The Insider

The agency responsible for managing the U.S. nuclear weapons complex still has lots of room for improvement, according to the Government Accountability Office.

In prepared testimony for a House Armed Services strategic forces subcommittee hearing held yesterday, GAO had this to say about the National Nuclear Security Administration:

NNSA has made considerable progress resolving some of its long-standing management deficiencies, but significant improvement is still needed especially in NNSA's management of its major projects and contracts. GAO reported in June 2004 that NNSA has better delineated lines of authority and has improved communication between its headquarters and site offices. In addition, NNSA's establishment of an effective headquarters security organization has made significant progress resolving many of the security weaknesses GAO has identified. Nevertheless, NNSA continues to experience major cost and schedule overruns on its projects, such as research and production facilities and nuclear weapons refurbishments, principally because of ineffective oversight and poor contractor management. In some areas, NNSA can be viewed as a success. Importantly, NNSA has continued to ensure that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing. At the same time, NNSA's struggles in defining itself as a separately organized agency within DOE, and the considerable management problems that remain have led to calls in Congress and other organizations to increase NNSA's independence from DOE. However, senior DOE and NNSA officials have committed to continuing reform, and DOE’s and NNSA's efforts have led to some management improvements. As a result, GAO continues to believe, as it concluded in its January 2007 report, that drastic organizational change to increase independence is unnecessary and questions whether such change would solve the agency's remaining management problems.

Seven months after Rolls-Royce and General Electric stopped self-funding the Joint Strike Fighter's second engine -- and more than a year after the Defense Department issued the contractors a stop-work order on the F136 engine -- termination proceedings are still not complete, Rolls-Royce officials said today.

The GE-Rolls-Royce team developing the F136 engine formally ended its work at the end of calendar year 2011. At that point, it was unclear where F136-related property, such as spare and test engines, would end up. At a media briefing today, Tom Hartmann, Rolls-Royce's senior vice president of U.S. government programs, said the status of those items remains undecided.

“We are currently in the termination process for the F136 with the U.S. government, and so it is premature to say how that worked out until that process is complete,” Hartmann said. “There's a legal time frame -- I think we have up to a year -- to complete that work.”

The parts developed under the F136 program are property of the Defense Department, so the two companies are awaiting direction on the final disposition of those items, Hartmann said. Rolls spokesman George McLaren added that the parts have remained where they were at the time the F136 team received its termination notice -- namely, at a Rolls-Royce facility in Indianapolis, a General Electric facility in Evendale, OH, in the possession of some suppliers, and possibly at some government sites.

DOD issued the GE-Rolls team a stop-work order on the F136 on March 24, 2011. The companies then self-funded development on the motor until early December, at which point they announced plans to wind down the program at the end of the year.

The Pentagon is prepared to be an "early adopter" of some technologies in ways that other departments cannot be, according to Deputy Defense Secretary Ashton Carter. In an April 16 speech on energy security at the Georgia Institute of Technology, Carter said:

First, there's some areas where we are cost insensitive in a way that the rest of the economy won't and can't be. We're prepared to invest and adopt before the rest of the economy and, sometimes, after we do -- sometimes but not always -- sometimes, that leads to a more economical version of the same product down the line as technology improves, a product that can be adopted and accommodated by the rest of the economy.

In the meantime, we both benefit on our own terms.

Secondly, unlike so many in the economy, we in the Department of Defense take the long view. We're going to be around a long time. Our cost of capital compares extremely favorably to anyone else's in the economy.

We're prepared to make investments that are sure to pay off, but won't pay off for a while, whereas others can't afford to place those kinds of bets as easily. We're prepared to do so. It’s in the national interest. It's in the warfighters' interest. It's in the taxpayers' interest. We can justify it as a larger value and a larger meaning over time to society as a whole.

Defense Department officials held a "director-level" meeting at the Pentagon this morning with officials from the Japanese defense and foreign-affairs ministries to provide an update on issues related to recent crashes of V-22 Osprey aircraft, Pentagon Press Secretary George Little said in a statement.

The meeting was led by Christopher Johnstone, the Pentagon policy shop's director for Northeast Asia, and Brig. Gen. Terrence O'Shaughnessy, the Joint Staff's deputy director for politico-military affairs for Asia, Little said. The session also included representatives from the Marine Corps and Air Force, who provided updates on the status of the investigations into recent Osprey mishaps, he said. Assistant Secretary of Defense for Asian and Pacific Security Affairs Mark Lippert, who Little said Thursday would participate in the session, did not.

"DOD takes the inquiries made by the Japanese government very seriously and provided relevant information to the extent currently possible, and will continue to do so," Little said. The Marine Corps' plans to base MV-22 Ospreys in Japan are facing potential delays amid increasing concern there about the safety of the aircraft. An Air Force CV-22 Osprey crashed June 13 during a routine training mission at Hurlburt Field's Eglin Range, north of Navarre, FL. "The Osprey is a highly capable aircraft with an excellent operational safety record, which includes more than five years of worldwide deployments and 140,000 flight hours," Little said.

