By Kevin Brancato and Robert Levinson

(Bloomberg) — Defense contractors may be able to protect some revenue from deficit-reduction cuts by persuading Pentagon buyers to sign contracts committing funds appropriated before fiscal year 2013.

The Office of Management and Budget estimates that $83.5 billion in previous years’ Department of Defense funds will remain unobligated on Sept. 30, the end of fiscal 2012. All those funds, combined with the entire fiscal 2013 budget, are subject to $54.7 billion in sequestration cuts next year, as required by the 2011 Budget Control Act.

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However, any unobligated balances from fiscal 2012 or prior years that are placed on contract by Jan. 2, when sequestration takes effect, will be exempt from sequestration cuts.

This BGOV Insight follows an Insight published May 29 which calculates the potential impact of unobligated balances on the allocation of the Pentagon’s sequestration cuts.

Defense contractors may press managers of programs with large, unobligated balances to accelerate contracts in order to exempt the money from sequestration.

September Spending

It is unclear how much of the estimated $83.5 billion in unobligated balances can be put on contract before Jan. 2, 2013. The Pentagon’s refusal to plan for sequestration means defense program managers may rely on the annual end-of-fiscal- year spending spree to get unobligated money on contracts.

Federal buyers and sellers rush every September to obligate funds set to expire at the end of the fiscal year. This September, those transactions may offer opportunities to also get prior-year, non-expiring funds on contract, which will prevent their sequester.

Combining expiring and unobligated funds may not be easy because changes in a program’s financial plan require multiple approvals from the military services, the Pentagon, and OMB. Some unobligated balances also are easier to put on contract than others.

A depot may obligate remaining funds by ordering larger amounts of frequently used spare parts. A weapon system still in research and development may have more trouble getting contracts signed because doing so may be tied to having achieved specific milestones, such as proving that key new technologies work.

OMB’s estimate of $83.5 billion in unobligated defense balances at the end of fiscal 2012 probably is too low. Every year since 2008, OMB has underestimated the amount of unobligated defense balances by more than 50 percent.

Leftover Money Goes to Contractors

The breakdown of unobligated balances at the end of fiscal 2011 may provide some insight on the programs and contractors most likely to be affected by sequestration of previous-year money.

At the end of fiscal 2011, $134.2 billion in Pentagon funds remained unobligated. About 80 percent were in categories used mostly to pay contractors: 56 percent in procurement, 12 percent in research and development, and 12 percent in military construction.

The five accounts with the largest unobligated balances, representing 39 percent of all unobligated funds, were in procurement. The largest was $14.5 billion for Air Force aircraft. The funds in that account pay for the F-35 fighter jet, made by Bethesda, Maryland-based Lockheed Martin Corp., and the V-22 tilt-rotor aircraft, made by Chicago-based Boeing and Textron, based in Providence, Rhode Island.

The second-largest account, at $11.5 billion, pays for Navy ships, including Virginia-class submarines made by Falls Church, Virginia-based General Dynamics Corp. and Huntington Ingalls Industries Inc., based in Newport News, Virginia, as well as Littoral Combat Ships made by Lockheed and Austal Ltd., based in Henderson, Australia.

The third-largest account, at $10.5 billion, covers “other procurement” for the Army. This account provides funds for communications equipment, support and training devices, and tactical vehicles, such as the Family of Medium Tactical Vehicles, made by Oshkosh Corp., based in Oshkosh, Wisconsin.

It’s not surprising that large, complex weapons have the most unobligated funds. Aircraft, ships, and large wheeled vehicles take a long time to put on contract and build. The money in these accounts can be rolled over for years, though it does expire. (See “Some Funds Last Longer” graphic.)

(Kevin Brancato and Robert Levinson are defense analysts for Bloomberg Government. The views expressed are their own.)

To contact the analysts: Kevin Brancato in Washington at kbrancato@bloomberg.net and Robert Levinson in Washington at rlevinson5@bloomberg.net;

(Read the full Bloomberg Government report, “September Spending Spree Takes on New Urgency.” BGov.com is a paid site and requires a subscription for access.)

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