As Secret Pentagon Spending Rises, Defense Firms Cash in

The share of Pentagon spending hidden from public view is rising, as are defense contractors’ revenues from it. 

The U.S. Defense Department’s overall budget request increased nearly 5 percent from 2019 to 2020, but classified spending rose 6 percent, according to the consulting firm Avascent. It accounts for about $76 billion, or almost 11%, of the $718 billion requested for the current fiscal year.

Military officials say they can’t talk about classified aircraft, space, and missile projects, lest they cede advantage to America’s enemies. (Critics, including House Armed Services Committee Chair Adam Smith, D-Wash., say excessive hidden spending hinders oversight, leads to waste, and undermines public trust.) 

But there is one group of people talking about classified spending: the executives of America’s largest defense firms. In recent months, what defense contractors call “restricted” projects have become a hot topic on quarterly earnings calls with Wall Street analysts. Firms also tout the increase in classified contracts in annual reports and regulatory filings.

While the executives and corporate reports don’t disclose the details of these military projects, they often identify the specific business units receiving the cash. 

For example, an uptick in classified deals have Lockheed Martin’s missiles and Skunk Works Advanced Development Programs divisions “growing faster than the corporation,” CFO Ken Possenriede said on a Tuesday conference call with Wall Street analysts.

This year, Lockheed received about $600 million for secret work to develop hypersonic weapon technology and prototypes. Next year, that’s expected to grow to “about $1 billion,” Possenriede said. And that’s just for weapons under development and not yet in serial production. 

Possenriede also touted the potential for counter-hypersonic weapon work.

The boost in secret contracts has also shown up in big defense contractors’ recent annual reports. For example, Raytheon’s 2018 annual report touted “record classified bookings of nearly $7 billion” — up 46 percent in just a year and representing 19 percent of the company’s total revenues. 

“These increases were largely driven by the need of our domestic customers to address advanced peer threats as outlined in both the National Defense Strategy and the Missile Defense Review,” the company said at the time. Raytheon remains well-aligned to both of these documents, which emphasize capabilities such as high-energy lasers, high-power microwaves, space, hypersonics and counter-hypersonics, next-generation sensors and cybersecurity.”

Northrop Grumman’s most recent annual report attributed part of $1 billion increase in its 2018 Aerospace Systems division revenue to a “higher restricted ... volume” of “manned aircraft” sales. Among its secret weapons portfolio, Northrop is building a new stealth bomber for the U.S. Air Force. While the Pentagon acknowledges the project’s existence and occasionally announces acquisition milestones, the effort is highly classified.

“We do expect that for 2019 and for … the long run we believe that the restricted portfolio will likely grow faster than the unrestricted portfolio,” Northrop CFO Ken Bedingfield said on an April earnings call.

Secrecy Pros and Cons

Part of the reason for the secrecy is that the U.S. has not had a “comprehensive adversary” since the Cold War ended nearly three decades ago, according to Vice Adm. Stuart Munsch, deputy chief of naval operations for operations, plans and strategy. But the rise of China and Russia as strategic competitors has the Pentagon reviving some of the practices that it used to hide information from the Soviet Union.

“As a result of that, we are restoring some behaviors that used to be second nature to us when we did have have a comprehensive adversary before,” Munsch said Sept. 4 at the Defense News conference. “I think increasingly you’ll see that we are more guarded in talking about our capabilities and our intentions simply because any revealing of those things is exploited by potential adversary.”

But transparency advocates say excessive secrecy hurts Americans, including those charged with protecting them.

“Increasing classification of defense work makes it impossible to make an independent assessment of whether certain avenues of spending make sense,” said William Hartung, director of the Arms and Security Project at the Center for International Policy. “This is even more true when the Pentagon budget is nearing its highest levels since World War II — lots of money is flowing into DoD, and there is a tendency to try to keep projects moving with fewer internal controls than usual. Classification should be used sparingly; otherwise, intentionally or not, it can end up being a cover for ill-advised investments.”