Military Modernization & Readiness Could Plunge If Congress Doesn’t Appropriate Funds To Cover Industry’s Coronavirus Costs
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The coronavirus pandemic has severely impacted the nation’s economy, particularly industrial activities that cannot be performed remotely. One of the most affected sectors is aerospace and defense, which employs a fifth of the nation’s manufacturing workforce.
The federal government designated defense production an essential activity early in the crisis, meaning that military contractors were expected to continue operations despite the pandemic and take steps to assist critical suppliers.
That mandate has worked reasonably well, considering that the nation is confronting the worst infectious disease outbreak in a century. However, the accumulated costs associated with trying to maintain production in the midst of a life-threatening pandemic already total many billions of dollars.
For instance, defense companies have needed to cope with supply-chain disruptions; cover the cost of any resulting downtime within their plants; rearrange production spaces to facilitate distancing; sanitize said spaces frequently; equip workers with personal protective equipment, and institute myriad other measures aimed at sustaining production while minimizing transmission of COVID-19.
Because the federal government is the sole customer for military goods, it has in place a system for “equitable adjustment” when suppliers incur extraordinary costs beyond their ability to control. Coronavirus costs fall within the scope of that system.
The question is where the money will come from.
Under a provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, federal agencies are authorized to reimburse contractors for costs arising from idled facilities and workers caused by the pandemic. However, Congress has provided no appropriations to fund the necessary outlays.
If no appropriations are forthcoming, then contractors either cannot be reimbursed for expenditures they undertook pursuant to federal direction, or the reimbursements would need to be funded out of the Pentagon’s existing budget.
Industry cannot absorb the additional costs without further dislocations to the economy and labor markets. But if the money for reimbursements were to come out of the existing defense budget, there is no mystery what the likely bill-payers would be: the money would come from the long-delayed efforts of the military services to modernize their Cold War arsenals, and from the readiness accounts that support training and maintenance of the current force.
Under Secretary of Defense Ellen Lord confirmed this fact in testimony before the House Armed Service Committee on June 10. Referring to the section of the CARES Act authorizing reimbursements to industry, she observed:
“It is important to note that section 3610 authorized, but did not appropriate, the funds needed to make these reimbursements. While the Department may be able to use other appropriated funds to reimburse contractors, the cost for 3610 is likely well beyond the Department’s resourced ability to do so without significantly jeopardizing modernization or readiness efforts.”
Chances are the modernization accounts would be hit first and hit hardest, because the consequences for warfighters of deferring purchase of new weapons are often not immediately apparent. If readiness accounts are cut, the consequences can become apparent all too quickly: weapons are taken out of service to await repairs, users become less proficient in their application, and spare parts aren’t available when and where they are needed.
The joint force has only recently recovered from a readiness crisis, and nobody wants to see that experience repeated. The force today is ready to fight, but in many cases it is equipped with antiquated weapons. For instance, most of the aerial refueling tankers that extend the range of U.S. fighters and bombers are over half a century old, and the Army’s arsenal of land combat systems consists largely of weapons that debuted during the Reagan years.
Whatever billpayers are targeted, the scale of the hit to defense spending could be significant. One major contractor is estimating that its coronavirus-related expenses may exceed $2 billion—much of which is owed to small and medium-size suppliers—and dozens of other contractors are in the process of calculating their own losses from the crisis.
The total bill to fully reimburse defense contractors for their extraordinary costs arising from the pandemic could top $20 billion. Taking that kind of money out of modernization or readiness accounts would impair the efforts of the Pentagon to prepare the joint force for an emerging era of great power rivalry.
For instance, the Air Force might have to defer plans to link its warfighters with a resilient network. The Army might need to put off development of a next-generation combat vehicle. The Navy’s pursuit of a new frigate could be hobbled. Or the readiness of all three services might be degraded.
There is a simple pathway out of this dilemma. When Congress gets around to passing its next stimulus package, the legislation should include appropriations to fund the reimbursement of defense contractors authorized by the CARES Act.
If no such action is taken, the government will have to make a choice between maintaining military preparedness and stabilizing the communities where defense plants are located. There are literally hundreds of communities that host plants in the defense industry supply chain.
The irony of this situation is that military contractors incurred the costs for which they are seeking reimbursement because the government deemed their work to be essential. But failure to appropriate funding to cover those unplanned costs would probably undercut the ability of the joint force to fight and win wars, which is why defense production was said to be essential in the first place.
The next stimulus package is the obvious place to fix the problem.
Several major military contractors contribute to my think tank. A few are consulting clients.
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