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Monday, Jun 24, 2024

Defense Budget Likely to Deliver for San Diego

Defense Contracts Awarded
in San Diego County

2018:$10.13 billion

2017: $9.18 billion

2016: $8.53 billion

Final Defense Budget

2019: $717 billion

2018: $692 billion

2017: $619 billion

Source: USAspending.gov. Figures show Department of Defense prime contract awards, with funds obligated to San Diego County recipients.

A draft Pentagon spending plan issued March 12 offers much to San Diego defense contractors, including publicly traded giants that build military ships and aircraft.

Under the 2020 plan, General Dynamics NASSCO would build two more U.S. Navy auxiliary ships while Northrop Grumman Corp. and privately held General Atomics Aeronautical Systems Inc. would each get more than $1 billion for unmanned aircraft programs.

But the budget for the fiscal year that begins in October is just a pencil sketch. Congress will likely call for many changes, and the negotiations have barely begun. Some see the budget as a political statement, teeing up debate for the 2020 presidential election.

The way through Congress will be tough because the defense budget document includes some divisive issues, including funds for a wall on the U.S.-Mexico border.

Defense spending is a significant part of the San Diego County economy, supporting an estimated 1 in 5 jobs. In 2018, $9.4 billion in procurement contracts flowed into the county, according to a recent study from the nonprofit San Diego Military Advisory Council. Defense contractors employ thousands. The 2020 budget blueprint calls for $718.3 billion in U.S. Department of Defense spending and a total of $750 billion in national security spending.

It’s not just one budget at the Defense Department. In addition to the basic Pentagon budget proposal, there is a plan for the separate warfighting budget, known in Defense Department lingo as OCO (for Overseas Contingency Operations). On top of that there is an emergency budget proposal. Both the OCO and emergency requests add up to $173.8 billion.

The emergency budget of $9.2 billion includes funding for military construction in response to emergencies, to include border security and the repair of facilities damaged by Hurricanes Florence and Michael.

Carrier Leads Budget Request for Ships

The Pentagon has billed its budget as the largest budget request in more than 20 years for shipbuilding.

In all, the Pentagon seeks $34.7 billion in ships.

The 2020 budget proposal calls for two John Lewis-class fleet replenishment oilers, built by the NASSCO subsidiary of General Dynamics (NYSE: GD). The budget plan calls for spending $1.08 billion for procurement on the locally built U.S. Navy ships and an additional $1.7 million for research, development, test and evaluation.

Looking ahead, the five-year budget plan calls for another Lewis B. Puller class expeditionary sea base ship to be built in fiscal 2023.

The proposal calls for building the fourth Gerald Ford-class aircraft carrier, which has yet to be named. Budget documents mention advanced aircraft launch and recovery systems built by locally based General Atomics, saying the systems offer “enhanced capability with reduced manning.” The systems rely on new technology, and they have their critics.

San Diego also has its ship repair ecosystem, concentrated in Barrio Logan. NASSCO, BAE Systems San Diego Ship Repair, Huntington Ingalls Industries and Pacific Ship Repair and Fabrication are prime contractors, supporting hundreds of subcontractors.

Ship depot spending would rise 6 percent under the new Pentagon proposal, from $9.8 billion in fiscal 2019 to $10.4 billion in fiscal 2020. The Pentagon also spent $10.4 billion in fiscal 2018.

Funding for ship repair appears in the OCO budget, which differs from usual practice. “It will be interesting to see how Congress reacts to that,” said Derry Pence, president of the Port of San Diego Ship Repair Association.

Funds Plentiful for UAVs

Northrop Grumman (NYSE: NOC) stands to gain slightly more than $1 billion from the Global Hawk program in the fiscal 2020 budget proposal. Some $521.3 million would go to procure two systems for the Navy (a version called Triton). Some $438 million would go toward R&D on both the Navy and U.S. Air Force models. Global Hawk is an autonomous, high-altitude aircraft that gathers intelligence. The program is based in Rancho Bernardo, though aircraft are built in Palmdale.

General Atomics Aeronautical Systems Inc. stands to gain roughly $1.15 billion in unmanned aircraft work, mostly on the MQ-9 Reaper, and to a lesser extent, on the MQ-1 Predator. GA-ASI designs, builds and supports the aircraft in North County.

The U.S. Marine Corps proposes to buy three MQ-9A Reaper aircraft for $77 million under the plan, in the warfighting (OCO) part of the budget.

The Air Force budget plan calls for spending $764.8 million for 12 MQ-9A Reaper aircraft, ground control stations and modifications to extend the range of already-delivered Reapers. Some $175 million would go toward research and development. The Reaper can serve as a spy aircraft or be a strike platform, delivering missiles or bombs.

Under the budget blueprint, U.S. Army spending on Predator aircraft would total $124 million. The Army calls its Predator aircraft Gray Eagle.

Electronics Work Should Continue

The budget spells out military construction projects such as improvements to the airfield at Naval Air Station North Island and Pier 8 at Naval Station San Diego.

Less information is available on the military electronics programs at the core of many San Diego County businesses.

Ken Peterman

Ken Peterman, president of Viasat Inc.’s government systems unit, said the way the government buys electronics is turning toward something that might be called “information technology as a service.” Instead of the government buying a system and living with it for decades, the military would continually upgrade its electronics as technology advances.

Infrastructure as a service has not arrived, but the 2020 budget proposal contains “significant steps in the right direction,” Peterman said.

John Roberti

John Roberti, vice president of government relations and strategy for San Diego-based Cubic Corp., said he sees opportunity for Cubic’s electronics and training businesses in the 2020 budget proposal. Military training is increasingly electronic and in some ways resembles video games. The Army budget, for example, calls for $136 million for R&D on its Synthetic Training Environment, and Cubic (NYSE: CUB) might go after some of those funds, Roberti said.

Northrop Grumman has sizable local factories building electronics for state-of-the-art F-35 fighter aircraft and signal jammers that let soldiers disable roadside bombs.

The Pentagon spending plan contains $9.6 billion in total cybersecurity spending. A fraction of that will likely go to SPAWAR, the Space and Naval Warfare Systems Command of San Diego, which employs large and small businesses.

Contact Special Sections Editor Brad Graves at bradg@sdbj.com or at (858) 277-6359, extension 3102.


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