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i 

75–666 2012

[H.A.S.C. No. 112–142] 

SEQUESTRATION IMPLEMENTATION 

OPTIONS AND THE EFFECTS 

ON NATIONAL DEFENSE: 

INDUSTRY PERSPECTIVES 

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JULY 18, 2012 
(II) 

HOUSE COMMITTEE ON ARMED SERVICES 

ONE HUNDRED TWELFTH CONGRESS

HOWARD P. ‘‘BUCK’’ MCKEON, California, Chairman 

ROSCOE G. BARTLETT, Maryland 

MAC THORNBERRY, Texas 

WALTER B. JONES, North Carolina 

W. TODD AKIN, Missouri 

J. RANDY FORBES, Virginia 

JEFF MILLER, Florida 

JOE WILSON, South Carolina 

FRANK A. LOBIONDO, New Jersey 

MICHAEL TURNER, Ohio 

JOHN KLINE, Minnesota 

MIKE ROGERS, Alabama 

TRENT FRANKS, Arizona 

BILL SHUSTER, Pennsylvania 

K. MICHAEL CONAWAY, Texas 

DOUG LAMBORN, Colorado 

ROB WITTMAN, Virginia 

DUNCAN HUNTER, California 

JOHN C. FLEMING, M.D., Louisiana 

MIKE COFFMAN, Colorado 

TOM ROONEY, Florida 

TODD RUSSELL PLATTS, Pennsylvania 

SCOTT RIGELL, Virginia 

CHRIS GIBSON, New York 

VICKY HARTZLER, Missouri 

JOE HECK, Nevada 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

AUSTIN SCOTT, Georgia 

TIM GRIFFIN, Arkansas 

STEVEN PALAZZO, Mississippi 

ALLEN B. WEST, Florida 

MARTHA ROBY, Alabama 

MO BROOKS, Alabama 

TODD YOUNG, Indiana 

ADAM SMITH, Washington 

SILVESTRE REYES, Texas 

LORETTA SANCHEZ, California 

MIKE MCINTYRE, North Carolina 

ROBERT A. BRADY, Pennsylvania 

ROBERT ANDREWS, New Jersey 

SUSAN A. DAVIS, California 

JAMES R. LANGEVIN, Rhode Island 

RICK LARSEN, Washington 

JIM COOPER, Tennessee 

MADELEINE Z. BORDALLO, Guam 

JOE COURTNEY, Connecticut 

DAVE LOEBSACK, Iowa 

NIKI TSONGAS, Massachusetts 

CHELLIE PINGREE, Maine 

LARRY KISSELL, North Carolina 

MARTIN HEINRICH, New Mexico 

BILL OWENS, New York 

JOHN R. GARAMENDI, California 

MARK S. CRITZ, Pennsylvania 

TIM RYAN, Ohio 

C.A. DUTCH RUPPERSBERGER, Maryland 

HANK JOHNSON, Georgia 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

KATHLEEN C. HOCHUL, New York 

JACKIE SPEIER, California 

RON BARBER, Arizona 

ROBERT L. SIMMONS II, Staff Director 

JACK SCHULER, Professional Staff Member 

WILLIAM (SPENCER) JOHNSON, Professional Staff Member 

LAUREN HAUHN, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2012 

Page 

HEARING: 

Wednesday, July 18, 2012, Sequestration Implementation Options and the 

Effects on National Defense: Industry Perspectives ......................................... 1 

APPENDIX: 

Wednesday, July 18, 2012 ....................................................................................... 43 

WEDNESDAY, JULY 18, 2012 

SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON 

NATIONAL DEFENSE: INDUSTRY PERSPECTIVES 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

McKeon, Hon. Howard P. ‘‘Buck,’’ a Representative from California, Chairman, Committee on Armed Services .................................................................. 1 

Smith, Hon. Adam, a Representative from Washington, Ranking Member, 

Committee on Armed Services ............................................................................ 3 

WITNESSES 

Hess, David P., President, Pratt & Whitney, and Chairman, Aerospace Industries Association ................................................................................................... 9 

O’Keefe, Sean, Chairman and Chief Executive Officer, EADS North America, 

and Chairman, National Defense Industrial Association ................................. 6 

Stevens, Robert J., Chairman and Chief Executive Officer, Lockheed Martin .. 5 

Williams, Della, President and Chief Executive Officer, Williams–Pyro ............ 12 

APPENDIX 

PREPARED STATEMENTS: 

Hess, David P. .................................................................................................. 85 

McKeon, Hon. Howard P. ‘‘Buck’’ .................................................................... 47 

O’Keefe, Sean .................................................................................................... 68 

Smith, Hon. Adam ............................................................................................ 49 

Stevens, Robert J. ............................................................................................. 51 

Williams, Della ................................................................................................. 90 

DOCUMENTS SUBMITTED FOR THE RECORD: 

Letter from NDIA (National Defense Industrial Association) and AIA 

(Aerospace Industries Association) to Chairman McKeon and Ranking 

Member Smith ............................................................................................... 101 

Defense Industrial Base Task Force Report of Sequestration Effects ......... 103 

‘‘The Economic Impact of the Budget Control Act of 2011 on DOD and 

non-DOD Agencies,’’ by Dr. Stephen S. Fuller of George Mason University .................................................................................................................. 111 

Letter from AIA to Jeffrey Zients, Acting Director of the Office of Management and Budget ..................................................................................... 136 
Page

IV 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Mr. McKeon ....................................................................................................... 141 

Mr. Ryan ........................................................................................................... 141 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

[There were no Questions submitted post hearing.] 
(1) 

SEQUESTRATION IMPLEMENTATION OPTIONS AND THE 

EFFECTS ON NATIONAL DEFENSE: INDUSTRY PERSPECTIVES 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, Washington, DC, Wednesday, July 18, 2012. 

The committee met, pursuant to call, at 10:22 a.m. in room 2118, 

Rayburn House Office Building, Hon. Howard P. ‘‘Buck’’ McKeon 

(chairman of the committee) presiding. 

OPENING STATEMENT OF HON. HOWARD P. ‘‘BUCK’’ MCKEON, 

A REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED SERVICES 

The CHAIRMAN. The hearing will come to order. Good morning, 

ladies and gentlemen. The House Armed Services Committee meets 

today to receive testimony from our industry partners on the challenges of planning for sequestration. Since we began this hearing 

series back in September of last year, we have held seven hearings 

and one briefing on sequestration, the bulk of which have delved 

into the impact of sequestration on our military capabilities and 

national defense. 

Today we are holding our second hearing that is focused on the 

economic impact of sequestration, this time focused on the implications for the defense industrial base that enables and supports our 

warfighters. Joining us today are Mr. Bob Stevens, Chairman and 

CEO [Chief Executive Officer] of Lockheed Martin; Mr. Sean 

O’Keefe, Chairman and CEO of EADS North America; Mr. David 

Hess, President of Pratt & Whitney; and Ms. Della Williams, President and CEO of Williams–Pyro. In addition to their own companies’ perspectives, I should note that Mr. O’Keefe also chairs the 

National Defense Industrial Association and Mr. Hess chairs the 

Aerospace Industries Association. Ms. Williams is on the board of 

the National Association of Manufacturers. 

Barring a new agreement between Congress and the White 

House on deficit reduction, over a trillion dollars in automatic cuts, 

known as sequestration, will take effect. Although the House has 

passed a measure that would achieve the necessary deficit reduction to avoid sequestration for a year, the Senate has yet to consider legislation, and the President’s budget submission, which 

sought $1.2 trillion in alternative deficit reduction through increased tax revenue, was defeated in a bipartisan and bicameral 

manner. 

This impasse and lack of a clear way forward has created a chaotic and uncertain budget environment for industry and defense 

planners. While the cuts are scheduled for implementation January 
2 

2nd, companies are required to assess and plan according to the 

law, and sequestration is the law right now. 

We have all heard the growing number of estimates. Secretary 

Panetta has warned sequestration would be catastrophic to our 

military and result in the loss of one-and-a-half million jobs and a 

1-percent increase in the unemployment rate. This would send 

200,000 of our men and women in uniform from the frontline to the 

unemployment line. It would, as the Secretary has said, result in 

the smallest ground force since 1940, the smallest number of ships 

since 1915, and the smallest Air Force in its history. 

The National Association of Manufacturers warned that dramatic 

cuts in defense spending under the Budget Control Act of 2011 will 

have a significant negative impact on U.S. jobs and economic 

growth. The manufacturers’ forecast and one by Dr. Stephen 

Fuller, on behalf of the Aerospace Industries Association, have estimated private sector job losses at over a million. 

Faced with the prospect of being forced to lay off workers, renegotiate contracts, disrupt production, and give bad news to the 

shareholders, industry leaders have been attempting to get more 

guidance from the Administration on how they will interpret and 

implement the law. To date, the guidance has been piecemeal. For 

example, last fall the Pentagon stated that war funding would not 

be sequestered. Then in May the OMB [Office of Management and 

Budget] overruled the Department and declared that while veterans’ benefits would be exempt, funding for the troops on the 

frontline would not be exempt. In June 2012, Secretary Panetta 

met with various defense industries executives to discuss the impact of sequestration on their operations and to gauge the current 

state of the industry in general. In addition, press reports indicate 

that the Director of the Office of Management and Budget met separately with heads of several major defense companies. 

Unfortunately, it doesn’t sound like industry learned much from 

those meetings. Reports indicate OMB made it clear that it does 

not plan to issue implementation guidance until at least November, 

less than 2 months before sequestration is scheduled to take effect. 

My fear is that the guidance will come much too late. Industry 

faces a host of planning challenges and requirements to be met this 

summer, not the least of which is the WARN [Worker Adjustment 

and Retraining Notification] Act, which requires most employers to 

provide notification at least 60 calendar days in advance of mass 

layoffs and plant closings. In some States the requirement is 90 

days. That means, as we will hear today, defense companies are 

currently grappling with whether to send pink slips by November 

3rd to their employees. 

In addition to the issue of jobs, I worry that the cavernous silence from the President will lead many to exit the industry or to 

walk away from capital investments that are in the best interests 

of our troops. As I have said many times before, the men and 

women on the front lines have our backs. Who is going to have 

theirs if we allow the impending threat of sequestration to shutter 

the American industrial machine that enables them to fight, win, 

and return home safely? 

This overdue guidance from the Administration on how they intend to interpret the law and implement sequester mechanically is 
3 

critical to employers, not to mention Congress, and I look forward 

to our follow-on panel with the Director of the OMB on August 1st. 

We all believe there is strong, bipartisan agreement that sequester is bad policy and should be replaced. My hope is this hearing 

will provide additional incentives for the Administration to provide 

more information to employers and for all parties to resolve this 

impasse, and I look forward to your insights today. 

Mr. Smith. 

[The prepared statement of Mr. McKeon can be found in the Appendix on page 47.] 

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM 

WASHINGTON, RANKING MEMBER, COMMITTEE ON ARMED 

SERVICES 

Mr. SMITH. Thank you, Mr. Chairman. I thank our witnesses for 

being here to discuss this very important subject and to give their 

perspectives on it. As some of our leading employers in the defense 

industry, their perspectives are critically important as we go forward, both in terms of the industrial base issues and in terms of 

the impact on our broader national security, and I completely agree 

with the chairman that sequestration is not a good idea. It would 

be bad for our economy, bad for defense. I always hasten to point 

out not just defense, it is, you know, a sort of mindless across-theboard cut in all discretionary spending. So education, transportation, infrastructure, on down the line—it would have a devastating impact, and part of the problem in addition to that is that 

the Budget Control Act was not particularly well drafted. I have 

heard dozens of different opinions about what it means and what 

exact effect it would have, what is exempt, what isn’t exempt, how 

would you implement it. Nobody knows for sure until we actually 

do it. That is part of what the Administration is wrestling with. 

So I don’t think there is any dispute that it is bad. I have not 

heard the White House dispute that. Secretary Panetta, in particular, has been very forceful on explaining how awful sequestration will be. The problem is, it is not like you can really come up 

with a plan that is going to make it anything other than awful. The 

burden, the real burden of this committee, this House, and the Senate, and the President is to get rid of it one way or the other, to 

make sure that it doesn’t happen. If it happens, it will have a very 

profound and negative impact. And it is also worth pointing out 

and I think the chairman has done an excellent job of this, this is 

a problem right now. We tend to look at it and say, well, sequestration kicks in on January 1st and people begin to imagine that that 

is the deadline. But all of you and thousands of other employers 

are making decisions right now based on what they reasonably 

project will happen in the next fiscal year, and those decisions are 

leading to people hiring less people and in some cases laying them 

off in anticipation that cuts will come one way or the other. So it 

definitely needs to be avoided. 

But we also need to look at the larger problem in terms of what 

got us into this and why we are having such a devil of a time getting out of it. There seems to be this opinion that while this is a 

terrible, terrible thing and it is just sort of fundamental incompetence that is preventing us from dealing with it, it is really not. 
4 

It is more denial about the fiscal situation we are in. Let’s go back 

to the fact that we are only here because of the refusal of the majority of people in the House to raise the debt ceiling. This deal was 

done as the only way to raise the debt ceiling and stop the United 

States of America from defaulting on its obligations for the first 

time. It was only that sort of blind notion that somehow not raising 

the debt ceiling was a solution to our fiscal problems that forced 

us into this awful, awful decision, an awful decision which I didn’t 

support, mainly because it put all of the burden on the discretionary budget. 

We unquestionably have a budget problem, we have a $1.2 trillion deficit, actually 1.3 last year, a 38-percent deficit, and it needs 

to be addressed. Thus far we have put all of the burden of that on 

the backs of 38 percent of the budget, which is the discretionary 

spending budget, and we have refused to talk about revenue. So 

the solution going forward, the thing that will help us come together and come up with the deficit control steps necessary to 

avoid sequestration is, number one, admit that we are not balancing the budget anytime soon. We would all love to have a balanced budget, but there isn’t an economist out there that won’t tell 

you doing that in the near term would be devastating to the economy. We are going to have structural deficits for a while. Our role 

is to get those deficits under control so that they are manageable, 

but we can’t hold hostage steps that will do that to the notion that 

we have to have a balanced budget right now or even in the next 

3, 4, 5, 6 years. So admit that. And then, second, everything has 

to be on the table. We are going to need more revenue. We have 

cut taxes across the board over the course of the last 10 or 12 

years. If we are truly, truly committed to providing for the men 

and women who serve us and providing for our national security, 

then we absolutely have to be willing to raise the revenue to pay 

for that. That is a critical, critical piece of it. And, yes, we also 

have to look at the other 62 percent of the budget, the mandatory 

spending, and find savings there as well. So that sort of a sort of 

realistic discussion is needed. Right now there seems to be this desire for a balanced budget. Also a desire to not raise revenue and 

a desire not to cut any spending that is important. Those numbers 

don’t add up. 

So I hope this committee can begin to be part of the process of 

starting a realistic debate that can avoid the truly awful outcome 

that would come with sequestration and the awful outcome that is 

coming every day, every day that we delay in making it clear that 

we are not going to do sequestration. 

So I think this hearing is very appropriate. I thank the chairman 

for having it. I look forward to the testimony and the discussion. 

Thank you. 

[The prepared statement of Mr. Smith can be found in the Appendix on page 49.] 

The CHAIRMAN. Thank you, Mr. Smith. And thank you again, 

each of you, for being here today. This is probably one of the most 

important hearings I can remember attending, and we really appreciate your willingness to be here. Your—Mr. Stevens, if you will 

begin, please. 
5 

STATEMENT OF ROBERT J. STEVENS, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, LOCKHEED MARTIN 

Mr. STEVENS. Thank you, Mr. Chairman. Good morning. Chairman McKeon, Ranking Member Smith, distinguished Members of 

the committee, I thank you very much for this opportunity to express our industry perspectives on the impact of sequestration. 

With your permission, I will submit a prepared statement for the 

record and offer now a brief summary. 

The CHAIRMAN. With no objection, so ordered. And that would go 

for each of you. 

Mr. STEVENS. Thank you, sir. As Chairman and Chief Executive 

Officer of Lockheed Martin, I am enormously proud to represent 

120,000 hard-working, patriotic women and men who are the foundation of our business. We are a global security company operating 

in 50 States and 75 countries. Our workforce includes 61,000 scientists and engineers and 26,000 military veterans. Year in and 

year out our company consistently hires the largest number of 

graduating engineers from U.S. universities compared to any other 

company. We receive more than a million re ́sume ́s each year from 

highly talented people who have a strong desire to deliver the next 

generation of technology that will help keep our Nation safe and 

secure and ensure the United States leads the world. 

Lockheed Martin is also the largest provider of information technology services to the Federal Government, and we have a business 

presence in virtually every Federal department or agency, including the Social Security Administration, the National Institutes of 

Health, the Veterans Administration, the Department of Homeland 

Security, and the Federal Aviation Administration, just to name a 

few. So the men and women of our company play an important role 

in America’s future, and we all take that responsibility seriously. 

Sequestration jeopardizes that future. From a national security 

perspective, Defense Secretary Leon Panetta has spoken in the 

strongest possible terms against sequestration. He said this process 

will have catastrophic consequences for our Nation’s defense, and 

he described it as a meat ax. It is. Sequestration’s automatic trigger and across-the-board cuts were developed independent of any 

correlation with national security strategy, force structure, technology needs or operational reality, and those cuts will be detrimental. 

From an industry perspective, our near-term horizon is completely obscured by a fog of uncertainty. With just 167 days remaining until it takes effect, we have little insight as to how sequestration will be implemented and no insight into which programs will be curtailed, which sites will be closed, which technologies will be discontinued, which contracts will be reformed, and 

which suppliers, particularly small businesses who are so vital to 

our supply chain, will be shut down or severely crippled. Most tragically, we fear we will be unable to provide the equipment and support needed by our military forces, and we are unable to reliably 

estimate how many employees are going to lose their jobs and how 

many families are going to be disrupted. 

It might be flattering to believe that our industry is so robust 

and so durable that it could absorb the impact of sequestration 

without breaking stride, but that is a fiction. The impact on our in-
6 

dustry would be devastating, with a significant disruption in ongoing programs and initiatives leading to facility closures and personnel reductions that would severely disrupt advanced manufacturing operations, erode engineering expertise, and accelerate the 

loss of skills and knowledge. In short, it will undermine our aerospace and defense industrial base, which I believe is one of the 

crown jewels of the American economy and is strategically vital to 

our country. 

Beyond defense, I think the broader consequences of sequestration also are not well understood. The abruptness and across-theboard nature of the cuts will hit hard virtually all domestic discretionary accounts as well, and since most of our domestic departments and agencies don’t have substantial capital acquisition accounts like the Department of Defense, that means the cuts will 

come from people, through significant work furloughs and personnel reductions that will likely constrain agencies from providing 

essential support and services and fulfilling their missions. 

In short, sequestration constitutes blunt-force trauma. It is likely 

to tear the fabric of our industry, adversely affect our national security, and impair our domestic agencies. 

Mr. Chairman, I don’t profess to have the wisdom or expertise 

to give counsel to this committee or to Congress on the precise path 

forward to resolve all the fiscal challenges that our Nation is facing, but I have spent decades of my professional working life in the 

national security arena, and I have never been as concerned over 

the risk to the health of our industry and our Government enterprise. 

Sequestration has been described many times to me as a doomsday device, as a threat that was designed never to happen, but the 

effects of sequestration are being felt right now throughout our industry. Every month that goes by without a solution is a month of 

additional uncertainty, deferred investment, lost talent, and ultimately increased costs. 

Respectfully, I urge you to take action to stop the sequestration 

process and ask that you do so soon. Thank you, sir. 

[The prepared statement of Mr. Stevens can be found in the Appendix on page 51.] 

The CHAIRMAN. Thank you very much. 

Mr. O’Keefe. 

STATEMENT OF SEAN O’KEEFE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, EADS NORTH AMERICA, AND CHAIRMAN, 

NATIONAL DEFENSE INDUSTRIAL ASSOCIATION 

Mr. O’KEEFE. Thank you, Mr. Chairman, Members of the committee, I appreciate the opportunity to appear here today on behalf 

of the 90,000 members of the National Defense Industrial Association, which I serve as chair, in addition to representing EADS, 

which is the world’s largest aerospace and defense company. 

I am particularly cursed by a memory of how this particular provision of public finance was first introduced into the Federal process as a mechanism to enforcing some measure of discipline, given 

my prior public service experience. Gramm-Rudman-Hollings, when 

it was enacted in the mid-1980s, was intended particularly to be 

indiscriminate by its precision to be exacting. Across the board by 
7 

precisely the same amounts, the logic was, 25 years ago when it 

was enacted was that the method was a substitute for rational 

judgment and choice of priorities because the process had failed to 

reach consensus on what those priorities would be, and so therefore 

an exacting precise amount with an indiscriminate application was 

enacted. The logic was also that this method was devoid of any priority selection and that nothing would be more affected and so 

therefore there were no priorities. If everything is the same priority, there are no priorities of any substance. And finally, the logic 

was this resource management mechanism was so stupid that the 

threat of it would be a prompt all by itself to public leaders to 

avoid it at any cost. 

That was the logic, quaint as it sounds, 25 years ago. But it has 

been adopted a year and a half ago or a year ago, excuse me, as 

a mechanism now of enforcement following the debt limit extension 

provisions that were then subsequently enacted in order to force 

this again. The consequences of this are serious. Bob Stevens has 

talked through a variety of very particular reference that would be 

applicable, but the percentage that is to be applied, while it ranges 

anywhere in the single digits to very low double digits, may sound 

like that is not going to be much of an impact masks the real consequence of this. The most severe is the administrative disruption 

that will likely cost almost as much as what this mechanism is designed to save. So by however much is sequestered, taken across 

the board without priority, without particular application to any 

sense of its value one way or the other in which body armor contracts are valued at exactly the same value as cutting grass at military bases, that the consequence of that may sound like it is going 

to be exacting in its precision, but indeed the administrative effort 

to implement it will be much more disruptive than anything else. 

It is going to force inefficiencies, as it has in the past in much 

smaller applications of this provision, and that has been demonstrated and documented in terms of its extent. It is going to implement and force any number of contract penalties. It will terminate a variety of different programs because there are some efforts 

to select within the amounts that are identified by the very 

wonkish-sounding program, project, and activity definitions, and 

even those definitions I think as Congressman Smith highlighted 

are still in dispute and argument over exactly how they would be 

applied. So that will extend this even further. Unit costs will certainly increase as there is a change in quantities by contract. The 

cost of capital for smaller second- and third-tier suppliers will almost certainly go up as financing expenses just to meet the cash 

flow requirements as progress payments are disrupted, and then 

once that is settled, Prompt Pay Act penalties will then be applied 

as well. Bob Stevens spoke to the, as well as the chairman spoke 

to the WARN Act provisions, that is going to be an across-theboard disruptive effort, and indeed that has already started in 

some cases by notification to many of you and your colleagues as 

well as Governors in 50 States that indeed this provision may, in 

fact, have to be implemented. So it has already begun. 

The impact on second- and third-tier suppliers, of which the National Defense Industrial Association, most of its members represent or are a part of that, is going to be very, very significant in 
8 

that regard, and the disruption in that particular market is going 

to be one that may not sound like, again, the percentage sounds 

like a very big deal. But just take, for example, some of the suppliers to my company, EADS, which does purchases $15 billion 

worth of commercial and other activities in the United States every 

year on an annual basis. Seventy percent of what we do is commercial, 30 percent is related to public contracts. And yet many of the 

suppliers are much the same for aerospace articles that apply in 

some circumstances to defense equipment and in other cases of 

which again we do roughly 30 percent, the other bulk of it is towards the commercial side of the equation. The cost of doing business for many of the second- and third-tier providers is going to go 

up significantly because some of those providers will elect to either 

exit one element of the market, defense in particular or public 

spending in particular, and as a consequence the options for competition to maintain cost competitiveness is going to become much 

stiffer in the $15 billion a year that my company invests every year 

to purchase goods and services in the United States. Some of those 

subtier providers will exit the market, and when they do there will 

be less choice and the cost of doing business will go up. 

In the defense market that is particularly true since those same 

products, identical in many respects in a commercial or military 

sale, costs in a public market at least on the order of 20 percent 

more to do business. Those suppliers who are providing in both 

markets will exit the public defense market faster than any other, 

just to shed that 20 percent overhead that it costs to do business 

there. And so as a consequence, it becomes an easy choice or one 

that they are driven to in order just to survive in many cases. And 

that is an opportunity at the same time to examine what that cost 

of doing business is uniquely to the public sector. If every article 

or most require roughly the same comparability of its application 

in a commercial or defense context, why does it cost that much 

more just to sell to the public? And that has an opportunity for reexamination. 

The Defense Business Board has advocated what is now called 

a regulatory holiday. During the 1990s in the post-Cold War period 

the Administration at that time referred to this as a procurement 

holiday. Let’s just stop buying things, we have got enough of an inventory, no need to buy more. Well, the same could be applied in 

these particular cases, in which 20 percent of the cost that is applied just to do business with the public could be reexamined on 

a case-by-case basis. But to demonstrate why it ought to stay there 

as opposed to be just accepted and therefore be justified on each 

occasion, they have come up with—the business board has come up, 

the Defense Business Board has come up with a very creative 

method to do that, and that is to be advanced as one method in 

the alternative to looking at a mindless across-the-board application of no-priority, everything-is-a-priority kind of reduction. And 

that is an overhead that I would encourage as an opportunity to 

really look at what those expenses could be to yield a lower cost 

and ultimately the kind of savings that are to be accrued. 

Lost in all this, though, and maybe this is the most important 

element, is that while there will be, there is no doubt, almost to 

equal proportion a reduction in this area of the domestic discre-
9 

tionary appropriations, as again Congressman Smith described, it 

nonetheless is going to resonate in a different way. We are looking 

at dominantly public servants or delivery of public services that require personnel, and as a result how the Federal Government goes 

about the process of determining how those reductions will be 

made is something yet to be heard from. So while there may be a 

prospect of fewer TSA [Transportation Security Administration] 

agents at the airports on any given day or flight disruptions as a 

consequence of the FAA [Federal Aviation Administration] air traffic controllers not being asked to report for duty that day, and 

there will be fewer research grants because the NIH [National Institutes of Health] or the National Science Foundation is withholding the grant that was required through a university for some 

research activity. All those are severe impacts. But by comparison 

to the impact that will be particularly on the Armed Forces of the 

United States, men and women in service who voluntarily are 

there in order to defend us, that impact is going to be particularly 

profound on them and their families. And it is worthy, therefore, 

of consideration of what that consequence will be that is far greater 

than anything we are talking about here this morning on the industry. 

The CHAIRMAN. Mr. O’Keefe, are you close to—— 

Mr. O’KEEFE. I am done. I simply would want to add, I commend 

the committee for seeking some resolution to this issue, and I very 

much appreciate the opportunity to testify. Thank you. 

[The prepared statement of Mr. O’Keefe can be found in the Appendix on page 68.] 

The CHAIRMAN. Thank you very much. 

Mr. Hess. 

STATEMENT OF DAVID P. HESS, PRESIDENT, PRATT & WHITNEY, AND CHAIRMAN, AEROSPACE INDUSTRIES ASSOCIATION 

Mr. HESS. Chairman McKeon, Ranking Member Smith, and 

Members of the committee—— 

The CHAIRMAN. Is your mike on? 

Mr. HESS. I believe it is, sir. Is that better? 

The CHAIRMAN. You have to get it right close. 

Mr. HESS. Thank you, sir. 

Chairman McKeon, Ranking Member Smith, and other Members 

of the committee, I appreciate the opportunity to testify before you 

today regarding the serious matter of the potential for sequestration and the implications it has to our defense industry. 

As you know, I wear two hats currently. One is the President of a $13 billion company that employs more than 36,000 employees 

worldwide, and second as the Chairman of the Aerospace Industries Association, which represents 300 aerospace companies across 

the United States which collectively account for about 90 percent 

of the revenues for the entire—for the aerospace and defense industry. I commend the committee on assembling such a representative 

group of witnesses to provide diverse answers based on the different challenges faced by each of us in the coming months. 

As chairman of AIA [Aerospace Industries Association], it has 

been my privilege to visit Capitol Hill on numerous occasions to 
10 

outline what we see with regard to sequestration, the potential to 

affect over one million highly skilled, highly compensated aerospace 

and defense-related jobs. AIA’s second-to-none advocacy campaign 

has been spreading throughout the country with grassroots rallies 

highlighting the importance of fixing sequestration versus suffering 

its consequences. 

As an industry, we are already seeing the impacts of potential 

sequestration budget cuts today. Companies are limiting hiring and 

halting investments largely due to the uncertainty about how sequestration cuts would be applied. At our UTC [United Technologies] sister division, Sikorsky, the leadership has already indicated that given this environment, if they had to choose right now 

between investing an internal R&D [Research & Development] dollar between a commercial and defense program, they would choose 

commercial programs because of the uncertainty in the defense 

budget, and that is considering there is a fair amount of uncertainty in the commercial environment right now. Equally concerning are the impacts of sequestration on the domestic side as it 

relates to Homeland Security, border security, air traffic control, 

TSA, and other agencies. The sequestration threats facing other 

Government agencies’ contracts and workforce affects our member 

companies’ ability to do business safely and effectively. In the near 

term some clarity from the Office of Management and Budget 

about how sequestration cuts would be implemented would be helpful in terms of avoiding some of these impacts. 

Regardless of how the cuts are implemented, the consequences 

for the industry would be dire. The Defense Industrial Base Task 

Force commissioned by Secretary of Defense Panetta has reported 

that sequestration level cuts would result in the closure of production lines, a layoff of skilled workers, severe curtailment of research and development investments, and a reduced ability to respond to the emergent needs of the U.S. military. 

However, today I am here as the President of Pratt & Whitney 

to offer my view on how sequestration will affect us directly and 

share with you how the effects Secretary Panetta mentioned are 

becoming a reality for us. 

At Pratt & Whitney we build jet engines for both the commercial 

and military marketplace. As you know, our future military base 

market consists primarily of the F135 engine for the F–35 Joint 

Strike Fighter. While we are also proud of our engine chosen to 

power the next generation KC–46 aerial refueling tanker for the 

U.S. Air Force, these engines will not really add to our production 

business until 2016 or later. With the end of the production run of 

the F–22 engine this year and potentially the end of the production 

run for our engine for the C–17 next year, the F135 engine is our 

future for our military business. 

Already the decline in defense spending is negatively affecting 

the F–35 production ramp and subsequently affecting our engine 

production. As you know, $487 billion in defense budget cuts already announced has pushed out 179 F–35 Joint Strike Fighter aircraft between 2012 and 2020. Original projections just a few years 

ago had us building over a hundred F135 engines per year. This 

year we will build just over 50, so about half of that number. Next 

year our F135 production will actually decrease, and if sequestra-
11 

tion were to take effect, that number would decline dramatically. 

It is not just new engine deliveries that are impacted at Pratt. 

Spare parts are the key to keeping our manufacturing base healthy 

and sustainable, but as a result of the announced $487 billion defense budget cuts, flight hours have already been cut back, and sequestration would result in still further reductions. This undercuts 

demand for our spare parts and overhaul work. For my company 

this situation poses both a workforce and a supply base problem. 

As the F–22 program winds down, I am currently transitioning 

many of these workers to the F135 production, but this is extremely difficult given the near-term production decline I described 

earlier. With sequestration it will be even more difficult to retain 

those highly skilled employees, and quite simply my workforce is 

aging, specialized, and highly compensated. If and when we do 

ramp back up production, the learning curve for new employees is 

steep and will affect production quality and training, all of which 

adds time and costs. 

Pratt & Whitney is somewhat unique because from a production 

standpoint a jet engine is a jet engine, whether it goes in a military 

aircraft or a commercial aircraft. This allows us to absorb some of 

the disruptions better than small companies in the supply base. 

For a short time I may be able to move employees between military 

and commercial programs, assuming I have an increase in demand 

for the commercial area. I can, if forced to, take some risks if there 

is to be a reward at the end of the day, but this is like putting a 

proverbial Band-Aid on a bullet wound. 

In terms of our supply base they, too, are currently struggling 

with volume. Many of them are small businesses, making specialized parts for military engines that simply cannot survive another 

production decline or disruption. We continue to hear from our suppliers that if further cuts take place, we would be—they would be 

forced to lay off employees, curtail investment, and pursue other 

businesses. 

One large supplier has told us, quite frankly, they don’t believe 

the DOD [Department of Defense] will ever produce the number of 

engines in the Joint Strike Fighter program. This uncertainty 

makes suppliers less willing to enter long-term agreements and 

drives our costs up today. 

