Stopping the Government’s Race to the Edge of the Fiscal Cliff

If you work in the national security space, you know that nothing happens across this industry without funding and budgets and some movement from Congress. And if you’re in this space, you certainly notice that the ability to pass a budget has been an ongoing issue. We’ve covered it in different ways over at ClearanceJobs, we will talk about the National Defense Authorization Act, the Intelligence Authorization Act. We kind of follow that legislation. Not only does it show how we’re funding these mission critical functions, but also how policy is getting made, especially when it comes to the security clearance process. You’ll find a lot of that actually in the Intelligence Authorization Act. That’s kind of turns into the policy that we see later. So following legislation really matters. I love to see companies who are both innovating and who are kind of explaining, demystifying some aspects of this work of actually getting things done in national security. And one of those companies is Rebellion Defense. One of those people is Jane Lee. I’m a big fan of hers and I appreciate her taking the time to chat. Jane Lee is the Chief Government Affairs Officer at Rebellion, an innovative software development technology company within this space. So really appreciate your time, Jane, and for being willing to chat with me today.

Of course, Lindy. It’s always so much fun to talk to you and not many people are as excited to talk about the budget like you. I think it’s just you and me really.

I’m a nightmare. Don’t invite me to your holiday party. I already got in trouble for this. Are you talking about politics at the holiday party? I was like, this stuff matters. We’ve got to talk about it. So yeah, don’t invite me to your holiday party. Maybe get the two of us together, a holiday party. We’ll make some exciting things happen. So I want to talk about the elephant in the room. You’ve worked at the intersection of national security and Congress, so let’s talk about that. The ongoing issue of continuing resolutions and Congress’s failure to pass a budget. How does that affect the DIB and especially emerging or innovating contractors in this space?

Sure. Let me talk about the first, the continuing resolution, which is a stop gap funding measure. It locks in prior year policies, programs, funding levels for the most part unless Congress makes specific exceptions. So I do want to start off with that short-term crs. It’s not unusual. Congress fights over about a trillion dollars in annual spending every year to help keep the government operating. It’s supposed to pass all those bills. It’s divided into 12 bills. So it’s supposed to pass this budget by October 1st, but really that rarely happens. And I took a look back at the entire modern budget history. It sounds like that would be a millennia, but really that was since 1974, so it’s been about 50 years and in that 50 year, five decade window, Congress has only passed the complete funding process on time four times in that entire history. And the most recently, that was 1997.

(03:23)
I think what would be unusual and unprecedented, and we’ll have those decisions coming up pretty soon because the CR expires for the Department of Defense on February 2nd. So what would be unprecedented is a full year CR. And so why that’s so damaging to emerging tech startup companies is that there’s new start prohibitions, for example. So a CR prohibits funding new activities, new projects, so it’s tough for the department to meet new emergent needs when it comes to modernization, it’s usually modernization readiness decisions that are placed on pause, and we don’t have to guess at the impacts what hasn’t been covered more thoroughly. So thank you so much for the opportunity to highlight this is that there already is a letter that was transmitted to the appropriators. Now the appropriators are the ones that draft these funding bills for Congress. It was from the chairman of the Joint Chiefs of staff on CR impacts, especially from a year long CR.

(04:25)
And these are investments, for example, that are critical to the Indo Pacific area of responsibility, including impacts to and activities around forward basing, something called sensor to shooter capabilities, which is our ability to really take action and lead campaigns in the area from ISR intelligence on down to leading these campaigns. There’s long range radars, hypersonic defense and investments in the classified space. Again, all of those different capabilities and make it crucial for us to compete in that region when there are deferments of these investments. These are also deferred opportunities and for startup companies, we’re just trying to find opportunities to compete and demonstrate our products. And you’re dealing also with the real constraints like runway for funding, unless you are prepared as a small company for these disruptions in advance, and if you don’t make some real tough choices to make sure you have cashflow being prepared for something like a full yurt CR or a shutdown, it can meet life or death for a company.

(05:31)
And no matter where you are actually in the defense industrial base, it’s a broad spectrum from the biggest primes onto the smallest suppliers, we’re all looking for demand signals where to place our investment, our research and development dollars because we’re always forward investing. And if those competitions don’t actually follow through with actual contracts and results, then again you have to make those really tough trade-offs. And this funding really makes it difficult also for DOD and the IC to attract companies and talent, especially when they have other opportunities in the commercial space. When you’re competing in a new software tech driven battle space, especially with a peer adversary. Certain technologies like we are with China, it can directly affect our defense posture. So that’s the full year CR impacts, but really a shutdown is a completely different story altogether.

