The Pentagon’s political leaders and generals have spent much of the past seven years decrying the defense budget cuts and uncertainty that they say put troops at risk. Just on Friday, Defense Secretary Jim Mattis told the military’s top officers to talk to the media, in part to pressure lawmakers on this very issue.
But on Wednesday, the head of one of the world’s largest defense firms said the entire industry is hurting from the budget uncertainty — a combination of federal spending caps, periods of restricted spending, and across-the-board slicing of budget accounts.
“We’re not looking for corporate welfare,” Michael Strianese, chairman and CEO of L3 Technologies, said in an exclusive interview at the Defense One Global Business Briefing.
“We’re just looking for a predictable budget so we can run businesses,” said Strianese, who runs the the world’s eighth-largest defense firm by revenue. “We can’t keep hitting a wall where the funding goes away and all of a sudden the numbers keep tanking.”
Strianese — who was among the investors who founded the firm in 1997 — plans to retire as L3’s CEO at year’s end, though he will remain as chairman.
The Pentagon’s budget has been capped since 2013. Those restrictions — put in place in 2011 to help lower the federal deficit — remain in place through 2021. Democrats and Republicans in Congress have not been able to reach a deal to remove the spending caps.
Further complicating matters, lawmakers have been unable to pass annual budgets on time, leading to spending being restricted to the prior years’ levels. Fiscal 2018 began on Oct. 1, however defense spending is frozen at the 2017 level, which also doesn’t allow the Pentagon to start work on anything new, including weapons programs, or change the quantities of items being purchased.
For the Pentagon, budget freezes mean pilots can’t train, parts aren’t available, and the military’s “readiness” to defend the nation is diminished, commanders frequently argue. For defense firms that supply the military, it means the Pentagon is unable to increase the number of bombs it needs to buy for the airstrike campaign against the Islamic State in Iraq and Syria.
“We need some level of predictability,” Strianese said. “We essentially have one major customer.”
The cry for defense budget stability is echoed often by some Republicans and Democrats leaders, especially those on the relevant Congressional committees and in the national security community. But the warnings have not moved House and Senate majority and minority leaders and political bosses who are trying to negotiate (or just win) a fundamental battle over the very sizes and purpose of government.
“Those on the Hill are hearing it loud and clear,” Strianese said, “but responding to it is a whole other story. I can’t say we’ve been off to the races with the budget.” He noted Congressional leaders and the White House’s inability to pass higher-priority legislation on tax reform, healthcare, and infrastructure left little reason to expect them to pass stable defense spending.
“They’ve all been talked up, but nothing’s been done,” he said. “I know national security wasn’t number one, two, or three. So I guess we’ll get there eventually. Heck, we need the budget … This is an industry with millions of jobs.”
Strianese also criticized the Obama administration’s American Recovery and Reinvestment Act of 2009, which poured more than $800 billion into infrastructure projects.
“We went through the whole nonsense with the ‘shovel-ready jobs,’” Strianese said. “There was nothing more shovel-ready than building a ship or a carrier or something. We had the plants, we had the capital, and we had the workers.”
“It’s just so frustratingly mismanaged, at a point,” he said. “My loyalty is to my industry here and our national security. If we could have squeezed out a ship or a sub or something with the $700 billion that got burned with [the Recovery Act]. It would have been helpful.”
The spending restrictions have hampered firms from making research-and-development and capital investments. It’s also “more difficult for us to hire people and retain people if they keep seeing defense jobs as short-term jobs. We’re not going to be getting the best and brightest out of schools,” Strianese said.
Defense firms were urged by Obama administration political appointees at the Pentagon to invest more private money on research and development projects. Strianese recalled one meeting between defense CEOs and Pentagon leaders who wondered why companies were spending tens of billions of dollars buying back their own stocks instead of investing in R&D.
“Just one [company] has to do it, then everybody else has to do it because we have to follow the metrics that shareholders have learned to expect,” he said of the stock buybacks. “We won’t be in our seats very long if we aren’t performing in line with the competition. You’re just not. That’s the way public companies [work]. Now maybe defense companies shouldn’t be public, I don’t know.”
Strianese also said the uncertainty of the timing of federal contracts causes companies to sometimes make rash decisions, pointing to his own firm’s pursuit of a project to convert a Boeing 747 jetliner into a VIP configuration for a head of state. He hinted that the firm signed a “silly contract” in hopes that it would protect employees’ jobs.
“I’d have to say it was not one of the best pieces of work I’ve saw in contracting,” he said. “It was ugly.”
In the end, the project cost the company more than $100 million.
“They thought they were going to be shut down,” he said of the business unit that signed the deal. “It just makes people do unnatural things.”
Strianese, impassioned, argued that defense spending differed from other government spending.
“National security is something that’s not an entitlement. It’s something that we have to work towards as a country,” he said. “Winning wars — it’s going to be because we work at it. It’s a rather daunting situation now.”