San Diego Business Journal

— A lame-duck Congress approved a final 2017 defense budget in early December and sent it to President Obama for his signature.

The full House of Representatives passed the House-Senate conference report for the National Defense Authorization Act on Dec. 2 with a 375-34 vote. The Senate approved it Dec. 8 with a 92-7 vote.

The bill had enough votes to withstand a presidential veto, according to published reports.

As of Dec. 14, it was unclear as to what action the president would take on the bill.

A signed 2017 defense budget would give defense contractors much more visibility into the year ahead. It would also give the military services and their contractors the freedom to begin new projects.

San Diego County is expected to benefit from $8.7 billion in military procurement in 2017, up from an estimated $8.6 billion in 2016, according to a recent study commissioned by SDMAC, the San Diego Military Advisory Council.

Stopgap Measure

The 2017 fiscal year began Oct. 1. So far, the U.S. Defense Department has been operating under a stopgap spending bill. No new projects may begin under the bill, called a continuing resolution.

The new budget would set aside money for U.S. Navy ships to make visits to Barrio Logan’s shipyards for all types of work, from small repairs to major overhauls. San Diego’s shipyard cluster is completely run by private enterprise. BAE Systems, the NASSCO unit of General Dynamics Corp. (NYSE: GD) and Huntington Ingalls Industries (NYSE: HII) run the three largest yards.

The fiscal 2017 budget would fund aircraft going together at privately held General Atomics Aeronautical Systems Inc. in Poway. Several lines of the U.S. Air Force budget contain several hundred million dollars for MQ-9 Reaper aircraft. The money appears in the main budget as well as the separate, overseas war budget (called overseas contingency operations or OCO by Pentagon planners). More is set aside for aircraft modifications as well as research and development.

Separately, the fiscal 2017 budget would fund unmanned aircraft programs managed by Northrop Grumman Corp. in Rancho Bernardo. Some $396 million is set aside for the U.S. Navy’s MQ-4 Triton aircraft. Budget negotiators decreased that sum from the original $409 million. The R&D budget sets aside another $112 million for Triton. (Budget negotiators apparently deleted a $95 million request for Triton in the overseas war budget.)

Northrop Grumman (NYSE: NOC) has several other businesses in San Diego, including a shop that builds electronics for the F-35 fighter.

While there is no government-run shipyard in the region, the Navy operates an aircraft repair and overhaul depot at Naval Air Station North Island. It handles a variety of aircraft, including carrier-based F/A-18 fighters and helicopters. Government work — as well as the work of outside contractors — will continue there.

SPAWAR Purchases

Also funded are a variety of U.S. Marine Corps and Navy commands, including the Space and Naval Warfare Systems Command (SPAWAR), which is expected to make electronics and information technology purchases in the new year. SPAWAR awarded $5 billion in contracts in 2015, with some $1.1 billion going to the San Diego region and $397 million going to San Diego small businesses, the SDMAC report said. SDMAC is a local organization with many defense contractor members, and deep military ties.

The entire Pentagon budget for 2017 — including funding for the Department of Energy — is $619 billion, up from the $610 billion that President Obama requested. The difference includes money for operations in Iraq, Afghanistan and Europe, as well as another $3.2 billion for military readiness and training.

The base defense budget of $523.7 billion is supplemented by some $59.5 billion for overseas war funding (OCO) and an additional $8.3 billion for overseas base requirements.

Pay Raise

The spending plan includes a 2.1 percent pay raise for troops. The Defense Department is expected to pump $9.98 billion into the San Diego economy this year in pay for uniformed and civilian employees, up from an estimated $9.78 billion in fiscal 2016, according to the SDMAC report.

As Congress wrangled over how to fund the military and other defense issues — including the appropriateness of naming recently retired Gen. James Mattis as defense secretary — The Washington Post broke news about an internal Pentagon report that said a five-year, $125 billion program of cuts at the Defense Department could eliminate unnecessary back-office bureaucracy. The report, assembled in 2015, had reportedly been suppressed by Pentagon leaders.

One of its recommendations was that the Pentagon use more information technology.

In response, House and Senate Republicans led by Rep. Mac Thornberry of Texas and Sen. John McCain of Arizona said the Pentagon could easily cut the number of generals, admirals and senior civilian executives by 12 percent. “Bloated headquarters staffs” could easily lose 25 percent of their employment, the legislators said.