Friday, April 06, 2012

Defense Contractors At Risk From Pension Obligations

Moody's is saying that America's leading defense contractors are at risk from underfunded pension plans.  There is little comfort in arguing that contractors' ability to bill the government for their pension gaps will reduce the risk to their balance sheets or credit ratings.  The government's ability to pay any unanticipated pension shortfalls is limited by the total appropriations for a given fiscal year.  DOD's typical practice is to reduce Operations and Maintenance spending when it finds contingency-driven costs exceeding budgeted estimates.  Paying such a sudden request for pension shortfalls will force DOD to rob money from O&M accounts even earlier in a fiscal year than it already does.  This will place any contingency operations at serious risk and force DOD to seek even more frequent supplemental appropriations throughout the year.

This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities.  The defense industry lobbyists who pushed for this change shouldn't gloat.  Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether.  The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.