If sequestration were to go in effect, no amount of juggling is 

going to preserve my workforce or help me maintain our supply 

base. A step down in the current production ramp for the F–35 

means some people will lose their jobs. It also means reduced volume for suppliers, and that means costs go up. More importantly, 

it puts a good program in a very tenuous position, a program that 

we cannot afford to lose. 

To reiterate, Mr. Chairman, we at Pratt & Whitney are better 

able than smaller companies to deal with short-term implications 

of sequestration, but make no mistake, it is dangerous to the 

warfighter, for us as a business, for our supply chain companies, 

and for us as a Nation. 

Again, I appreciate your perseverance on this important topic 

and for your allowing me to be here today. Thank you, sir. 

[The prepared statement of Mr. Hess can be found in the Appendix on page 85.] 
12 

The CHAIRMAN. Thank you. 

Ms. Williams. 

STATEMENT OF DELLA WILLIAMS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WILLIAMS–PYRO 

Ms. WILLIAMS. Thank you. Mr. Chairman, Ranking Member 

Smith, and Members of the committee, thank you for the opportunity to testify on sequestration implementation options and the 

effects on national defense industry perspectives. My name is Della 

Williams, and I am the President and CEO of Williams–Pyro in 

Fort Worth, Texas. 

Williams–Pyro is a woman-owned small business that designs 

and manufactures innovative products, including custom cables, 

connectors, adapters, automated test equipment, and intelligent 

power management systems. Our products have improved the safety of flight line maintainers, reduced aircraft downtime, boosted 

the buying power of the defense and procurement dollar. We currently have 89 employees who continue to amaze me every day. I 

have been here since day one. 

As a manufacturer and part of the defense industry chain, defense supply chain, I very much appreciate your focus on defense 

industry and the impact of the impending cuts in defense spending 

set to begin on January 1, 2013. While I wish I were here under 

better circumstances, and the impending threat of these wholesale 

budget cuts is of deep concern to me, my goal today is to put a face 

and a name to what is rather cavalierly discussed in the press as 

sequestration. 

Most people would associate defense cuts with big Tier I defense 

contractors which are represented by several of my colleagues here 

today. Supporting every one of these large integrators on dozens of 

programs are thousands of Tier II and Tier III suppliers, most 

small and medium-sized businesses who design and manufacture 

what seems like small parts. Moreover, the defense supply chain 

companies collectively employ millions of hard-working people who 

each support spouses and children and communities. 

So these cuts will not just impact a few companies, these cuts 

will flow down the supply chain and through the broader economy. 

They will impact companies like mine and threaten the jobs of 

thousands of skilled workers who work at them. In fact, a report 

released last month by the National Association of Manufacturers 

concludes that by 2014 the cuts in defense spending enacted last 

year combined with the cuts set for January 1, 2013, will result in 

the loss of more than one million jobs, increasing the unemployment rate by almost 1 percent. Just in Texas alone this means a 

loss of more than 100,000 jobs. If small business, and I would submit even further manufacturing, is an engine of economic growth, 

why are we making decisions that will inevitably stall that engine? 

The budgetary issues the Federal Government is facing are the 

same ones that I, as a small manufacturer and a taxpayer, deal 

with every day in my own business. 

Analysts say the defense industry is faced with several choices, 

either exit the market, double down on defense by buying your 

competitors or weather the storm. At Williams–Pyro, however, we 

have chosen to invest in product development. These are major in-
13 

vestments for a small business, but we are committed to developing 

products that will meet the military’s operational and procurement 

requirements. I believe that this dedication to providing innovative 

products for the defense industry helps to illustrate the potential 

impact sequestration will have on my business and many others. 

Sequestration, as is being discussed, will create a mass exodus 

of talent and skills to other industries. Williams–Pyro presently 

has almost 90 employees, including machinists, assemblers, and 

R&D engineers experienced in mechanical, electrical, software, 

firmware, hardware, and manufacturing. These jobs are in jeopardy. 

What is being billed as a stopgap budget fix will have lasting effects on our defense capabilities for years to come. The switch will 

just not get flipped back on to reverse that trend. Moreover, the 

deep personnel and program cuts will threaten our national security. Indeed, the United States could lose our technological and 

strategic advantage and never get it back. 

In conclusion, I urge Members of Congress to go back and sharpen your pencils. Sequestration is cosmetic surgery with a chainsaw. 

Working together we can solve this, but we need to do it smartly 

and strategically while keeping the economy moving and defending 

this great land. 

Thank you again for inviting me to appear before you to talk 

about this very important issue. I would be pleased to answer any 

questions you might have. Thank you. 

[The prepared statement of Ms. Williams can be found in the Appendix on page 90.] 

The CHAIRMAN. Thank you very much. I think we on this committee probably all understand more than perhaps the rest of Congress how serious these impacts will be on our military and on our 

industrial base, but you have laid out even further these problems. 

I have a series of questions that probably could be answered very 

briefly. I would encourage you to do that so that we get these 

things on the record, which will help us as we go forward. 

Based on your testimony, it appears to me that you believe if sequestration goes into effect January 2nd there will be job losses. 

Can you each confirm at this time that layoffs are reasonably foreseeable? 

Mr. STEVENS. Yes, sir. 

Mr. O’KEEFE. Yes, sir. 

Mr. HESS. Yes, sir. 

Ms. WILLIAMS. Yes, sir. 

The CHAIRMAN. Thank you very much. 

Do you believe that you are obligated by either the spirit of the 

letter of the Worker Adjustment and Retraining Notification, 

known as the WARN Act, to give conditional notices to your employees that may be laid off as a result of sequestration in advance 

of making a final determination regarding which specific employees 

will be let go? 

Mr. STEVENS. Sir, given the uncertainty in this environment 

today, yes, we do. 

The CHAIRMAN. May I—I would like that answer from each of 

you, but you have a specific history regarding the presidential heli-
14 

copter that is very important. Could you just expand on that a little bit as to your history there? 

Mr. STEVENS. I can, sir. With respect to the termination of the 

VH–71 helicopter where we knew there would be layoffs at a particular site in Owego, New York, but we didn’t know which employees would be laid off, we did not issue WARN notices at the time 

of that termination, opting rather to do internal planning to see if 

we could replace the worker in another assignment either in that 

location or another location, look at dimensions of the business we 

might have to provide some flexibility here. That process took 

about 45 days. In the subsequent evaluation of the termination 

claim that is typical in a termination for convenience environment, 

we have an opinion from the Defense Contract Audit Agency that 

said we should have acted more timely and that the costs associated with that 45 days may well not be allowable and viewed, I believe, in their draft opinion that our actions were unreasonable, 

that we waited an unreasonably long period of time. 

So experiences like that inform us in an odd way of the compelling requirement to take timely action and not allow the ambiguity 

of the situation to accrue against the interests of the company even 

though in that case our preference was in our judgment to act prudently and see if we could move the employees around. 

The CHAIRMAN. And you are still in litigation on that issue, as 

I understand it? 

Mr. STEVENS. It is a negotiation over the termination, yes, sir. 

It has not been concluded yet. 

The CHAIRMAN. Thank you. Mr. O’Keefe. 

Mr. O’KEEFE. Yes, sir, no, I concur entirely with your question 

that yes, indeed, we will be as a matter of the spirit of the law compelled to do something in that regard, yes. 

The CHAIRMAN. Mr. Hess. 

Mr. HESS. We would certainly abide by the requirements of the 

WARN Act. Now we have certain advantages in our business that 

Mr. Stevens doesn’t have, Mr. Stevens’ business, roughly 80 percent of it is defense. At Pratt & Whitney roughly 25 percent of our 

business is defense, so depending on what is happening in the 

other elements of the business, the commercial environment, we 

might have the potential, the opportunity to redeploy people, but 

it is far from certain, and certainly when you are looking at budget 

cuts of the order of magnitude that sequestration would involve, 

potentially another 10 to 14 percent on top of the 10-percent budget 

reduction that is already being implemented today, certainly there 

would be scenarios where we would be looking at proportional head 

count reductions. 

The CHAIRMAN. Thank you. Ms. Williams. 

Ms. WILLIAMS. I don’t believe we are covered under the WARN 

Act because we are less than 100 employees. However, if that 

changes, absolutely. And even if it doesn’t change, if we don’t get 

some contracts soon, and I don’t see how we will be able to get, 

keep our employees, and this sequestration is going to cut drastically in our contracts. 

The CHAIRMAN. Thank you. 

Barring additional guidance from the Office of Management and 

Budget and the Department of Defense on the application of se-
15 

questration, do you believe that conditional notices will have to be 

issued this fall prior to January 2 to comply with the WARN Act? 

How many employees do you estimate will receive those conditional 

notices? And if you will not have to issue conditional notices this 

fall, what extenuating factors affect your decision? 

Mr. STEVENS. Yes, sir. I think that we will be compelled to issue 

notices. There is an ongoing discussion about how many WARN notices will need to be issued and exactly when. There is so much uncertainty in this environment. I think that will be a capstone comment that I know the committee wrestles with all the time in your 

deliberations. But we do know several things. We do know sequestration is the law. We know that law takes effect January 2. We 

believe any reasonable modeling around that law will require significant reductions in force with double-digit reductions in the 

budget. 

In the past, when we have had budget reductions, we look internally at a strategic assessment of our company because if we just 

cut the cloth uniformly, it would be terribly uneconomical and inefficient, and those costs would flow back in the future. That restructuring likely means we will have plant closings. Plant closings and 

significant reductions in force will trigger the WARN Act. 

The question then becomes, when? Our best judgment, as we 

have tried to put pencil to paper with all this uncertainty about 

planning, is that agencies will actually move closer to January 2 

because the act requires a $55 billion reduction in fiscal 2013. But 

the act takes effect after the first quarter. So the $55 billion has 

to be reduced over 9 months, not a year. Every day it is delayed 

after January 2 makes the magnitude of the reduction to accumulate $55 billion in the year more. If 3 more months go by, the 

equivalent of $110 billion would have to be taken out of the agency, 

which would be more and more disruptive. 

So I think as people come to terms with their responsibilities in 

that sequestration is the law and we must prepare for it, there will 

be an impetus to move closer to January 2. We need to be prepared 

to enable agencies to make those determinations. Because of that 

preparedness, we will set back 60 days or, in the case of New York, 

90 days from that. The question is, which employees would be terminated? We don’t really know. We would have to broaden the notification under WARN appropriately. We are very hungry for more 

guidance, very hungry for more information so we can narrow this 

and behave responsibly. 

The CHAIRMAN. And yet when we held one of our hearings in 

September, and we asked the Assistant Secretary, Dr. Carter, what 

they were doing to prepare, his comment was rather flippant, ‘‘We 

don’t have to do anything to prepare. We just take the budget out, 

take the percentage off of every line item. So it takes no planning.’’ 

I just think that is totally irresponsible. 

Mr. O’Keefe. 

Mr. O’KEEFE. Again, I think as much as you have heard from 

others here, absent any specific guidance on how this should be applied, we will be compelled as a matter of compliance with the spirit of the law following through on the WARN Act provisions. 

Now we have already begun that process. Again, we have notified many Members of Congress that represent constituencies and 
16 

districts in which we operate in as well as the Governors of those 

States that this provision will have applicability. We are assessing 

at what point we have to make that determination. And as much 

as you just heard from Bob Stevens, we are going to have to make 

that choice. As we see the time unfold here, absent any guidance, 

that is going to have to be sooner or later. And again, the determination from the Office of Management and Budget and DOD 

would prescribe that. 

But much as what you heard as well from Dave Hess, 70 percent 

of what we do is commercial related. We are going to have options 

and alternatives. But there are going to be very specific contracts 

and programs that will be affected that are Federal contracts 

across the board. And once we get those more specifically targeted, 

that will be the focus on where the WARN Act applications and notifications will have to occur. 

The CHAIRMAN. Thank you. 

Mr. Hess. 

Mr. HESS. We will certainly abide by the regulations in the 

WARN Act. But as you have heard from my colleagues, given the 

amount of uncertainty in terms of how these budget reductions 

play out, also given the opportunity maybe to redeploy people to 

other parts of the business, it is not clear to us today that we 

would trip the thresholds involving implementation of the WARN 

Act. With respect to your question about conditional notification, 

we are still considering that possibility. 

The CHAIRMAN. Thank you. 

I understand you are not affected by this. But please explain 

whether any of the exemptions to the 60-day notice WARN Act requirements are applicable in this situation. For example, could 

your company claim that layoffs resulting from sequestration were 

sudden, dramatic, and unexpected? 

Mr. STEVENS. We don’t believe so. 

Mr. O’KEEFE. No. They are well forecasted and anticipated. We 

knew months in advance and you could see it coming. 

Mr. HESS. I would agree with my colleagues. The law on the 

books today says that sequestration will occur on January 2, not 

conditional or contingent on anything; that it is the law of the land, 

and we are obligated to plan on it. 

The CHAIRMAN. Even though some in the Administration say, it 

is not going to happen, don’t worry about it, you feel you are bound 

by the law? 

Mr. HESS. We have a fiduciary responsibility to our boards, to 

our shareholders and our employees to plan based on the laws that 

are on the books today. 

The CHAIRMAN. And my final question, aside from issuing notices 

to your current employees, how has the possibility of sequestration 

impacted your current hiring practices or that of your industry 

partners? 

Mr. STEVENS. Well, sir, we have slowed down on I think the very 

simple and logical premise that if we are going to engage in significant reductions in the workforce in January, it is imprudent to 

bring people on for 6 months. 

What struck me as more interesting and maybe more telling 

about the future, we recruit heavily on college campuses. We do get 
17 

a million re ́sume ́s a year from very talented young people. And I 

know you interact and the Members of the committee interact with 

these young people all the time. And it really gives you optimism 

about the future of America when you have the ability to see the 

talent, the energy, and the vision possessed by these young graduates. For the very first time in my tenure as CEO, they have 

started to ask whether they want to come into the industry or specifically with our company, even though they love the technology 

and they love the mission. Because they question, if I join you now, 

will I have a job next year? These are very smart kids. We want 

them because they are smart young people. And they are smart 

enough to realize that this uncertainty may cause them to look at 

other options for their career. 

We want the best and brightest talent in the defense industry so 

we can continue to innovate the products and services that our 

women and men in the Armed Forces rely on to keep themselves 

safe. 

The CHAIRMAN. Mr. O’Keefe. 

Mr. O’KEEFE. Mr. Chairman, I would say that we have slowed 

down hiring as a consequence indirectly of sequestration. What is 

occurring now is requests for proposals, a range of different contractual activities. We are all shifting to the right in the Federal 

activity. It has all been delayed. So as a consequence, that really 

refocuses your attention. We are not going to hire folks in anticipation of what we think is going to be market opportunities coming 

down the road that we think we can compete for successfully. We 

have slowed that down significantly. 

The CHAIRMAN. So even though you have been told that it is 

probably not going to happen, don’t worry about it, the department 

is already slowing down in anticipation of it happening? 

Mr. O’KEEFE. Absolutely. There is no question. 

The CHAIRMAN. Thank you. 

Mr. Hess. 

Mr. HESS. Clearly the threat of sequestration is tempering our 

decisions today with respect to hiring and capital investments. And 

quite honestly, we have seen companies in the past that have made 

decisions to invest and are suffering the consequences today. For 

example, in the Joint Strike Fighter program, I mentioned the fact 

that the volumes that we are looking at today—production volumes—are about half of what they were forecasted to be. Companies that had invested based on the prospects of a much higher volume are now struggling. In fact, some of them—we have examples, 

small businesses, like Williams, that have gone chapter 11 or chapter 7 because they can’t support the cash flow. They made decisions 

based on forecasted growth. They haven’t occurred. Sequestration 

would only exacerbate that. 

The CHAIRMAN. Ms. Williams. 

Ms. WILLIAMS. I feel that I owe an obligation to my employees 

to explain this as well as I can to them. I mean, they get very nervous about this word ‘‘sequestration.’’ They were like, what does this 

mean? But I owe it to them so that they know what might be happening and whether they should go look for another job. And believe me, I don’t want to lose those people because they are longtime employees. But this consumes about 50 percent of our busi-
18 

ness, a little over 50 percent. And I think my hands are going to 

be tied if all of this happens. 

The CHAIRMAN. Thank you very much. 

Mr. Smith. 

Mr. SMITH. Thank you. First of all, just out of curiosity, have any 

of you been told that it is not going to happen, don’t worry about 

it? 

Mr. STEVENS. In my case, sir, there is lots of discussion when we 

engage in a dialogue about what we should prepare for. And there 

are suggestions that a remedy will be developed. 

Mr. SMITH. Sure. 

Mr. STEVENS. I would say and I think your comments earlier certainly reflected this, sir, that there are lots of opinions, and there 

are a lot of points of view. But we hold ourselves to a set of standards that I know you and the committee expect business leaders to 

hold themselves to. 

Mr. SMITH. I understand that. I have further questions. 

The chair has said a couple of times the Administration’s position 

is, it is not going to happen, don’t worry about it. I don’t think that 

is accurate. 

Mr. STEVENS. We are preparing for the implementation of sequestration. 

Mr. SMITH. Right. The Administration is aware of the fact that 

this is the law. And until we change it, it is potential. They don’t 

want it to happen. Nobody on this committee or in this room wants 

it to happen. The problem isn’t so much a matter of preparation. 

The problem is that the law is, regrettably, on the books and coming. And we have to find a way to change it. 

And toward that end—and I do have a question at the end of 

this. But I think what we have learned here is that Government 

spending kind of matters. You can’t just blindly cut it and assume 

that there is no problem, which is sort of what led us to this horrible deal and the Budget Control Act last time was, well, you don’t 

raise the debt ceiling. It is no big deal. That will get us to a balanced budget. That will work. 

Government spending matters. So does private sector, so does 

keeping taxes low, I will grant you all of that. But we can’t simply 

blindly say, whatever you cut from Government, it will be fine because they are not really doing anything that important anyway. 

And it is that attitude that led us to where we are sitting here, the 

notion that you didn’t have to raise the debt ceiling and then if you 

put in place mandatory cuts, it really isn’t that big a deal. So I 

hope that lesson will be learned. 

And as we go forward, looking at our budget situation with a 

$1.3 trillion deficit, as I mentioned, even if, let’s say, tomorrow we 

just say, never mind, we are not going to do sequestration, I am 

curious, as all of you look at the next 10 years—the defense budget 

doubled since 2002. It was a boom time for defense contractors. No 

matter what happens—sequestration or no sequestration—we have 

got a pretty tight fiscal situation for the next 10 years. How are 

you looking at that? How are you anticipating the impact of simply 

the reality of, you know, revenue being in one place and spending 

being in another and the need to reconcile that and the reality that 
19 

the defense budget right now is 20 percent of our budget? How are 

you planning for that over the course of the next 10 years? 

Mr. STEVENS. Well, the way we are focusing our business now is 

to accommodate the reductions already in the Budget Control Act 

of $487 billion that Defense Secretary Panetta has spoken about, 

that is embedded in our national security strategy. A number of 

our programs have been capped, terminated, canceled. We have 

slowed down those programs. Our workforce is 18 percent smaller 

today than it was 3 years ago. We are hitting the brakes there. We 

have taken out 1.5 million square feet of facilities. We will take out 

another 2.9 million square feet before the end of 2014. We have cut 

our capital investments. We have cut our research and development, sizing the cloth of the business to meet the market reality. 

We are also looking to work with the Administration and the 

leadership in the Pentagon at international work because our Nation has asked others to step up as security cooperation partners. 

As good security cooperation partners, if we have interoperable systems, we are able to do more effectively well together. They burden-share some of the expense. And any incremental work flowing 

into our businesses stabilizes our businesses, stabilizes the workforce. And it lowers the cost of every bit of equipment that the U.S. 

buys for U.S. purposes. So that is how we focus the strategy and 

the business. 

Mr. SMITH. But if I could—Mr. O’Keefe, you can take a stab at 

this one. How worried are you that, again, looking at the budget 

realities, that that reduction number is going to wind up above the 

$487 billion that is currently projected? And also, if I could piggyback on that question, there are a number of studies coming out 

now that the Pentagon’s plans to, quote, ‘‘reduce debt spending 

over the course of the next 10 years’’ don’t really quite add up. 

What they say gets them savings doesn’t. The programs they have 

started actually are going to wind up costing more than that. So 

do you think it could be more than what has currently been talked 

about? 

Mr. STEVENS. I think it is possible. We have watched the reductions associated with the Budget Control Act. If there are reductions, we will do the best that we can to accommodate our business. 

We have done it historically. And we will continue to do our very 

level best to size the business so that we can deliver against these 

commitments. 

I think the greater concern we have is that the resources that 

are available for national security align with a strategy for national 

security as an objective set of outcomes. 

Thank you, sir. 

Mr. SMITH. Does anybody else want to comment on any of those? 

Mr. O’KEEFE. I will just pick up on that last point. And that has 

yet to be mentioned. This is the first time we have seen in the 

course of better than 40 years in which every change and reduction 

in national security spending in that span of time has been precipitated by a change in strategy to accommodate or to recognize a different threat level. This hasn’t happened in this case. This is purely exclusively driven by the financial realities of—— 

Mr. SMITH. If I may—exclusively—I mean, we just took 175,000 

troops out of Iraq. We are drawing down in Afghanistan. There are 
20 

national security changes that have precipitated some of it. I think 

it is certainly the budget part of it. But I wouldn’t say it is exclusive. There have been, just like in those previous cases, changes in 

our national security needs, at least based on Iraq and Afghanistan. 

Mr. O’KEEFE. To this point, certainly there has been accommodation to that. But I think you would also suggest, as you have in 

your opening statements as well, that much of what we are seeing 

going forward here is going to be a consequence of the fiscal uncertainty and less about the threat. 

So it is very difficult, it is near impossible, from where we sit, 

to anticipate exactly what kind of market changes that will involve. 

And I think very realistically, there is a pairing back of expectations of what the market will look like in the future and what demand will look like. And what we are already seeing is a gravitation toward—from second- and third-tier suppliers towards different activities that are far more commercially oriented. 

Mr. SMITH. And the last thing, I imagine it would help if the 

Government had more revenue so it wasn’t forced into as bad of a 

budget situation. Would any of you disagree with that assessment? 

Mr. O’KEEFE. I think the choice of exactly what spending and 

revenue balance is, is more dominantly of your portfolio. So, as a 

consequence, I would defer to you on the answer to that one, sir. 

Mr. SMITH. That is true. 

I yield back. Thank you. 

The CHAIRMAN. Thank you. 

Mr. Bartlett. 

Mr. BARTLETT. Thank you. 

Twenty years ago, I sat in the most junior seat on this committee 

and was frequently frustrated particularly in important hearings 

like this that time is going to run out before I came up in the 

queue. 

Sensitive to that frustration, I would like to yield my time to the 

most junior Member of our committee here at gavel fall today, and 

that is Mr. West. 

Mr. WEST. Thank you, Mr. Bartlett. 

And thank you, Mr. Chairman and Mr. Ranking Member. 

I would like to try to get a little bit more specific. I would like 

to know from each of you what are your four major weapons systems programs or developments that you have the most concern 

about being affected by sequestration and, of course, the corresponding workforce concerns as well. So if you could give us that 

idea of kind of your top four. 

Mr. STEVENS. I want to be responsive to your question, sir. When 

you align the top four with sequestration, one of the challenges we 

have is, our understanding of sequestration is across the board. 

Mr. WEST. Yes. But irregardless of sequestration, what are the 

top four that you think would cause you concerns if they were affected by sequestration? 

Mr. STEVENS. Undoubtedly, the Joint Strike Fighter program. 

Undoubtedly programs in missile defense. And there is a portfolio 

associated with missile defense. Without question, programs like 

the Littoral Combat Ship, which are accelerating capabilities. And 

then we have an array of what I would describe as classified or in-
21 

telligence-oriented programs, all of which is, as I understand the 

environment, would not be immune so the support service we provide to the intelligence community would be adversely impacted. 

Mr. WEST. How about workforce effects from those four programs? Just an estimation. 

Mr. STEVENS. Our best estimate, which I will admit is sufficiently crude, that I am a little embarrassed to offer it, across the 

board, 10,000 people. But we have done it on the back of the envelope where we have made up most of the assumptions of 120,000 

people, in the neighborhood of 10,000. That neighborhood could be 

more or less, depending upon, will there be accounts that are excluded? As the chairman and ranking member said, there is still 

yet information to be determined. We will shape our outcome there, 

I think 10,000 across the board is about the best answer I can 

offer. 

Mr. WEST. Thank you. 

Mr. O’KEEFE. Well, sir, the three that I would highlight in particular are, first and foremost, the UH–72 Lakota helicopter, the 

program that is frequently recognized by every audit service and 

the Defense Department overall as on time, on budget for over 225 

aircraft thus far without any exception to that whatsoever. That 

could be compromised. As the changes in production rates alter, 

that will almost certainly motivate cost increases per unit. And 

that would be the first time in the entire experience of that program that we would see a cost increase or a failure on delivery. I 

really would hate to see that record of absolute achievement compromised or blemished even for a moment. 

The second is one which, as Bob Stevens described, is the Littoral Combat Ship. We have a very strong interest in a lot of the 

systems that are engaged there, for radar and a variety of other 

activities, all of which will turn on whether or not the number of 

vessels commissioned for production and contracted will be engaged. That is going to be an uncertainty for a period of time 

which, therefore, takes whole units and defers them until such 

time as there is certainty. 

And the third would be for the United States Coast Guard, often 

recognized as a very strong support element of the defense establishment and national security overall. We produce most of their 

helicopters and a good number of their cargo aircraft, all of which 

by contract at this point have a prospect of being deferred, given 

the very small maneuverability that particular agency has towards 

capital accounts. We don’t know what that would be. 

So, all in sum, trying to estimate the numbers of people would 

be nearly impossible to figure out what would be involved here, 

until we see what those exemptions are as well as which programs 

in specific may ultimately have to deal with that, if they are all 

going to be applied across the board evenly. 

Mr. HESS. For Pratt & Whitney, we are already seeing significant engine delivery reductions in our legacy engine programs. Certainly our sole source engine on the F–22, now that that program 

has been terminated, engine deliveries for that program will cease 

this year. We are finishing up some spare engine deliveries. 

Similarly, for the C–17 and the F–16 where we deliver military 

engines both of those program delivery rates are declining as well 
22 

as they shift largely to international sales. We are counting on the 

ramp-up and the increase in the Joint Strike Fighter program that 

Bob talked about with our sole source engine there to offset those 

declines and really kind of stabilize our operation and enable us to 

maintain our industrial base. But again, as we see that program 

continue to be delayed, the last reductions that support the $487 

billion in reductions took 179 airplanes out of the schedule in the 

next 5 years. So that is 179 engines for us. So that has impacted 

our delivery rates. And we were also counting on the ramp-up in 

the Air Force tanker program. But deliveries there don’t start until 

2016 and beyond. So really, Joint Strike Fighter and to a lesser degree the tanker would be the important programs for us. 

Ms. WILLIAMS. The weapons systems test equipment that we 

manufacture for all aircraft that we do currently for F–16, F–15, 

F–18, the A–10 program and the F–35 and some on the F–22. But 

this concerns me because we go to the Air Force bases, and recently we saw 1969 technology still being used. 

Do you remember 1969? Rabbit ears and transistors and diodes. 

Mr. WEST. I was only 8 years old. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. WEST. Thank you, Mr. Chairman. 

My time has expired. 

The CHAIRMAN. Thank you. Mr. Andrews. 

Mr. ANDREWS. Thank you, Mr. Chairman. 

Thank you, ladies and gentlemen for your testimony this morning. 

I agree with you completely that I favor repeal of the sequester 

as soon as we can possibly do it for many of the reasons you very 

well articulated here this morning. 

But I also acknowledge the responsibility to understand the comments that Admiral Mullen gave us when he was chair of the Joint 

Chiefs of Staff, in which he recognized that a country that borrows 

40 percent of its operating funds can no longer be a strong country. 

Inevitably, the national debt is a national security issue. 

The way we got into this mess is that for five decades, people on 

this side of the aisle and people on that side of the aisle have gone 

through the following exercise: Whenever anybody brought up a reduction in spending, we had hearings about how bad that was and 

who it would hurt. And whenever anyone brought up an increase 

in revenues, we had hearings about how bad that was and who it 

would hurt. 

So we made a series of decisions that you would never make in 

your fiduciary responsibility. We made a series of stovepipe decisions about those spending programs and those revenue increases 

in isolation. That is how you create a $17 trillion debt. 

How you get out of it is to do things that people do not like. I 

think most of you would agree that since nearly half of our budget—I guess more than half of our budget soon is Social Security, 

Medicare, and Medicaid, that we have to do something about restraining the growth of those programs in an equitable way. I 

agree. That is why I am one of the fewer than three dozen people 

who voted for the Simpson-Bowles budget proposal Mr. Cooper put 

on the House floor in March. I will stipulate that most of you I 

think would agree with that. 
23 

Let me ask you another question. It has become an article of almost religious faith around here for some Members that any revenue increase at any time on anyone should be taken off the table. 

Who here agrees with that proposition? 

Mr. HESS. Let me speak. I don’t think you will hear any of us 

here today arguing against the need for fiscal responsibility. I 

mean, we all have our jobs to do running the companies that we 

run. But I would say—and I can look honestly at my colleagues 

here and know that we are first and foremost Americans. And as 

Bob talked about, we are all making decisions today to deal with 

the 10-percent budget reduction that has already been enacted and 

being planned on and implemented now. We are making decisions 

in terms of head count reductions. We are right-sizing our companies. We are closing facilities, consolidating our footprint, making 

the tough decisions, and taking the tough actions to deal with the 

need for fiscal responsibility. We, I think, are supportive of that 

and understand that. 

Mr. ANDREWS. But, Mr. Hess, if I may, the specific question I 

asked was, who here would advise Congress to rule out under all 

circumstances any revenue increase on anyone at any time? Would 

any of you make that recommendation to us? 

Mr. HESS. I would say that I don’t think any of us are sitting 

here today presuming that we have the wisdom to recommend a solution here. 

Mr. ANDREWS. No. I don’t think it is a matter of wisdom. I think 

you have a lot of wisdom. Do you have an opinion though? You are 

an American citizen. You are a leader of a major institution. Do 

you or do you not think it is wise for Congress to rule out all revenues on all people at all times forever? Do you think that is a wise 

course? 

Mr. HESS. I think everything has got to be on the table at this 

point. This is a personal opinion. I am not speaking for the employees for United Technologies or for UTC. 

Mr. ANDREWS. I think you are right, Mr. Hess, and I agree with 

you. 

How about the rest of you? What do you think of that. 

Mr. STEVENS. I know when we face challenges in our business— 

and I don’t intend to imply that the challenges that we face come 

close to the magnitude of the challenges you face on this committee 

or Congress faces at large—it really makes ours look pale—we 

tried to put into the recipe every possible ingredient that might 

lend itself to the formation not just of a solution but, in a perfect 

world, a flexible array of solutions. 

Mr. ANDREWS. A balanced solution. 

Mr. STEVENS. Comprehensive, integrated, thorough that allows 

us the flexibility to run the business. 

Philosophically, I think you will see that in our actions. I think 

we are held accountable for that kind of behavior from our board 

and our shareholders. I think our employees expect it. 

Mr. ANDREWS. I appreciate that. Since my time is running, I will 

just give you this context: Social Security was truly imperiled in 

the early 1980s. And a President named Ronald Reagan stepped 

forward and, on two occasions, agreed to raise more revenue for it. 

It is the reason Social Security still exists today. And I think that 
24 

our friends on the other side would be wise to follow President Reagan’s example in this time of national emergency. 

I yield back. 

The CHAIRMAN. Oh, that we had President Reagan. 

Mr. Forbes. 

Mr. FORBES. Thank you, Mr. Chairman. 

Gentlemen and lady, thank you for being here. 

Mr. Chairman, I want to first thank you, not just for holding this 

hearing but for being across the country, alerting the public to the 

dangers of sequestration long before anybody else was doing it and 

also for actually putting a solution on the table. We are not going 

to change this by press conferences. Unfortunately, the House, as 

you mentioned, has passed a solution. It may not be the perfect 

one. But at least they have passed a solution. The second thing I 

have to do is take issue with something the ranking member said 

at the beginning because I just believe it to be blatantly inaccurate. 

We did not get here because a majority of Members of the House 

of Representatives or a majority of individuals across the country 

realized the insanity of continuing to allow an irresponsible and 

uncontrolled massive increase and the smothering debt our Nation 

is mounting. We got here very easily—a picture is worth a thousand words. 

