US government shutdown could impact defense contractors, disrupt weapons production

Key Points

• Paychecks for US military personnel on active duty could be delayed

• Troop morale could suffer from a shutdown at a time when the military is facing global threats

• Nearly 400,000 civilian defense workers could be immediately furloughed in a shutdown

U.S. Marine Corps reservists with the 1st Battalion, 24th Marine Regiment at Camp Pendelton in Oceanside, Calif.
Getty Images

A federal government shutdown could result in major furloughs at the Department of Defense and even disrupt the production of weapon systems, according to experts.

Now almost seven months through the current fiscal year, the federal government is operating under a continuing resolution passed in December, which is set to expire Friday.

Without a deal, however, there could be federal workers immediately furloughed, including around 400,000 civilian defense employees as was the case when the last shutdown happened in 2013.

"If there were to be a government shutdown, the most immediate impact is that the DoD can't spend any money," said Katherine Blakeley, a research fellow at the nonpartisan Center for Strategic and Budgetary Assessments in Washington, D.C.

She said a shutdown would mean military personnel on active duty wouldn't get paid, civilians wouldn't get paid, and pay for the National Guard and reservists who perform training and drilling functions would be impacted too. Even so, the roughly 1.4 million active-duty U.S. military members still would be required to perform their roles.

During the 2013 shutdown, Congress passed a bill allowing some appropriations so that uniformed members of the services could be paid. They also included a separate bill to pay for Guard and Reserve members.

But there's no guarantee Congress will pass such bills this time around if there's a government shutdown.

If the 2013 shutdown is any indication, jobs that could be safe from furlough would be those deemed as performing activities critical to national security and the protection of life and property. The last shutdown lasted about 2.5 weeks, although some workers furloughed were allowed to return to their jobs early.

The Pentagon building in Washington, DC.
AFP | Getty Images

Still, that could mean defense acquisition workers might be furloughed as well as civilian workers at maintenance depots around the nation. Moreover, a former Pentagon official told CNBC it could potentially impact the ability of the Pentagon's leadership to obtain advice at a time when the U.S. military is facing growing hostilities overseas and new threats from North Korea and Russia.

"Although I'm not in a position to predict whether it will occur this time, I can say that when this sort of thing occurs it has an effect on morale and has an effect on the ability of the Secretary of Defense to obtain the relevant advice on policy and operations that he needs," said David Simon, a Washington, D.C.-based partner in Mayer Brown's cybersecurity and national security practice groups and a former special counsel at the Pentagon.

Having gone through the shutdown and cuts mandated through sequestration in 2013, Simon said he was "surprised" by the small number of individuals then who were deemed "essential" and excluded from the original furlough order.

Air Force Lt. Col. Eric Badger, a Pentagon spokesman, said the DoD was "taking appropriate steps to prepare for the unlikely event of a lapse in appropriations," and working in "close coordination" with the Office of Management and Budget. Beyond that, he wouldn't speculate on potential impacts in terms of furloughs to the department.

"There is enough time for Congress to prevent a lapse in appropriations, and we expect Congress will work with the administration to fund much of our additional FY 2017 budget request," said Badger. "The Secretary and the Service Chiefs highlighted the readiness needs of the armed forces in their recent testimony. That has not changed."

The budget battle comes as congressional Democrats are raising concerns about President Donald Trump's plan to spend billions to build a border wall and criticizing his threats to cut funding from so-called sanctuary cities. Any new spending bill to fund the government will need to get at least a two-thirds vote in the 100-member Senate, and the GOP has 52 seats so it will need at least eight more votes to reach the goal.

The Trump administration has proposed raising the defense discretionary caps for the current fiscal year through Sept. 30 and for next fiscal year to accommodate his increased military spending plans. The administration wants to pay for the higher defense spending with cuts to domestic programs but so far the Democrats have resisted the plan.

It's unclear if bipartisan negotiations will result in a budget deal in time before current funds for the government expire Friday.

"There's a lot of uncertainty in the business community," said Blakeley.

Major U.S.-based defense contractors rely on the Pentagon for the bulk of their revenue and any prolonged slowdown in federal government spending or a halt in key reimbursements could force them to announce furloughs of their own. There's also exposure for subcontractors and suppliers, including small or medium-sized businesses more sensitive to the disruption in cash flow than some of the larger primes.

"A shutdown of the federal government generally impacts government contractors and of course we're speaking of federal contractors in one of two ways," said Joseph Martinez, a Denver-based attorney specializing in defense and government contracts with the Dentons law firm.

First, he said when there's a shutdown the funding is gone and "government essentially doesn't have legal authority to spend any more money. So contractors who are waiting the award of a new contract, that new award cannot be issued" in most instances.

Additionally, Martinez said if the defense contracting officers or other technical personnel are furloughed as part of the shutdown there's a possibility government weapons programs could be delayed for "technical direction" or inspections.

Martinez recalls having a client back during the 2013 shutdown wait for inspection and key approvals so it went into a "a cold shutdown … where the contractor had to stop the manufacturing and put things into a standby mode."

In fact, if contractors do have to go into a standby mode on programs they might look to recoup the cost of the impacts later from the federal government. As a result, the shutdown could end up costing American taxpayers even more money on certain defense programs.

According to Martinez, when the government reopened after the 2013 shutdown there were "costs of shutting and restarting the [production] line so the contractor did seek compensation."

That said, in the case of big ticket programs such as Lockheed Martin's F-35 Joint Strike Fighter, experts say it would be unlikely for there to be any shutdown of the production given a brief government shutdown of a few days or weeks. They note most of the fighter program has funding secured several years out based on the previous two batches of contracts.

Lockheed is scheduled to report its first-quarter financial results on Tuesday and is likely to get asked about potential impacts on the company as a result of any government shutdown. Other defense primes are reporting results this week, including Boeing, General Dynamics, Northrop Grumman as well as Raytheon.