I mean there’s so much, it’s at play here. The CRs, the full budget, the potential for a government shutdown. I think we get through those news cycles where we keep covering and the amount of prep that that takes within government too and spending to say, we keep having these prep scenarios for how do we cope with a government shutdown? It would be nice if that option wasn’t always on the table every fiscal year. Even in terms we have a conference every October conference planning these days. We now know the way the government ends up doing their budgets. It totally reframes what we look at as what a fiscal year looks like. You mentioned how the joint chiefs of staff, how the military weighs in on this. What role does industry play in advising or informing or leading and getting that understanding? Because we know the big contractors have a lot of lobbying arms on that the smaller defense contractors are emerging. Folks in the space might not necessarily have a seat at the table and it does affect you all disproportionately.

Sure. In fact, we have and I help lead a group of about 40 American startup companies in the defense tech space. It’s called the Software and Defense Coalition. In the past few years we’ve joined with the National Venture Capital Association, the Alliance for Commercial Technology and Government really to represent the innovation base and to push forward and understanding of what the impacts are on industry, especially the newer entrance to the market from an absence of full year funding for defense or a shutdown. We also advocated for the passage of the defense authorization bill and the intelligence bill, which actually Congress completed earlier this month. There were some important provisions in there to help codify the defense innovation unit. For example, they also lead a billion dollar fund that was authorized to help non-traditional contractors like rebellion and so many others in this space actually scale because that is actually a gap in the market.

(08:19)
So we help represent our views, and this is a public debate that is a cycle that that’s open to the public to inform industry community groups to inform starting at usually around the beginning of the year. And I have to say, you talk to members staffs that I know bottom line too. They all want to represent their constituencies back at home and they feel like they need to cut the best deal. So I wanted to highlight some of those dynamics. Two dynamics that I really focused I think on that haven’t been in the process in these negotiations or been affiliated with these negotiations from the, and there’s two dynamics here. The first is that defense spending is never really considered in a vacuum alone. It’s always in the context of a much bigger debate. So usually, for example, on the parity debate, so for every dollar increase in defense, do non-defense agencies get a dollar two?

(09:14)
That really has been the orientation for these negotiations for the past decade or so. And so there are also because defense is usually considered a must-pass bill, and I hope that continues to be the case this year. There are other issues like other funding bills, other priorities like policy writers. So those are policy provisions that are in these funding bills that usually try to ride with the defense budget to the finish line. So it all becomes a much bigger, more complicated negotiation than just the binary choice of do you support service men and women or not. These are complex negotiations and secondly, I do want to highlight the calendar might be broken because in this current system we’re constantly, like you referenced, we’re in this doom loop of these cascading delays. So for example, this year if the appropriations process for FY 24 and right now they don’t have an agreement on the top line, which is the very first step really to reconcile differences between the two chambers and the White House on these funding bills.

(10:16)
If they can’t finish their job by February 2nd, which is when there’s a funding cliff deadline, what happens for all of these bills too is that it causes a delay in the White House’s budget for the next fiscal year for FY 25 by statute in the, sorry, a 1974 Congressional Budget Act. There’s a deadline for the White House to transmit their budget by the first Monday in February. But usually again, that deadline gets blown past if there’s a delay in the White House budget. Then there’s delays also in the oversight capabilities of Congress to call up agency witnesses, have them justify their budget and then how they draft their budgets themselves. It starts in the two chambers individually, but then the legislative machine of reporting out the bills from committee and then you get to the floor because from a leadership perspective too, you want as broad of a spectrum of your conference to participate and debate and to mend these bills because that makes it much more fast.

(11:16)
Tracks an opportunity to get an enacted bill completed by the time that all of this activity happens. I haven’t even talked about the two chambers agreeing to an overall common framework. It’s already past October 1st, so the start of the fiscal year. So then you’re constantly here on fire in the end, the last quarter of the calendar year fighting over trying to get resolution to these bills. So it seems like it’s really a system where we can’t catch up. And so I think next year if there’s three factors that collide, it creates a perfect storm for defense funding. If there’s a full year CR, if there’s a sequester, which also is extremely harmful because that’s an arbitrary cross the board cut for all the different eligible accounts. If you have that specter of a shutdown, which I think there is a non-zero possibility of a shutdown, I think there’s going to be a lot more demands for budget reform and how this current system doesn’t meet, especially not the security interests.