If you look, this Administration decided that they would spend $825 billion on a stimulus package, $347 billion of interest. And if 

you look at these charts, if they look identical, it is identical because what actually happened was they decided to spend in 1 year 

on a stimulus package almost the entire amount they are now taking out of defense for 10 years. And even though this package has 

no measurable significant increase in jobs, we know this is going 

to cost us between 1.5 million and 2 million jobs. 

So I think it is important, we want to know how we got here. 

But this committee is not the Ways and Means Committee. We are 

not here to talk about tax increases and anything else. We are not 

even a ‘‘jobs creation’’ committee. What we are here for is looking 

at the national defense of this country. And that is what you guys 

do, and you do it very, very well. 

My big concern is, as I go back to the 1990s and look at all the 

cuts that are taking place, and I am concerned about the $487 billion we have already taken, much less the $500 billion that is coming. It is my understanding that we started that decade with 50 

major defense firms, and we ended up with six prime contractors. 

We started that decade and at the end of it, our major surface combatant shipbuilders and our fixed-wing aircraft developers fell from 

eight to three. Our tactical missile producers fell from 13 to 3. And 

the number of track to combat vehicle developers fell from three to 

two. Today there are just two companies, Boeing and Lockheed 

Martin, that build U.S. fighter aircraft. My question for you is, 

What impact do you think sequestration may have that might be 

similar to the 1990s in terms of weeding out our industrial base 

and the impact it may have on that over a long-term period of 

time? 

Mr. STEVENS. Yes, sir. Well, having lived through the 1990s, I 

think the consolidation you described was an effort to size supply 

to the likely demand that has to equilibrate somehow. In a consoli-
25 

dated environment, that we are in today, another round of significant reductions on the demand side of this will adversely affect 

supply. The question will be, should we try another round of consolidation in the industrial base? Right now that is viewed as unfavorable and undesirable so as not to limit competition. But there 

has to be a healthy relationship between the demand for the products and services that we have and our ability to supply them. So 

the supply chain in some form or fashion will equilibrate over time. 

It will either be graceful and focused and have a good architecture 

or it won’t be. But it will size and shape itself differently to meet 

the level of demand that exists. 

Mr. O’KEEFE. I think that the shakeout in the market we are 

seeing right now in second- and third-tier suppliers is already a 

manifestation of that point. We are seeing either companies consolidate, be bought by larger primes, as I have seen in the last few 

years, or they have just simply exited the public market and have 

consolidated much more toward the vagaries of some of the commercial trends that occur but at the same time much more reliable 

than what we are seeing as forecast for the next decade in the public spending market. So I think that is already occurring. It is happening right now. 

Mr. HESS. I guess I would have to agree with you. I think we are 

getting to a very critical point with respect to the industrial base. 

And quite honestly, it is not just the big companies that you reference, people like Lockheed and Boeing. But honestly, where we 

see a greater concern is with the smaller companies, such as represented by Ms. Williams today, where we are down to one company that maybe has a unique skill set or technology or capability 

that is at the point where they are considering exiting the business. It is not worth their trouble. They will go pursue commercial 

or other markets. And that is quite honestly where we are really 

starting to see some concern. 

Ms. WILLIAMS. I would agree with the gentleman here, that this 

is going to affect us greatly. 

Mr. FORBES. Mr. Chairman, thank you. 

I yield back. 

The CHAIRMAN. Thank you very much. 

Mrs. Davis. 

Mrs. DAVIS. Thank you, Mr. Chairman. And thank you all for 

being here. 

I just want to say, as someone representing San Diego that I 

want to thank you for your work on behalf of your employees and 

certainly their families. And I really relate to what you are saying 

about people being affected. 

But as we know, it is not just in the defense industry that we 

see tremendous effect on families today, uncertainty. And I know 

that you have to be concerned about that. How young people are 

educated today is critically important to our national security. So 

that is a concern as well. 

I want to just identify myself with some of the comments and the 

questions of my colleague Mr. Andrews because I think we do want 

to see this in a balanced way. And I call upon you—and I hope that 

you are considering that you obviously need to be very strong advocates, which you are, for the industry that you represent. But I 
26 

would hope that you would extend that, as we work into these 

very, very difficult issues that we are facing. And I wonder if I 

could count on you to do that, to include those kinds of comments 

as well and the need that we have to balance out and put everything on the table, as you suggested. I hope that we can count on 

you to do that. Thank you. 

What I wanted to ask you about is, as you think about and you 

are asking, let’s be strategic about this. I don’t support sequestration. As we said, nobody here does in terms of those kind of acrossthe-board cuts. But the reality is you have had to deal with cuts 

and different ways of really analyzing the work that you do in the 

Budget Control Act and some of that extends to additional changes 

that may be made in the industry. 

Are you in a position today to suggest to us, are there some reforms in contracting that you think are critically important to 

make? We know that multiyear contracts—perhaps that can spread 

out some of the sacrifices, if you will that, that might be made in 

terms of looking at the strategy that is put in place, the targeted 

kinds of cuts. And I know that, Ms. Williams, you spoke about that 

as well. 

What is it that we should and could be looking at that is—I really don’t want to say a next generation of reform but something that 

perhaps you talk about but we don’t necessarily acknowledge as 

part of this whole discussion? 

Mr. STEVENS. Thank you. I will try first, ma’am. And I will say 

this probably won’t sound inventive or innovative in any way because it is interesting about acquisition reform. The fundamentals 

that seem to keep resurfacing are the same observations we have 

across the industry. I will tell you first is stability. Whether that 

stability is the funding environment or the requirements environment or industry’s ability to hire, train, get the right people in the 

right place at the right time, do those fundamentals, those fundamentals drive this process substantially. 

Secondly, if we could look at shortening the cycle times. Cycle 

times in the industry are getting longer and longer and longer from 

the formation of a proposal, the early test phases; it is getting 

longer. And time is money. Anything we can do to streamline, simplify, and shorten that process, certainly would accrue to a portfolio 

of efficiency initiatives that I think would result in good savings. 

Mr. O’KEEFE. I would simply offer that the recommendations of 

the Defense Business Board that reports to the Secretary of Defense, take them up on their suggestion: What they are proposing 

is simply suspend a regulatory environment in which every regulation then has to justify the reasons for its application, as is being 

sought to be applied. Otherwise, suspend it; just dispense with it. 

That is an approach that will sort out this question—not our recommendations, one that the Business Board made to the Secretary 

of Defense in that regard. It is not an unreasonable proposition. It 

is a documented proposition that it costs for precisely the same articles at least 20 percent more to sell to the public than it does in 

any other commercial activity. So sorting out what causes that 20 

percent is one matter that the Defense Business Board has recommended. I would take them up on their suggestion and do it. 

Mrs. DAVIS. What do you think keeps us from doing that now? 
27 

Mr. O’KEEFE. I don’t know. Resolve. Commitment. Suggestion, 

whatever. And it has just been put forward. But it is one that 

would be worthy I think of inquiring of the Defense Department 

and of the Office of Management and Budget. What is errant about 

the logic that this group has recommended forward to be implemented, which doesn’t suspend regulations? It simply says, justify 

in every term why it needs to be there or else it is dismissed. It 

is a fairly reasonable proposition, one we would love to contribute 

in on every effort because of the additional cost of doing business. 

Mrs. DAVIS. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlelady’s time has expired. 

Mr. Wilson. 

Mr. WILSON. Thank you, Mr. Chairman. And thank you for your 

leadership. You have proposed legislation that would address sequestration. In fact, Chairman McKeon has led three times in the 

House. We voted to address sequestration. But sadly, the President 

has threatened a veto. The Senate has not taken up the legislation. 

But the more the American people learn about the consequence— 

I want to thank all of you for bringing this issue up—— 

Also, I am really grateful that Bloomberg Government has done 

a study of every State which indicates defense spending. A State 

near and dear to me—and this is available to the American people—is Virginia. My mother was born in Richmond. I am a very 

proud graduate of Washington Lee University of Lexington. And I 

have a son who is Active Duty Navy at Norfolk. So we cover the 

State. And it is very revealing, particularly in Northern Virginia, 

as you look at the consequence of defense spending, it is just not 

Northern Virginia. It is by community. And there are communities 

which have over $1 billion which could be affected by sequestration, which include McLean, Sterling, Arlington, Falls Church, Alexandria, Fort Belvoir, Quantico. Each one, over $1 billion. Northern Virginia would be such a State affected—or a district, communities affected. Jobs. Military families truly are put at risk. As we 

approach this—it has already been addressed—but there has been 

some confusion about the WARN Act. The notices of layoffs. 60 

days, 90 days. State law. What is it? And with a minimum of 60 

days, when would persons anticipate to receive the notice of layoff? 

If each of you could give your point of view. 

Mr. STEVENS. I am certainly no attorney or WARN Act specialist. 

But I seem to surround myself with a lot of attorneys who claim 

to be WARN Act specialists, particularly as we look at sequestration. Our sense is, 60 days from January 2 with timely notification 

puts the notice, end of October/early November for 60-day notification States. New York is a 90-day notification State. I think we 

would set that back obviously 30 days in time. It would be the end 

of September/early October. 

Mr. O’KEEFE. As I testified a little bit earlier, we have already 

begun to notify Members of Congress that represent districts in 

which we operate and do business as well as Governors of those respective States that we may be compelled to do this once we—in 

the absence of guidance from the Office of Management and Budget 

or the Defense Department. Now that will have to occur some time 

prior to that 60-day notification stage. And exactly when is going 
28 

to be very much contract-dependent, depending on what advice or 

the guidance we receive from the Administration. 

Mr. HESS. I think Mr. Stevens clearly defined the requirements 

of the WARN Act. And again, we are certainly prepared to comply 

with the law. Again, given the uncertainty and how sequestration 

will play out, it is not clear to us that UTC would trigger the 

WARN Act thresholds. But it certainly is a concern that we have. 

Ms. WILLIAMS. As I said earlier, I don’t think this applies to me 

because I am less than 100 people. But I still want to give my employees an update and bring them up to speed on this because they 

don’t understand what is happening. 

Mr. WILSON. And it is an extraordinary coincidence, each of you 

have identified a date prior to November 6, which is Election Day. 

So this is something the American people need to know. 

Ms. Williams, has your company stopped or slowed down capital 

investment in an effort to conserve funds in anticipation of sequestration? 

Ms. WILLIAMS. What we have done previously is—the way we got 

a lot of our business was that we would make prototypes. And that 

is how we developed all these years. But recently, as I was talking 

earlier, we went to an Air Force base, saw the 1969 technology. We 

personally invested lots of dollars in order to bring this up to current technology. We have done that. We are not through by any 

means. But we have done that. What concerns me is, will I be able 

to continue to finish that project? And if this happens, I will lose 

those engineers. 

Mr. WILSON. Well, I just want you to know, I particularly appreciate it. I represent the communities of Fort Jackson, Fort Gordon. 

I currently represent Parris Island. I want the best for our troops, 

for their health and safety. We do have the best in the world, but 

it really is dependent on your efforts. And I want to thank you for 

your prototype efforts and however we can help. 

Ms. WILLIAMS. Thank you, sir. 

The CHAIRMAN. Thank you. 

Mr. Courtney. 

Mr. COURTNEY. Thank you, Mr. Chairman. Thank you for holding this hearing and the witnesses for your really important testimony here today. 

I want to also note, Mr. O’Keefe, your comments regarding the 

sort of genealogy of sequestration, talking about the Gramm-Rudman Act I think is very helpful because, frankly, it is a concept 

which is now sort of lost in the midst of time a little bit. And I 

think it is important for people to remember that—again, it was a 

measure that was used at a time of structural deficit. And one of 

the sponsors of it, then-Congressman Gramm, was quoted at the 

time saying, it was never the objective of Gramm-Rudman to trigger sequester. The objective of Gramm-Rudman was to have the 

threat of a sequester force compromise and action. And obviously 

those are the critical two words that I think is our burden to satisfy here, as Members, which is, A, to compromise and, B, to act. 

And if you finish the story in terms of Gramm-Rudman, it was 

a bumpy ride to get to the point where we started to actually deal 

with the structural deficit that existed at that time. It was really 

not until President George Herbert Walker Bush negotiated the 
29 

compromise at Andrews Air Force Base that moved off some sort 

of sacred cows to get to a measure, but it adopted the PAYGO rules 

which, again, put real discipline into the proceedings of Congress 

and the budget that President Clinton passed in 1993, which 

changed the tax rates that finally intersected spending and revenue to a point where for the first time in our lives, we actually 

had the Government’s public finances in balance. And by the way, 

we created 22 million jobs during that time period. 

When I view the Budget Control Act, which, again, I joined the 

majority of people in this committee supporting passage, that is 

certainly the path that I think we voted for or should have been 

thinking we were voting for, that compromise in action was what 

we were looking for, not a chainsaw going through the Government. So it is going to require people to move off of pledges and 

some sacred positions to really fix the problem. 

And again, we have a historical precedent. We can do this. Our 

country did it. And again, your testimony—all of you here today— 

again, reinforces the fact that the stakes are huge if we don’t. 

One issue, which you have mentioned, a number of you, is the 

question of, again, having that horizon, that stability, which really 

provides the basis for you to move forward and plan and invest. 

Coming from a district where the construction of nuclear submarines takes roughly 4 to 5 years, obviously a 1-year horizon is 

not enough in terms of really trying to, you know, get to that sweet 

spot of efficiency and quality. One of the measures that we have 

been voting on here is just a 1-year fix to sequestration. And I was 

wondering if you could just sort of comment whether or not that, 

in your mind, really fixes the problem or just delays it and just, 

again, leaves the challenge of trying to do intelligent planning sort 

of out there for just a short period of time. 

Mr. STEVENS. Well, we are a long-cycle business. Our products 

last 20, 30, 40 years. Right now, we don’t have 6 months’ visibility, 

which is unprecedentedly short. And we are doing our planning for 

our business cycle in detail right now, 1-year, 3-year, 5-year. I do 

think—the best suggestion I can give, recognizing how complex and 

difficult the actions will be associated with this suggestion is a 

complete, a comprehensive, a balanced and an integrated a durable 

approach is I think the very best solution. When we look at the 

challenges in our company, we think a lot about growth. The 

growth of our business—and I think you could extrapolate the 

growth of our country—is through competitiveness. That means 

getting the best talent, investing in that talent, getting the best innovation and investing in that. That investment cycle is absolutely 

determined by how much visibility and how much certainty or uncertainty is in the environment. Right now, there is crushing uncertainty that is limiting all of that. So the more comprehensive a 

solution that can be put together, the longer duration of that would 

clear the deck chairs considerably and I think open up degrees of 

freedom for businesses to take actions that would lead to that kind 

of growth that we are looking for in our business. 

Mr. O’KEEFE. I would simply offer to add to that, the history that 

you describe—I think most accurately—is to the extent that this 

particular mechanism is useful for the purpose of prompting process reform and adherence within the determination of public policy 
30 

and public finance choices, that is terrific. To the extent, though, 

that it also serves to create unrest in the marketplace, a complete, 

you know, lack of confidence and any stability down-phase because 

of the prospect of this sort of Damocles, as it was called historically 

at its point of origin, to the extent that it could be triggered, if that 

creates the kind of market disruption that is seen to the point of 

I think reaction a year ago. That does nothing to add or contribute 

to the stability either. So this is a double-edged sword. There is no 

question. It is in some respects perhaps a Hobson’s choice that is 

uniquely a challenge that you confront. As Members of Congress 

who have to wrestle with this question, I don’t envy you at all. 

The CHAIRMAN. Thank you. The gentleman’s time has expired. 

Mr. Wittman. 

Mr. WITTMAN. Thank you, Mr. Chairman. 

Ladies and gentlemen, thank you so much for joining us today. 

We appreciate your perspective. It has been very telling as to what 

may be looming out there if sequestration takes place. 

I want to summarize some of the comments that you all have 

made. I think they are very telling. Some of the adjectives you 

used, uncertainty, instability, unrest. Obviously as that relates to 

what you all have pointed to as your greatest asset—that is, your 

intellectual capital, your human capital—that affects that significantly. I would argue that both in our uniformed services and the 

U.S. supporters of those uniformed services is those intellectual capacity assets that are most valuable and that if we lose those or 

if those are weakened, that we weakens us in the future. Even if 

we don’t get to sequestration, even if it is put off, as you are 

quoting us today, that uncertainty is building. That affects your 

workforce. That affects your capacity, your capability. Those things 

are concerning to me. 

What I do want to look at though is to try to define, if we do get 

to this sort of Damocles, as it has been termed, of sequestration, 

what effect will it have on your current contracts? Will those contracts have to be terminated for default? And if so, what does that 

mean for your employees, for your partners, for your suppliers? I 

think that has a significant effect. What would happen with the restructuring of those contracts? I want to make sure we understand 

not only the uncertainty that is leading up to that but what happens if—and what does that mean for you all—and you talked 

about long term. Obviously, the contractual agreements there are 

what is going to affect you in the long term. So I would like to get 

your perspective on what that scenario might hold. 

Mr. STEVENS. Well, we certainly think it will affect a lot of contracts, broad-based, thousands perhaps. I don’t believe these terminations would be for default because it is not a for-cause termination. It would be a convenience termination, if the contract were 

terminated. Contracts can be reformed without being terminated, 

which I rather suspect will be the majority of the cases. We probably won’t stop buying everything. We will just buy fewer or less. 

And that would require folks like us to go into the supply chain 

and reschedule all the work that is being done to accommodate a 

lower profile of resources available to put under contract. It is our 

sense that our suppliers will look at that environment, look at that 

action, and call that a business disruption and will, as a result of 
31 

that business disruption, formulate a claim, a request for equitable 

adjustment or some consideration under the contract. 

So one of the areas we are still trying to explore in greater depth is, if $55 billion is needed, that is a net number. There is likely to 

be some business interruption or disruption claims flowing back. 

Do the cuts actually have to be deeper than $55 billion to achieve 

a net $55 billion outcome? All of that will unfold very broadly, 

probably all at once when we get agency guidance about either terminations or reformations of contracts. And it will require a huge 

amount of administrative and auditing effort to prepare these 

claims to submit them and to deal with this administrative environment. 

Mr. WITTMAN. Mr. O’Keefe. 

Mr. O’KEEFE. I agree entirely with the representation as well as 

the process that Bob Stevens has walked through. I think that is 

a certainty. Other than to simply add, this is going to be a full employment act for auditors. And if you are an attorney, this is going 

to be a great opportunity to do all kinds of things in the future because everything now is going to be subject to adjustment in these 

cases of review at the levels he is talking about. It is just about 

impossible to estimate what the consequence of that will be at this 

juncture. 

Mr. WITTMAN. Mr. Hess. 

Mr. HESS. I think your question is a very good one and one that 

hasn’t really been considered. There is clearly going to be a cost to 

sequestration that hasn’t been considered here. And I think Bob 

described it well. But clearly, if you look at the volume of contracts 

that would have to be repriced and requests for equitable consideration, it is a huge task both for the contractor as well as for the 

Department of Defense to administer all of that. We don’t know 

quite honestly how it would be accomplished. 

Mr. WITTMAN. Ms. Williams. 

Ms. WILLIAMS. The effect I think that it is going to have on us— 

I have already had five contracts put on hold. They have not been 

stopped. In fact, I have been even asked by the contractor, when 

could you finish this? Well, when you give me the funds to finish 

it. You know, it is that simple. And they are not forthcoming. And 

when you ask them where the funds are, when we could expect it, 

you can’t. So we are virtually shut down on those five contracts 

right now. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. Johnson. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

I have got to tell you, I had to pinch myself as I prepared for this 

hearing today. I thought I might be dreaming. House Republicans 

are holding hearings that talk about how cuts to Government 

spending are going to hurt jobs and the economy. It is really amazing. 

Now no one thinks sequestration is a good idea. The meat-ax approach to defense cuts is irrational, and it is obviously bad policy. 

And it was designed by my colleagues on the other side of the aisle, 

the Republicans, to be so bad that we would make tough decisions 

about raising revenues and cutting spending so that we could avoid 

it. 
32 

Nevertheless, here we are playing brinkmanship again. The same folks who self-righteously opposed President Obama’s $700 

billion stimulus package, the same folks who sneered and said Government never created a single job in America and never would, 

they are now wringing their hands because the impact on jobs of 

about $50 billion in defense cuts in 2013—of course, it is $500 billion over 10 years, but $50 billion next year. 

Now there is an easy way out of this: Make tough choices and 

tough compromises to raise revenues, cut spending, and meet our 

budget targets. The President is willing to do that. The Democrats 

in the House are willing to do that. 

What is the Republican solution? The Ryan budget: Cut employment and training programs, cut food stamps, cut health care for 

children, the sick and the poor, cut foreclosure prevention, cut 

taxes for the rich, and lard up the defense budget with an East 

Coast missile shield, nuclear facilities that no one wants, and billions of dollars of waste, far in excess of caps under the Budget 

Control Act. 

With all due respect to our witnesses today, you won’t see House 

Republicans calling community leaders, church leaders, the owners 

of mom-and-pop businesses or struggling homeowners to testify on 

the impact of all of these cuts to help the poor and the jobless and 

the sick. 

Now to our witnesses today, each of you are highly talented, 

highly sought-after executives. And I imagine that you are pretty 

well compensated for the value that you add to your companies, 

and I deeply respect that. As you have made clear, you are also 

rightly concerned about the impact of sequestration on your businesses, your employees, and our country’s national defense. 

My first question is, would each of you be willing to forgo the 4 

to 5 percent of your annual income that you save under the Bush 

tax cuts in order to avoid sequestration? Yes or no? Mr. Stevens? 

Mr. STEVENS. I am afraid I am not going to be able to give you 

a yes or no answer to your question, sir, and I offer that to you 

respectfully. 

Mr. JOHNSON. Okay. 

Mr. STEVENS. I have never—— 

Mr. JOHNSON. Good enough, good enough right there. Mr. 

O’Keefe? 

Mr. O’KEEFE. Mr. Chairman, I think the choices over revenue 

and spending is entirely the prerogative of the Government, the 

Administration, and Congress. 

Mr. JOHNSON. Would you be willing to forgo your savings if the 

Bush tax cuts were made permanent in lieu of sequestration? 

Would you rather have your 4 or 5 percent and undergo sequestration or would you—you know, what is your position? 

Mr. O’KEEFE. My opinion of the priorities are far less significant 

than yours. 

Mr. JOHNSON. Okay. 

Mr. O’KEEFE. You are empowered—— 

Mr. JOHNSON. Well, you are not going to give me an answer on 

that? 

Mr. O’KEEFE. No, sir. I think that is a prerogative, it really is 

important for you to make those choices. 
33 

Mr. JOHNSON. All right. I have got you. How you about, Mr. 

Hess? 

Mr. HESS. I would echo Mr. Stevens’ response. 

Mr. JOHNSON. All right. And Ms. Williams? 

Ms. WILLIAMS. I would do the same. 

Mr. JOHNSON. Okay. Well, nobody wants to give up their 4 or 5 

percent that they would save if the Bush tax cuts were made permanent. That is exactly the sentiment that is being represented by 

the Republicans here in Congress. They will not impose any taxes, 

any tax increase on those who can afford to bear it because of the 

Grover Norquist pledge, and my time has expired. 

The CHAIRMAN. The gentleman’s time has expired. Just a little 

update on history as to how we got here. We had last year the opportunity to vote for the Budget Reconciliation Act or shut down 

the Government. At the time a compromise was worked out with 

the Administration, the Senate, and the House, and Budget Reconciliation Act was passed and signed by the President. So all 

three parties were involved. 

Since then we have passed in the House a solution for this that 

pays for the first year of the sequestration. There had been a lot 

of talk about we will not support tax increases and the Democrats 

want tax increases. We have taken action in the House. The Senate 

has done nothing but talk. All they have to do, according to the 

Constitution, is pass a bill in the Senate. Then we would go to conference, and then we have real negotiation. Then we will have real 

talk because plans have been laid out and passed. But the Senate 

has refused to take action, and the President has not given the 

leadership and the direction to get us past this point. So that is 

just correcting the history. 

Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman, and ma’am and gentlemen, thank you for being here today. We do have fundamental differences, certainly. The Democrats believe that higher tax rates 

lead to higher tax revenues. I fall into a different camp. I believe 

that businesses embed the costs of their taxes into the products 

that they sell, and the higher the tax rate is, the more a product 

costs, and therefore the less of that product they get to sell and 

therefore giving an advantage to our industries’ overseas competitors. If you listened to the President’s initial speech a couple of 

years ago, he talked about the fact that we needed to actually reduce the corporate income tax rate. We as Republicans embraced 

him on that, and then he turned around and withdrew and never 

gave us a specific proposal. 

But 18 months ago I was a small business owner, Ms. Williams, 

and so I will tell you what I found in my small business was that 

my percentage of fixed costs were much higher than larger competitors. I didn’t have the ability to play with variable costs the 

way the larger competitors do. Do you think that—and so the last 

dollar’s worth of revenue meant much more to me as far as the end 

profit at the business and therefore the amount that I paid income 

taxes on. Do you think that is—have you found that to be true in 

your industry? 

Ms. WILLIAMS. Yes, sir, that is true, very much so. 
34 

Mr. SCOTT. And that is where I am very concerned with kind of 

this anti-profit mentality that some have in Washington right now, 

that while our large industries, and I certainly want all of our 

large industries that operate ethically to be profitable, but my real 

fear with the economy today is what we are doing to our small 

businesses and the suppliers to the large guys, and if you lose 8 

percent of your revenue, Mr. Stevens, I think the impact on Ms. 

Williams of an 8-percent revenue loss would be much greater on 

her business and her employees therefore. 

So I want to go, though, if I could to you, Mr. Stevens, because 

you talked about back-of-the-envelope math, and you have got approximately an 8-percent operating margin in your business if I am 

correct; is that right? 

Mr. STEVENS. It is closer to 10. But yes, sir. 

Mr. SCOTT. Closer to 10. And your profit margin on that is somewhere in the 6 percent range, just above 6 percent if I am not mistaken. 

Mr. STEVENS. Yes. 

Mr. SCOTT. And when you talk about your back-of-the-envelope 

math, you take that 8 percent, and you have got approximately 

120,000 employees, you multiply that 8 percent, which would be 

your approximate 10 percent, which is kind of the number we are 

assuming will be your cut to revenue, 80 percent of your revenue 

is Government business, so that is an 8 percent loss, which happens to correlate, quite honestly, pretty close with your operating 

margin, and it also correlates pretty closely with what you say your 

reduction in employees will be because if the company is not profitable, nobody gets a paycheck. Is that a fair statement? 

Mr. STEVENS. Certainly we perform against a set of objectives 

every year where profitability is an important objective for every 

business. You extinguish your ability to perform if you don’t generate a profit, that would be correct. 

Mr. SCOTT. So this is my question for those of you with publicly 

held companies. What are your SEC [Securities and Exchange 

Commission] obligations with regard to sequestration? How has the 

impending threat of sequestration affected your reporting to your 

shareholders and the fact that this is currently the law, there are 

no plans to rescind this law other than what the House has done, 

and what, again, obligations do the three of you have to your 

shareholders to discuss sequestration? 

Mr. STEVENS. As a result of being a publicly traded company, but 

I would say it is true of every high integrity business person we 

know, we have duties of loyalty, of transparency in our disclosures, 

of not acting in a way that is imprudent with respect to the business, not taking unnecessary risks, but importantly conveying with 

honesty and accuracy within our best professional judgment the 

status of the business and the risks associated to the business certainly to the equity investors in the company. We have a collateral 

responsibility to the bondholders, the credit rating agencies, certainly to our customers and our suppliers because they are our 

partners in this enterprise. So we have been disclosing under our 

SEC disclosures in 10–Qs and other correspondences the nature of 

sequestration, including the discussion of the WARN Act, and we 

will continue to do that. 
35 

Mr. SCOTT. Mr. Stevens, I am very short on time. If we could get 

to Mr. O’Keefe and Mr. Hess. 

Mr. O’KEEFE. That is precisely the same debate we are underway 

with right now in looking at what our various obligations are. 

Mr. HESS. Again, we clearly plan to adhere to the requirements 

of the WARN Act, and we are looking at the possible impacts and 

doing some scenario planning now. Absolutely we have a fiduciary 

responsibility to our shareholders and our boards to do exactly 

that. 

The CHAIRMAN. The gentleman’s time has expired. Mr. Ryan. 

Mr. RYAN. Thank you, Mr. Chairman. Back when I was younger 

I used to coach like 9th grade football or 9th grade basketball, 7th 

and 8th grade, and there is a stunning dynamic when you get into 

coaching and you are coaching kids. You could be a coach and see 

a coach, and they could be the most objective person in the world 

in analyzing their players and their talent. Then their kid is on the 

team, and they lose all objectivity, right? They think their kid is 

a little better than they probably are, so their kid starts and all 

of this other stuff. We all know that happens in the midst of Little 

League season. And I feel like my friends on the other side, and 

it is just stunning to watch this hearing, completely have a blind 

spot when it comes to Government spending for the military. Now, 

I represent Akron, Ohio, so I have Lockheed facilities, we have lots 

of defense, we have got a lot of Tier II, Tier III. I get it. This is 

Government spending, and it is creating jobs, and the scenario that 

we are talking about right now is that a cut in Government spending is going to cost jobs, and that is why we are here, and we don’t 

want to see that happen. And to have my colleague from South 

Carolina talk about, you know, the jobs in Virginia that are going 

to be lost or the WARN notices, the WARN notice was put into law 

by an Ohio Senator, Senator Metzenbaum, because of factories 

being closed down in the 1980s. So we know that, you know, what 

could potentially happen here in my district and in our State, and 

I just find it stunning that we can sit here and have a conversation 

about job loss because of these reductions, but turn around in the 

same breath and say that the stimulus package had absolutely no 

effect, didn’t save any jobs when numbers and every economist basically will tell us otherwise. 

We need your help because there is a narrative in this country 

right now that every dollar that the Government spends is a waste 

of money, should be privatized, outsourced, done by the private sector, so on, so forth. Transportation, education. And I just—and I 

am not here to lecture anybody, but I just find it stunning because 

I am on the Budget Committee, too, and I have to listen to—you 

know, I just try to imagine if you were energy companies, if you 

were alternative energy companies, if you were a solar panel company, if you were a windmill company, and there was Government 

funding, saying we need to reduce our dependency on foreign oil, 

so we want to contract with energy companies and put up windmills so we can reduce our dependency and get out of all these entanglements all over the world, you guys would be crucified right 

now, crucified. And I am with you. I think this is a bad idea. I 

think I like the chainsaw, you know, for cosmetic surgery analogy. 

This is terrible what is going to happen, and it is stupid. But we 
36 

need your help to say, hey, all Government funding isn’t bad, you 

can’t just be concerned with your one little slice of the pie because 

you are getting bombarded by a narrative, quite frankly, that has 

been created by the other side, and we have all got to deal with 

this problem, I get it, but it is overwhelming, and now we are all 

swimming upstream trying to say, well, wait a minute, this funding is very necessary because it has got all these jobs and here is 

the Tier II and Tier III supply chain that is going to be affected 

by this. And if a guy like me from Youngstown, Ohio, comes out 

and says, well, maybe we need some Government funding for security in our neighborhoods and we need to fund the COPS [Community Oriented Policing Services] program or we need to fund fire 

grants, I would be crucified. I am a liberal tree hugger, Government doesn’t have a responsibility to do that stuff. Security is security. And it is just important for us, we have got to get past this 

because this is ridiculous. This is the end result of 20 or 30 years 

of bashing the Government, and here we are, sequestration is all 

coming right to a head right now. 

So I just want to ask one question of all of you if you can quickly 

give me an answer or one of you can speak for the group because 

the time is short. We are going to have to go out and borrow money 

to make sure that this sequestration doesn’t go online. We have got 

to borrow it. So I don’t want it to go online, I don’t think it is a 

good idea. Help me make the argument to my constituents that it 

is okay for us to go out and borrow money to make sure that these 

cuts don’t happen. Can you help me make that argument why it 

is valuable at this point in a deep financial crisis that we are in? 

Why it is important for us to go out and maybe borrow it this time 

until the economy recovers? Can any of you help me make that argument in Ohio? 

The CHAIRMAN. The gentleman’s time has expired. He made 

some beautiful, eloquent arguments, but you will have to answer 

those for the record if you would. 

Mr. RYAN. Could I get those for the record, Mr. Chairman? 

The CHAIRMAN. I would be happy to ask the witnesses if they 

will provide that for the record. 

Mr. RYAN. Thank you. 

