The Insider

With the fiscal year set to expire early next week, Pentagon Comptroller Robert Hale will hold a briefing tomorrow "on the Department of Defense's contingency plan guidance for a potential lapse in government appropriations," according to a just-issued DOD announcement.

House and Senate lawmakers are working on a continuing resolution that would keep the government running past the end of fiscal year 2013, which closes next Monday. The White House today issued a statement of administration policy commenting on the proposed bill.

Inside the Pentagon reports this morning that the uncertainty surrounding sequestration is putting DOD analysts in the unenviable position of readying defense reductions that would be difficult to reverse if the $500 billion cuts over 10 years were to be lifted:

In the near term, defense officials are facing the possibility of having to cut $50 billion from the FY-14 budget when that year's sequestration cap kicks in early next year. Defense leaders unveiled a $527 billion budget proposal in May that exceeded the BCA limit.

Congress also has disregarded the sequestration requirement, with lawmakers expressing hope that the cuts could be averted this year. Yet, the law has continued to stand, propped up because of disagreements between Republicans and Democrats over how overall government spending should be reduced and taxes increased.

Meanwhile, a government shutdown looms on Oct. 1 because some Republicans have threatened to block a continuing resolution unless the Obama administration's signature legislative accomplishment, the Affordable Care Act, is not funded.

Pentagon leaders, for their part, are awaiting whatever lawmakers decide. "No decision has been made" regarding DOD's response to FY-14 sequestration, DOD spokesman Cmdr. Bill Urban told Inside the Pentagon. "We will issue guidance for operating under a continuing resolution or defense appropriations after it has been approved."

In related news, the Senate Armed Services Committee has called in senior service leaders to testify next month on the "impact of sequestration on the national defense."

According to a committee statement released yesterday, the Oct. 8 hearing will feature the testimony of Army Chief of Staff Gen. Raymond Odierno, Chief of Naval Operations Adm. Jonathan Greenert, Marine Corps Commandant Gen. James Amos and Air Force Chief of Staff Gen. Mark Welsh.

Pentagon Comptroller Robert Hale is seeking congressional authorization to shift $24 million from the Defense Security Cooperation Agency to the Global Security Contingency Fund to help the Philippine government transition some of its missions from the military to civilian law enforcement.

"Funds are required to support the Philippine government's efforts to accelerate transition of internal defense and counterterrorism responsibilities to civilian law enforcement and ensure the Philippine military can provide a credible defense posture in response to rising geopolitical proessures, particularly in the South China Sea," the Aug. 12 reprogramming request states.

Hale's reprogramming request "provides funding in support of higher-priority items, based on unforeseen military requirements, than those for which originally appropriated; and are determined to be necessary in the national interest. They meet all administrative and legal requirements, and none of the items have previously been denied by the Congress."

Late last month, Defense Secretary Chuck Hagel visited the Philippines, where he told reporters during a briefing in Manila:

One theme that I want to emphasize is that the United States is committed to the mutual defense treaty between our nations. It was borne out of Americans and Filipinos fighting shoulder-to-shoulder during World War II. And it has formed the foundation of the U.S.-Philippine security relationship for more than 60 years.

In the spirit of that treaty, and its continuing relevance today, President Aquino and I reaffirmed the progress being made in the ongoing discussions for our framework agreement. This agreement will strengthen cooperation between our two militaries and help them work together more effectively, so both now and the future that relationship will strengthen.

This progress is welcome and encouraging. I noted that our negotiating teams are working hard to finish the framework agreement in the near future. The United States does not seek permanent bases in the Philippines. That would represent a return to an outdated Cold War mentality. Instead, we are using a new model of military-to-military cooperation befitting two great allies and friends, and looking to increase our rotational presence here, as we have done recently in Singapore and Australia. Such an arrangement would benefit both our militaries by increasing our ability to train and operate together.

Deepening engagement opportunities between our forces would further support President Aquino's defense modernization agenda. The United States has a great deal of experience in building a modern military and we would like to share what we've learned with our Filipino allies.

U.S. officials have launched a new study on the "strategies for and challenges to" American efforts to negotiate status of forces agreements (SOFAs), according to a memo obtained by InsideDefense.com. Such agreements -- the United States is party to more than 100 -- define the legal status of Defense Department personnel and property on foreign soil and lay out rights and responsibilities between the United States and the host government.

The Aug. 23 memo, prepared by acting Under Secretary of State for Arms Control and International Security Rose Gottemoeller for the International Security Advisory Board, states the review will examine the results and status of recent SOFA efforts; the "widening gap" between provisions desired by DOD and what host nations are willing to provide; host-nation perspectives on as well as objections to U.S. SOFAs, and improved strategies for negotiating future SOFAs. The board, led by former Sen. Gary Hart (D-CO), is due to complete its assessment by June 2014.

China's ownership of 95 percent of the supply of rare-earth minerals that are crucial to high-tech equipment -- military and civilian -- has in recent years caused concern among lawmakers on Capitol Hill.

A new Congressional Research Service report -- originally obtained by Secrecy News -- notes that lawmakers in their 2011 Defense Authorization Act called on the defense secretary to "conduct an assessment of rare earth supply chain issues and develop a plan to address any vulnerabilities."