I mean now you’re talking about love language, some disruption in the way we do things. So are there things that are discussed as far as reforming the budget process or I feel like we spend so much weight talking about, like you said, doomsday, that the possibility for innovation just gets lost. Do you think there is some momentum saying, Hey, this is broken. How can we actually reform this process and even bust open the calendar and do things differently?

There is a discussion that was authorized something called the PPE commission to take a look at the defense budget process, which is a multi-year process. There’s a five-year development process, a fit up to create the requirements and then have the POM process, which is the internal services, attaching resources to those priorities. And really this system has remained unchanged since Secretary McNamara since its origin. So there is a commission to take a look at different funding flexibilities, also different availability of funds, different colors of money and providing some flexibility that allows more discretion, especially when you’re talking about these major disruptions in the defense space to make sure that the top priorities are provided for. So there is a methodical review of the current budget system that’s happening right now, and so hopefully, again, regardless of what happens next year, knock on wood, I’m hoping that everything gets resolved.

(13:42)
We avoid a sequester, we get full year funding and we all move forward. But there is a review that’s coming up to take a look at the budget system and right now the department does have certain flexibilities that were already provided by Congress, something called BA eight, which is colorless money, especially for software acquisition that cuts across different colors of money. There’s operations maintenance, which is one year dollars. There’s RD t and E funds, which is two year and procurement is multi-year dollars and software development is in this binary approach where it’s just siloed in these mechanical processes. Isn’t iterative continuing process for development that you should cut across between product development and sustainment. So there is a structure that currently is provided for that Congress is going to review too as to whether there can be more programs eligible for this colorless money approach so that there are certain mechanisms that are in place to provide the department along with the reprogramming and transfer authority thresholds that provide them some discretion on how to use these tools. But again, I think if there’s a perfect storm for defense funding, there’s going to be I think an overall push for broader reforms, especially in the process of how Congress considers next steps and how they deliberate these appropriations bills.

Yeah, I want to talk to you a little bit about the hot topic of spending in Ukraine. We’ve got seen some chatter, there have been some decent op-eds on that. We’re heading into another election year with the politicization of things. We’ve seen a lot of that with the Ukraine funding and just a general lack of awareness of where our defense dollars go, how much of that is actually directed into the us. I think people see military spending as something, oftentimes it’s going overseas and they see these other countries where a lot of that is actually building up our US innovation. A lot of the innovation that used to hit the commercial sector would come through that. I think the way that our budget cycles are working now, the way that we kind of direct money the commercial sector is having to innovate and then punt that over to defense. But maybe can you talk about the misconceptions around the spending bills or when we’re spending money on military aid, what that actually goes to?

Yeah, so for Ukraine assistance specifically, there are two major pots of money. One is the presidential drawdown authority under which the US provides weapons that are already in its stockpiles. The other major source of funding and assistance is the Ukraine Security Assistance Initiative. So that funds longer term weapons contracts, and there has been recent analysis, like you mentioned, taking a look at some of the investments that were made to Ukraine. It does show that the vast major piece of Ukraine assistance actually benefits US defense manufacturers jobs and companies here at home. So it’s spread out across 35 states. As I understand, not only does this also protect our servicemen and women from engaging in the fight overseas directly, it does again, from an industry perspective, an economic perspective, it does benefit our home base and the employment and companies here. I think the Ukraine issue has a number of challenges.

(16:55)
Number one, like you mentioned there is that larger politics and optics issue. There’s always that tension. Actually it’s not very specific to Ukraine, it’s what you mentioned, what’s spent overseas and what’s spent here or addressed here domestically on this issue, Republicans have tied funding support for Ukraine to border security. And I think whether you believe this is right or wrong, ultimately that’s the negotiating reality. The house is at an impasse here and they believe that they need stronger border provisions for the Ukraine aid to actually pass both chambers. And there has been, I think in the senate some progress made, like you indicated, to try to move the immigration and border negotiation forward. I think too, it’s always difficult to move in an emergency spending package when top lines haven’t been negotiated or agreed to as well. So it’s pulled into the larger debt debate.