[The information referred to can be found in the Appendix on 

page 141.] 

The CHAIRMAN. Also for the record, this committee is the Armed 

Services Committee. We have the responsibility to look after the 

defense of this Nation which is in our Constitution. We have the 

responsibility to provide for that defense of the Nation. So there is 

a difference between that and providing for COPS. 

Mr. RYAN. Will the gentleman yield? 

The CHAIRMAN. I would be happy to. 

Mr. RYAN. We also have a responsibility to provide for the general welfare. 

The CHAIRMAN. We do. 

Mr. RYAN. I think when you look at the gentlemen that Mr. Stevens was talking about, the young people that he wants to hire, 

something—— 

The CHAIRMAN. Reclaiming my time. 

Mr. RYAN [continuing]. Would tell me that those are—— 
37 

The CHAIRMAN. This is not the general welfare committee, this 

is the Armed Services Committee. We have the responsibility to 

provide—— 

Mr. RYAN. But I would just add, Mr. Chairman, we have an obligation to make sure that Mr. Stevens keeps getting those bright, 

intelligent people that he wants to hire—— 

The CHAIRMAN. Reclaiming my time. 

Mr. RYAN. Something tells me that they got a Pell grant, they 

went through public education. 

The CHAIRMAN. Reclaiming my time. We could go on, I am sure, 

Mr. Ryan, for a long time. 

Mr. RYAN. I am happy to, Mr. Chairman. 

The CHAIRMAN. But we do not have the time at this moment. 

And we will now turn the time to Mr. Garamendi, 5 minutes. 

Mr. GARAMENDI. I almost want to give you time to answer the 

question, but it probably won’t—— 

The CHAIRMAN. Do you want to use your time for that? 

Mr. GARAMENDI. No. We are going to have a written response 

perhaps. 

Gentlemen and ma’am, you are leaders in America. You really 

are. You are the titans of industry, big and small, and you have 

awesome responsibilities not just to your shareholders but to your 

workers and really to this Nation. That responsibility is very direct 

in the military and the defense of this Nation, as the chairman just 

pointed out. But your responsibilities, because of your position, go 

far beyond that. It really goes to leading and providing leadership. 

We have had some discussion from Mr. Johnson and now Mr. 

Ryan, and I think it is really important. I don’t want sequestration. 

I voted not to have sequestration. But the real question underlying 

all of that is about the deficit and about the financing of our Government, and it is either going to be cuts, you have argued against 

cuts in the defense industry, okay. And my question is then what 

do we cut and/or, and/or do we raise revenue? And I want you to 

answer this question as a leader in America that each of you are. 

Mr. Stevens, what do we do? Do we make cuts in other areas? 

And if so, what? Do we raise revenue? If so, where? 

Mr. STEVENS. The very best answer I can give you, and I am flattered that you regard me as a leader. I take my leadership responsibilities seriously, my board holds me accountable, investors, employees, members of the communities in which we live and work. 

We look to you, sir, respectfully, the Members of this committee 

and Congress, as leaders, you are our leaders. We have a portfolio 

of responsibilities in our company. That is my domain. I truly do 

look to you and others to wrestle—— 

Mr. GARAMENDI. Let me ask—— 

Mr. STEVENS [continuing]. With these incredibly complicated circumstances. 

Mr. GARAMENDI. Excuse me for interrupting. Does your company 

contribute to political contributions, to political action groups, and 

do those action groups express your opinion? 

Mr. STEVENS. We do contribute to them, yes, sir. 

Mr. GARAMENDI. For example, do you contribute to the Chamber 

of Commerce, the U.S. Chamber of Commerce? 

Mr. STEVENS. We do. 
38 

Mr. GARAMENDI. Okay, do you agree with their view that there 

should be no taxes, no tax increases? 

Mr. STEVENS. We contribute to organizations that we think in 

the main express the view that we have, which I believe is the 

focus of the committee’s attention today on a strong national security, and my role here today is to communicate in my best effort 

the disastrous effects of a sequestration that will disable our ability 

to contribute to the national security, sir. 

Mr. GARAMENDI. I am going to just forgo the rest unless you 

would like to answer my question. The reality is you have twice, 

three times now you have been asked the question, and then I 

would just ask you to take up your leadership role beyond the narrow focus of your own company. You are leaders. 

Mr. O’Keefe, you were the leader of a major university, a very 

successful university. You have a different role today, but you have 

not given up your leadership role in this Nation. You were Secretary of the Navy. We have a very, very, very difficult, very difficult situation, one that requires each of you, all four of you and 

other leaders around this Nation to really come to grips with the 

reality and put aside all the political rhetoric, much of which you 

have heard here, and help us. Yes, I do have a responsibility, I am 

more than willing to take up that responsibility and have. But you 

also have a responsibility. And I would ask you to ponder, if you 

would, that responsibility to speak out on this issue. If you don’t 

want cuts in the military, then where do we cut? Social Security? 

Medicare? Employment opportunities? Education? If we don’t want 

to cut there, then what revenues do you want to increase and 

where do we do that? Or do we not do it at all? 

I am going to let it go at that. I don’t want to put you on the 

hot seat anymore, but I really would ask you to take up your larger 

responsibility as very, very influential men and women. Thank you 

very much. 

Mr. O’KEEFE. Congressman and Mr. Chairman, if I could respond 

for just one moment, I very much appreciate the spirit and context 

of your commentary, and that is primarily what you have offered 

here. And certainly I think we all accept the leadership responsibilities we bear, and that is why we are here. We were invited and 

requested to speak to a mechanism of how to achieve these kinds 

of targeted reductions, not what the alternatives are. Those are 

really complex challenges that again you have observed the importance of really having an opinion as citizens, and that is an entirely 

separate point. In terms of institutional challenges, what you face 

is the challenge of, again, revenue and spending objectives and how 

that gets sorted out, there are methods to do it, and this is one we 

are simply advising is more destructive than others, not where it 

is applied. It is across-the-board on domestic and defense, all discretionary spending, just as observed in the very opening comments. 

Thank you. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. WILSON. Mr. Chairman? 

The CHAIRMAN. Mr.—— 

Mr. WILSON. Mr. Chairman? As we conclude, we have just received sad news of a terrorist attack on a bus in Burgas, Bulgaria, 
39 

and I want to express my sympathy for the tourists from Israel and 

our NATO [North Atlantic Treaty Organization] ally Bulgaria. 

The CHAIRMAN. Thank you. Mr. Smith. 

Mr. SMITH. Thank you. I want to follow up on that point because 

we have heard a number of times from all of you that, you know, 

when we get down to the tough question of how to actually avoid 

this that basically that is on us, that is up to us as if, you know, 

everybody else in the country has no role whatsoever to play in 

public policy decisions. 

Let me tell you, that attitude that you expressed right there is 

the number one biggest problem in solving the problem, is the notion that you have no responsibility in solving the problem. The 

only responsibility you have is to explain to us how bad it is going 

to be in one given area because that is exactly what public policy 

has come down to in this country, everybody protects their own 

piece. And I will say this, you are in no way unique in that regard. 

Everybody who comes back here is concerned about what happens 

to Medicare and Social Security or they are concerned about this 

tax going up or they are concerned about defense being cut or concerned about something else, and then when we come down to how 

to add it up they say, oh, no, we can’t, that is not us, we can’t have 

anything to do with that. So what happens is we divide and destroy, and every little piece of our country protects themselves and 

makes no argument whatsoever beyond that because that is easy. 

It is much easier to say don’t cut this, don’t raise that tax. The 

hard part of governing—and in a representative democracy theoretically we all have some responsibility for governing—is making 

choices, and everybody does exactly what you did today. You flat 

refuse to say anything about making those choices and dump it all 

on us. Meanwhile, not only do you flat refuse to say anything about 

it, but you also take steps that systematically kick our legs out 

from under us as we try to deal with it. Mr. Garamendi pointed 

out some of that. But even if it isn’t taxes, if nobody, but nobody 

is advocating for the types of cuts or the types of tax increases that 

are necessary to deal with our deficit, then you are never going to 

be able to build the political support necessary to get this Nation 

to support those steps. It is just not going to happen, and everybody conveniently hides behind that. And I know why. Because it 

is brutal. And ultimately I will say this: We have a far, far greater 

responsibility, there is no question. But that will always play out 

because we are the only ones that ultimately have to vote and will 

ultimately be held accountable for that decision. That greater responsibility is baked in, and there is no way for us to duck it one 

way or the other. But to the extent that group after group, individual after individual comes up here and says don’t cut this, don’t 

raise that tax and balance the budget, and then refuses to move 

the needle at all on a solution to that problem, refuses to take a 

leadership role in moving the debate in the direction of getting the 

country to acknowledge that choices have to be made, we are dead. 

There is just no way we can get public opinion. That is why you 

can take public opinion polls, I have this Pew research poll, and I 

will close with this, from February 2011 that best sums up the 

problem. It asked people if they were concerned about the deficit. 

Eighty percent said we ought to basically balance the budget. And 
40 

then it listed every single area that the Federal Government 

spends money and asked if you would like to see the amount of 

spending there kept the same, cut or increased. Over two-thirds of 

the people on every single category save foreign aid, which still 

managed to get 50 percent, so 99 percent of where we spend our 

money, two-thirds said increase it or keep it the same. Those exact 

same people who expressed profound concern about the size of the 

deficit, and then of course they asked them if they wanted to raise 

taxes, and they all said no. Now where do these opinions come 

from? How do people form these opinions? They form these opinions because all they ever hear is people advocating for spending 

and tax cuts. They never hear anybody advocating for the ability 

to make that work. So that is why we get a little vexed when people like you come up here and say you are going to kill our industry if you fix this. Okay, well, we get that, but the reason that you 

are in the position you are in is because of the problems with our 

deficit, okay? Because they are very real and necessary problems. 

So if you didn’t say, okay, well, what do we do to get out of it? Oh, 

we have got nothing to say on that, except of course for all the ads 

we run to say don’t cut—don’t raise taxes or in some cases don’t 

increase spending. So what you are doing isn’t helping. Certainly 

not solely responsible. There are many others, all of us in many 

ways, you know, in Congress many times advocate for things that 

don’t add up either, but we have got to get past this, look, I am 

only here to talk about my area, don’t talk to me about the rest 

because it is a budget, it all adds up and we have to make those 

decisions, and we need help in getting the public to support those 

decisions because if they don’t, it won’t happen. 

The CHAIRMAN. My good friend and I sometimes disagree. 

Mr. O’KEEFE. Mr. Chairman—— 

The CHAIRMAN. This is one of those, one of those times. None of 

us was forced to run for this job. Each of us chose to run for the 

House of Representatives, we understand that we have the responsibility to make the final decisions. These people are here today at 

our request to talk about the guidance that they need to implement 

the laws that we have passed. I have not heard them say, don’t cut 

defense. That—maybe we should have another hearing on that, but 

I haven’t heard them say that. What they have said is you already 

implemented $487.0 billion, we are implementing that, we are taking care of how we can manage that. You have given, you have 

passed a law that is going to cut another $500 [billion] to $600 billion out of defense. We are just wanting to know how, as business 

people, do you expect us to comply with the law that was passed 

and carry out those instructions to the best of our ability? That is 

what this hearing was for. That is what they have advocated, that 

is what they have talked about. 

You know, I come from a small business background, and it 

wasn’t anything like building ships or planes or boats. We sold 

western wear, pretty simple little business, family business. But 

even at that level we went to a market in January to buy products 

that we were going to sell for the first half of the year, and we 

would go to the different booths, and we would buy shirts and boots 

and hats and jeans and the things that we needed for our customers, and they would be shipped in a timely manner so we would 
41 

have inventory in February and March and April and May, and 

customers would come in, and they would expect we would have 

the size and the things that they needed. Meanwhile, our suppliers, 

after we gave them orders in January, they would go to their suppliers, and they would buy the things they needed to make the 

jeans and the hats and the boots and shirts, and it was done in 

an orderly method because we didn’t have the Government involved. They are trying to run their business in an orderly manner, 

and they want to know what they need to do in January and February and March so that our warfighters that are over in Afghanistan right now going outside the wire every day, putting their lives 

on the line will have the things they need to protect themselves 

and to carry out their mission at the direction of our Commander 

in Chief. And I applaud them for the job that they do, I applaud 

all of our workforce that is invested in that and gets up every day, 

goes to work at the best of their ability trying to carry out their 

mission to see that those warfighters over there return home safely, and that is the responsibility of this committee, and we will continue to carry out that responsibility. There are other committees, 

I also sit on the Education Committee, and I can go across to the 

Education Committee and I can talk about things, but while I am 

here as chairman of this committee, we will carry out that mission 

of looking out for our warfighters who are putting their lives on the 

line. 

Thank you very much for being here today. I have one other final 

question I would like you to submit for the record. We have OMB 

coming up here the 1st of August to testify. You have all talked 

about things that you would like to see, but I would specifically 

ask, can you please describe, except for Ms. Williams who doesn’t 

have to deal with the WARN Act, guidance from the OMB and the 

Department so that we can give them these questions beforehand 

necessary for you to begin making decisions related to the onset of 

sequestration. If you could get that to us at the earliest possible so 

that we can get it to them so that our hearing on August 1st will 

be productive. 

[The information referred to can be found in the Appendix on 

page 141.] 

The CHAIRMAN. Thank you very much, and this hearing stands 

adjourned. 

[Whereupon, at 12:40 p.m., the committee was adjourned.] 

A P P E N D I X 

JULY 18, 2012 

PREPARED STATEMENTS SUBMITTED FOR THE RECORD 

JULY 18, 2012 

(47) 

Statement of Hon. Howard P. ‘‘Buck’’ McKeon 

Chairman, House Committee on Armed Services 

Hearing on 

Sequestration Implementation Options and the 

Effects on National Defense: Industry Perspectives 

July 18, 2012 

The House Armed Services Committee meets today to receive 

testimony from our industry partners on the challenges of planning 

for sequestration. Since we began this hearing series back in September we have held seven hearings and one briefing on sequestration, the bulk of which have delved into the impact of sequestration 

on our military capabilities and national defense. 

Today we are holding our second hearing that is focused on the 

economic impact of sequestration, this time focused on the implications for the defense industrial base that enables and supports our 

warfighters. Joining us today are Mr. Bob Stevens, Chairman and 

CEO of Lockheed Martin; Mr. Sean O’Keefe, Chairman and CEO 

of EADS North America; Mr. David Hess, President of Pratt & 

Whitney; and Ms. Della Williams, President and CEO of Williams– 

Pyro. In addition to their own companies’ perspectives, I should 

note that Mr. O’Keefe also chairs the National Defense Industrial 

Association and Mr. Hess chairs the Aerospace Industries Association. Ms. Williams is on the Board of the National Association of 

Manufacturers. 

Barring a new agreement between Congress and the White 

House on deficit reduction, over a trillion dollars in automatic 

cuts—known as sequestration—will take effect. Although the 

House has passed a measure that would achieve the necessary deficit reduction to avoid sequestration for a year, the Senate has yet 

to consider legislation. And the President’s Budget submission, 

which sought $1.2 trillion in alternative deficit reduction through 

increased tax revenue, was defeated in a bipartisan, bicameral 

manner. 

This impasse, and lack of a clear way forward, has created a chaotic and uncertain budget environment for industry and defense 

planners. While the cuts are scheduled for implementation January 

2nd, companies are required to assess and plan according to the 

law—and sequestration is the law right now. 

We’ve all heard the growing number of estimates. Secretary Panetta has warned sequestration would be ‘‘catastrophic’’ to our military and result in the loss of 1.5 million jobs and a 1-percent increase in the unemployment rate. This would send 200,000 of our 

men and women in uniform from the frontline to the unemploy-
48 

ment line. It would as the Secretary has said, result in the smallest 

ground force since 1940, the smallest number of ships since 1915, 

and the smallest Air Force in its history. 

The National Association of Manufacturers warned that ‘‘dramatic cuts in defense spending under the Budget Control Act of 

2011 will have a significant, negative impact on U.S. jobs and economic growth.’’ The Manufacturers’ forecast, and one by Dr. Stephen Fuller on behalf of the Aerospace Industries Association, have 

estimated private sector job losses at over a million. 

Faced with the prospect of being forced to lay off workers, renegotiate contracts, disrupt production, and give bad news to 

shareholders, industry leaders have been attempting to get more 

guidance from the Administration on how they will interpret and 

implement the law. To date the guidance has been piecemeal. For 

example, last fall the Pentagon stated that war funding would not 

be sequestered. Then in May, OMB overruled the Department and 

declared that while Veterans benefits would be exempt, funding for 

the troops on the front line would not be exempt. In June 2012, 

Secretary Panetta met with various defense industry executives to 

discuss the impact of sequestration on their operations and to 

gauge the current state of the industry in general. In addition, 

press reports indicate that the Director of the Office of Management and Budget met separately with heads of several major defense companies. 

Unfortunately, it doesn’t sound like industry learned much from 

those meetings. Reports indicate OMB made it clear that it does 

not plan to issue implementation guidance until at least November, 

less than 2 months before sequestration is scheduled to take effect. 

My fear is that guidance will come much too late. Industry faces 

a host of planning challenges and requirements to be met this summer, not the least of which is the WARN Act, which requires most 

employers to provide notification at least 60 calendar days in advance of mass layoffs and plant closings. In some States, the requirement is 90 days. That means, as we’ll hear today, defense 

companies are currently grappling with whether to send pink slips 

by November 3rd to their employees. 

In addition to the issue of jobs, I worry that the cavernous silence from the President will lead many to exit the industry or to 

walk away from capital investments that are in the best interest 

of our troops. As I’ve said many times before, the men and women 

on the front lines have our backs. Who is going to have theirs if 

we allow the impending threat of sequestration to shutter the 

American industrial machine that enables them to fight, win, and 

return home? 

This overdue guidance from the Administration on how they intend to interpret the law and implement sequester mechanically is 

critical to employers, not to mention Congress, and I look forward 

to our follow-on panel with the Director of the OMB on August 1st. 

We all believe there is strong bipartisan agreement that sequester is bad policy and should be replaced. My hope is this hearing 

will provide additional incentives for the Administration to provide 

more information to employers and for all parties to resolve this 

impasse. I look forward to your insights today. 
49 

Statement of Hon. Adam Smith 

Ranking Member, House Committee on Armed Services 

Hearing on 

Sequestration Implementation Options and the 

Effects on National Defense: Industry Perspectives 

July 18, 2012 

I thank our witnesses for being here to discuss this very important subject and to give their perspectives on it. As some of our 

leading employers in the defense industry, their perspectives are 

critically important as we go forward, both in terms of the industrial base issues and in terms of the impact on our broader national security, and I completely agree with the chairman that sequestration is not a good idea. It would be bad for our economy, 

bad for defense. I always hasten to point out not just defense, it 

is, you know, a sort of mindless across-the-board cut in all discretionary spending. So education, transportation, infrastructure, on 

down the line that would have a devastating impact, and part of 

the problem in addition to that is that the Budget Control Act was 

not particularly well drafted. I have heard dozens of different opinions about what it means and what exact effect it would have, 

what is exempt, what isn’t exempt, how would you implement it. 

Nobody knows for sure until we actually do it. That is part of what 

the Administration is wrestling with. 

So I don’t think there is any dispute that it is bad. I have not 

heard the White House dispute that. Secretary Panetta, in particular, has been very forceful on explaining how awful sequestration will be. The problem is, it is not like you can really come up 

with a plan that is going to make it anything other than awful. The 

burden, the real burden of this committee, this House, and the Senate, and the President is to get rid of it one way or the other, to 

make sure that it doesn’t happen. If it happens, it will have a very 

profound and negative impact. And it is also worth pointing out 

and I think the chairman has done an excellent job of this, this is 

a problem right now. We tend to look at it and say, well, sequestration kicks in on January 1st and people begin to imagine that that 

is the deadline. But all of you and thousands of other employers 

are making decisions right now based on what they reasonably 

project will happen in the next fiscal year, and those decisions are 

leading to people hiring less people and in some cases laying them 

off in anticipation that cuts will come one way or the other. So it 

definitely needs to be avoided. 

But we also need to look at the larger problem in terms of what 

got us into this and why we are having such a devil of a time getting out of it. There seems to be this opinion that while this is a 

terrible, terrible thing and it is just sort of fundamental incompetence that is preventing us from dealing with it, it is really not. 

It is more denial about the fiscal situation we are in. Let’s go back 

to the fact that we are only here because of the refusal of the majority of people in the House to raise the debt ceiling. This deal was 
50 

done as the only way to raise the debt ceiling and stop the United 

States of America from defaulting on its obligations for the first 

time. It was only that sort of blind notion that somehow not raising 

the debt ceiling was a solution to our fiscal problems that forced 

us into this awful, awful decision, an awful decision which I didn’t 

support, mainly because it put all of the burden on the discretionary budget. 

We unquestionably have a budget problem, we have a $1.2 trillion deficit, actually 1.3 last year, a 38-percent deficit, and it needs 

to be addressed. Thus far we have put all of the burden of that on 

the backs of 38 percent of the budget, which is the discretionary 

spending budget, and we have refused to talk about revenue. So 

the solution going forward, the thing that will help us come together and come up with the deficit control steps necessary to 

avoid sequestration is, number one, admit that we are not balancing the budget any time soon. We would all love to have a balanced budget, but there isn’t an economist out there that won’t tell 

you doing that in the near term would be devastating to the economy. We are going to have structural deficits for a while. Our role 

is to get those deficits under control so that they are manageable, 

but we can’t hold hostage steps that will do that to the notion that 

we have to have a balanced budget right now or even in the next 

3, 4, 5, 6 years. So admit that. And then, second, everything has 

to be on the table. We are going to need more revenue. We have 

cut taxes across the board over the course of the last 10 or 12 

years. If we are truly, truly committed to providing for the men 

and women who serve us and providing for our national security, 

then we absolutely have to be willing to raise the revenue to pay 

for that. That is a critical, critical piece of it. And, yes, we also 

have to look at the other 62 percent of the budget, the mandatory 

spending, and find savings there as well. So that sort of realistic 

discussion is needed. Right now there seems to be this desire for 

a balanced budget. Also a desire to not raise revenue and a desire 

not to cut any spending that is important. Those numbers don’t 

add up. 

So I hope this committee can begin to be part of the process of 

starting a realistic debate that can avoid the truly awful outcome 

that would come with sequestration and the awful outcome that is 

coming every day, every day that we delay in making it clear that 

we are not going to do sequestration. 

So I think this hearing is very appropriate. I thank the chairman 

for having it. I look forward to the testimony and the discussion. 
51 

STATEMENT OF ROBERT J. STEVENS 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER 

LOCKHEED MARTIN CORPORATION 

BEFORE THE HOUSE ARMED SERVICES COMMITTEE 

JULY 18, 2012 
52 

Mr. Chairman, Ranking Member Smith and Members ofthe Committee: 

On behalf of the 120,000 men and women of Lockheed Martin that I am so 

very privileged to represent, thank you for the opportunity to share our views on 

the impacts of sequestration. We strongly believe this represents the single 

greatest challenge faced by our company and our industry. 

We understand the fiscal pressures our nation faces, and we are 3 years 

into an aggressive effort to reduce costs and better align ourselves to these 

budget realities. We have reduced our overhead, cut capital expenses, curtailed 

research and development, consolidated facilities, and engaged in very painful 

but necessary reductions in personnel across our company. And we'll continue 

to do more, because we understand the need to be more affordable, more 

efficient, and more effective. 

To illustrate this commitment, over the past three years alone, we have 

reduced costs by billions of dollars. We've removed a million and a half square 

feet from our facilities' footprint, and we will reduce another 2.9 million square 

feet before the end of 2014. Most painfully, today our workforce is 18 percent 

smaller than it was just three years ago. That means we have 26,000 fewer 

employees today, and the pace of our hiring has slowed considerably. 

We know that program execution is critical to delivering affordable 

products and services to our customers ... and we stay focused on that priority 

2 
53 

every day, because that's how we deliver value to our customers which enables 

us to return value to our shareholders. 

Yet, our ability to continue this orderly process of reducing cost while 

continuing delivering to our customers the best technology and security 

capabilities in the world is under direct jeopardy by the arbitrary and uncertain 

consequences of budget sequestration. Despite assurances by some that 

sequestration is not likely to happen, it is the law of the land and we have no 

choice but to do our best in planning for its execution. Accordingly, if 

sequestration occurs in January of next year, it will result in cuts of about half a 

trillion dollars each in defense and non-defense accounts over the next nine 

years. For defense, that's an additional half trillion dollars beyond the Budget 

Control Act commitments already in place to reduce defense by $487 billion over 

10 years beginning this year. 

Secretary of Defense Panetta has spoken in the strongest possible terms 

against sequestration. He said this process will have catastrophic consequences 

for our national defense and called it a "meat axe". It is. By its very nature, the 

sequestration process would occur independent of any correlation with strategy, 

force structure, technology needs or operational reality. 

My purpose here today is not to attempt to speak for our government 

customers. But we certainly closely listen to them as to what they need and why. 

We know they invest a considerable amount of time examining the global security 

3 
54 

environment, the technologies and capabilities they will need, and how that flows 

into recapitalization programs. 

In the new national security strategy, the President and the Secretary of 

Defense have spoken extensively about those requirements. And sequestration 

doesn't align with any of them. That is one of our great concerns about 

sequestration. It's not aligned with the national security strategy. It's not aligned 

with technology evolution. It's not aligned with mission areas. 

From an industry perspective, because of the specter of sequestration, the 

near-term horizon is completely obscured by a fog of uncertainty. With just 167 

days remaining until it is triggered, we have little insight as to how sequestration 

will be implemented ... no insight into which programs will be curtailed, which 

sites will be closed, which technologies will be discontinued, or which contracts 

will be reformed. Nor do we know which suppliers - particularly our small 

business participants, who are so vital to our supply chain - will be shut down or 

crippled. And most tragically, we can't reliably estimate how many people will be 

affected. How many dedicated employees are going to lose their jobs? How 

many family lives are going to be disrupted? 

Some may consider it flattering to believe that our industry is so robust 

and so durable that it could absorb the impact of sequestration without breaking 

stride. But this is fiction. The impact on industry would be devastating, with a 

significant disruption to ongoing programs and initiatives, leading to facility 

4 
55 

closures and personnel reductions that would significantly disrupt advanced 

manufacturing operations, erode engineering expertise, and accelerate the loss 

of skills and knowledge. It would also directly undermine a key provision of the 

new national security strategy, which is to preserve the industrial base, not 

dismantle it. We fear our industry - which is a crown jewel of the American 

economy -- will suffer a loss of learning, a depletion of talent, and erosion in 

quality. 

In fact, the very prospect of sequestration is already having a chilling effect 

on the industry. Our ability to hire the best and brightest is being hurt. We're not 

making as many discretionary investments. We're not leaning forward. We're 

reducing our training programs. All because of the uncertainty associated with 

sequestration's sudden and arbitrary additional cuts in next year's defense 

budget. It's a huge disruption to our businesses. 

Beyond the defense industry, the broader consequences of sequestration, 

in my opinion, are also not well understood. Contrary to the popular perception, 

sequestration does not only affect defense accounts. It affects non-defense 

discretionary accounts as well. And since most of those departments and 

agencies don't have substantial capital acquisition accounts like the Department 

of Defense, that means these cuts are likely to fall more heavily on the "people 

accounts" through significant unpaid furloughs and personnel reductions. This 

will constrain agencies from providing essential support and services, and 

severely hurt their ability to properly fulfill their missions. 

5 
56 

Unless this law is changed, we're probably going to see a reduction in the 

number of FBI agents that are on the job, the number of Border Patrol officers 

who are available, the number of people who process social security claims, the 

number of air traffic controllers, Coast Guardsmen, TSA agents, and so many 

more people whose jobs will be cutback. These are very real, direct implications 

of sequestration that many people don't fully appreciate. Taken together, we 

agree with the emerging assessment that sequestration would have extremely 

adverse impacts on our U.S. economy at a critical time. 

In terms of how sequestration will actually be implemented, what we know 

are the basic facts on when it is supposed to take place and the aggregate figures 

involved. Beyond that knowledge, we don't have authoritative guidance on how 

sequestration will be implemented or the mechanics of this process. There are 

many important implementation questions yet to be answered that will affect 

Significantly how the sequestration process unfolds. 

We do know, however, that we have responsibilities under the Worker 

Adjustment and Retraining Notification Act - the WARN Act - that require us to 

notify workers in advance of plant closings or significant layoffs. Under the law, we 

must give affected employees 60 days' notice in most states and 90 days' notice in 

New York. 

That establishes a framework where we're compelled to start talking to our 

employees and our 40,000 suppliers, who want to know, "am I going to have a job in 

January," and "am I going to have a contract in January?" 

6 
57 

And the answer from us today is we're not clear about that. We know it's the 

law to notify many of them in advance, and we know we'll comply with the law. Our 

best estimate at this point is that defense sequestration is likely to result in about a 

10 percent, across-the-board reduction, at the program, project and activity level for 

most accounts, which means it could be peanut butter spread set of cuts across 

most of our contracts. We have seen higher estimates and lower estimates 

depending on how the Administration chooses to implement the Act. But as 

responsible business leaders we must do the best we can to prepare for this 

coming reduction. The law, prudence, good corporate governance, and our 

integrity require that of us. 

But without additional guidance on how or when cuts will be implemented, 

the modeling that we're undertaking lacks clarity in many cases. Based on the 

limited information available to us and taking into account the allocation of our 

business among DOD, other U.S. Government and commercial work that will not 

likely be impacted, a very rough "seat of the pants" estimate is that we might be 

required to layoff about 10,000 employees. This number is derived by assuming 

a 10% across-the-board cut in the DOD budget and an 8% across-the-board cut in 

non-DOD governmental budgets and reflects the fact that approximately 60% of 

our business is with the DOD and approximately 20% is with non-DOD 

governmental entities. 

But which 10,000? And when? That is difficult to determine without 

additional guidance from the Government that allows us to narrow the potential 

7 
58 

impacts. We don't know with much precision yet which lines of business, which 

sites, which contracts, which programs, or which technologies would be affected. 

But when we do know the details, it is in the Government's interest and frankly our 

employees' interest that we be prepared to move out immediately and without 

delay. Since these reductions involve a defined dollar amount for the fiscal year, 

every day or week of delay in making necessary cost reductions can mean even 

deeper cuts might be required later in the fiscal year, or production costs will be 

higher than necessary and there will likely be a dispute as to who will pay for these 

costs. So our judgment is that we need to be ready to act as closely as possible to 

"day one" of the Act. 

One thing we are reasonably certain about is that reductions of this 

magnitude are likely to trigger the law - the WARN Act - requiring 60 days or more 

advanced notification in certain locations before workers can be laid off. But since 

we don't exactly who will be affected by layoffs, or whether any plant closings will 

be necessary absent legal or contractual relief, our best judgment is that we may 

have to notify a substantially higher number of our employees beginning late in the 

third quarter of this year that they may not have a job if sequestration takes place. 

We do not look forward to making those notifications. But we have a legal and 

ethical obligation to tell our employees what we know and what we can share. We'd 

very much prefer to give them more clarity and more details because they have a 

right - the law gives them that right - to know that their jobs are potentially at risk. 

8 
59 

We may also conditionally notify our suppliers that the contracts we have 

with them mayor may not be impacted by sequestration. Our suppliers are already 

asking how they should price their work. If they're bidding a job with us and the job 

goes on for three years in the future and that starts in 2013, should we include the 

consequences of sequestration to our cost structure in that bid, or should we not? 

Or should we propose a re-opener provision? It's very murky right now, and we 

don't think there's going to be uniformity across the industrial base until we get 

much more refined guidance about how sequestration would be precisely 

implemented. 

Throughout our supply chain, many of our suppliers, through our drive for 

affordability and alignment with Pentagon expectations, have worked to lower 

their costs and provide the most affordable prices for our high-technology 

products. They've done that with an expectation within reasonable boundaries of 

what the future business environment will look like. If sequestration occurs in 

January, the expectations upon which that cost and pricing structure have been 

built will be off the table. 

Another question will be, how will the contracts be modified? And when 

we have a modification of our contracts, are we going to re-phase and 

reschedule, in our case, up to 40,000 suppliers? Our sense is, those 40,000 

companies will assert that is a business disruption and we are going to make a 

claim for the adverse cost impact of the disruption in that business. This has 

happened before, even when individual contracts are modified. And then we'll be 

9 
60 

compelled to assemble this portfolio of requests for equitable adjustments or 

claims and pass that along, as the prime contractor to our government 

customers. 