The law mandated that the secretary "assess which rare earths met the following criteria: (1) the rare earth material was critical to the production, sustainment, or operation of significant U.S. military equipment; and (2) the rare earth material was subject to interruption of supply, based on actions or events outside the control of the U.S. government."

DOD subsequently issued its report in March 2012, which found there wasn't that much to worry about:

Rare earth materials are widely used within the defense industrial base. However, such end uses represent a small fraction of U.S. consumption. As a result, when looked at in isolation, the growing U.S. supply of these materials is increasingly capable of meeting the consumption of the defense industrial base. Over the past year, there have been a number of positive developments with regard to both supply and demand within the rare earth materials markets. Reactions to market forces have resulted in positive developments, such as prices decreasing by half from their peak levels in July 2011, increased investment and domestic supply of rare earth materials, corporate restructuring within the supply chain, and lower forecasts for non-Chinese consumption. By 2015, the Department believes this will help to stabilize overall markets and improve the availability of rare earth materials.

The Department remains committed to pursuing a three-pronged approach to this important issue: diversification of supply, pursuit of substitutes, and a focus on reclamation of waste as part of a larger U.S. Government recycling effort. In addition to the many positive developments that indicate an increasingly diverse and robust domestic and global supply chain for rare earth materials, the Department will continue to monitor these supply chains, prepare possible contingency plans for ensuring their availability, and implement such plans as appropriate.

The Sept. 17 CRS report also notes that Mountain Pass, CA-based mining company Molycorp recently announced it was buying Canadian company Neo Material Technologies. "Neo Material Technologies makes specialty materials from rare earths at factories based in China and Thailand. Molycorp also announced the start of its new heavy rare earth production facilities, Project Phoenix, which will process rare earth oxides from ore mined from the Mountain Pass facilities," CRS states.

Given all that, the CRS report states that Congress "may choose to use its oversight role to seek more complete answers" to four questions:

* Given Molycorp's purchase of Neo Material Technologies and the potential for the possible migration of domestic rare earth minerals to Molycorp's processing facilities in China, how may this move affect the domestic supply of rare earth minerals for the production of U.S. defense weapon systems?

* Given that DOD's assessment of future supply and demand was based on previous estimates using 2010 data, could there be new concern for a possible rare earth material supply shortage or vulnerability that could affect national security?

* Are there substitutes for rare earth materials that are economic, efficient, and available?

* Does dependence on foreign sources alone for rare earths pose a national security threat?

CRS concludes with this:

Congress may encourage DOD to develop a collaborative, long-term strategy designed to identify any material weaknesses and vulnerabilities associated with rare earths and to protect long-term U.S. national security interests.

The White House Office of Management and Budget has directed the Defense Department and other federal agencies to prepare for a possible government shutdown at the end of the month in the event Congress does not pass a spending bill to fund operations at the start of the new fiscal year, which begins on Oct. 1. “At this time, agencies should be updating their plans for operations in the absence of appropriations,” Sylvia Burwell, OMB director, wrote in a Sept. 17 memo. She added:

The Administration does not want a lapse in appropriations to occur. There is enough time for Congress to prevent a lapse in appropriations, and the Administration is willing to work with Congress to enact a short-term continuing resolution to fund critical Government operations and allow Congress the time to complete the full year 2014 appropriations. However, prudent management requires that agencies be prepared for the possibility of a lapse. To that end, this guidance reminds agencies of their responsibilities to plan for agency operations under such a contingency.

The Aerospace Industries Association has released a new white paper on the "State of the Defense Budget."

Developed by AIA's National Security and Acquisition Policy division, the document "analyzes how the United States arrived at this budget impasse and the initial impacts of sequestration, followed by a look ahead at the potential cuts in 2014 and beyond."

Here are some excerpts:

Given the President's announced intent to once again exempt Military Personnel spending, expect between 15-20 percent reductions in investment spending should full sequestration be implemented in January 2014. . . .

Should sequestration occur in fiscal year 2014, the defense topline including overseas contingency funding will be reduced to its lowest level in constant dollars since 2002. While the topline dollars may be similar to 2002, the overhead costs within that total are not: DOD's military personnel costs have inflated by 29 percent and its health care costs by 45 percent since 2002.

As for the "way ahead":

Given the need to resolve the extension of the nation's debt ceiling this fall, Congress and the president may well come to some sort of agreement on a revised defense budget for fiscal year 2014 and fiscal year 2015 at the same time. Such a deal will be achieved only in the context of a number of issues that have little to do with defense and will almost certainly only be agreed upon with great acrimony. It is certain that any deal will not result in a defense topline below the Budget Control Act and it is probable that we will see a total budget somewhere between the BCA cap and the president's current request.

Bingen, WA-based Insitu Inc. has been awarded a $300 million Scan Eagle unmanned aerial system support contract, the Pentagon announced this afternoon.

The firm-fixed-price, indefinite-delivery/indefinite-quantity contract is for "hardware and operational and maintenance services in support of the Scan Eagle Unmanned Aerial Systems operated by the U.S. Special Operations Command," the Defense Department contract announcement reads, adding: "The hardware and services to be provided include replacement air vehicles, spare and consumable parts, and in-theatre field service representatives to supplement naval special warfare operators."

Work will take place in Bingen "and is expected to be completed in September 2016," according to DOD.

The Navy has obligated $85 million in fiscal year 2013 overseas contingency operations contract funds, all of which will expire at the end of this month, according to the statement.