Pentagon does not see big cancellation fees from cuts

WASHINGTON Thu Sep 20, 2012 8:00pm EDT

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WASHINGTON (Reuters) - The Pentagon's top money man again urged Congress to stop across-the-board budget cuts that he said would devastate the U.S. military, but downplayed the prospect of billions of dollars in contract termination fees forecast by some in industry.

Undersecretary of Defense Robert Hale said on Thursday piling $500 billion in additional cuts on top of $487 billion already planned for the next decade would hit operations and training, procurement and civilian personnel accounts particularly hard.

He told members of the House Armed Services Committee that the Pentagon faced $52.3 billion in spending cuts in fiscal 2013, with every budget category except military personnel facing a 9.4 percent reduction.

That meant the Pentagon would be able to buy fewer weapons and those it could buy would cost more, while work on ships and other bigger weapons systems would likely be delayed.

Hale urged Congress to act quickly to avert the cuts rather than try to mitigate their effect.

"We need to avoid this thing, not try to make it better," he said. "If you're driving into a brick wall at 60 miles an hour, let's find a way to avoid the wall, not figure out a way to pick up the pieces after we hit it."

Democrats and Republicans are united in opposing additional across-the-board cuts in defense spending over the next decade, but have failed to reach agreement on $1.2 trillion in other deficit-reducing measures that would be needed to avert the automatic cuts to be split between defense and non-defense.

Industry executives say uncertainty about the process known as sequestration is already forcing them to cut jobs, close facilities and slow down spending on research.

They are pressing the Pentagon and White House for details on how the cuts would be executed so they can better prepare. The White House budget office sent a report to Congress last Friday, but it only gave the impact for broad budget categories.

Top officials from the Army, Navy, Air Force and Marine Corps insisted they would protect funding for troops already deployed overseas, but said the military would be less ready to respond to other disasters or crises if the cuts went through.

Hale said the cuts would not apply to money that had already been put under contract, which meant that most contracts signed before January 2, 2013 would not need to be renegotiated -- averting billions of dollars in change fees expected by some executives.

"Both because of the law and the way we'd implement it ... I don't see those sorts of large cancellation fees," Hale said, adding that the department would also seek to avoid severance costs wherever possible.

Mike McCord, principal deputy undersecretary of defense, told a separate hearing by the House Small Business Committee, that the Pentagon would use its authority within contracts to buy less, rather than having to renegotiate contracts.

"If we have within the scope of the contract the ability to buy, say 10 percent less, we would probably do so," he said. "It would not be our intent to go reopen contracts if avoidable."

However the Pentagon does have eight longer-term contracts, such the Air Force's deal with Boeing Co for 179 new refueling planes, that would be affected.

Air Force Vice Chief of Staff General Larry Spencer told the hearing on Thursday that he did not expect to have to cancel the tanker contract with Boeing, but said the payment schedule might have to be renegotiated, depending on the size of the cut.

That in turn could prompt a change in the schedule or even an increase in the previous price negotiated, he said.

"As we go down the thousands of contracts and thousands of lines that's the type of process that we have to go through with every contract," Spencer said.

Hale said he still hoped Congress could reach a deal to avoid sequestration, but said the department would begin planning how to implement the cuts over the next month, followed by more detailed efforts in the subsequent six weeks.

"We'll wait as long as we can to begin this process, again in hopes that it is halted, but we won't wait so long that we won't have this department ready if in fact it goes into effect on January 2," Hale said.

(Reporting By Andrea Shalal-Esa; Editing by Phil Berlowitz and Bob Burgdorfer)

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