We have no guidance on how that number of requests for equitable 

adjustments and claims will be managed, so it's just not clear to us, and more 

importantly, it's not clear to our small-business suppliers. That really puts them 

under an enormous amount of pressure and for some, will put their businesses at 

risk. 

If sequestration happens, we will comply with the law respectfully and as 

ably as we can. But if sequestration is going to happen, the sooner we get 

clarifying and implementing guidance, the better. 

For the reasons outlined here, we firmly believe that sequestration is wrong 

for the country, wrong for the industry, wrong for the people of Lockheed Martin. In 

summary, it's the wrong process through which to try to secure greater reductions 

in spending. We firmly believe we must not let an automatic budget trigger - a 

default position - become the dominant force for allocating resources and shaping 

our nation's security posture. 

If sequestration happens, it will be a blunt-force trauma to industry and to 

America. We're concerned that it will tear the fabric of the supply chain, the 

industrial base and our national security in significant and irreparable ways. The 

evidence is compelling. 

10 
61 

Multiple credible studies point to the potential for the loss of up to two 

million jobs as result of sequestration. The new national security strategy, 

according to Secretary Panetta, will be unachievable. We'll lose the ability to 

gainfully employ adequate numbers of engineers, scientists, and mathematicians 

just when we need more of each to maintain our competitiveness as a nation. We 

think about that every day, because the long-term health and vitality of our 

economy, of our ability to provide for our security and provide for our citizens, is 

based entirely on our ability to be competitive in the 21st century. 

We have had meaningful discussions with the Administration, the 

Congress, and others, and we will continue to have those conversations in hopes 

that a comprehensive and integrated solution can be found to avoid this disaster. 

I don't profess to have the wisdom or expertise to give counsel to this 

Committee or to the Congress on the precise path forward to resolve all the fiscal 

challenges facing our nation. But I have spent decades of my professional working 

life in the national security arena and I have never been as concerned over the risk 

to the health of our industry and our government enterprise. Sequestration has 

been described many times to me as a "doomsday device" as a threat designed to 

never happen. But the effects of sequestration are being felt, right now, throughout 

industry. Every month that goes by without a solution is a month of additional 

uncertainty, deferred investment, lost talent and ultimately increased cost. 

Respectfully, I urge you to take action to stop the sequestration process 

and ask that you do so soon. 

11 
62 

The invitation to testify identified Rule 11, clause 2(g)(5), of the Rules of the U.S. 

House of Representatives for the 112th Congress which requires 

nongovernmental witnesses appearing before House committees to include in 

their written statements a curriculum vitae and a disclosure of federal contracts 

received. 

Attached is my bio, along with a summary disclosure of the value of Lockheed 

Martin contracts received from the U.S. Government during the prior two years. 

Lockheed Martin is the single largest federal contractor with over 10,000 

contracts. 

Calendar Year 2011 

Department of Defense -

NASA -

Department of Homeland Security -

Civil/Other US Government/Intelligence -

Total U.S. Government Contracts Order Value -

Calendar Year 2010 

Department of Defense -

NASADepartment of Homeland Security -

Civil/Other US Government/Intelligence -

Total U.S. Government Contracts Order Value -

12 

$32,548 Million 

$1,449 Million 

$566 Million 

$5,925 Million 

$40,488 Million 

$28,869 Million 

$1,319 Million 

$488 Million 

$7,615 Million 

$38,291 Million 
63 

Robert J. Stevens 

Chairman and Chief Executive Officer 

Lockheed Martin Corporation 

Robert J. Stevens serves as Chairman and Chief Executive Officer of Lockheed Martin. He has 

held a variety of increasingly responsible executive positions with the Corporation, including 

President and Chief Operating Officer, Chief Financial Officer, and head of Strategic Planning 

through a career that has included experience in program management, finance, manufacturing, 

and operations. 

Mr. Stevens is a Fellow of the American Astronautical Society, the American Institute of 

Aeronautics and Astronautics (AIM), the Royal Aeronautical Society, and the International 

Academy of Astronautics. In addition, in May 2012, AIM named Mr. Stevens an Honorary 

Fellow, its highest honor. He serves on the International Advisory Boards of the Atlantic Council 

and the British-American Business Council and also serves on the Executive Committee of the 

Aerospace Industries Association's Board of Governors. He is a member of the Council on 

Foreign Relations, Lead Director of the Monsanto Company, and a member of the Board of 

Directors of the Congressional Medal of Honor Foundation. Mr. Stevens served on President 

George W. Bush's Commission to Examine the Future of the United States Aerospace Industry, 

and in January 2012, he was appOinted by President Barack Obama to the Advisory Committee 

for Trade Policy and Negotiations. 

Born in McKeesport, Pennsylvania, Mr. Stevens is a summa cum laude graduate of Slippery 

Rock University, from which he received the Distinguished Alumni Award. He earned a master's 

degree in engineering and management from the Polytechnic University of New York and, with 

a Fairchild Fellowship, earned a master's degree in business from Columbia University. He is a 

graduate of the Department of Defense Systems Management College Program Management 

course and also served in the United States Marine Corps. He has been recognized by the 

National Management Association as Executive of the Year, by Government Computer News as 

the Industry Executive of the Year, by the Partnership for Public Service with the Private Sector 

Council Leadership Award, and by the Marine Corps Scholarship Foundation with the Globe 

and Anchor Award. In 2010, he received the Marine Corps Heritage Foundation's inaugural 

Lejeune Recognition for Exemplary Leadership, and in 2011 he was recognized by the National 

Defense Industrial Association with the James Forrestallndustry Leadership Award and 

inducted into the Washington Business Hall of Fame. 

May 2012 
64 

DISCLOSURE FORM FOR WITNESSES 

CONCERNING FEDERAL CONTRACT AND GRANT INFORMATION 

INSTRUCTION TO WITNESSES: Rule 11, clause 2(g)(5). of the Rules ofthc U.S. 

House of Representatives for the I 12th Congress requires nongovernmental witnesses 

appearing before House committees to include in their written statements a curriculum 

vitae and a disclosure of the amount and source of any federal contracts or grants 

(iucluding subcontracts and suhgrants) received during the current and two previous 

fiscal years either by the witness or by an entity represented hy the witness. This form is 

intended to assist witnesses appearing bei(lre the House Armed Services Committee in 

complying with the House rule. 

Witness name: Robert J. Stevens 

Capacity in which appearing: (check one) 

Individual 

_K Representati ve 

If appearing in a representative capacity, name of the company, association or other 

entity being represented: 

FISCAL YEAR 2011 

federal grant(s) / federal agency dollar value subject(s) of contract or 

contracts grant .'-

~""TTACHED --

1-------.. 

FISCAL YEAR 2010 

federal grant(s) / federal agency dollar value subject(s) of contract or 

contracts grant 

SEE ATTACHED 

-- c-_ 

.'"'" 1----.. .... -

._-----

FISCAL YEAR 2009 
65 

Federal grant(s) / 

contracts 

SEEATTAC_H_E_D __ + ______________ -+ _____________ +-________________ ~ 

Federal Contract Information: If you or the entity you represent betore the Committee 

on Armed Services has contracts (including subcontracts) with the federal government. 

please provide the following information: 

Number of contracts (including subcontracts) with the federal government: 

SEE ATTACHED 

Current fiscal year (20 11): ~ _____ _ 

Fiscal year 2010: ~ ______ _ 

Fiscal year 2009: ___________________________ __ 

Federal agencies with which lederal contracts are held: 

Current fiscal year (20 11 ): ______________ . ______ ~ 

Fiscal year 2010: __ _ 

Fiscal year 2009: _____ ~ ____ ~ 

List of subjects of lederal contract(s) (for example, ship construction_ aircraft parts 

manufacturing, software design_ force structure consultant, architecture & engineering 

services, etc_): 

Current fiscal year (2011): ____________ ~ ___ ~________ _, 

Fiscal year2010:~~ _____ ~ __________ ~ __ ~ _________ __ 

Fiscal year 2009-____________________________________ _ 

Aggregate dollar value of federal contracts held: 

Current fiscal year (201 1): __ _ 

Fiscal year 20 1 O: ________ ~ ______ ~ ____ ~___ _ ________ ._ ~ ____ ~ __ _ 

Fiscal year 2009:~_~ _______ ~ __________ __ 

2 
66 

Federal Grant Information: If you or the entity you represent before the Committee 011 

Armed Services has grants (including subgrants) with the federal govemment, please 

provide the following information: 

SEE ATTACHED 

Number of grants (including sub grants) with the federal government: 

Current fiscal year (20 II): _____ .. _. ___ _ 

Fiscal year 20 I 

Fiscal year 

Federal agencies with which federal grants are held: 

Current fiscal year (20 I I 

Fiscal year 

Fiscal year 

List of subjects offederal grants(s) (for example, materials research, sociological study, 

sottware design, etc.): 

Current fiscal year (20 I 

Fiscal year 

Fiscal year 

Aggregate dollar value of led era I grants held: 

Current fiscal year (20 I 

Fiscal year 20 

Fiscal year 

3 
67 

Calendar Year 2011 

Department of Defense· 

NASA· 

Department of Homeland Security· 

Civil/Other US Government/Intelligence· 

Total U.S. Government Contracts Order Value· 

Calendar Year 2010 

Department of Defense· 

NASA· 

Department of Homeland Security -

Civil/Other US Government/Intelligence· 

Total U.S. Government Contracts Order Value -

$32,548 Million 

$1,449 Million 

$566 Million 

$5,925 Million 

$40,488 Million 

$28,869 Million 

$1,319 Million 

$488 Million 

$7,615 Million 

$38,291 Million 
68 

Congressional Testimony 

Before the House Armed Services Committee 

(as presented for the record) 

The Impact of Sequestration on the U.S. Aerospace and 

Defense Industry 

By the Honorable Sean O'Keefe 

Chairman and CEO, EADS North America, and 

Chairman, National Defense Industrial Association 

July 18, 2012 

1 
69 

Mr. Chairman, Ranking Member Smith and distinguished members of the 

Committee. Thank you for the invitation to be with you today, and to join my colleagues 

in the aerospace and defense industry. 

My prior public service experience gives me some insight into the challenges 

which have prompted you to call this hearing. However, it is in my current capacity as 

Chairman and CEO of EADS North America and Chairman of the National Defense 

Industrial Association, representing nearly 90,000 corporate and individual members, 

that I speak with you today. 

This hearing is particularly well timed. And I express my appreciation to you, Mr. 

Chairman, for your foresight and tenacity in tirelessly drawing attention to the impending 

"perfect fiscal storm" of sequestration. 

Many in Washington believe that the disastrous impact of sequestration is a 

distant threat since it would not be implemented until January 2013. But as you, and 

your fellow committee members know well, the fiscal challenges of sequestration are 

already upon us. Industry shares your concerns-and our experience to date validates 

your alarm. 

The question is not how we got in this position, but rather how we steer through 

the storm. As your defense industrial partners, we recognize that reconciling federal 

spending to revenues is absolutely essential in securing lasting economic stability and 

national security. But we fear that the government's reluctance to make difficult choices 

and apply a well-aimed fiscal razor will mean that the federal budget, and particularly 

defense, will get the equivalent of a shave with a chain saw. 

2 
70 

Cuts will be made - but they will be imprecise and without regard to priority. The 

mechanistic implementation formula as prescribed in law treats the contract for 

protective armor and the cost to cut the grass on military bases to be of equal priority. 

These cuts, and the process used to derive them, also will have a significantly negative 

impact on hundreds of thousands of men and women in uniform, and millions of 

employees and their families that our industry supports. 

Industry is very familiar with cyclical down-turns and the need to periodically 

adjust defense spending to meet new fiscal realities. But unlike the "peace dividends" 

of the past, the next round of cuts will not be driven by positive, external strategic 

factors like the collapse of the Soviet Union, the fall of the Berlin Wall, or the end of the 

Vietnam War. Rather, the impending sequestration cuts, if they are allowed to happen, 

will be driven by our collective inability to make hard choices. In effect, this is a selfinflicted wound. 

Every echelon of the defense industry will be impacted. Let me speak 

specifically for EADS, and its U.S. subsidiary, EADS North America. As you know, 

EADS is one of the largest aerospace and defense companies in the world with brands 

you recognize, including Airbus, Eurocopter, Astrium and Cassidian. 

As what some refer to as a "non-heritage" defense company, EADS North 

America has been on a significant growth path in the U.S.: investing in facilities, 

creating jobs, delivering systems like the UH-72A Lakota and competing for programs 

like the Air Force refueling tanker, all of which has brought positive return to the 

American taxpayer and warfighter. In fact just two weeks ago we announced the 

3 
71 

establishment of an Airbus aircraft manufacturing center in Mobile, Alabama. This $600 

million investment will create several thousand construction jobs in the near term, and 

sustain nearly 1,000 aerospace jobs in the greater Mobile community alone. 

In addition to our direct investment and employment, the United States is the 

largest supplier nation in the world to our corporation. Last year EADS purchased 

nearly $15 billion in goods and services from American aerospace suppliers. That's 

more than any other company outside the US. In fact that's more than any country in 

the world. And our sourcing activities support approximately 250,000 American jobs. 

The threat of sequestration raises a number of troubling issues for EADS. All are 

important, but two jump out: 

1. I have already advised the Governors and Congressional delegations in the 

states and districts where we operate that we are wrestling with how to meet 

our obligations under the WARN Act. In the absence of definitive guidance 

from DoD, OMB and the Defense Contract Management Agency, we feel 

compelled to act in the spirit of this law and in all likelihood will issue WARN 

notices to those employees engaged in ongoing federal contract activities. 

It's not something we want to do. But it appears the law requires us to do it. 

Clearly the intent of the Act is to provide employees with time to prepare for 

known events that may impact their employment. Without a doubt 

sequestration could be just that kind of event. 

2. We are very concerned about the affect of sequestration on our extended 

supplier base. EADS buys in the U.S. because of the high quality, innovation 

4 
72 

and reliability of our vast American supplier network. We believe 

sequestration will negatively impact many of these suppliers, including driving 

some out of the market. Again, in the absence of guidance, we and our 

suppliers are left to wonder how and if our businesses will be disrupted as a 

result of sequestration, not only in the defense sector, but commercial activity 

as well. 

The most vulnerable of these aerospace and defense suppliers are the vast 

number of small to mid-cap businesses that sustain millions of jobs, drive technology 

and create the innovation that is the hallmark of American aerospace. While larger 

companies have the capacity to more successfully weather the impending fiscal storm, 

small businesses do not. 

In preparing for my testimony today, the National Defense Industrial Association 

reached out to a number of our small business members. 

Their responses were both illuminating and alarming. 

Small business suppliers tell us that they are already preparing to trim payrolls, 

that they are not creating new jobs because of the anticipation of sequestration and that 

many are gearing up to leave the federal and defense market space all together. 

Here are three examples of our member companies: 

1. An eight year old small electronics contract manufacturer, with less than 20 

employees and revenues of less than $10M. A five year contract for electronic 

parts was pulled back by Tier 1 supplier, because of uncertainty of whether that 

5 
73 

particular program would survive post-sequestration. The small supplier had a 

cash flow crunch, forcing them to delay new hires and even downsize slightly. 

2. A three year old aerospace parts manufacturer, with less than 25 employees 

and revenues less than $10M. A two year contract for aircraft parts was placed 

on hold, because the platform was one of those targeted for cuts for Budget 

Control Act and sequestration. The small manufacturer pulled back on a 

proposed capital investment and new hires, instead using the cash to cover 

payroll while looking for new business. 

3. A six year old aerospace components manufacturer, with less than 30 

employees and revenues of less than $15M. A three year contract for aircraft 

components was suspended, because several of the platforms were mentioned 

as potential sequestration targets. The company shelved a facility expansion 

plan, put a hold on new hires, and had several employees switch to reduced 

work hours until the business outlook was more definitive. 

These company experiences are particularly disappointing because over the 

years this Committee has led the effort to bring small businesses into the DoD supply 

chain. I fear those successes will be significantly curtailed or reversed. 

But even in this difficult fiscal environment, I believe there are opportunities and 

paths we could follow that would produce positive results, leading to more efficient 

government management of the defense acquisition process, and an equally more 

efficient industry supporting it. 

6 
74 

The first steps in my view would be to set a realistic Defense budget reduction 

target, repeal the across-the-board sequester, and delegate the creation of a spending 

reduction plan to the Secretary of Defense. Working with a select group of 

Congressional national security leaders, the Secretary could produce a difficult, but 

acceptable, plan to meet necessary budget targets. 

Such a plan shouldn't be restricted to just program choices. Rather, it must 

include an opportunity for "economic stimulus" by removing some of the self-imposed 

administrative impediments that blunt market activity. The administration has done a 

decent job of starting to make export control rules less rigid. But more can be done to 

truncate prolonged reviews by multiple agencies that discourage U.S. industry from 

seeking overseas markets. At the same time, Congress can help by streamlining current 

export control laws that negatively impact trade. 

This same approach can be applied to domestic programs. The cost of doing 

business with the government can add more than 20% to the price of goods. This is 

especially true when it comes to defense. The extensive array of regulations that push 

up prices and drive out potential competitors could be suspended by executive order. In 

the mid-1990s, the Clinton administration pursued a "procurement holiday" to reduce 

defense spending, Introducing a "regulatory holiday" would create immediate and longterm economic benefits, 

Under such a regulatory holiday as recommended by the Defense Business 

Board, all administrative rules and regulations would be suspended, unless reinstated 

by the Secretary of Defense. I believe we would see broader competition, greater 

7 
75 

savings and retention of second- and third-tier suppliers-even in the face of budget 

reductions. 

There also are regulatory challenges that could be addressed that impact 

companies like EADS North America and our ability to offer competitive choices in the 

U.S. market. For example, many of the new aviation contracts with 000 require FAA 

certification. While the European Aviation Safety Agency (EASA) standards are 

considered comparable to the FAA certification standards, there is no 000 process for 

considering and accepting EASA certified aviation standards. Therefore, the financial 

and schedule burdens required to convert these comparable aviation standards in order 

to compete for 000 programs must ultimately be priced into our offers, which increases 

the cost of doing business with the U.S. government. 

Most immediately, the administration must communicate today its sequestration 

implementation plan to the public, our armed forces and to industry. The current 

uncertainty has effectively put sequestration and its consequences in motion. In the 

absence of any guidance, industry is already holding back investments, questioning the 

fairness of ongoing competitions, doubting the viability of existing contracts and starting 

to trim capacity. 

During my government service I experienced first-hand the challenges of budget 

reductions. Program managers, analysts and budget officers will burn the midnight oil 

trying to shelter programs, missions and capabilities from the looming disaster. 

Without guidance, I fear their cuts will be random, inwardly focused and not 

always driven by national security priorities. In addition, the Department will potentially 

be overwhelmed with renegotiating contracts, dealing with unobligated balances from 

8 
76 

previous years and addressing unexpected Nunn-McCurdy breaches. Savings for 

businesses and the government under multi-year procurement contracts could be lost, 

fixed-price contracts will almost certainly be challenged, as well as many others 

terminated due to unplanned costs and liabilities. 

This is a recipe for endless argument, litigation and gridlock. And it will ultimately 

drive up costs to the point that they exceed the savings that sequestration was enacted 

to produce. 

But lost in the debate about this budget reduction mechanism is the larger impact 

of this action. This is not about the bottom line, the corporate balance sheet, share 

prices and market analyst reports. And it is less about preserving the industrial base, 

maintaining production capacity, or impacting competitiveness. The impact is on our 

national security. It's about diminishing the ability of our men and women in uniform 

who have volunteered to defend us and represent our national interests around the 

globe. All that we are discussing today is about industry's ability to support them. In the 

greater context, this is but one element of a wider range of dangerous consequences 

that this fiscal mechanism will create to erode our national security. 

Mr. Chairman and members of the Committee, we in the industry stand ready to 

support your important efforts. We are prepared to make difficult decisions. But we 

need guidance, direction and rationality in the process. And we need it now. 

Thank you for the opportunity to address the Committee. I look forward to your 

questions. 

9 
77 

NORTH AMERICA 

Sean O'Keefe 

Chairman and Chief Executive Officer 

EADS North America 

Sean O'Keefe was appointed CEO of EADS North America in November 2009 and 

Chairman of the Board in January 2012, His responsibilities include directing EADS 

activities in the United States, developing strategic partnerships with U.S, companies, and 

enhancing the participation of EADS in the U.s, marketplace - including the development, 

growth, and management of large-scale defense acquisition programs, 

Globally, EADS is the parent company of some of the most recognized brands in the 

international aerospace and defense sector, including Airbus, Eurocopter, Ariane Space, 

Astrium, Eurofighter and MBDA, The company had annual revenues in 2011 of more than 

$66 billion and employs some 133,000 people worldwide. 

Prior to joining EADS North America, Mr. O'Keefe served as a company officer and Vice 

President of the General Electric Company in the Technology Infrastructure sector, leading 

the Washington operations of the GE Aviation business, From 2005 to 2008, he served as 

Chancellor of the Louisiana State University, the chief executive officer, in Baton Rouge, LA 

On four separate occasions O'Keefe served as a presidential appointee. Prior to leading 

LSU, he served as the tenth Administrator of the National Aeronautics and Space 

Administration, Mr. O'Keefe joined President George W, Bush's administration on 

inauguration day as Deputy Assistant to the President and Deputy Director of the Office of 

Management and Budget until December 2001, when he was appointed NASA 

Administrator. 

Appointed the 69th Secretary of the Navy in July 1992 by President George H, W Bush, Mr. 

O'Keefe previously served as Comptroller and Chief Financial Officer of the Department of 

Defense from 1989, Before joining then-Defense Secretary Dick Cheney's Pentagon 

management team in these capacities, he served on the United States Senate Committee 

on Appropriations staff for eight years and was Staff Director of the Defense Appropriations 

Subcommittee, 

His public service began in 1978 upon his selection as a Presidential Management Intern, 

Mr. O'Keefe earned his Bachelor of Arts from Loyola University in New Orleans in 1977 and 

his Master of Public Administration from the Maxwell School of Syracuse University in 1978, 

He is married to Laura McCarthy O'Keefe, and they have three children Lindsey, Jonathan, 

and Kevin. 

service 

Mr. was appointed in November 2011 as Chairman of the National Defense 

Industrial Association (NDIA) America's leading industry association promoting the 

defense industry and national security. Prior to this appointment, he had served as Vice 

Chairman of the NDIA's Executive Committee, 
78 

2 - O'Keefe 

Academic service and fellowships 

From 1996-2001 Mr. O'Keefe was an endowed chair professor at the Syracuse University 

Maxwell School of Citizenship and Public Affairs. Concurrently he served as the Director of 

National Security Studies, a partnership of Syracuse University and Johns Hopkins 

University for delivery of executive education programs. From 1993-1996 he was Professor 

of Business Administration and Assistant to the Senior Vice President for Research and 

Dean of the Graduate School at the Pennsylvania State University. 

Mr. O'Keefe is a Fellow of the National Academy of Public Administration, a Fellow of the 

International Academy of Astronautics, and serves on corporate and non-profit boards of 

directors. During his academic postings, he was a Visiting Scholar at the Wolfson College of 

the University of Cambridge in the United Kingdom, a member of the Naval Postgraduate 

School's civil-military relations seminar team, and conducted seminars for the Strategic 

Studies Group at Oxford University. He was a member of the 1985 Kennedy School of 

Government program for national security executives at Harvard University. 

Awards and authorship 

In 1993, President Bush and Secretary Cheney presented Mr. O'Keefe with the 

Distinguished Public Service Award. He was the 1999 faculty recipient of the Syracuse 

University Chancellor's Award for Public Service; recipient of the Department of the Navy's 

Public Service Award in December 2000; and has been awarded five honorary doctorate 

degrees from several prestigious educational institutions. In 2003 and 2004, he was 

recognized and honored by the Irish American Magazine as one of the Top 100 Irish 

Americans and was named among the magazine's "Stars of the South" in 2006. 

O'Keefe was named recipient of the Potomac Institute for Policy Studies' 2005 Navigator 

Award and received the 2005 Honorary Engineer of the Year Award from the Engineer's 

Council. He was inducted into the Louisiana Political Hall of Fame in January 2007. 

He is the author of several journal articles and contributing author of Keeping the Edge. 

Managing Defense for the Future, released in October 2000. In 1998, he co-authored The 

Defense Industry in the Post-Cold War Era. Corporate Strategies and Public Policy 

Perspectives. 

About EADS North America (www.eadsnorthamerica.com) 

EADS North America is the North American operation of EADS, a global leader in 

aerospace, defense and related services. As a leader in all sectors of defense and 

homeland security, EADS North America and its parent company, EADS, contribute over 

$11 billion to the U.S. economy annually and support more than 200,000 American jobs 

through its network of suppliers and services. Operating in 17 states, EADS North America 

offers a broad array of advanced solutions to its customers in the commercial, homeland 

security, aerospace and defense markets. 

Marcl12012 
79 

DISCLOSURE FORM FOR WITNESSES 

CONCERNING FEDERAL CONTRACT AND GRANT INFORMATION 

INSTRUCTION TO WITNESSES: Rule II, clause 2(g)(5), oflhc Rules of the U,S, 

Ilouse of Representatives for the 112th Congress requires nongovernmental witnesses 

appearing before House committees to include in their written statements a curriculum 

vitae and a disclosure of the amount and source of any federal contracts or grants 

(including subcontracts and subgrants) received during the current and two previous 

fiscal years either by the witness or by an entity represented by the witness, This form is 

intended to assist witnesses appearing before the House Armed Services Committee in 

complying with the House rule, 

Witness name: Sean O'Keefe 

Capacity in which appearing: (check one) 

Individual 

_X_ Representative 

If appearing in a representative capacity, name of the company, association or other 

entity being represented: EADS North America, Inc, 

FISCAL YEAR 2012 

federal grant(s) I fedcl'alllgency dollar value subject(s) of contract 0""-

contracts grant 

U,S, Army Aviation 

and Missile Command 

(subcontract from SES- AMPS-M (Missile Warning 

LI2POO1513 I) $947,387,00 System) Parts 

Army ( subcontract 

II'om Applied Geo MQM 175 (Aerial Target) A&B 

LP120009663 Technol~oics) $29,856,00 Bore Siuht Units 

Army ( subcontract 

frolll Applicd Geo MQM 175 (Aerial Target) A&B 

LP I 20009664 Technologies) $29,857.00 Bore Sight Units 

contract is through Air 

Force. customer is I 

DISA (subcontract Ectocryp Black engineering 

F00214 from Raytheon) $1.731,692,00 services 

National GcospatialHM021 01 ODOOO2 Intelliuence Agency $2 I 3,000,00 TerraSAR-X imagery 

G 12PDOO079 U,S, Geological Survey $800,000,00 TerraSAR -X imagery 

U,S, Navy (subcontract TRS-3D radars for Littoral 

SRTOO05 fl'om Lockheed Mmiin) $10.022.559.76 Combat Ship program 

repair of 1-11-1·65 electrical 

I-ISCG38-I I-D-202053 U,S, Coast Guard $95,680.48 components 

HSCG38- I O-D- US Coast Guard $14,536,00 H-65 Sustaining Enoineering 
80 

2000013 -.~ ... ----~-r-----~-··--··- ""----

HSCG3S-IO-D- US Coast Guard ""---C2000016 ""- -_ ... _--"-- _._--_. 

$1 ,585,865"521~ain Rotor Blades re:air:=----

HSCG38-D-202048 US Coast Guard $85,70 I "21 HH65C Bearing Spider PLT 

i--------- repairs ~ 

Yemen FMS CN-235 

N6833S-12-P-0228 US Navy $39,549, II Preservation 

IDIQ contract for sustaining 

engineering support for HC~-

HSCGZ3-09-D-O 1 0004 US Coast Guar<l ____ 1--"---- $19,84927 144A fleet ._---- Light Utility Hclicopter (option 

W58RUZ-06-C-OI94 US Army $296,009,226,73 exercise plus mods) 

HSCG23-IO-C- US Coast Guard IlC-144A Production Contract 

2DA020 $78,507,936,76 (option exercise) 

N66604-12-D-00SI INavy "-""---"- - "-- _~2~ RF'2:~~?_?l'~~_ " _ 

N00383-12-D-O 12P INavy $170,094 JETI Sparcs Mini Stock Point ~ 

Multiple purchase Navy, Army, Marine -$4,800,000 Mise Electronic and Test System 

orders Corp Orders 

FISCAL YEAR 2011 

I federal grant(s) I federal agency dollar value sub,iect(s) of contract or 

contracts "rant 

US Army, Aviation 

and Missile Command 

(subcontract from SESL10P004000 I) $14,70 I ,622,00 AMPS"M Svstem) scnsors ,M<%ilo and W""'"'j l'atiS 

U.S. Army, Aviation 

and Missile Command 

(subcontract lrom SES- AMPS-M (Missile Warning 

PIIPOOO751 I) $145,697,00 System) earts "" 

U,S, Army, Aviation I 

and Missile Command AMPS-M (Missile Warning 

(subcontract from SES- System dessicant replacement 

lJJl'Q()l_o.l8 I) $23,7nOO kits "" ___ ," 

Army (subcontract 

trom Applied Geo MQM 175 (Aerial Target) AlB 

1'11009527 Technologies) $14,293,02 Cross Plate kits 

contract is through Air 

Force, customer is 

DISA (subcontract Ectocryp Black engineering 

1081038 from Rilytheon) S300,000,00 I services 

National GeospatialHM021 0 I 000002 Intelligence Aaency $1,691,841.00 TerraSAR-X imagerv 

