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August 10, 2012

Looming defense spending cuts have some N.C. companies concerned

In battle, the U.S. military is a mighty force, strong and confident. In matters of money, though, it has turned skittish, delaying or canceling contracts for research, products and services it isn’t sure it will be able to afford after Jan. 2.

In battle, the U.S. military is a mighty force, strong and confident. In matters of money, though, it has turned skittish, delaying or canceling contracts for research, products and services it isn’t sure it will be able to afford after Jan. 2.

The military’s financial fears are affecting companies across North Carolina whose cutting-edge products and technology often are aimed specifically at protecting fighting forces and making armies more powerful and self-sufficient. If their defense contracts evaporate as a result of a sweeping budget cut looming five months out, industry experts say thousands of jobs could be lost in the state along with important research and development.

“It’s just putting a huge chill on business,” said Will Austin, director of government affairs for Lord Corp., a Cary-based company with 2,800 employees worldwide making adhesives, coatings, electronics and other items. Fifteen to 20 percent of the company’s $789 million business last year was with the military. How much it will be this year or next remains to be seen.

“That’s the problem for us,” Austin said. “We don’t know what’s going to happen, so we don’t know how to plan for it.”

The sequester control

The threat on the horizon is a federal budget mechanism that Congress put into play last year without intending that it ever be used.

The Budget Control Act of 2011 prescribed $1.2 trillion in savings over 10 years, without identifying them. As an incentive, Congress also voted that if it couldn’t agree on how to come up with the $1.2 trillion, a seldom-used tool called a sequester would kick in on Jan. 2, 2013, to make the cuts instead, dividing them over 10 budget years. If Congress makes only part of the cuts, the sequester would make the rest.

The sequester is viewed as a monetary blunt instrument, knocking the top off every budget it hits, with no argument over which programs are more important. Applied to a household budget, it would be like cutting payments for the mortgage, groceries and electricity in the same way as those for club memberships, haircuts and movie rentals.

$50B a year off defense

In this case, the Defense Department would bear half the $1.2 trillion burden. The rest would be split among other government divisions, sparing only Social Security, Medicaid, supplemental security income, refundable tax credits, children’s health insurance, food stamps and veterans benefits. President Barack Obama has said he would exempt military personnel as well.

If allowed to take effect, the sequester would knock at least $50 billion off the defense budget every year for a decade.

That would be in addition to $487 billion in budget cuts the Defense Department already has agreed to over the next 10 years.

Defense Secretary Leon Panetta has said massive, indiscriminate cuts in military spending could compromise the nation’s security.

In North Carolina, the timing of such cuts would seem especially frustrating to business recruiters who have tried for years to capitalize on the presence of the nation’s fourth-largest military population and many of its decision-makers. A network has developed to make connections between research and teaching at universities and community colleges, private industry, and military officials who can describe what soldiers and Marines need.

“Our state has done more to create infrastructure for the defense industry than any state in the country,” said Scott Dorney, executive director of the N.C. Military Business Center, based in Fayetteville.

Last year was the best ever for North Carolina companies competing for defense contracts; companies here secured more than $4 billion in defense contracts and untold millions more as subcontractors performing work for companies based in other states. While companies in Cumberland and Onslow counties, home to Fort Bragg and Camp Lejeune, bagged the most federal money, businesses in 87 of the state’s 100 counties got defense contracts last year. Many of those were founded by or employ former service members.

Military goods from N.C.

A symposium in Chapel Hill in July highlighted the range of goods and services coming out of North Carolina that have military applications, including nanotechnology, medical treatment devices, self-charging batteries, custom communications devices, robotics and behavioral-science studies.

A military trade show in Fayetteville this week kicked off with appearances by U.S. Sens. Kay Hagan and Richard Burr, and U.S. Reps. Larry Kissell and Renee Ellmers – two Republicans and two Democrats – all of whom expressed support for the industry.

In Washington, each side has said it recognizes the devastating impacts the cuts could have, and blames the other for a lack of agreement.

Company representatives displaying samples of high-tech bandages, uniform fabric and luminescent paint at the trade show seemed pessimistic about the prospects of Congress reaching a solution in time to avert sequestration completely.

“Two words: election year,” said Todd Biederman, who retired last year after 31 years in the Army and is now defense contracts manager for BRS Aerospace. The company has a 160-worker plant in Moore County where it makes parachutes. “It will be the Republicans versus the Democrats, all talking trash. And it will cripple the defense industry.”

Brian Kent, founder of K3 Enterprises, a business consulting firm based in Fayetteville, has been diversifying his work to prevent total reliance on the military so K3 can survive if the budget cuts hit. Kent works with manufacturers to find customers, get contracts and set up training protocols on how the customer should use and maintain the product. Until recently, the 20-year Army veteran worked only with customers seeking military contracts.

Now, he also looks for commercial and other government uses; he’s currently helping the maker of an automatic sandbag-filler market the machine to coastal municipalities and hospitals that could use it to protect against a hurricane’s high tides.

It has obvious military applications, too, but K3 has about 20 proposals with the Defense Department now, including some that were scheduled to be awarded six months ago.

“This is what hurts us, working with the defense guys. It’s so unpredictable,” Kent said. “It makes it difficult to borrow money, plan staffing and purchase supplies.

“The defense industry is not a game for you if you’re weak at heart.”

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