Credit Suisse analysts attended Bloomberg Government's aerospace and defense conference this week, and this morning issued their thoughts on what they heard:

* Plenty of Rhetoric and Congress Still Lacks Direction: There was clear consensus that sequester has disastrous ramifications ranging from decimation of the defense industry, massive job loss and severe weakening of national security and the economy. But, nobody offered any semblance of a solution. Of course, among the speakers only the congressmen and senators are in any position of real power and they generally pointed figures at one another and stayed to party lines, although there were minor signals that modest compromise could occur down the road. Our sense is that no solution is imminent and this will not be addressed until after the election.

* Lack of Visibility Should Drive Continued Defense Stock Volatility: We expect shares to be pressured through summer and into the election, although there may be support for companies like LMT ahead of its anticipated September dividend hike. While most speakers expect an ultimate deal through compromise on revenues, cost-cutting and entitlements, it appears that such a deal will not materialize until the lame duck and perhaps even calendar Q1'13. Mechanically, we see a CR in place in calendar Q4'12 and there is some risk that Sequester then triggers on Jan 3rd. Our understanding is that such a trigger won't take effect until Feb 13th (CR in place until then), but we suspect eventual compromise on cuts of $250-300B, which is what we believe is currently discounted in the shares. If cuts are limited to $100B as Senator McCain (R-AZ) and Carl Levin (D-MI) hope, we see modest upside vs more severe downside with full sequester.

* Notable Comments: Perhaps Dov Zakheim (former DOD Comptroller) said it best. Sitting on a panel with Democratic and Republican congressmen, Zakheim was frank in saying he does not think that this Congress can cut a deal because it "would've done so already". He added that he expected GDP to decline 0.5% on Sequestration. Marian Blakey (CEO Aerospace Industries Association) quantified potential job loss at 1 million jobs (330k directly from contractors and another 570k associated positions).

Regarding negotiations, Congressman Forbes (R-VA) said it's easy to say "let's put everything on the table", but we [Congress] don't even have a table.

On a positive note, Senator McCain mentioned that an amendment had been tagged onto the Farm bill requiring a report on the effects of sequestration on DOD and the economy by August 15th and said it is irresponsible for the administration not to have done this analysis earlier.

Of course, InsideDefense.com was at the conference as well. Scroll down the Defense:Next blog to view our coverage.

The Defense Department will brief Japanese defense officials tomorrow on the status of investigations concerning recent V-22 Osprey crashes, Pentagon Press Secretary George Little told reporters today. Assistant Secretary of Defense for Asian and Pacific Security Affairs Mark Lippert will participate in the briefing, Little said.

The Marine Corps' plans to base MV-22 Ospreys in Japan are facing potential delays amid increasing concern there about the safety of the aircraft. An Air Force CV-22 Osprey crashed June 13 during a routine training mission at Hurlburt Field's Eglin Range, north of Navarre, FL. InsideDefense.com reported last night that the Air Force has removed the commander of the 8th Special Operations Squadron, citing a lack of confidence in his leadership following that crash. The Marine Corps, meanwhile, has been investigating a fatal MV-22 Osprey crash in Morocco on April 11.

Alarm bells continue to ring over the hundreds of billions of dollars in Pentagon cuts that could result from sequestration as several members of Congress today called for the Obama administration to take a larger role in solving the problem and encouraged fellow lawmakers to put everything -- including taxes and entitlements -- on the table.

During a Bloomberg Government defense conference, Rep. Norm Dicks (D-WA), Rep. Randy Forbes (R-VA) and Sen. John McCain (R-AZ) said the White House must take a larger role.

“The idea the administration can sit back and not do anything about this is unacceptable as far as I am concerned,” said Dicks, the ranking member on the House Appropriations Committee.

Forbes, who chairs the House Armed Services readiness subcommittee, said he was shocked by reports that the Pentagon was not planning for the cuts. McCain, the ranking member of the Senate Armed Services Committee, said the president needs to take the lead, and called on the president to start a dialogue with Republican leaders in Congress.

McCain added that he could be open to revenue increases.

Dicks concurred, and said House leaders should set up a bipartisan staff panel to find a way to resolve the sequestration issue before the election, rather than waiting for a lame-duck session afterwards.

Forbes called for the Senate to pass a bill to enable the two houses to deal with sequestration in the conference process. He also said the idea of sequestration should be debated during congressional campaigns this year, as well as the presidential race. He said he hopes it galvanizes the public to demand action.

During the session, former Pentagon comptroller Dov Zakheim said that if lawmakers were able to cut a deal they would have done so already. Zakheim said he does not understand why the White House has been sitting on its hands. He said the lame-duck Congress does not have the incentive to fix the problem of sequestration.

Zakheim recommended lawmakers pass a one-year continuing resolution and force the new Congress to solve the problem next year.