U,S, Navy (subcontract TRS-3 D radars for Littoral 

SRTOOOS from Lockheed Martin) $10.219,734,77 Combat Ship program 

Defense Logistics 

SPRMMI-II-P-YD75 Agency $100,652,00 TRS-3D Power Supply 

SPRMMI-II-P-YD76 De fense Logistics $ I 00,652,00 TRS-3D Power Supply 

2 
81 

~~~-- - ---

Agency 

Defense Logistics 

~!,M!VI1:Il~P~YD77 Aacncy $25.597.00 TRS~3D Modulator Driver 

Defense Logistics -"-.~-.--~" ... __ ... ~--~.~~-.-~.--

SPRMM I ~ II ~P~ YD78 Agenc;r $28,816.00 I TRS-3D Grid Modulator 

De fense Logistics 

SPRMMI~II-P-YD80 A~y $29,975.00 TRS-3D Controllcr Board 

Defense l.,ogistics 

SPRMVlI ~ II ~P~ YD81 Agency , $38.377.00 TRS-3D Gear Pump Rcfinex. ___ 

Defense Logistics 

SPRMM I-II ~P~ YD82 Agency $25,590.00 TRS~3D Double Coupler 50 DB 

Defense Logistics 

SPRMMI~II-P-YD83 Aaency $12.371.00 TRS~3D Power Supplv [--_._. 

Defense Logistics 

SPRMMI-II~P-YD84 Agency ""---,-- 1---~ __ S~}'_154.00 TRS-3D Grid Bias P.S. ---."--~.-~---- --,~- ~-

repair of HH-65 electrical 

IlSCG38~ 11-1)-202053 U.S. Coast Guard $24,500.63 c5)!n~oncnts 

W9113M~07-D~OOO6 Armv S31,499,937.32 Aircrall ~ CN235 ---- IlSCG23-1 O~C~PXOO I Coast Guard $157.647,996.60 Aircraft - CN235 

HSCG38~ I O~D~ US Coast Guard SI.210.500.55 H-65 Sustaining Engineering 

2000013 

HSCG38~10-D- US Coast Guard 1,867.763 AI Main Rotor Blades engineering 

2000016 services 

HSCG38~D-202048 US Coast Guard $127.365.41 HH65C Bearing Spider PLT 

repairs 

IDIQ contract Ii" sustailliI~g 

engineering support for 

HSC(j23-09-D~O 10004 US Coast Guard $1,835.68 I 44 A tleet_-----,--

Light Utility Helicopter (option 

W58RGZ~06-C~0194 US Armv $375,534.205.38 exercise plus mods) 

N683]5-11 ~D~OO 17 Navy 1,730,600 TPTI 

Multiple purchase Navy, Army, Marille -18,000,000 Vlisc Electrollic and Test System 

orders Corp Orders - HSCG23-1 O~C- US Coast Guard I 

2DA020 $41,143,476.38 HC-144A P.r()~uction Co,,!,~U 

FISCAL YEAR 2010 

Federal grant(s) I fedeml agency dollar value subject(s) of contract or 

contracts grant 

Army (subcontract launcher and smoke generation 

AGT~TMO~IDIQ-07- from Applied Gco equipment for aerial target 

~- Technolooies) $858,776.50 system 

U.S. Army (subcontract 

from Griffon 

P00000786I Aerospace) $60,000.00 aerial targets scoring system 

U.S. Army (subcontract 

from Kratos 

WS-LP-0369 Government Sol~tions) $53,196.00 DT 45 (Aerial Target) wings 

3 
82 

-------"- ----~-- -~--.~-

U.S. Army (subcontract 

from Kratos OT 35 and OT 45 (Aerial 

WS-LP-043I Government Solutions) $46,350.00 Target) parts 

U.S. Army (subcontract OT 35 and OT 45 (Aerial 

from Torch Target) Instrumented MAST 

W3104Q-07-00-0-001 Technologies) $9,660.00 wing tips 

National GeospatialHM021 01 000002 Intelligence Agency $2,002,240.00 TerraSAR-X imaoerv 

G08C90056 US Geological Survey ---~---~-

$13.290.00 TerraSAR-X imagery ____ C:-==-------. HSCG38-IO-0- es Coast Guard $877.705.46 H-65 Sustaining Engineering 

2000013 

HSCG38-10-0- US Coast Guard $527,002.76 --~----~--,-----

Main Rotor Blades engineering 

2000016 services 

HSCG38-0-202048 US Coast Guard $53,145.16 HH65C Bearing Spider PLT 

repairs -- HSCG23-10-C- es Coast Guard 

20A020 $115,980,650_20 HC-144A Production Contract 

HSCG23-10-C-P9XOOI US Coast Guard $157.708,922.32 Merida FMS CN-235 Production 

US Coast Guard 

(subcontract from 

PO 7200007857 Lockheed Martin) $31,352,968.32 Yemen FMS CN-235 Production 

HSCG38-IO-C-011010 US Coast Guard $1.406,151.23 FSR support for HC-144A neet 

W91IQX-II-G9002 IUS Army $5,915378.00 SONEX (detection equipment) 

IDIQ contract for sustaining 

engineering support for HCHSCG23-09-0-0 I 0004 US Coast Guard $41,474.26 144/\ fleet 

Light Utility Helicopter (optioll 

W58RGZ-06-C-O 194 US Army $394,196,322.67 ~cise plus mods) 

J"iQ!i604-1 0-C-05 31 Navy $15,656,992 RFDACS 

Multiple purchase Navy, Army, Marine -$22,000,000 Mise Electronic and Test System 

orders Corp Orders 

Federal Contract Information: If you or the entity you represent before the Committee 

on Armed Services has contracts (including subcontracts) with the federal government, 

please provide the following information: 

Number of contracts (including subcontracts) with the federal government: 

Cun-ent fiscal year (2012):_ -29_~ ___ . ______ ._ 

Fiscal year 2011: -94 ___ ~ 

Fiscal year 2010:_ -77_~~ ____ _ 

Federal agencies with which federal contracts are held: 

Cun-ent fiscal year (2012): National Geospatial-Intclligence Agency, U.S. 

Geological Survey, U.S. Coast Guard, Army, Navy, DlSAI Air Force, Marine 

Corps; 

Fiscal year 2011: National Geospatial-Intelligence Agency, U.S. Coast Guard, 

4 
83 

Army, Defense Logistics Agency, DISA/Air Force, Navy, Marine Corps; 

Fiscal year 2010: National Geospatial-Intelligence Agency, U.S. Geological 

Survey, U.S. Coast Guard, Army, Marine Corps. 

List of subjects of federal contract(s) (for example, ship construction, aircraft parts 

manufacturing, software design. force structure consultant, architecture & engineering 

services. etc.): 

Current fiscal year (2012): engineering services, aircraft/helicopter parts, missile 

warning systems. satellite imagery, radar parts, helicopters, ship radars, 

cryptologic equipment, aircraft, electronic test equipment, engine test 

equipment, radio distribution equipment; 

Fiscal year 2011: engineering services, satellite imagery, aircraft/helicopter parts, 

missile warning system, certification and testing, radar pmis, helicopters, 

cryptologic equipment, aircraft, electronic test equipment, engine test 

equipment, radio distribution equipment; 

Fiscal year 2010: aerial target launcher, engineering services, aircraft/helicopter 

parts, satellite imagery. missile warning systems, helicopters, detection 

equipmcnt, aircraft, electronic test equipment, engine test equipment, radio 

distribution equipment. 

Aggregate dollar value of federal contracts held: 

Current fiscal year (2012): -$397,727,000.84; 

Fiscal year 2011: -$656,270,275.15; 

Fiscal year 20 I 0: -$742,844,846.88. 

5 
84 

Federal Grant Information: If you or the entity you represent before the Committee 011 

Armed Services has grants (including sub grants) with the federal government, please 

provide the following information: 

Number of grants (including subgrants) with the federal government: 

Cunent fiscal year 

Fiscal year 2011 . 

Fiscal year 

Federal agencies with which federal grants are held: 

Current fiscal year 

Fiscal year 2011: NI A 

Fiscal year 2010:_N/A 

List of subjects of federal grants(s) (for example, materials research, sociological study, 

software design. etc.): 

Aggregate dollar value of federal grants held: 

Current tiscal year 

Fiscal year 20 II' 

Fiscal year 201 

6 

----.--~---
85 

Testimony of Mr. David Hess 

President, Pratt & Whitney 

Before the House Armed Services Committee 

On Sequestration Implementation and Options and the Effects on National Defense 

July 18, 2012 

Chairman McKeon, Ranking Member Smith, Members of the Committee, I appreciate 

the opportunity to testify before you today regarding the serious matter of the potential 

for sequestration and the implications for the defense industry. As you know, I wear two 

hats currently - one as the President of a $13 billion company that employs more than 

36,000 employees worldwide, and another as Chairman of the Aerospace Industries 

Association (AlA), which represents over 300 aerospace companies in the United 

States. I commend the committee for assembling such a fine group of witnesses to 

provide diverse answers based upon the different challenges each of us face in the 

coming months. 

As Chairman of AlA, it has been my privilege to visit Capitol Hill on numerous occasions 

to outline what we see with regard to sequestration - the potential to affect over one 

million highly skilled, highly compensated aerospace and defense related jobs. AlA's 

"Second to None" advocacy campaign has been spreading throughout the country with 

grassroots rallies highlighting the importance of fixing sequestration versus suffering its 

consequences. 

As an industry, we are already seeing the impacts of potential sequestration budget cuts 

today. Companies are limiting hiring and halting investments - largely due to the 

uncertainty about how sequestration cuts would be applied. At our sister division, 

Sikorsky, the leadership has already indicated that in this environment, if they had to 

choose right now how to invest internal R&D dollars between commercial and defense 

programs, they would choose commercial programs because of the uncertainty with the 

defense budget. Equally concerning are the impacts of sequestration on the domestic 

side as it relates to homeland security, border security, air traffic control, TSA and other 

agencies. The sequestration threats facing other government agencies, contracts, and 

workforce affect our member companies' ability to do business safely and effectively. 

In the near term, some clarity from the Office of Management and Budget about how 

sequestration cuts would be implemented would be helpful in avoiding some of these 

impacts. 

Regardless of how the cuts are implemented, the consequences for the industry will be 

dire. The Defense Industrial Base Task Force, commissioned by Secretary Panetta, 

has reported that sequestration level cuts would result in the closure of production lines, 

the layoff of skilled workers, severe curtailment of research and development 

investments, and a reduced ability to respond to emergent needs of the U.S. military. 

However, today I am here as the President of Pratt & Whitney, to offer my view on how 

sequestration will affect us directly and share with you how the effects Secretary 

Panetta mentioned are becoming reality. 
86 

At Pratt & Whitney, we build jet engines for both the commercial and military 

marketplace. As you know, our military base market consists primarily of the F 135 

engine for the F-35. While we are also proud to have our engine chosen to power the 

next-generation KC-46 aerial refueling tanker for the U.S. Air Force, these engines will 

not affect our production business until 2016 at the earliest. With the end of the 

production run of the F-22 engine this year, and the end of the production of the C-17 

engine next, the F135 engine is our future for our military business. 

Already, the decline in defense spending is negatively affecting the F-35 production 

ramp and subsequently affecting our engine production. As you know, the $487B in 

defense budget cuts already announced has pushed out 179 F-35 aircraft between 

2012 and 2020. Original projections from just a few years ago had us building well over 

100 F135 engines per year by now. This year, we will build just over 50 F135 engines. 

Next year, our F135 production will actually decrease, and if sequestration were to take 

effect, that number would decline significantly. 

It's not just new engine deliveries that are impacted at Pratt &Whitney, Spares parts are 

key to keeping our manufacturing base healthy and sustainable. But as a result of the 

announced [$487B] 000 budget cuts, flight hours have already been cut back and 

sequestration could result in still further reductions. This undercuts demand for our 

spare parts and overhaul work, 

For my company, this situation poses both a workforce and a supply base problem. As 

the F-22 program winds down, I am currently transitioning many of those workers to 

F135 production - but this is extremely difficult given the near-term production decline I 

described earlier. With sequestration, it will be even more difficult to retain those highly 

skilled employees. Quite simply, my workforce is aging, specialized, and highly 

compensated. If and when we do ramp back up production, the learning curve for new 

employees is steep and that will affect production, quality, and training - all of which 

add time and cost. 

Pratt & Whitney is somewhat unique, because from a production standpoint a jet engine 

is a jet engine, whether it goes on a military aircraft or a commercial aircraft. This allows 

us to absorb some disruptions better than small companies in the supply base, For a 

short time, I may be able to move employees between military and commercial 

programs - assuming I have increasing demand in the commercial area. I can, if forced 

to, take some risk if there is to be a reward at the end of the day. But this is putting the 

proverbial band-aid on a bullet wound. 

In terms of our supply base, they too are currently struggling with volume. Many of 

them are small businesses making specialized parts for military engines that simply 

cannot survive another production decline or disruption. We continue to hear from our 

suppliers that if further cuts take place they would be forced to lay people off, curtail 

investment and pursue other business, 
87 

One large supplier has told us frankly that they don't believe that the DOD will ever 

procure the number of engines in the current program forecasts. This uncertainty 

makes suppliers less willing to enter into long-term agreements with us and drives up 

our costs today. 

If sequestration were to go into effect, no amount of juggling is going to preserve my 

workforce or help me maintain my supply base. A step down in the current production 

ramp for the F-35 means some of my people will lose their jobs. It also means reduced 

volume for suppliers and that means costs go up. More importantly, it puts a good 

program in a very tenuous position - a program that we cannot afford to lose. 

To reiterate Mr. Chairman, we at Pratt & Whitney are better able than smaller 

companies to deal with short-term implications of sequestration. But make no mistake, it 

is dangerous for the warfighter, for us as a business, for the supply chain companies 

and for us as a nation. Again, I appreciate your perseverance on this important topic 

and for your allowing me to be here today. 
88 

David P. Hess 

President, Pratt & Whitney 

of Pratt & Whitney, a division of United Technologies 

2009, He is responsible for the company's global 

manufacture and service of aircraft engines, space 

systems and power systems, With an installed aero engine base 

unmatched global service network and strong in manufacturing 

servicing engines, the company had revenues in 2011 < 

1979, 

He serves as chairman of the !ndustries Association Board of Governors and 

is a vice chairman of the New of the American Cancer CEOs 

Cancer initiative, He also serves on board of trustees of the World 

II Museum, He is vice chairman of the board of directors for The Discovery Center, 

by Paul Newman and Joanne Woodward that works with 

midd!e~school students from Connecticut's urban centers and suburban 

mrnmllniliA< on diversity and team-building, 

master's in 

awarded an Sloan 

management in 1990, 

February 2012 

from Hamilton College and a bachelor's and 

en'Jin,eerinofrom Rensselaer Polytechnic Institute, He was 

and earned a master's degree in 
89 

DISCLOSURE FORM FOR WITNESSES 

CONCERNING FEDERAL CONTRACT AND GRANT INFORMATION 

INSTRUCTION TO WITNESSES: Rule II, clause 2(g)(5), of the Rules of the U.S. 

House of Representatives for the 112[11 Congress requires nongovernmental witnesses 

appearing before House committees to include in their written statements a curriculum 

vitae and a disclosure of the amount and source of any federal contracts or grants 

(including subcontracts and subgrants) received during thc current and two previous 

fiscal years either by the witness or by an entity represented by the witness. This form is 

intended to assist witnesses appearing before the House Armcd Services Committee in 

complying with the House rule. 

Witncss namc: David P. Hess 

Capacity in which appcaring: (check one) 

Individual 

LRepresentative 

If appcaring in a rcpl'cscntative capacity, name of the company, association or other 

entity being represented:]ratt & Whitney. a division of United Technologies 

Corporation 

Individual Contraets and grants for Pratt & Whitney (a division of United Teehnologies 

Corporation), are too numerous to list individually. Pratt & Whitney's sales to the U.S. 

Government in 2009 were $3.66B, representing 30% of total sales. Pratt & Whitney's 

sales to the U.S. Government in 2010 were $3.60B, representing 38% of total sales. Pratt 

& Whitney's sales to the U.S. Government in 201 J were $3.328. representing 25% of 

total sales. 
90 

TESTIMONY OF DELLA WILLIAMS, PRESIDENT AND CEO, WILLIAMS PYRO 

BEFORE THE 

HOUSE ARMED SERVICES COMMITTEE 

JULY 18, 2012 

Chairman McKeon, Ranking Member Smith and members of the Committee, thank you 

for the opportunity to testify at the July 18, 2012, House Armed Services Committee 

hearing, "Sequestration Implementation Options and the Effects on National Defense: 

Industry Perspectives." 

My name is Della Williams, and I am President and CEO ofWiliiams-Pyro in Fort Worth, 

Texas. Williams-Pyro is a woman-owned, small business that designs and 

manufactures innovative products, including custom cables, connectors, 

adapters, automated test equipment, and intelligent power management systems. 

We currently have 89 employees who continue to amaze me every day; and I've 

been here since Day 1. 

As a manufacturer and part of the defense supply chain, I very much appreciate your 

focus on the defense industry and the impact of the impending cuts in defense spending 

set to begin on January 1, 2013. While I wish I were here under better circumstances, 

the impending threat of these wholesale budget cuts is of deep concern to me. My goal 

today is to put a face and a name to what is rather cavalierly discussed in the press as 

"sequestration." 

Most people would associate defense cuts with the big Tier I defense contractors, which 

are represented by several of my colleague here today. Supporting everyone of these 

large integrators on dozens of programs, are thousands of Tier II and Tier III suppliersmost small and medium-sized businesses- who design and manufacture what seems 

like small parts. 

All of those parts combined make up systems that seek out and destroy multiple targets, 

aircraft that soar to their targets or evacuate civilians in a disaster, and ships that knife 

through the water to intercede in a conflict or deliver humanitarian aid. Moreover, the 

defense supply chain companies collectively employ millions of hard-working people 

who each support spouses and children and communities. 

So these cuts will not just impact a few large companies. These cuts will flow down the 

supply chain and through the broader economy. They will impact companies, like mine 

and threaten the jobs of thousands of skilled workers. In fact, a report released last 
91 

month by the National Association of Manufacturers concludes that by 2014, the cuts in 

defense spending enacted last year combined with the cuts set for January 1, 2013, will 

result in the loss of more than one million jobs, increasing the unemployment rate by 

almost one percent. 

If small business-and I would submit even further, manufacturing- is an engine for 

economic growth, why are we making decisions that will inevitably stall that engine? 

My company was founded in April 1963-in fact, we celebrate 50 years in business next 

year. That is a huge milestone for a small, woman-owned company. During that time, 

our company has proven to be a very innovative organization building our business on 

deSigning and manufacturing forward-thinking weapons systems test equipment for the 

Air Force, Navy, Army and the Marine Corps. Our products have improved the safety of 

flight line maintainers, reduced aircraft downtime, and boosted the buying power of the 

defense procurement dollar. 

The budgetary issues the federal government is facing are the same ones that I, as a 

small manufacturer and a taxpayer, deal with every day in my own business. I am proud 

to say that Williams Pyro has won many awards over the years including the muchcoveted Tibbetts Award for Innovation, Small Business of the Year award from Lockheed 

Martin Global Training & Logistics in 2008 and 2011, Boeing Preferred Supplier, and 

numerous awards for our 100 percent quality and on-time delivery from the Defense 

Logistics Agency. Williams Pyro has won these awards by meeting the challenges 

presented to us. 

Analysts say the defense industry is faced with several choices, either exit the market, 

double down on defense by buying competitors or "weather the storm." At Williams Pyro 

however, we have chosen to invest in product development. I'd like to share a recent 

example of our innovation. 

A few years ago, my Chief Engineer and I were observing one of our testers at a First 

Article Test at Nellis AFB and a piece of Government Furnished Equipment was brought 

out to perform the testing, a unit referred to as the Beer Can. Another manufacturer had 

developed this device in 1969. Technology of the 1960's was very different from today 

and included rabbit ears, tranSistors, diodes, etc. Apropos of the 1960's, the "Beer Can" 

used a very expensive, and heavy, lithium battery. 

While we were there, the technician had to replace the Beer Can three times to find one 

that worked. Apparently they had numerous problems using and calibrating the device 

over the years. Since the device was round, and frequently rolled off the wing crashing 

onto the ground. The batteries also required replacement often and were difficult to find. 

After observing what happened, I asked our Chief Engineer to follow up on this when we 

returned to our facility. I later spoke to the F-16 program manager at the Hill Air Force 

2 
92 

base about our experience and my concern as a taxpayer that the government was 

spending a lot of money on an expensive and outdated device. I was surprised to find 

out from him that the government actually bought 30 percent more of these devices than 

required because of the problems they encounter with these devices. I secured his 

commitment that he would look at a replacement device if we could develop one. 

When I returned to our facility, we met with our very capable staff of engineers and they 

developed a digital voltage detector that operates on two off-the-shelf AA batteries. This 

design offers many superior features and is less costly than what they were using. We 

developed this "Juice Box," as it is called by the military, with our own R&D money. 

Moreover, even amid the talk of the defense cuts, this past year, we have invested over 

$1 million dollars of our own money to develop a compact, rugged stores management 

tester that can be used across multiple aircraft platforms, saving additional procurement 

dollars. This development is still on-going and more money will be required to put it into 

service. As you can see, these are major investments for a small business, but we are 

committed to developing products that will meet the military's operational and 

procurement requirements. 

I believe that this dedication to providing innovative products for the defense industry 

helps to illustrate the potential impact sequestration will have on my business and many 

others. The same people who have put their hearts, souls and backs into developing the 

next generation of test equipment I described before, are left wondering if there will be a 

next generation. 

Imagine the talent erosion that is already occurring at thousands of other small and 

medium sized-businesses in the defense industry, as talented workers leap off what they 

perceive is a sinking ship. Sequestration, as is being discussed, will create a mass 

exodus of talent and skill to other industries. 

Williams Pyro presently has 89 employees, including machinists, assemblers and R&D 

engineers experienced in mechanical, electrical, software, firmware, hardware and 

manufacturing. These jobs are in jeopardy. What is being billed as a stop-gap budget fix 

will have lasting effects on our defense capabilities for years to come. The switch will not 

just get flipped back on to reverse that trend. 

Moreover, the deep personnel and program cuts will threaten our national security. 

Indeed, the United States could lose our technological and strategic advantage and 

never get it back. 

In conclusion, I urge members of Congress to go back and sharpen your pencils. 

Sequestration is cosmetic surgery with a chainsaw. Working together, we can solve this, 

but we need to do it smartly and strategically, while keeping the economy moving and 

defending this great land. 

3 
93 

Thank you again for inviting me to appear before to talk about this very important issue. 

4 
94 
95 

DISCLOSURE FORM FOR WITNESSES 

CONCERNING FEDERAL CONTRACT ANI) GRANT INFORMATION 

INSTRUCTION TO WITNESSES: Rule II, clause 2(g)(5), of the Rules of the lJ,S, 

llouse of Representatives for the 112'h Congress requires nongovernmental witnesses 

appearing before House committees to include in their written statements a curriculum 

vitae and a disclosure of the amount and source of any federal contracts or grants 

(including subcontracts and subgrants) received during the CLllTent and two previous 

fiscal years either by the witness or by an entity represented by the witness, This form is 

intended to assist witnesses appearing before the House Armed Services Committee in 

complying with the House rule. 

Witness name:_Della H Williams ________________ _ 

Capacity in which appearing: (check one) 

Individual 

_ X_Representative 

If appearing in a representative capacity, name of the company, association or other 

entity being represented:_WiIliams-Pyro, Inc. ________ _ 

FISCAL YEAR 2011 

federal grant(s) / federal agency dollar value 'ubj~'I') of "n',," q contracts grant 

Heuristic-based Prognostic 

W15P7T-ll-C-H212 Army 70,000 Power Mgmt 

Intelligent Energy Control 

W909MY-I0-C-0082 _. __ Army 276,471 System - Mod . 

Rapid Electrical Outfitting for 

NOO024-10-C-4141 Navy 300,000 Shipbuilding - Ph 2 - Yr 2 

Method of Locating Unexploded 

FA8222-10-C-0016 USAF 362,000 Ordnance - Ph 2 - Yr 2 ------

Dozens of direct Dozens of contracts to supply 

(prime) contracts Multiple agencies 1,572,321 components/products to Gov't 

Hundreds of Over 100 subcontracts to supply 

subcontracts Multiple agencies 3,552,664 components to primes 

TOTAL 6,133,456 --

FISCAL YEAR 2010 

- ~--.-. 

federal grant(s) / federal agency dollar value subjed(s) of contract or 

contracts lITant 

Intelligent Energy Control 

W909MY-I0-C-0082 Army 2,064,000 -- __ S~tem ___ ~_ 
96 

~---

Noise Cancellation Smart (VOX) 

NI0PC20024 DHS lQQ,QOO For Firefighters 

Rapid Electrical Outfitting for 

NOO024-10-C-4141 Navy 300,000 Shipbuilding - Ph 2 - Yr 1 

Water Impermeable Connector 

NOO024-10-C-4183 Navy 747,328 Ph 2 

Method of Locating Unexploded 

FA8222-1O-C-0016 USAF 188,000 Ordnance - Ph 2 - Yr 1 

Autonomous Distributed Plant 

FA9101-10-M-0013 USAF 100,000 ,",u,,,eu, "'15 Network _____ 

Dozens of direct I Dozens of contracts to supply 

(prime) contracts Multiple agencies 969,215 components/products to Gov't 

Hundreds of Over 100 subcontracts to supply 

subcontracts Multiple agencies 2,288,459 components to primes 

'----- TOTAL 6,707,002 

FISCAL YEAR 2009 

Federal grant(s) / federal agency dollar value subject(s) of contract or 

contracts grant 

Plug and Play Architecture for 

W909MY-09-C-0003 Army 730,000 Tactical Power Grids 

Acoustic Detection and 

W912HZ-09-C-0004 Army 70,000 Verification 

Rapid Electrical Outfitting for 

N65538-09-M-0034 Navy 100,000 Shipbuilding Ph 1 

Water Impermeable Con~;;ct;;;:-:-

N65538-09-M-OllS Navy 100,000 Ph 1 -- Method of Locating Unexploded 

FA8224-09-C-0044 USAF 100,000 Ordnance -- Ph 1 

FA9201-09-C-0267 USAF 750,000 Wireless Fire Detector 

Dozens of direct Dozens of contracts to supply 

(prime) contracts Multiple agencies 1,005,849 components/products to Gov't 

Hundreds of Over 100 subcontracts to supply 

subcontracts Multiple agencies 3,581,784 components to primes -- TOTAL 6,437,633 

Federal Contract Information: If you or the entity you represent before the Committee 

on Armed Services has contracts (including subcontracts) with the federal government, 

please provide the following information: 

Number of contracts (including subcontracts) with the federal government: 

Current liscal year (2011):_ 157 

Fiscal year 201 0:_ I 

Fiscal year 2009: ___ 

2 
97 

Federal agencies with which federal contracts are held: 

Current fiscal year (2011 ):_Army, Navy, USAF, 

Fiscal year 2010:_ Army, Navy, USAF, DLA, 

Fiscal year 2009:_ Army, Navy, USAF, DLA __ 

List of subjects of federal contract(s) (for example, ship construction, aircraft parts 

manufacturing, software design, force structure consultant, architecture & engineering 

services, etc.): 

Current fiscal year (2011 ):_ Test equipment, cables, connectors, SBIR research .. : 

Fiscal year 2010:_ Test equipment, cables, connectors, SBIR research __ _ 

Fiscal year 2009:_ Test equipment. cables, connectors, SBIR research __ _ 

Aggregate dollar value of federal contracts held: 

Current fiscal year (2011):_$6,133,456 ______________ _ 

Fiscal year 

Fiscal year 

3 
98 

Federal Grant Information: If you or the entity you represent before the Committee on 

Armed Services has grants (including subgrants) with the federal government, please 

provide the following information: 

Number of grants (including sub grants) with the federal government: 

Current fiscal year (20 I 

Fiscal year 201 

Fiscal year 

Federal agencies with which federal grants are held: 

Current fiscal year (201 

Fiscal year 2010: __________ _ 

Fiscal year 2009: ___________ _ 

List of subjects of federal grants(s) (for example, materials research, sociological study, 

software design, etc_): 

Current fiscal year (20 I 

Fiscal year 

Fiscal year 

Aggregate dollar value offederal grants held: 

Current liscal year (20 I 

Fiscal year 

Fiscal year 

4 
DOCUMENTS SUBMITTED FOR THE RECORD 

JULY 18, 2012 

(101) 

July 25,2012 

The Honorable Buck McKeon 

2184 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Adam Smith 

2402 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman McKeon and Ranking Member Smith: 

Thank you for the opportunity to testify before the House Armed Services Committee regarding 

the impact of sequestration on the defense industrial base, The issue is important and the 

consequences of not managing the industrial base appropriately could lead to inefficiencies and 

loss of critical capabilities, As we stated at the hearing, industry is currently downsizing and 

taking other steps necessary to manage the industrial base given the $487 billion that has 

already been cut from the Defense budget The additional $500 billion under sequestration and 

the "meat axe" manner in which it will be applied will significantly impair our ability to take those 

actions that will be in the long term best interest of the Department of Defense and its 

supporting industrial base, 

During the hearing, we were asked to provide answers for the record to two important 

questions, The first was to provide the Committee with detailed information that can be passed 

to constituents at home when they ask why Congress needs to take action to eliminate 

sequestration asked by Congressmen Ryan of Ohio, The second request for information was 

from Chairman McKeon who asked us to provide the Committee with the areas where industry 

needs the Office of Management and Budget to provide guidance and clarity in order for us to 

most effectively manage the industrial base under the terms of sequestration. 

In response to Congressman Ryan's request, we have enclosed the report of the Defense 

Industrial Base Task Force that we completed for the Secretary of Defense in November of last 

year, and the report recently released by Dr, Stephen Fuller of George Mason University "The 

Economic Impact of the Budget Control Act of 2011 on DOD and Non-DOD Agencies", These 

two reports contain detailed information on the industrial and economic impacts of 

sequestration, which will help your constituents in understanding the negative consequences 

this measure goes forward, 

In response to Chairman McKeon's request, we have included the recent letter sent by industry 

to Acting OMB Director Zients that details the areas where we need greater information and 

clarity in order to most effectively manage the industrial base, and with the least disruption, once 

sequestration is implemented, 
102 

Chairman McKeon 

Ranking Member Smith 

July 25,2012 

Page 2 

We want to thank you again for the opportunity to testify and if you have any further questions 

please contact Cord A. Sterling at (703) 358-1060. 

Sincerely, 

David Hess 

Chairman, AlA 

President, Pratt & Whitney/UTC 

Sean O'Keefe 

Chairman, NOlA 

Chairman & CEO, EAOS N.A. 

Robert J. Stevens 

Past Chairman, AlA 

Chairman & CEO 

Lockheed Martin 
103 

November 11, 2011 

The Honorable Leon Pa netta 

Secretary of Defense 

United States Department of Defense 

Washington, DC 20301-1000 

Dear Me. Secretary: 

PROFESSIONAL 

SERVICES 

COUNCIL 

With significant austerity challenges facing the Defense Department, we wanted to provide you our 

assessment of potential industrial base impacts resuiting from severe budget reduction scenarios under 

consideration by the Congress and the Department of Defense. To produce the assessment, the 

Aerospace Industries Association, National Defense Industrial Association and the Professional Services 

Council convened a joint Defense Industrial Base Task Force composed of smail, medium and large 

aerospace and defense companies across the spectrum of manufacturing and services. 

Twenty-eight of the companies represented on the Task Force ranked in Defense News' Top 100 (21 in 

the Top 50) Defense Companies with over $254 billion in 2010 defense revenues. Mid-tier and small 

business interests were represented through direct participation on the Task Force, as well as via 

extended outreach through the Association members. 

The attached report provides our assessment of potential impacts under two scenarios: a $480 billion 

Defense budget reduction over ten years (2.013-2022), and the $1 trillion 'sequestration' option. To an 

industry segment that is already executing significant personnel layoffs, planning on shuttering 

production facilities and reassessing near- term research and development investments, the added 

prospect of either of the above scenarios is both daunting and of grave concern. The defense industrial 

base that has reliably and oftentimes courageously contributed superior technologies, capabilities, and 

services to America's warriors over many years must not be allowed to wither or disappear as a result 

of imprudent budget reductions. It is critical that industria! base capabilities always 'be there' when 

needed to respond to immediate and urgent defense needs. 

We know budget reductions are necessary. We also know the U.S. defense industrial base is a national 

strategic asset. We provide the information in the attached report in hopes that it will contribute to 

informed decisions and deliberate, well-thought out and well-managed actions. 

Sincerely, 

Lawrence P. Farrell, Jr. 

Lieutenant General, USAF, Retired 

Aerospace Industries Association President & CEO 

National Defense Industrial 

Assoc!atlon 

Stan Soloway 

President & CEO 

Professional Services Council 
104 

FINAL 

DEFENSE EXECUTIVES ASSESS BUSINESS IMPACTS OF MAJOR BUDGET CUTS 

Conclude further reductions will deter investment, weaken industrial base 

According to senior executives at manufacturing and service companies that support the 

u.s. military, the $480 billion in additional budget cuts projected over the next decade could 