(17:50)
This is emergency spending, so above the spending caps for defense and non-defense. So it’s outside the caps established by the debt limit agreement. You’re always going to see a little bit more scrutiny on emergency spending, especially from the right flank of the Republican party when those larger debates are happening. And lastly, there is a timing issue. Generally something as emotionally charged as immigration and border security. You generally don’t announce an agreement right before the holidays where there’s a long break because when you have a deal like that, because there’s going to be compromises made from both sides, it’s difficult to have that out in the public sphere where members are back at home being pummeled with questions. So I wasn’t surprised that there was a delay that they hadn’t been able to come to resolution here on Ukraine spending, but hopefully there’s forward progress. That was what was indicated over in the joint statement between Leader Schumer and McConnell. And that also there’s going to be additional negotiations in the new year. So I’m hoping for fast resolution in January

That does make sense. The trickle down effect of when you can’t get these big pieces of legislation or budgets passed, it does make sense that then the compromise on emergency spending or tertiary issues just becomes like, I mean, why do we expect there to actually be compromised on this when these things that we’ve had in process and in place since 1974 for a rhythm that should be passing this are so broken. So if we can actually get some movement on those, then the net positive effects could actually circle down to these other types of legislation. I want to talk a little bit the Software Defense Coalition, your work there, some of these, why is it important for smaller companies like Rebellion to band together and work together? How do you find some compromise areas and focus areas to say, Hey, this is what’s really important?

(19:32)
Again, I think innovation across this space is big. I think for us at clearance jobs, we always say, if you want to work in national defense, look at how big that job prospect can be. So we know a lot of our listeners are folks that are in the federal space or around it or interested in it, and we always say, Hey, look at, we love companies like Rebellion companies doing innovative things, see how big this industry can be, see how all these different sectors can work together. So how do you do that through the different coalitions and cohorts that you’ve built out?

So the Software and Defense Coalition, we are a new group. We’re about a year old of 40 CEOs and founders of New American emerging tech companies and small businesses who pull together really amid the pacing challenge of China and of course the conflict overseas and Ukraine and what’s happening in the Middle East to push for faster adoption of safe emerging technology into the national security space. Our war fighters who are defending our country, they deserve the best tools and technology, but there are some structural barriers in doing so, including getting pathways for buying readily available commercial options. There’s that tension sometimes between COTS and GOTS and making sure that per statute, that if there’s commercial options, the first order option isn’t just to create a new government program, that they choose the commercial options where we’ve dedicated the best talent and our own capital towards those products.

(20:54)
There are also, I think, just larger barriers of entry. We talked about the budget instability to get into the department, finding opportunities to scale. So what we did was join together because one vendor alone can only do so much, especially when you’re talking about these structural changes that you have to make, demonstrate and justify your position, and you do that by joining together. There is strength in numbers to show that isn’t the interest of one company, but really the broader industry and to make sure that we’re joining with all different types of voices to show the breadth of this coalition. And quite frankly, there are specific impacts on our defense posture by newer companies not being allowed to compete and have a voice in spite of the department’s focus on strengthening the innovation chain. Small business participation in the defense industrial base has declined by 40% over the past decade.

(21:51)
And DOD, so Defense Logistics Agency and the small business administration had statistics too that moving forward, it’s going to lose 15,000 suppliers. So small businesses, defense startups we’re struggling with the uncertainty and the timeline specifically of defense procurement. So we all pulled together as a coalition. Actually we were in several companies that founded this coalition. We were in a joint briefing with the House Intelligence Committee and during that round table without any coordination, all of those companies identified actually the same set of Red Tape bureaucracy and some issues that slowed down tech adoption. So we were thinking, what can we do together jointly, usually startup companies, so focused on product market fit, go to market, all those activities to stay alive that we are not coordinating with each other. So what common market challenges are we facing together and what can we solve? What specific recommendations can we provide to close those gaps?

Talking about that, I think that’s so important for companies, for coalitions to come together and gather because like you said, if you’re a smaller entity in this space, getting your voice heard really makes a difference. I think it shows the importance of we’re in this for the mission. So even a lot of these emerging startup companies, you could be pursuing just commercial sector work, but you want the value proposition, the mission that’s there from what’s happening. And I see Rebellion doing that and I so appreciate you, Jane. I always see you out there championing this work and sharing your voice around how to improve this process. And I love that because there’s a lot to complain about, I think, in the government and the budget space, but you bring valuable ideas forward and you share them and you get your community rallying around them. So I love to see that. So I appreciate your time, appreciate you sharing with us today, and thank you so much.