[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                         [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





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                   HOUSE COMMITTEE ON ARMED SERVICES
                      One Hundred Twelfth Congress

            HOWARD P. ``BUCK'' McKEON, California, Chairman
ROSCOE G. BARTLETT, Maryland         ADAM SMITH, Washington
MAC THORNBERRY, Texas                SILVESTRE REYES, Texas
WALTER B. JONES, North Carolina      LORETTA SANCHEZ, California
W. TODD AKIN, Missouri               MIKE McINTYRE, North Carolina
J. RANDY FORBES, Virginia            ROBERT A. BRADY, Pennsylvania
JEFF MILLER, Florida                 ROBERT ANDREWS, New Jersey
JOE WILSON, South Carolina           SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey        JAMES R. LANGEVIN, Rhode Island
MICHAEL TURNER, Ohio                 RICK LARSEN, Washington
JOHN KLINE, Minnesota                JIM COOPER, Tennessee
MIKE ROGERS, Alabama                 MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona                JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania           DAVE LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas            NIKI TSONGAS, Massachusetts
DOUG LAMBORN, Colorado               CHELLIE PINGREE, Maine
ROB WITTMAN, Virginia                LARRY KISSELL, North Carolina
DUNCAN HUNTER, California            MARTIN HEINRICH, New Mexico
JOHN C. FLEMING, M.D., Louisiana     BILL OWENS, New York
MIKE COFFMAN, Colorado               JOHN R. GARAMENDI, California
TOM ROONEY, Florida                  MARK S. CRITZ, Pennsylvania
TODD RUSSELL PLATTS, Pennsylvania    TIM RYAN, Ohio
SCOTT RIGELL, Virginia               C.A. DUTCH RUPPERSBERGER, Maryland
CHRIS GIBSON, New York               HANK JOHNSON, Georgia
VICKY HARTZLER, Missouri             BETTY SUTTON, Ohio
JOE HECK, Nevada                     COLLEEN HANABUSA, Hawaii
BOBBY SCHILLING, Illinois            KATHLEEN C. HOCHUL, New York
JON RUNYAN, New Jersey               JACKIE SPEIER, California
AUSTIN SCOTT, Georgia                RON BARBER, Arizona
TIM GRIFFIN, Arkansas
STEVEN PALAZZO, Mississippi
ALLEN B. WEST, Florida
MARTHA ROBY, Alabama
MO BROOKS, Alabama
TODD YOUNG, Indiana
                  Robert L. Simmons II, Staff Director
                Jack Schuler, Professional Staff Member
          William (Spencer) Johnson, Professional Staff Member
                    Lauren Hauhn, Research Assistant


















                            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

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.]
 
   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 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 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-the-board 
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. 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.

 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 resumes 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 industry 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-the-board 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 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-the-board 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 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 discretionary 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 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 sequestration 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.]
    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 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.
    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 
helicopter 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 
sequestration, 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 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 a million resumes 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 long-time employees. But this 
consumes about 50 percent of our business, 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 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 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 intelligence-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 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.
    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 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 consolidated 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 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 across-the-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?
    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 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 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 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 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.
    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.
    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.
    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.
    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 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----
    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.
    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, 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 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 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

=======================================================================

      
              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 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 
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.

                      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 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.



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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             July 18, 2012

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                             July 18, 2012

=======================================================================

      
             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.]

                                  
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