cripple certain defense sectors, resulting in an industrial base that is smaller, less innovative, 

and less responsive to urgent wartime needs. Impacts of major cuts would most likely include: 

• Forcing firms to close production lines and lay-off skilled full-time workers - beyond 

the thousands already let go in the wake of previous budget cuts and program 

cancellations- specialized manufacturing capacity and human capital that cannot be 

regenerated without great cost and significant time; 

• Reducing or eliminating investments in capabilities beyond those needed to meet 

existing contracts; 

• Making defense companies and business units manufacturing and service, up and 

down the supply chain more likely to exit the sector altogether, consolidate 

further, or be divested by their parent corporation. 

Consequently, defense executives predicted an erosion of the continuum of goods and 

services provided by industry - from R&D to advanced development and design, to production, 

and then sustainment and upgrade - that could result in critical gaps in military capability over 

time. 

These conclusions, drawn from a questionnaire distributed to several dozen member 

companies of the Aerospace Industries Association (AlA), the National Defense Industrial 

Association (NOlA), and the Professional Services Council (PSC), confirm that the negative 

impacts have begun. The responses also suggest that the impacts could be mitigated over time 

if reductions are made, paced, and managed in a balanced manner and are combined with 

fundamental changes in the way 000 interacts with industry when it comes to compliance 

measures, cost- and risk-sharing, and program stability. Cuts beyond $480 billion, which most 

company executives expect in future budget requests even if sequestration is avoided, would 

render major segments of the defense industry unable to produce critical products and 

components, leaving wide gaps in the domestic capacity needed to sustain an acceptable 

margin of military superiority into the future. 

Background & Assumptions 

The aerospace and defense services industry finds itself in uncertain and potentially 

perilous times. The cancellation of several major weapons systems in the FY 2010 budget has 

already led companies to shed thousands of employees and curtail investment for the future: 

For example, at the beginning of this year Boeing announced the loss of more than 

1000 jobs at its Long Beach factory, on top of the roughly 4,500 layoffs initiated in 

2009; 

• BAE Systems announced cuts of 600 positions at its Sealy, Texas facility, on top of 

2,900 let go in 2010; and 

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• This summer, Lockheed Martin announced voluntary separation offers for up to 

6,500 employees. 

This cycle is playing itself out in increments of 50, 100, 200 jobs or more in labs, 

factories and other defense-related facilities across the country. 

To take the temperature of the industry's corporate boardrooms in anticipation of 

further major defense cuts, the AlA, NDIA and PSC asked their companies' top executives to 

assess the impact of defense cuts of approximately $480 billion - the lO-year budget total 

expected to be submitted by the administration next year - up to the $1 trillion sequestration 

that would take effect if Congress does not enact a major budget reduction plan before January 

2013. 

Even if the trillion-dollar "doomsday" scenario is avoided, respondents were operating 

under the assumption that, based on past history, more cuts would be added on top of the 

$480 billion over the next decade. Respondents also believed that because savings to endstrength reductions and other personnel costs will take longer to materialize, cuts to the 

investment accounts - procurement, research, development, and testing will be front loaded 

and could reach up to 60- to 70- percent of the total defense spending decreases in the first 

two to three years. 

Defense Industry Boardroom Facts of Ufe 

The United States relies on private, for-profit companies to produce the preponderance 

of the equipment and services needed by the u.s. military. Senior management at those 

companies must balance several key relationships in order to survive and succeed as a business 

enterprise: with investors in the capital marketplace; with skilled workers in the talent 

marketplace; and partnerships with suppliers and customers. These elements are intrinsically 

linked. Moreover, all rely on one quality above all else-stability. 

Steady demand from the customer for the industry's unique products provides a 

generally stable revenue flow and basis for long-range strategic investment. Returns on 

investment for the defense industry traditionally have been modest compared to industries 

such as pharmaceuticals, petroleum, and software. It is the stability of revenue sources and 

levels that has made defense an attractive industry for investors. 

Investors rely on this industry as a hedge in their portfolios to balance risk, and expect 

defense companies to make business choices that provide sufficient cash flow and an 

acceptable rate of return. Poor or declining returns in this sector will cause investors to put 

their money elsewhere, or incentivize corporations to divest themselves of their defense 

businesses, as happened when Northrop Grumman divested its Huntington Ingalls shipyard 

earlier this year. 

Conversely, a financially healthy sector allows the u.s. defense industry to attract the 

technical and scientific talent needed to sustain innovation in new products and services, all of 

which enables the United States to retain its military edge. 

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FINAL 

Companies' Responses 

Given these realities, the AIA/NDIA/PSC members' executives were asked to assess the 

impact of major defense budget cuts in the following areas: 

• Investment - research and development, facilities, and intellectual property. 

• Structure - supply-chain composition, mergers, acquisitions, and divestitures 

• Workforce retention of critical skills, attracting new talent, implications for science 

and technology education; 

• Sector Health and Responsiveness 

INVESTMENT 

Companies are already curtailing new investments in plant, personnel, research and 

development. One company responded that "we have already put on hold any plans to expand 

to a second facility [consisting of] 50,000 additional square feet of manufacturing space." 

Anticipating the next round of budget cuts, an aviation company has already reduced 

defense research and development spending, commenting that "if we do any R&D it will be in 

the commercial aviation sector." Generally, independent R&D expenditures are budgeted as a 

percentage of sales, thus expected declines in revenue will tie directly to less R&D spending and 

ultimately less of the kind of innovation that creates the products and technologies U.S. troops 

need to survive and succeed on the battlefield. 

One of the greatest worries is that, collectively, government and industry leaders will 

miscalculate about what our military will need in the future and make investment and budget 

decisions accordingly. When future world events demand certain military capabilities at short 

notice, the manufacturing and intellectual capacity may not be there. 

In the services industry, DoD's move towards "Iow price/technically acceptable" awards 

(even for complex needs) in conjunction with the Pentagon's efficiencies campaign, has shrunk 

margins and correspondingly the resources available for R&D, which traditionally comes out of 

a company's overhead. While this challenge will affect a wide array of companies, several 

respondents observed that the impact will be greatest on small and smaller mid-tier 

businesses-many of which are critical providers of engineering and other technical talent, that 

by definition are far less able to weather difficult times. Said one respondent, in a theme 

repeated by many: "cost pressure from both customers and competitors could further reduce 

internal R&D in order to maintain affordable and competitive overhead rates." 

INDUSTRY STRUCTURE, SIZE & COMPOSITION 

Many companies expect that, given the added uncertainty and perceived risk, even the 

lower $460 - $480 billion range of projected budget cuts could be the "tipping point" that 

causes capital markets - expecting a degree of stability in exchange for comparatively modest 

returns - to move money elsewhere. larger companies would be incentivized to unload their 

defense portfolio altogether. However, the dim prospects for this sector are making it difficult 

to divest. "[1] don't think we will find buyers," one executive responded. "Probably better to 

shutter operations and wait." 

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FINAL 

One concern that is readily apparent from both large and small companies' inputs was 

the potential effects further down defense supply chains, often made up of smaller businesses 

that lack the capacity to withstand steep drops in orders. Those effects include: 

• Verticalization - Dwindling revenue would push many 2

nd and 3rd tier suppliers away 

from DoD-related business, thus forcing prime contractors unwilling to subsidize their 

ailing suppliers to bring many of those critical sources and services in-house. One prime 

contractor, reflecting the sentiments of most of his Tier I company colleagues, said his 

firm is already preparing to "in-source some of the (critical) functions we currently 

subcontract." The existing supply-chain "would be broken" according to a respondent 

from a prime contractor. Fewer suppliers would reduce competition and lead to higher 

costs overall. 

• Globalization - Falling revenue and dim prospects would incentivize companies to 

shutter their U.S. factories and send remaining work to their facilities abroad. States 

like California, Texas, Georgia and Virginia, with large aerospace and defense presence, 

would be hardest hit, just as they were during the 1990s. To the extent business 

remains within the United States, lower tier firms would be the most adversely affected, 

as they would be unable to compete on a cost basis with operations based in developing 

countries. That will make it more difficult to control counterfeit parts, increasing cost. 

• Innovation loss -lower tier suppliers have traditionally been a great source of 

innovation, given that new ideas can be rapidly prototyped and tested and the appetite 

for risk is greater. A broken supply chain combined with less incentive to invest means 

less new thinking, new technologies, and new products for our military. 

WORK FORCE 

Most of the industry is already reducing payrolls in response to previous program 

cancellations and current and projected defense spending reductions. In anticipation of future 

budget reductions, many companies have already decided to delay hiring highly technical 

positions, and "making do with hourly 1099 contractors." Others have begun reducing their 

workforces through attrition - by up to 5 percent in one company - but most view this as a first 

step to significant future layoffs. looking towards the expected defense builddown, one 

respondent predicted "further layoffs of engineering and manufacturing workers of between 25 

and 50 percent beyond current strained levels. " 

On the services side, one company reported that it had laid-off 200 workers in the last 

two months and had frozen hiring in their government systems business unit. Other services 

companies were concerned about retaining employees with unique skills in systems 

architecture and program and sub-contract management, skills especially important to keeping 

costs under control. One respondent said: "We are losing people out of this industry who are 

seeing the writing on the wall that DoD is not the place to be if you want a stable job. Our 

customers are more and more ... asking us to cut our staff with one day's notice." 

All companies voiced concern about the ability to attract the best and brightest students 

to science and engineering degrees, and of those who do graduate with these skills, the 

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FINAL 

perception of a diminishing industrial base with fewer cutting edge programs will make them 

less likely to work in defense sectors. Even in a difficult economy, there are ample 

opportunities and competition in the commercial sector for skilled scientists, engineers, and 

technicians. This problem will be compounded as a generation of designers and other experts 

approach retirement, without the funding or work to support a new cohort of workers to take 

their place. 

This problem is especially acute in design, development and production areas unique to 

military systems. One respondent pointed out that the design of advanced algorithms and 

software for military radars is distributed among a very limited number of experts in a handful 

of companies. 

SECTOR HEALTH & RESPONSIVENESS 

The major defense sectors - aircraft, shipbuilding, C4ISR, munitions, missiles, space, 

ground vehicles, plus related services - assessed budget impacts in the areas of design, 

development, production, maintenance, support and responsiveness to urgent military needs. 

In general, both large and small companies concluded that the general impact of cuts in the 

$480 billion-range on top of those already executed in recent years would be moderate to 

significant. Beyond that level of reduction almost all respondents believe the impact will be 

significant across the board. 

Most expect significant impact to design and build capabilities. As it stands, there are 

no manned combat aircraft in development for the first time in nearly a century. Lack of any 

new starts will make aircraft investments "speculative" according to one respondent, who 

predicted that some firms will assume the risk of retaining design and build capacity if there is 

an expectation that programs will go forward on schedule. 

However, budget cuts typically cause postponements in production and, ultimately, 

reductions in quantity procured. An aerospace executive recounted the case of one major 

supplier for a major engine program that "tooled up" for production based on forecasts of sales 

volume. "As the deliveries were pushed to the right, the supplier could not meet his financial 

obligations and was forced into bankruptcy. " Reductions in procurement quantities raise unit 

costs. Several companies noted that Nunn-McCurdy breaches can be triggered by these 

actions, thus generating adverse publicity for a situation beyond any firm's control. 

The fact that delayed modernization would lead to an older, more maintenanceintensive fleet could create some opportunities in the support areas for some companies. One 

aircraft manufacturer responded that if defense budget cuts stayed at the $460 $480 billion 

level, "the build portion of our income would be impacted significantly. The repairs and 

support/spares will be impacted but would be manageable." In particular, "we expect the lack 

of new aircraft starts to force additional service life extension and capability upgrades to 

existing aircraft." However, those gains would be nullified by large force structure cuts to the 

military's inventory of ships, aircraft, and combat vehicles and the sub-systems that go with 

them. 

Several munitions companies predicted dire consequences even at the $480 billion 

reduction level because this sector has little connection to any civilian market. "As the DoD 

budget goes, so does the munitions industrial base" replied one producer. In general, those 

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FINAL 

companies considered to be at greatest risk are those of moderate or small size and with 

narrow product and service lines concentrated in the defense sector. 

The services sector is already seeing diminishing margins because of DoD's increase of 

Lowest Price/Technically Acceptable (lPTA) contract awards, even for complex requirements. 

This "flight to price" rather than "flight to quality," as one respondent characterized it, will 

require significant process adjustments within the department, as well. Service companies 

believe that DoD's approach to pricing is at odds with its desire to improve innovation and 

access the best talent from its service support contractors. As a result of LPTA practices, "we 

are reevaluating investments in infrastructure and employee development and benefits ... [The 

government seems] to think that the number of [contract employees] in chairs is more 

important than the quality of the work." 

Insofar as budget cuts would delay purchase of new information technology, one 

services company anticipated that the resulting personnel cuts would have the most impact on 

the government's "outdated legacy systems that require expensive, but extremely outdated, 

technical knowledge." 

Real concern also exists that the on-going reductions could potentially "hollow out" key 

capabilities, particularly those needed to support contingencies and sustain technology 

innovation. According to some respondents, a number of segments of the defense services 

market (cyber security, IT, equipment maintenance) are expected to stay in high demand for 

the future and thus will remain relatively stable at the lower end of projected budget cuts. 

Both manufacturing and service companies responded that a smaller and less financially 

healthy defense sector will not have the capacity to surge weapons, equipment, and services to 

the battlefield in a way that the U.s. military has come to expect and rely on over the past 

decade. 

Mitigating Measures 

The companies were asked to consider measures that would ameliorate the impact of 

defense cuts on their ability to stay in the industry and produce the capabilities needed. 

Reflecting a common sentiment, one respondent said the government should "ensure cuts are 

moderate in the first three to four years to allow companies to smoothly transition downwardly 

from DoD programs." However, the historical record of past draw-downs plus the difficulty of 

achieving prompt savings in other areas strongly suggests that the department's investment 

accounts will bear the brunt of early cuts, giving companies little time to prepare or respond. 

A company representative urged Congress and DoD to "carefully weigh cuts and 

cancellations to programs that are unique to the military and have no connection to the civilian 

sector. .. if cuts at this range are not carefully managed with an eye to the industrial base, critical 

capabilities and facilities could be lost even at the [$480 Billion] level of reduction." 

An aerospace executive asked that Congress abstain from the recent habit of governing 

through Continuing Resolutions, which "limit the ability of the government and industry to 

execute programs and negotiate contracts efficiently, thus raising costs and constricting the 

critical flow of funding." 

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Many of the mitigation measures reflect longstanding industry priorities that are now all 

the more urgent given new budget realities. Those include: 

• Creating a more equitable and sustainable arrangement for sharing the risks and 

costs associated with major weapons programs, especially during concurrent 

development of complex systems. 

• Reducing compliance burdens and other unnecessary cost drivers. For example, the 

attempt to get cost data on commercial items will actually increase cost to the 

government by requiring collection of data that is not now kept and reduce the pool 

of suppliers willing to compete for DoD contracts. 

• Approving multi-year budgets for long-term design and development programs, 

establishing firm requirements early in the acquisition process in order to avoid 

"requirements creep." 

• Streamlining DoD acquisition processes by eliminating lower priority reviews, with a 

goal of accelerating the timeline for issuing contract awards by 30 percent. 

• Increasing use of the private sector for research and development, as well as 

maintenance, repair, overhaul, and other key services, a sustainment model that 

preserves the industrial base while supporting exports, which benefits innovation 

and increases domestic employment. 

• Accelerating implementation of export control reform, along with other actions to 

open international markets to U.S. industry. 

• Investing more funding in science and technology education, research and 

mentorship programs, inspiring talented young people to pursue a defense-related 

aerospace career, in spite of the difficult budget situation. 

With respect to services, respondents recommended a renewed focus on "how" the 

Department buys, in addition to what it buys. The "better buying initiatives" create some 

positive incentives for firms to retain core capabilities to meet the department's critical 

missions. However, services acquisitions continue to be treated monolithically, when each 

sector has a different character and competitive dynamics. 

In this environment, a more intense collaborative dialogue between industry and the 

DoD would help mitigate the risks associated with constrained resources. In the past, 

increasing defense budgets could mask systematic flaws in the u.s. government's approach to 

dealing with the nation's industrial base; this is no longer possible. 

In conclusion, both the executive and legislative branches must take sensible, long-term, 

measures to mitigate the negative impacts of the expected $480 billion reduction. Cuts beyond 

that, up to the $1 trillion sequestration level, would severely damage the Defense Industrial 

Base as a commercially viable enterprise, as a reliable and responsive provider of urgent 

wartime needs, and as a national strategic asset that is indispensable to the defense of the 

United States. 

### 

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The Economic Impact of the Budget Control Act 

of2011 on DOD and Non-DOD Agencies 

by 

Stephen S. Fuller, Ph.D. 

Dwight Schar Faculty Chair and University Professor 

Director, Center of Regional Analysis 

George Mason University 

Arlington, Virginia 

with 

Chmura Economics & Analytics 

Richmond, Virginia 

prepared for 

Aerospace Industries Association 

Arlington, Virginia 

July 17, 2012 
113 

The Economic Impact ofthe Budget Control Act of2011 

on DOD and Non-DOD Agencies 

Summary of Research Findings 

There is a broad consensus that implementation of the automatic federal spending 

reductions provided for in the Budget Control Act (BCA) of 2011 would have 

significant negative impacts on the U.S. economy in 2013. The Congressional Budget 

Office (May 2012) released its analyses of these impacts confirming what other 

independent organizations had already concluded-that if the provisions of the BCA 

of 2011 are implemented beginning January 2, 2013, the U.S. economy, which is still 

struggling to sustain its recovery more than three years after the end of the 2008-

2009 recession, could be pushed into recession during the first half of 2013. The 

International Monetary Fund (IMF) released a report on July 3, 2012 with the same 

conclusion. Other analyses have reported on the impacts of these federal spending 

reductions or sequestration on specific industries and their conclusions are the 

same: that implementing BCA of 2011 would severely impact the economy in 2013 

with these losses reflected in reduced Gross Domestic Product (GDP) and a broad 

based loss of jobs that could add an estimated 1.5 percentage pOints to the current 

U.S. unemployment rate. 

This author released a report entitled "The U.S. Economic Impact of Approved and 

Projected DOD Spending Reductions on Equipment in 2013" on October 24,2011 in 

which the economic effects of reduced spending for military equipment were 

calculated. This analysis determined that a combined $45.1 billion reduction in the 

purchase of military equipment and in Research and Development funding (BCA I 

and II) by the Department of Defense would reduce GDP by $86.5 billion and result 

in the loss of 1,006,320 direct, indirect and induced jobs across all sectors of the u.s. 

economy impacting every state and representing a decline of personal income 

(salaries and wages) totaling $59.4 billion. This analysis was restricted to the 

procurement of military equipment and R&D spending and excluded reductions in 

DOD civilian payroll and DOD outlays for operations and maintenance. It also 

excluded the projected spending reductions in the SCA of 2011 impacting non-DOD 

agencies and therefore only provided a partial assessment of the potential 

consequences of federal spending reductions under sequestration. 

The economic impact assessment presented in this report includes all discretionary 

spending subject to cutbacks under the SCA of 2011 (both the effects of statutory 

limits and automatic reductions) for DOD and non-DOD agencies (e.g., Agriculture, 

Commerce, Education, EPA, Energy, Health and Human Services, Homeland Security, 

Housing and Urban Department, Interior, Justice, Labor, NASA, State, and 

Transportation). However, it excludes spending reductions for all federal mandatory 

programs such as Medicare. The Congressional Research Service report, "The 

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Budget Control Act of 2011: The Effects on Spending and the Budget Deficit When 

the Automatic Spending Cuts Are Implemented" (CRS Report) dated April 23, 2012, 

was relied upon for the magnitude and timing of these federal spending reductions. 

However, the spending reductions used herein vary slightly from those reported by 

CRS. Rather than using spending reductions from the baseline budget forecast, yearover-year changes in spending were used as these provide a more realistic measure 

of the actual reductions for calculating associated economic impacts. 

The identified economic impacts occurring in 2013 constitute the greatest one-year 

reductions in GOP, personal earnings and employment. The post-2013 schedule of 

federal spending trends through 2021 moderate these first-year losses, resulting in 

overall ten-year economic impacts that are smaller than the impacts occurring in 

2013, although these are still negative for the full period. As the initial impacts of the 

BCA of 2011 are so damaging to the U.S. economy, the focus of this report will be on 

2013. 

As currently formulated, the automatic spending cuts affecting DOD and non-DOD 

agencies' discretionary spending authorities beginning January 2, 2013 will: 

• Reduce the nation's GOP by $215 billion; 

• Decrease personal earnings of the workforce by $109.4 billion; and, 

• Cost the U.S. economy 2.14 million jobs. 

As a consequence of sequestration, GOP growth in 2013 will be reduced by twothirds and unemployment will increase by as much as 1.5 percentage points raising 

the current national rate above 9 percent. These are the easily measured impacts. 

Other collateral impacts will be driven by behavioral factors. The loss of consumer 

confidence may suppress spending, especially spending requiring credit such as for 

autos and housing. Personal saving may increase taking further spending out of the 

economy. Business investment and private sector hiring may be dampened as a 

result of increased uncertainty-contributing to further erosion of the national 

economy. These and other collateral impacts will enlarge the negative consequences 

of the initial federal spending reductions and contribute to further deepening of the 

economic contraction in 2013, thereby extending its duration and increasing its 

magnitude. 

Other costs will occur over a longer timeframe resulting from deferred or foregone 

innovation by both federal agencies and private entrepreneurs. These disruptions to 

the U.S. economy will have cumulative impacts with far-reaching and potentially 

more significant consequences than these initial first-year impacts. While these are 

beyond the scope of this analysis they need to be recognized and understood. 

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115 

Still, these initial economic loss of GOP, personal income and jobsare rea! and have measurable consequences. If they are allowed to occur as 

currently scheduled, the long-term consequences will permanently alter the course 

of the U.S. performance, its competitive position in the global 

economy. 

The BeA of 2011 was signed into law on August 2, 2011. Among other provisions, 

this Act provided for two major categories of federal spending reductions: (1) 

discretionary spending caps that became effective in FY 2012 and (2) automatic 

reductions that now will become effective January 2,2013. This reduction 

in budget authority would result in decreased spending by DOD 

totaling $800 billion and by non-DOD agencies totaling $700 billion with a roughly 

$200 billion reduction in mandatory programs (mainly from Medicare) over this 

ten-year period. 

The CRS Report has analyzed the federal spending reductions mandated by the BCA. 

This confirms that these cutbacks result in a reduction in federal 

spending beginning in FY 2013. Under the BCA, the federal budget reductions 

reduce spending levels from a "baseline" trajectory as shown in Figure 1. 

Figure 1: SeA Total Spending Reductions (DOD and Non-DOD I 

$1,600 (in millions of nominal $s) 

$1,400 

$1,200 

$1,000 

$800 

$600 

$400 

$200 

$0 """"T""'''' 

,,,m,,,_, WithBCA 

_Baseline 

FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 

Source: Congressional Research Service 

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The largest year-over-year spending reduction would occur in FY 2013 due to the 

implementation of the automatic spending cuts with spending levels reduced 12.1 

percent (in nominal terms) from FY 2012 levels (in FY 2012 spending will reflect a 

nominal increase over FY 2011). For DOD, this will represent a 11.5 percent 

reduction in spending in FY 2013 following a small (0.6 percent) nominal increase 

in FY 2012. For non-DOD agencies, their FY 2013 spending levels would decline by 

9.8 percent following a year with no change in spending authority from FY 2011 (in 

nominal terms). 

In subsequent fiscal years, the projected spending reductions from the baseline 

forecast would result in nominal increases in federal spending subject to BCA caps 

averaging 2.4 percent over the FY 2014-FY 2021 period. This rate of increase would 

also result in small "real" increases in spending although the actual gain in inflationadjusted dollars will depend on the inflation rates over this period. Congressional 

Research Service calculations of spending levels by fiscal year for DOD and non-DOD 

for the FY 2012-FY 2021 period are shown in Figure 2. 

4.00% Figure 2: Percentage Change in Real Federal Spending 

2.00% 1.4% 

0.00% 

-2.00% 

-4.00% 

-6.00% 

-8.00% 

-10.00% 

-12.00% 

-14.00% ~13.0% 

FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 

Source: Congressional Research Service 

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The Economic Impact of the BCA of 2011 in 2013 

This author's October 24, 2011 report entitled "The U.S. Economic Impact of 

Approved and Projected DOD Spending Reductions on Equipment in 2013" was 

limited to BCA reductions affecting DOD spending for military equipment and R&D 

and excluded reductions in DOD civilian payroll and DOD outlays for operations and 

maintenance. It also excluded the projected spending reductions in the BCA of 2011 

impacting non-DOD agencies and therefore only provided a partial assessment of 

the potential consequences of sequestration-mandated federal spending reductions. 

The analyses presented herein include both DOD and non-DOD agencies subject to 

BCA required federal spending reductions. 

The CRS Report presents estimates for the discretionary budget authority subject to 

BCA limits. This schedule of potential discretionary spending-the combined effects 

of statutory limits and automatic spending reductions-provides the inputs to the 

economic impact analysis presented herein. The annual changes in federal 

spending-year-to-year changes-provide the measure of direct federal spending 

reductions for DOD and non-DOD agencies. 

Reductions in procurement spending are distributed across the primary sectors of 

the U.S. economy based on the General Services Administration (GSA) procurement 

database differentiating DOD and non-DOD purchasing patterns as reported in 

Tables 4 and 6. Reductions in federal payroll outlays are shown in a single-line item 

as a change in "federal payroll" on these tables. 

Impacts of DOD Spending Reductions Under BCA 

The estimated decrease in federal spending with the implementation of the Budget 

Control Act of 2011 (spending for FY 2012 and FY 2013) will reduce DOD spending 

by a total of $56.7 billion (see Table 4). This reduction in DOD spending is composed 

of payroll reductions totaling $7.1 billion and procurement reductions totaling $49.6 

billion. These spending reductions would reduce U.S. gross domestic product by 

$94.5 billion. 

These spending reductions and lost GDP would result in the loss of 325,693 direct 

jobs, including 48,147 civilian DOD employees. As shown in Table 4, the Professional 

and Business Services (PBS) sector would account for the largest direct job losses 

from DOD budget reductions. The sector would account for 133,883 direct jobs lost 

or 41.1 percent of the total direct job loss. This concentration of direct job losses 

reflects the impacts of DOD procurement spending reductions on contractors 

providing scientific, engineering and technical services. 

These direct jobs losses would be accompanied by the further loss of 282,426 jobs 

among the suppliers and vendors that depend on DOD's primary contractors 

(indirect job losses) and 482,240 jobs that are dependent on the payroll spending 

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(induced job losses) of the workers whose jobs depended on DOD's procurement 

and payroll spending that was reduced as a result of the BCA of 2011. 

A total of 1.090,359 jobs with a total labor income of $46.5 billion would be lost due 

to DOD budget cuts in FY 2012-FY 2013. Of these total job losses, almost 70 percent 

would come from two high-value added sectors: 37.1 percent (404,507) would be 

manufacturing jobs and 32.2 percent (351.311 jobs) would consist of professional 

and business service jobs. The federal sector job losses would account for 9.8 

percent of the total (107,220 jobs). Although representing smaller percentages, all 

of the remaining sectors would experience job losses as the impacts from DOD 

spending reductions spread across the national economy. 

Impacts of Non-DOD Agency Spending Reductions Under BCA 

Budget cuts impacting non-DOD agencies (FY 2012-FY 2013) are estimated at $59.0 

billion including $33.8 billion in reduced federal payroll (see Table 6). These nonDOD spending reductions would reduce u.s. GDP by $120.5 billion. Non-DOD 

cutbacks would have a much greater direct impact on federal employment than DOD 

budget reductions due to the respective differences in procurement and payroll 

distributions. 

Non-DOD agency budget cuts would generate direct employment reductions of 

420,529 jobs with an estimated 229,116 jobs or 54.5 percent of these direct job 

losses consisting of federal workers. Professional and Business Services would lose 

125,012 direct jobs (29.7 percent of the total direct jobs losses), reflecting the 

