Executive Briefings

Budget Control Act Could Really Crimp Money Spigot Flowing to Defense Contractors

There are cyclical industries, and there's the defense industry. In wartime, billions of additional dollars flow to defense contractors from the U.S. government, and in peacetime, Congress tightens the money spigot. It's a cycle that all contractors are used to, except this time around there's an added dimension: the Budget Control Act of 2011 and sequestration.

By itself the act was bad enough for the industry, requiring the Pentagon to cut $487bn from its budget over the next 10 years. But the automatic spending cuts triggered under the act's sequestration provisions could shrink the budget by an additional $500bn during the same period, unless Congress steps in.

Taken together, the measures could slow defense spending by nearly $1tr over the next decade. And the current transition from war to peace will make things worse. "It's not just sequestration that's taking a toll on the industry," comments Tim Dragelin, senior managing director in the corporate finance practice of FTI, a West Palm Beach, Fla.-based global advisory firm. "It's the other projected losses of revenue from traditional government budget drawdowns that really hurt."

Those drawdowns include a 37-percent decrease in the federal budget for operations and maintenance-related projects over the next three years, and a 400-percent reduction for Overseas Contingency Operations, from $162bn in FY 2010 to $40bn by FY 2014. "Those are the two areas of largest impact," says Dragelin.

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By itself the act was bad enough for the industry, requiring the Pentagon to cut $487bn from its budget over the next 10 years. But the automatic spending cuts triggered under the act's sequestration provisions could shrink the budget by an additional $500bn during the same period, unless Congress steps in.

Taken together, the measures could slow defense spending by nearly $1tr over the next decade. And the current transition from war to peace will make things worse. "It's not just sequestration that's taking a toll on the industry," comments Tim Dragelin, senior managing director in the corporate finance practice of FTI, a West Palm Beach, Fla.-based global advisory firm. "It's the other projected losses of revenue from traditional government budget drawdowns that really hurt."

Those drawdowns include a 37-percent decrease in the federal budget for operations and maintenance-related projects over the next three years, and a 400-percent reduction for Overseas Contingency Operations, from $162bn in FY 2010 to $40bn by FY 2014. "Those are the two areas of largest impact," says Dragelin.

Read Full Article