton B. Carter, the deputy secretary of defense, warned about these effects of an uncertain defense environment in an August testimony to the House Armed Services Committee.
Holding back funds that should be sent to projects or necessary training as these deficit talks move sluggishly on, he said, could cause "inefficiency and waste" as well as negatively affect military readiness "in a period when we face a complex array of national security challenges."
"In the charged budgetary environment in which we are operating," Carter said. "This type of error is very real."
Fears of this attitude reach to East Hartford, where RSL Fiber Systems has proposed a cost-saving solution to the problem of corrosion ruining lighting components on U.S. Navy ships, according to Giovanni Tomasi, the company's president and chief technology officer.
If defense budgets are curtailed, the up-front investment — from both the Navy and RSL Fiber Systems — could be lost. Tomasi said he is holding off making hires for the program until the future is a bit more clear.
"We're hesitant to make the investment, train them, then in three to six months say, sorry guys we don't have the funding" to keep you on, Tomasi said. "Given the uncertainty, we are taking the wait-and-see approach."
If the industry does manage to dodge the broad cuts, Connecticut's defense contractors aren't quite yet in the clear. From the $1.2 trillion in savings needed over the next decade, the Department of Defense will likely bear some of the weight, according to Mark Bobbi, an aerospace industry analyst with MB Strategy Consulting.
"One way or another, defense is going to take it on the chin," Bobbi said, with procurement budgets the first be reduced.
It's possible that any cuts could hit the F-35 Joint Strike Fighter program, the most expensive acquisition program in the Department of Defense's history, he added. Beyond that, submarine production timelines at Electric Boat in Groton could be lengthened.
When asked about changing production rates for these programs, Sen. Blumenthal said that such a move could increase costs. "If you build them more slowly, the cost per submarine and per engine rise inevitably, and we should be producing these weapon systems in the most cost-effective manner."
Either way, there will be some layoffs, Bobbi said. "It's going to be a depressing situation for a lot of companies."
At Kaman Industries in Bloomfield, where about two-thirds of their business is defense-related, executives have planned for a worst-case scenario of a $25 million hit in revenues if the sequester of defense funds goes through.
Kaman would still expect its aerospace business to grow, just less quickly, said company spokesman Eric Remington. But that would still hit jobs in the state.
"If you take out that level of revenue whether it's a reduction or a reduction of an anticipated increase, it will result in existing jobs or ones that would have been added in the future to be effected," Remington said.