impacts on federal contractors providing scientific, engineering and technical 

services. Additionally, suppliers and vendors of primary federal contractors would 

lose 150,552 jobs. This loss of direct and indirect jobs would contribute to the loss 

of an additional 476,268 jobs dependent on the payroll spending (induced jobs) 

foregone due to these spending reductions experienced by non-DOD agencies. 

In total, non-DOD agency budget reductions for the FY 2012- FY 2013 period would 

generate job losses of 1,047,349 with almost half of these (510,229) consisting of 

federal jobs and 31 percent coming from the professional and business services 

sector. These two sectors would account for 80 percent of the direct, indirect and 

induced job losses attributable to non-DOD agency budget reductions. 

Total Economic Impacts Under BCA in 2013 

These economic impacts are summarized in Table 1 below for DOD and non-DOD 

agencies. Combined, the budget reductions (statutory discretionary spending limits 

and automatic spending reductions) would result in the loss of 2.14 million jobs in 

2013 and the loss of $215 billion in GDP. This job loss would add as much as 1.5 

percentage points to the current unemployment rate and this sharp decline in GDP 

would erase two-thirds of the gains in GDP currently projected for 2013. The 

distribution of these job losses are shown in Table 3 and the state-level losses of 

gross state product and labor income (personal earnings) are presented in Tables 

10 and 11. 

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Table 1 

Summary of U.S. Economic Impacts of the Budget Control Act of 2011 

Fiscal Year 2012 and 2013 

(in billions of current year dollars) 

Sources of Spending Reductions* Total 

Impact DOD Non-DOD Impacts 

Direct Impacts (1) $56.7 $59.0 $115.7 

Total Output (2) $94.5 $120.5 $215.0 

Personal Earnings (3) $46.5 $62.9 $109.4 

Employment (4) 1,090,359 1,047,349 2,137,708 

Direct 325,693 420,529 746,222 

Indirect 282,426 150,552 432,978 

Induced 482,240 476,268 958,508 

Sources: GMU Center for Regional Analysis; Chmura Economics & Analysis 

*Direct, indirect and induced impacts resulting from BCA-mandated federal 

spending reductions during FY 2012 and FY 2013; excludes impacts from cuts 

in entitlement programs. (1) Congressional Research Service, (2) reduction 

from GOP, (3) lost labor income, (4) direct, indirect and induced jobs lost due 

to BCA spending reductions in FY 2012 and FY 2013. 

Employment Impacts by State Impact of the BeA of2011 in 2013 

The estimated job losses under BCA, summarized in Table 1, can be disaggregated to 

the state level employment impacts based on the historic distribution of DOD and 

non-DOD payroll and procurement spending. By using the most recent state-level 

distribution (FY 2010) of federal spending for payroll and procurement 

disbursements for DOD and non-DOD agencies the potential state-level 

vulnerabilities can be identified. Actual agency budget reductions will have a 

different pattern depending on how each agency chooses to absorb these cuts in 

their operating programs and public service requirements. Still, this state-level 

distribution of impacts confirms that DOD and non-DOD spending patterns vary 

considerably across the states and that in many states, the non-DOD agency 

spending cuts will be the primary sources of potential employment losses. 

Several states stand out as being particularly vulnerable to federal spending cuts. 

The ten states (including the District of Columbia) shown to have the greatest 

potential job losses from federal spending cutbacks are listed in Table 2. These ten 

states account for more than one-half (55.3 percent) of the total potential jobs losses, 

7 
120 

with California accounting for 10.5 percent and Virginia accounting for 9.7 percent 

representing a combined 20.2 percent of the job losses based on their FY 2010 share 

of DOD and non-DOD federal payroll and procurement outlays. 

Table 2 

Top Ten State Employment Impacts of the Budget Control Act of 2011 

Fiscal Years 2012 and 2013 

State Job Losses* Job Losses* Total job* 

DOD Cuts Non-DOD Cuts Losses 

California 135,209 90,255 225,464 

Virginia 136,191 71,380 207,571 

Texas 98,979 60,494 159,473 

DC 15,169 112,238 127,407 

Maryland 39,395 75,400 114,795 

Florida 41,905 37,554 79,459 

Pennsylvania 39,941 38,513 78,454 

New York 28,809 41,201 70,010 

Massachusetts 41,469 19,028 60,497 

Georgia 27,609 26,903 54,512 

Sources: GMU Center for Regional Analysis, Chmura Economics & 

Analysis. *Direct, indirect and induced job losses resulting from 

BCA-mandated federal spending reductions during FY 2012 and 

FY 2013; excludes impacts from cuts in entitlement programs. 

8 
121 

The full potential job loss distribution across all states is presented in Table 3. 

Table 3 

State Employment Impacts of the Budget Control Act of 2011 

Fiscal Years 2012 and 2013 

State Job Losses* Job Losses* Total Job* 

DOD Cuts Non-DOD Cuts Losses 

Alabama 26,845 11,933 38,778 

Alaska 5,893 4,518 10,411 

Arizona 35,248 13,941 49,189 

Arkansas 3,601 5,548 9,149 

California 135,209 90,255 225,464 

Colorado 18,442 24,120 42,562 

Connecticut 36,230 5,712 41,942 

Delaware 65 2,137 2,202 

District of Columbia 15,169 112,238 127,407 

Florida 41,905 37,554 79,459 

Georgia 27,609 26,903 54,512 

Hawaii 7,857 2,831 10,688 

Idaho 982 9,429 10,411 

Illinois 23,245 30,411 53,656 

Indiana 14,950 8,992 23,942 

Iowa 5,238 5,878 11,116 

Kansas 6,220 7,675 13,895 

Kentucky 17,024 11,621 28,645 

Louisiana 18,879 9,553 28,432 

Maine 4,256 3,012 7,268 

Maryland 39,395 75,400 114,795 

Massachusetts 41,469 19,028 60,497 

Michigan 13,531 17,679 31,210 

Minnesota 4,911 11,122 16,033 

Mississippi 5,238 6,434 11,672 

Missouri 33,611 17,480 51,091 

Montana 981 4,064 5,045 

Nebraska 2,618 4,009 6,627 

Nevada 4,256 6,155 10,411 

New Hampshire 3,601 2,705 6,306 

New Jersey 25,427 17,755 43,182 

New Mexico 4,911 23,521 28,432 

New York 28,809 41,201 70,010 

North Carolina 11,895 17,434 29,329 

9 
122 

Table 3 Continued 

State Job Losses* Job Losses* Total Job* 

DOD Cuts Non-DOD Cuts Losses 

North Dakota 982 2,481 3,463 

Ohio 21,280 19,123 40,403 

Oklahoma 7,967 7,852 15,819 

Oregon 2,946 9,025 11,971 

Pennsylvania 39,941 38,513 78,454 

Rhode Island 2,619 1,870 4,489 

South Carolina 14,732 15,623 30,355 

South Dakota 1,965 2,738 4,703 

Tennessee 10,148 28,972 39,120 

Texas 98,979 60,494 159,473 

Utah 8,294 7,739 16,033 

Vermont 2,292 1,770 4,062 

Virginia 136,191 71,380 207,571 

Washington 17,024 24,661 41,685 

West Virginia 982 9,065 10,047 

Wisconsin 27,609 8,946 36,555 

Wyoming 654 2,125 2,779 

Guam 2,181 491 2,672 

Puerto Rico 2,181 3,056 5,237 

Undistributed 25,872 43,177 69,049 

Totals 1,090,359 1,047,349 2,137,708 

Sources: GMU Center for Regional Analysis; Chmura Economics & 

Analysis. *Direct, indirect and induced job losses resulting from 

BCA-mandated federal spending reductions during FY 2012 and FY 2013; 

excludes impacts from cuts in entitlement programs. Columns and rows 

may not add up to the totals due to rounding. 

Measuring Economic Impact: How To Read The Tables 

The CRS report is the principal source for the distribution of budget reductions to 

DOD and non-DOD agencies and their magnitudes and schedule over the FY 2011-FY 

2021 period. It is assumed that all non-DOD agencies will experience the same 

percentage cutback with the distribution between salaries and wages (payroll) and 

procurement being proportional to non-DOD agency's budget split between payroll 

and procurement as reported for FY 2010 (U.S. Census, Consolidated Federal Funds 

Report). The DOD cutback is assumed to be the same as reported in the CRS report. 

10 
123 

Cutbacks from procurement were distributed across twelve major industry sectors 

based on the North American Industrial Classification System (NAICS). The 

distribution is based on the purchasing matrix from the GSA procurement database 

that reflects historic procurement data (2000-2010) for each agency reported by 

NAICS Industries. These federal budget reductions, distributed by industry sector, 

are shown in Tables 4, 6, 8 and 9. Reductions affecting federal payroll and their 

economic impacts are shown under the heading "federal payrolL" Impacts affecting 

state and local government sectors are combined under the heading "Government." 

Other headings include: TWU - Transportation, Wholesale Trade and Utilities; FIRE 

- Finance, Insurance and Real Estate; PBS - Professional and Business Services; 

Trade Retail Trade; Information - Information Services; Leisure - Leisure and 

Hospitality. 

The IMPLAN Pro model was used to estimate the GDP impact, the direct labor 

income or personal earnings effects and the indirect and induced employment 

impacts of these budget cutbacks by industry sector. 

The impacts of the budget cutbacks reported by NAICS Industry sectors were 

converted to occupational categories by using the national industry-occupation 

matrix. These are presented in Tables 5 and 7 for the direct employment effects for 

budget cuts affecting DOD and non-DOD agencies respectively for the FY 2012-FY 

2013 period. 

Direct federal spending reductions are the estimated changes in federal spending on 

a year-to-year basis; that is, budget levels in FY 2012 are compared to budget 

outlays in FY 2011 and for FY 2013 the value of cutbacks are the differences 

between FY 2012 and proposed budget levels for FY 2013 (with BCA). These 

differences vary slightly from the values presented in the CRS report that represent 

the difference between the proposed reduced budget level and the hypothetical 

baseline budget for FY 2013 rather than the year-to-year spending comparison. 

Direct impact is the measure of the output value lost directly as a consequence of 

the federal budget cutback For procurement, this value is equal to the value of the 

reduction in federal purchases. For payroll, however, direct impact measures the 

estimated value of the services that will be lost due to reductions in federal 

employment. As a result, the direct impact of reductions in federal payroll outlays is 

larger than the value of the direct payroll cutback This difference explains why the 

total Direct Impact value is larger than the total value of the Direct Federal Spending 

Cut 

Total Impact is the sum of the Direct Impact and its indirect (impacts on suppliers 

and vendors) and induced (household income benefits) effects. It is the accumulated 

value of the direct spending lost and the lost monetary value that would have been 

achieved as these dollars where recycled through the economy being spent and respent with business and consumer outlays spreading out across all sectors of the 

national economy. 

11 
124 

The GOP impact from this direct, indirect and induced spending-or the absence of 

this spending-accounts only for the non-duplicative, value-added portion of this 

economic activity and therefore is smaller than the Total Impact. 

As shown in Table 4, the Total Impact of direct federal spending cuts affecting DOD 

over the FY 2012-FY 2013 period is projected to total $157.6 billion and will reduce 

GOP by $94.5 billion. Similarly, as shown in Table 6, non-DOD agency cutbacks for 

the same period would generate a Total Impact of $173.5 billion and reduce GOP by 

a total of$120.5 billion. 

In addition, this loss of GDP as a result of federal spending cuts can be expressed in 

terms of lost jobs and labor income. Employment impacts include: (1) those 

resulting directly from the reduction in procurement and federal payroll spending, 

(2) the loss of employment by suppliers and vendors associated with the prime 

contractors and (3) the lost jobs dependent on the payroll spending of employees of 

the prime contractors and their suppliers and vendors. This payroll effect associated 

with DOD cutbacks during FY 2012 and FY 2013 would total $46.5 billion and would 

total $62.9 billion as a result of cutbacks impacting non-DOD agencies. 

Conclusions 

The research presented herein measures the magnitude and Significance of 

economic impacts that will be generated as a result of the Budget Control Act (BCA) 

of 2011. These impacts can be identified as: (1) a decline in gross domestic product 

(GDP), (2) a decreased labor income and (3) a loss of jobs. While these impacts will 

extend over a planned ten-year period, their incidence has been shown to impact FY 

2013 to the greatest extent, with the result that economic losses would reverse the 

positive GDP trend occurring since the recovery began in June 2009 and push the 

u.s. economy towards recession with the associated job loss raising the 

unemployment rate by as much as 1.5 percentage points above the current level. 

The magnitude of economic impacts resulting from BCA over the combined FY 

2012-FY 2013 period have been shown to be large and their impact on the U.S. 

economy to be significant: 

• Combined DOD and non-DOD agency spending reductions totaling $115.7 

billion in FY 2013 would reduce the 2013 U.S. GDP by $215.0 billion. 

• These spending reductions would result in the loss of 746,222 direct jobs 

including cutbacks in the federal workforce totaling 277,263 and decreases 

in the federal contractor workforce totaling 468,959 jobs, thus affecting all 

sectors of the national economy. 

12 
125 

• The loss of these 746,222 direct jobs and 432,978 jobs of suppliers and 

vendors (indirect jobs) dependent on the prime contractors would reduce 

total labor income in the U.S. by $109.4 billion. 

• The loss of this labor income and the resultant impacts of reduced consumer 

spending in the economy would generate an additional loss of 958,508 jobs 

dependent on the spending and re-spending of payroll dollars associated 

with the direct and indirect jobs lost as a result of BCA. 

• This loss of $215.0 billion in GDP and 2.14 million jobs in 2013 would erase 

two-thirds of the GDP gains projected for the year and raise the national 

unemployment rate by 1.5 percentage points by the end of 2013. 

• These economic impacts would affect every state with their respective 

vulnerabilities to projected DOD and non-DOD spending reductions being 

determined by their agency mix and relative magnitudes of federal payroll 

and procurement. Based on current patterns of federal spending by state, ten 

states account for more than half of total federal payroll and procurement 

outlays. This significant concentration of federal spending represents a major 

threat to these states' economies in 2013. While other states may appear less 

vulnerable to federal spending reductions, these may also suffer significant 

impacts due to their smaller sizes or more specialized economic structures. 

13 
126 

Table 4 

Effect of DOD Spending Reductions on the National Economy, 

FY2012-13 Cumulative 

Total GOP {Direct+Rigl2lel Labor Income {Direct+RlgQle) EmQlo~ment ImQ3ct 

Sector ($Million) ($Million) Direct Indirect Induced Total 

Natura! Resource $109.1 $49.0 359 421 531 1,311 

Construction $6,080.9 $3,048.3 25,949 16,906 26,493 69,348 

Manufacturing $31,534.6 $14,339.9 55,410 167,301 181,796 404,507 

Trade $3,620.6 $1,660.9 24,343 7,097 18,672 50,112 

TWU $2,424.4 $1,071.4 8,964 6,521 14,280 29,765 

Information $3,050.3 $1,333.7 7,383 10,210 12,963 30,556 

FIRE $127.9 $21.9 648 433 446 1,527 

PBS $28,102.9 $14,576.1 133,883 58,527 158,900 351,311 

Education/Health $1,113.9 $600.0 6,995 2,680 6,397 16,072 

leisure $2851 $132.2 2,909 778 1,203 4,890 

Other Service $7293 $385.3 5,701 2,602 4,296 12,599 

Government $943.3 $506.2 5,003 842 5,295 11,140 

Federal Payroll $16,383.8 $8,791.9 48,147 8,107 50,966 107,220 

Total $94,506.1 $46,517.0 325,693 282,426 482,240 1,090,359 

Effect of BCA of 2011 (DOD FY2012-FY2013) 

Direct Federal Spending Direct Total Impact (Direct+ Total GDP 

Cut Impact ~ {Dlrect+RiQQlel 

Sector ($Million) ($Million) ($Million) ($Million) 

Natural Resource $70.1 $70.1 $186.0 $109.1 

Construction $3,693.5 $3,693.5 $10,654.4 $6,080.9 

Manufacturing $22,573.1 $22,523.1 $62,193.1 $31,534.6 

ffade $2,274.0 $2,274.0 $5,432.1 $3,620.6 

TWU $1,654.5 $1,654.5 $3,814.4 $2,424.4 

Information $2,008.7 $2,008.7 $5,144.7 $3,050.3 

FIRE $111.1 $111.1 $167.9 $127.9 

PBS $15,474.7 $15,474.7 $43,160.3 $28,102.9 

Education/Health $634.2 $634.2 $1,785.7 $1,113.9 

Leisure $179.3 $179.3 $472.7 $235.1 

Other Service $419.5 $419.5 $1,223.0 $729.3 

Government $534.7 $534.7 $1,272.4 $943.3 

Federal Payroll $7,099.5 $9,286.3 $22,099.7 $16,383.8 

Total $56,676.9 $58,863.7 $157,606.3 $94,506.1 

Note: Columns and rows may not add up to the totals due to rounding. 

14 
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Table 5 

Direct Employment Impacts of DOD Cutbacks 

By Occupation, FY 2013 

Jobs 

Occupation Group Impacted 

Architecture and Engineering 40,036 

Arts, Design, Entertainment, Sports, and Media 3,908 

Building and Grounds Cleaning and Maintenance 5,862 

Business and Finance 32,569 

Community and Social Service 1,628 

Computer and Mathematics 22,799 

Construction and Extraction 24,101 

Education, Training and Library 2,931 

Farming, Fishing and Forestry 489 

Food Preparation and Service 3,257 

Health Care Practitioners and Technicians 8,142 

Health Care Support 1,954 

Installation, Maintenance and Repair 14,005 

Legal 2,467 

Life, Physical and Social Science 14,982 

Management 23,776 

Office and Administrative Support 41,689 

Personal Care and Service 1,303 

Production 30,615 

Protective Service 22,147 

Sales and Related 12,051 

Transportation and Material Moving 14,982 

Total 325,693 

Percent 

12.3 

1.2 

1.8 

10.0 

0.5 

7.0 

7.4 

0.9 

0.2 

1.0 

2.5 

0.6 

4.3 

0.8 

4.6 

7.3 

12.8 

0.4 

9.4 

6.8 

3.7 

4.6 

100.0 

Note: Columns and rows may not add up to the totals due to rounding. 

15 
128 

Table 6 

Effect of Non-DOD Spending Reductions on the National Economy, 

FY2012-13 Cumulative 

Total GDP (Oirect+RiQQlei Labor Income (Direct+RiQQlel EmQ!o':lment lmQ3ct 

Sector ($Million) ($Million) Direct Indirect Induced Total 

Natural Resource $169.0 $76.0 556 653 823 2,032 

Construction $2,561.9 $1,284.3 10,943 7,129 11,172 29,245 

Manufacturing $5,353.8 $2,434.6 9,416 28,431 30,895 68,743 

Trade $2,366.4 $1,085.6 15,926 4,643 12,216 32,786 

TWU $886.4 $3917 3,280 2,386 5,226 10,892 

Information $1,281.9 $560.5 3,106 4,295 5,453 12,854 

FIRE $871.3 $149.3 4,417 2,952 3,037 10,406 

PBS $26,215.1 $13,597.0 125,012 54,649 148,371 328,033 

Education/Health $2,214.7 $1,193.0 13,922 5,334 12,731 31,987 

Leisure $105.5 $48.9 1,077 288 445 1,811 

Other Service $257.1 $135.8 2,012 918 1,516 4,446 

Government $328.7 $176.4 1,745 294 1,847 3,885 

Federal Payroll $77,889.6 $41,797.2 229,116 38,577 242,535 510,229 

Total $120,501.4 $62,930.2 420,529 150,552 476,268 1,047,349 

Effect of BCA of 2011, Non Defense (FY2012-FY2013) 

Direct Federal Spending Direct Tota! Impact (Direct+ Total GOP 

Cut Impact ~ {Direct+RiQQle) 

Sector ($Million) ($Million) ($Million) ($Million) 

Natural Resource $108.6 $108.6 $288.1 $169.0 

Construction $1,556.1 $1,556.1 $4,488.7 $2,561.9 

Manufacturing $3,823.9 $3,823.9 $10,558.9 $5,353.8 

Trade $1,486.3 $1,486.3 $3,550.4 $2,366.4 

TWU $604.9 $604.9 $1,394.5 $886.4 

Information $844.2 $844.2 $2,162.1 $1,281.9 

FIRE $756.6 $756.6 $1,143.2 $871.3 

PBS $14,435.2 $14,435.2 $40,261.1 $26,215.1 

Education/Health $1,260.9 $1,260.9 $3,550.4 $2,214.7 

Leisure $66.3 $66.3 $174.9 $105.5 

Other Service $147.9 $147.9 $431.1 $257.1 

Government $186.3 $186.3 $443.3 $328.7 

federal Payroll $33,751.5 $44,147.8 $105,063.3 $77,889.6 

Total $59,028.6 $69,424.9 $173,510.1 $120,501.4 

Note: Columns and rows may not add up to the totals due to rounding. 

16 
129 

Table 7 

Direct Employment Impact of Non-DOD Agency Cutbacks 

By Occupation, 2013 

Jobs 

occupation Group Impacted Percent 

Architecture and Engineering 21,447 5,1 

Arts, Design, Entertainment, Sports, and Media 3,785 0,9 

Building and Grounds Cleaning and Maintenance 10,093 2,4 

Business and Finance 40,371 9,6 

Community and Social Service 10,093 2,4 

Computer and Mathematics 23,550 5,6 

Construction and Extraction 15,139 3,6 

Education, Training and Library 6,728 1.6 

Farming, Fishing and Forestry 1,682 0.4 

Food Preparation and Service 2,944 0,7 

Health Care Practitioners and Technicians 13,877 3,3 

Health Care Support 4,205 1.0 

Installation, Maintenance and Repair 14,298 3,4 

Legal 6,728 1.6 

Life, Physical and Social Science 15,980 3,8 

Management 24,811 5,9 

Office and Administrative Support 103,030 24,5 

Personal Care and Service 4,626 1,1 

Production 8,831 2,1 

Protective Service 62,238 14,8 

Sales and Related 11,775 2,8 

Transportation and Material Moving 14,298 3,4 

Total 420,529 100,0 

Note: Columns and rows may not add up to the totals due to rounding, 

17 
130 

Table 8 

Effect of DOD Spending Reductions on the National Economy, 

FY2012-21 Cumulative 

Total GDP (Direct+Ri~~lel Labor Income iOirect+RiI2Qle) EmQloyment ImQ3ct 

Sector ($Million) ($Million) Direct Indirect Induced Total 

Natural Resource $833 $37.4 281 330 416 1,026 

Construction $4,640.7 $2,326.4 20,306 13,229 20,731 54,267 

Manufacturing $24,066.2 $10,943.7 43,360 130,917 142,260 316,536 

Trade $2,763.1 $1,267.6 19,049 5,554 14,612 39,214 

TWU $1,850.3 $817.6 7,014 5,103 11,175 23,292 

Information $2,327.9 $1,017.9 5,777 7,990 10,144 23,911 

FIRE $97.6 $16.7 507 339 349 1,195 

PBS $21,447.2 $11,124.1 104,767 45,799 124,343 274,909 

Education/Health $850.1 $457.9 5,474 2,097 5,006 12,577 

leisure $2176 $100.9 2,277 609 941 3,827 

Other Service $556.6 $294.1 4,461 2,036 3,362 9,859 

Government $719.9 $386.3 3,915 659 4,144 8,718 

Federal Payroll $12,503.6 $6,709.7 37,676 6,344 39,882 83,902 

Total $72,124.1 $35,500.3 254,862 221,005 377,364 853,232 

Effect of BCA of 2011 (DOD FY2012-FY2021) 

Direct Federal Spending Direct Total Impact (Direct+ Total GDP 

Cut Impact B.l!J.Q!gl (Oirect+Ri!2!2lel 

Sector ($Million) ($Million) ($Million) ($Million) 

Natural Resource $53.5 $53.5 $141.9 $83.3 

Construction $2,818.8 $2,818.8 $8,131.1 $4,640.7 

Manufacturing $17,188.9 $17,188.9 $47,463.8 $24,066.2 

Trade $1,735.4 $1,735.4 $4,145.6 $2,763.1 

TWU $1,262.7 $1,262.7 $2,911.0 $1,850.3 

Information $1,533.0 $1,533.0 $3,926.2 $2,327.9 

FIRE $84.8 $84.8 $128.1 $97.6 

PBS $11,809.8 $11,809.8 $32,938.6 $21,447.2 

Education/Health $484.0 $484.0 $1,362.8 $850.1 

Leisure $136.9 $136.9 $360.8 $217.6 

Other Service $320.1 $320.1 $933.3 $556.6 

Government $408.0 $408.0 $971.1 $719.9 

Federal Payroll $5,418.1 $7,087.0 516,865.8 $12,503.6 

Total $43,254.0 $44,922.9 $120,280.3 $72,124.1 

Note: Columns and rows may not add up to the totals due to rounding. 

18 
131 

Table 9 

Effect of Non-DOD Spending Reductions on the National Economy, 

FY2012-21 Cumulative 

Total GDP (Direct+RiQQlej labor Income (Direct+RiQQle} Em!2!o~ment ImQact 

Sector ($Million) ($Million) Direct Indirect Induced Total 

Natural Resource $108.4 $48.7 371 435 549 1,354 

Construction $1,643.4 $823,8 7,291 4,750 7,444 19,486 

Manufacturing $3,434.4 $1,561.7 6,274 18,944 20,585 45,803 

Trade $1,518.0 $696.4 10,611 3,094 8,140 21,845 

TWU $568.6 $251.3 2,186 1,590 3,482 7,258 

Information $822.3 $359.6 2,069 2,862 3,633 8,565 

FIRE $558.9 $958 2,943 1,967 2,023 6,933 

PBS $16,816.7 $8,722.4 83,294 36,412 98,858 218,565 

Education/Health $1,420.7 $765.3 9,276 3,554 8,482 21,312 

Leisure $67.7 $31.4 718 192 297 1,207 

Other Service $164.9 $871 1,340 612 1,010 2,962 

Government $210.8 $113.1 1,162 196 1,230 2,589 

Federal Payroll $49,965.5 $26,812.5 152,658 25,704 161,599 339,960 

Total $77,300,5 $40,369,1 280,194 100,311 317,333 697,839 

Effect of BCA of 2011, Non Defense (FY2012-FY2021) 

Direct Federal Spending Direct Total Impact {Dlrect+ Total GDP 

Cut Impact ~ (Direct+RiQQle) 

Source ($Million) ($Million) ($Million) ($Million) 

Natura! Resource $69.7 $69.7 $184.8 $108.4 

Construction $998.2 $998.2 $2,879.5 $1,643.4 

Manufacturing $2,453.0 $2,453.0 $6,773.4 $3,434.4 

Trade $953.4 $953A $2,277.6 $1,518.0 

TWU $388.0 $388.0 $894,6 $568.6 

Information $541.5 $541.5 $1,387.0 $822.3 

FIRE $485.4 $485.4 $733.4 $558.9 

PBS $9,260.0 $9,260.0 $25,827.1 $16,816,7 

Education/Health $808.9 $808.9 $2,277.5 $1,420.7 

Leisure $42.6 $42.6 $112.2 $677 

Other Service $94.9 $94.9 $276.6 $164.9 

Government $119.5 $119.5 $284.4 $210.8 

Federal Payroll $21.651.2 $28,320.4 $67,397,1 $49,965.5 

Total $37,866.3 $44,535.4 $111,305.1 $77,300.5 

Note: Columns and rows may not add up to the totals due to rounding. 

19 
132 

Table 10 

Gross State Product (GSP) Impacts of the Budget Control Act of 2011 

Fiscal Years 2012 and 2013 

(in billions of current year dollars) 

State GSP Losses* GSP Losses* Total GSP* 

DOD Cuts Non-DOD Cuts Losses 

Alabama $2.327 $1.573 $3.900 

Alaska 0.510 0.537 1.047 

Arizona 3.055 1.892 4.947 

Arkansas 0.312 0.608 0.920 

California 11.719 10.957 22.676 

Colorado 1.598 2.683 4.281 

Connecticut 3.140 1.078 4.218 

Delaware 0.006 0.215 0.221 

District of Columbia 1.314 11.500 12.814 

Florida 3.632 4.366 7.998 

Georgia 2.393 3.089 5.482 

Hawaii 0.680 0.395 1.075 

Idaho 0.085 0.969 1.054 

Illinois 2.015 3.381 5.396 

Indiana 1.296 1.112 2.408 

Iowa 0.454 0.664 1.118 

Kansas 0.539 0.859 1.398 

Kentucky 1.475 1.406 2.881 

Louisiana 1.636 1.224 2.860 

Maine 0.368 0.363 0.731 

Maryland 3.414 8.132 11.546 

Massachusetts 3.594 2.491 6.085 

Michigan 1.173 1.966 3.139 

Minnesota 0.425 1.187 1.612 

Mississippi 0.454 0.720 1.174 

Missouri 2.913 2.225 5.138 

Montana 0.085 0.422 0.507 

Nebraska 0.227 0.439 0.666 

Nevada 0.368 0.679 1.047 

New Hampshire 0.312 0.322 0.634 

New Jersey 2.202 2.141 4.343 

New Mexico 0.425 2.435 2.860 

New York 2.497 4.544 7.041 

North Carolina 1.023 1.927 2.950 

20 
133 

Table 10 Continued 

State GSP Losses* GSP Losses* Total GSP* 

DOD Cuts Non-DOD Cuts Losses 

North Dakota $0.085 $0.263 $0.348 

Ohio 1.845 2.219 4.064 

Oklahoma 0.691 0.900 1.591 

Oregon 0.255 0.949 1.204 

Pennsylvania 3.462 4.428 7.890 

Rhode Island 0.227 0.225 0.452 

South Carolina 1.277 1.776 3.053 

South Dakota 0.170 0.303 0.473 

Tennessee 0.879 3.055 3.934 

Texas 8.579 7.460 16.039 

Utah 0.718 0.894 1.612 

Vermont 0.198 0.210 0.408 

Virginia 11.804 9.072 20.876 

Washington 1.475 2.717 4.192 

West Virginia 0.085 0.925 1.010 

Wisconsin 2.391 1.285 3.676 

Wyoming 0.057 0.223 0.280 

Guam 0.189 0.080 0.269 

Puerto Rico 0.189 0.338 0.527 

Undistributed 2.243 4.701 6.944 

Totals $94.506 $120.502 $215.008 

Sources: GMU Center for Regional Analysis; Chmura Economics & 

Analysis. *Gross state product losses resulting from BCA-mandated 

federal spending reductions during FY 2012 and FY 2013; excludes 

impacts from cuts in entitlement programs. Columns and rows may 

not add up to the totals due to rounding. 

21 
134 

Table 11 

State Labor Income Impacts of the Budget Control Act of 2011 

Fiscal Years 2012 and 2013 

(in billions of current year dollars) 

State Income Losses* Income Losses* Totallncome* 

DOD Cuts Non-DOD Cuts Losses 

Alabama $1.145 $0.840 $1.985 

Alaska 0.251 0.282 0.533 

Arizona 1.504 1.014 2.518 

Arkansas 0.154 0.314 0.468 

California 5.768 5.775 11.543 

Colorado 0.787 1.392 2.179 

Connecticut 1.546 0.601 2.147 

Delaware 0.003 0.110 0.113 

District of Columbia 0.647 5.876 6.523 

Florida 1.788 2.283 4.071 

Georgia 1.178 1.613 2.791 

Hawaii 0.335 0.212 0.547 

Idaho 0.042 0.494 0.536 

Illinois 0.992 1.755 2.747 

Indiana 0.638 0.588 1.226 

Iowa 0.223 0.346 0.569 

Kansas 0.265 0.446 0.711 

Kentucky 0.726 0.740 1.466 

Louisiana 0.805 0.651 1.456 

Maine 0.181 0.191 0.372 

Maryland 1.681 4.196 5.877 

Massachusetts 1.769 1.328 3.097 

Michigan 0.577 1.021 1.598 

Minnesota 0.209 0.612 0.821 

Mississippi 0.223 0.375 0.598 

Missouri 1.434 1.182 2.616 

Montana 0.042 0.216 0.258 

Nebraska 0.112 0.227 0.339 

Nevada 0.181 0.352 0.533 

New Hampshire 0.154 0.169 0.323 

New Jersey 1.084 1.127 2.211 

New Mexico 0.209 1.247 1.456 

New York 1.229 2.355 3.584 

North Carolina 0.504 0.998 1.502 

22 
135 

Table 11 Continued 

State Income Losses* Income Losses* Total Income* 

DOD Cuts Non-DOD Cuts Losses 

North Dakota $0.042 $0.135 $0.177 

Ohio 0.908 1.160 2.068 

Oklahoma 0.340 0.470 0.810 

Oregon 0.126 0.487 0.613 

Pennsylvania 1.704 2.313 4.017 

Rhode Island 0.112 0.118 0.230 

South Carolina 0.628 0.926 1.554 

South Dakota 0.084 0.157 0.241 

Tennessee 0.433 1.570 2.003 

Texas 4.223 3.942 8.165 

Utah 0.354 0.467 0.821 

Vermont 0.098 0.110 0.208 

Virginia 5.810 4.817 10.627 

Washington 0.726 1.408 2.134 

West Virginia 0.042 0.472 0.514 

Wisconsin 1.177 0.695 1.872 

Wyoming 0.028 0.114 0.142 

Guam 0.093 0.044 0.137 

Puerto Rico 0.093 0.175 0.268 

Undistributed 1.104 2.431 3.535 

Totals $46.517 $62.937 $109.447 

Sources: GMU Center for Regional Analysis; Chmura Economics & 

Analysis. * Personal earnings lost due to losses of direct and indirect 

employment resulting from BCA-mandated federal spending 

reductions during FY 2012 and FY 2013; excludes impacts from 

cuts in entitlement programs. Columns and rows may not add up 

to the totals due to rounding. 

23 
136 

Mr. Jeffrey Zients 

Acting Director 

Office of Management and Budget 

Executive Office of the President 

Washington. D.C. 20503 

Dear Mr. Zients: 

June 27, 2012 

Thank you for taking the time to meet with us on June 13. 2012 regarding the impact of federal 

budget sequestration. scheduled to take effect January 2. 2013. We appreCiated the thoughtful 

exchange with you and your staff. 

As we discussed. sequestration will have devastating effects on our economy and U.S. national 

security. and we believe it will result in terrible public policy if it goes into effect. Currently, however. 

sequestration is the law. Absent intervening action it will become reality in under six months. 

Our companies have responsibilities to carefully assess the likely impacts on their businesses 

and to manage. and where reasonably pOSSible, mitigate the negative consequences. Their abilities to 

do this effectively, however. are constrained by the Significant uncertainties regarding sequestration. 

including what actions Congress might take and how the executive branch will interpret and apply 

existing law. Accordingly, clarification and policy guidance on a number of issues discussed during 

our meeting and highlighted below would be helpful. This will better enable our members to plan and 

lessen at least some of the impacts of sequestration. 

(1) Employee considerations, including those covered under the Worker Adjustment and 

Retraining Notification (WARN) Act. The WARN Act establishes a general federal requirement 

for a 60-day advance noUce to certain affected employees facing layoffs or facility closures. 

We are greatly concerned that companies will have to consider issuing a notice to a broad 

population of their workforce in the October and November timeframe. Specific guidance 

would be helpful from your office to federal agencies on the allowability of WARN related costs 

that contractors could incur. as well as any steps agencies should take to mitigate negative 

impacts. 

(2) The scope of funding subject to seguestration. Of particular concern is whether prior year 

unobligated balances' will be included in the resource baseline for defense sequestration and 

whether military pay accounts wfll be excluded from the baseline. Including unobligated funds 

in the baseline would likely result in a larger cut in defense acquisition programs. above and 

beyond the required across-the-board reduction to the Fiscal Year 2013 base budget. 
137 

Mr. Zients 

Page 2 

June 27,2012 

(3) Level of sequestration application, Important to any planning exercise is an authoritative 

understanding of whether sequestration will be implemented at the individual "Program, 

Project, and Activity" (PPA) level or at some higher aggregate level. The PPA approach, which 

provides the executive agencies with the least amount of discretion, will result in an even more 

significant number of contract changes that will be difficult to execute in a timely manner, 

disrupt program execution, and create additional substantial costs to the government. Industry 

would appreciate clarification from your office on whether this is the approach that will be used. 

(4) Contract impacts. We believe that sequestration will result in significant contract changes 

including Requests for Equitable Adjustment (REAs) and possible program terminations. These 

actions would represent potentially large and unbudgeted costs to the government Guidance 

on how these changes will be implemented is important to understanding the postsequestration budget and contracting environment. 

(5) Approach to new requests for proposals prior to sequestration, The core of this issue is the 

cost basis of near term proposals that would otherwise assume rate structures for overhead 

and other expenses that would be in place absent sequestration, We believe clear advance 

policy guidance on this issue would be beneficial to both the government and industry. 

(6) Differing government approaches to sequestration planning/preparation. In the absence of 

federal-wide guidance, the potential exists for agencies and departments to pursue 

independent approaches (slow down vs. speed up, etc.) in a 'run-up' to sequestration, Program 

offices and contracting officers need clear guidance in this area, and that guidance should be 

shared with industry to facilitate an orderly planning process. 

We expect that other issues will arise as we proceed further into our assessment and planning 

efforts, but at present, the above issues are of most pressing concern. 

Thank you again for taking the time to meet with us and your attention to these matters. We look 

forward to receiving your response and suggested plan of action to address these important concerns. 

Establishing as much clarity as possible on these and other important questions will help all of us 

prepare for the very unfortunate possibility of sequestration. 

Best regards, 

cc: David P. Hess, Chairman, AlA; President, Pratt & Whitney, UTC 

Wes Bush, Vice Chairman, AlA; Chairman, CEO & PreSident, Northrop Grumman Corporation 

Robert J. Stevens, Former Chairman, AlA; Chairman & CEO, Lockheed Martin Corporation 

WITNESS RESPONSES TO QUESTIONS ASKED DURING 

THE HEARING 

JULY 18, 2012 

(141) 

RESPONSES TO QUESTION SUBMITTED BY MR. MCKEON 

Mr. STEVENS, Mr. O’KEEFE, and Mr. HESS. In response to Chairman McKeon’s request, we have included the recent letter sent by industry to Acting OMB Director 

Zients (on page 136) that details the areas where we need greater information and 

clarity in order to most effectively manage the industrial base, and with the least 

disruption, once sequestration is implemented. [See page 41.] 

RESPONSES TO QUESTION SUBMITTED BY MR. RYAN 

Mr. STEVENS, Mr. O’KEEFE, and Mr. HESS. In response to Congressman Ryan’s 

request, we have enclosed the report of the Defense Industrial Base Task Force that 

we completed for the Secretary of Defense in November of last year (on page 103), 

and the report recently released by Dr. Stephen Fuller of George Mason University, 

‘‘The Economic Impact of the Budget Control Act of 2011 on DOD and Non-DOD 

Agencies’’ (on page 111). These two reports contain detailed information on the industrial and economic impacts of sequestration, which will help your constituents 

in understanding the negative consequences if this measure goes forward. [See page 

36.] 

Ms. WILLIAMS. [The information was not available at the time of printing.] [See 

page 36.] 

Æ