Ash to stay; Panetta’s perfect storm; The clock ticks for Allen; Did the Pentagon turn on the cyber-burglar alarm? Wheels up for Dempsey and a little more.

Ash to stay at the Pentagon. The Pentagon’s No. 2, Ash Carter, will stay on at the Pentagon, Situation Report learns this morning. A senior defense official tells us that Carter, who had been on a short list to lead the Pentagon – or would go to lead Energy – was asked by President Barack Obama to stay on. "He’s doing an outstanding job for Secretary Panetta and has been a friend of Senator Hagel for years," the senior defense official tells us. Naturally, Carter has been integral to the transition that has begun this week in the building as well as the confirmation hearing prep that is also taking place. Folks inside the building tell us that Carter and his chief of staff, Wendy Anderson, who has also known Hagel for some time, are both seen as critical elements in the handover from Panetta to Hagel. Hagel’s pending confirmation is certainly controversial but likely.

The Pentagon faces rough fiscal sledding over the next few months. Defense Secretary Leon Panetta told reporters yesterday that he was prepared to take dire steps to stave off a "perfect storm of budgetary uncertainty," announcing that the Pentagon would have to curtail facility maintenance for "non-mission critical activities," freeze civilian hiring and delay contracts. Panetta said there are plans to implement unpaid furloughs for civilian personnel if sequestration occurs. His anxiousness stems from the combination of the threat from sequestration, that could still occur March 1, to the debt ceiling crisis to the possibility that the "continuing resolution" under which the Pentagon is currently funded might extend through the rest of the fiscal year. But the main issue is if there is no budget deal soon, the Pentagon could have to deal with a $52 billion budget shortfall, Panetta said.

"The fact is, looking at all three of those, we have no idea what the hell’s going to happen.  All told, this uncertainty, if left unresolved by the Congress, will seriously harm our military readiness," he said yesterday.

The impact of the continuing resolution has been scaring defense officials for several weeks. Last year, Congress failed to pass an appropriations bill, instead implementing a "CR" that keeps funding at 2012 levels. But under the CR, Defense Department funding is essentially frozen, not only at past levels but also in the same accounts — and that’s where the rub is. As an example, funding for the Air Force’s long-troubled KC-46 refueling tanker, which was finally put back on track, was to double in 2013. But since funding is frozen at 2012 levels, the program doesn’t have the money to expand as the Pentagon had planned. "The problem is that under a CR, the money is in the wrong places, DOD has limited ability to reprogram the money around, and you can’t have any new starts," CSBA’s Todd Harrison told Situation Report. If Congress keeps funding the Pentagon under the CR, it will put such a program at risk; and even if Congress passes an appropriations bill in the coming months, it will force Pentagon budgeteers and programming personnel to change tracks in a limited amount of time.

The net effect of all this? "Schedule delays in programs. They’ve been trying to manage at one level, now at a higher level," said Harrison. "It just creates a lot of churn, a lot of delays in contracting actions." It also means regular maintenance scheduled during 2013 may not happen — since that would be considered a new contract, defense officials explain.

One service official tells Situation Report, "This could have an incredibly big impact. It’s largely going to involve operations and maintenance because we’re going to try to protect personnel. So this is all about operations and maintenance. That’s where this is going to be  felt."

Wethinks: The tanker issue will surely come up at today’s Air Force presser with SecAf Donley and CoS Welsh at 11 a.m.

Welcome to Friday’s edition of Situation Report, where we try to manage churn daily. Follow me @glubold. Or hit me anytime at gordon.lubold@foreignpolicy.com. And sign up for Situation Report here: http://bit.ly/NCN9uN or just send me an e-mail and I’ll put you on the list. And if you have a report, piece of news, or tidbit you want teased, send it to us early for maximum tease.

Obama and Karzai meet at the White House at 10 a.m. today, lunch at noon with Biden, and speak at a joint presser in the East Room at 1:15.

The clock is ticking for John Allen. The DOD inspector general will have 60 days to close its case on ISAF Commander Gen. John Allen after the Feb. 10 change of command ceremony, or Allen’s rank will revert automatically to that of a two-star. According to federal code, general and flag officers can’t maintain a third or fourth star unless they are assigned to a specific command — three and four stars are jobs. It’s been 8½ weeks since Secretary Panetta opened the investigation after the FBI stumbled on e-mail exchanges between Allen and Jill Kelley that were deemed inappropriate.

Optimists believe Allen will not only be exonerated but also be re-nominated for the job in Europe; but many pessimists think that, even if Allen is cleared, the White House won’t re-nominate him, thereby ending his career. Although, if re-nominated, he’s not expected to face Senate opposition. Either way, the IG would have to conclude its investigation very soon if Allen were to be re-nominated and then confirmed — and the average investigation takes six or seven months.

U.S. code citation: http://bit.ly/TOOYvp

Did the Pentagon remember to turn on the cyber burglar alarm? Killer Apps’ John Reed wondered that aloud, when he heard Mark Orndorff, the program XO for mission assurance at the Defense Information Systems Agency, say during an otherwise dry panel discussion: "We have so much capability that is positioning us to stay in front of the threat, but have we thought through and applied ourselves in a way that we should to leverage that in a way to make sure we’re getting the most out of it?" Orndorff: "If somebody is just flat smarter than us and they come up with [a threat] that we can’t deal with, that’s not what keeps me up at night." http://atfp.co/WIs7yo

Starting tomorrow, the new ODRP in Pakistan is Greg Biscone. The Air Force’s Biscone, now a major general, will be given another star tomorrow and assume duties as the Office of Defense Representative, Pakistan. He replaces Lt. Gen. P.K. "Ken" Keen. Also… the Navy announced that Rear Adm. (lower half) Philip Howe will be assigned as commander of Special Operations Command at PACOM (he is now serving as assistant commander of operations at JSOC, SOCOM at Fort Bragg). Rear Adm. (lower) Matthew Kohler will be assigned as director of intel at AFRICOM in Stuttgart. He’s now the director for intel operations at the office of the CNO.

Dempsey’s wheels are up tomorrow for Brussels. Dempsey will leave tomorrow for Brussels, where he’ll attend the meeting of more than 60 NATO chiefs of defense in Brussels. Spokesman Col. Dave Lapan tells the E-Ring’s Kevin Baron that the one-stop trip will focus on issues within the alliance, from Kosovo to counter-piracy to NATO-Russia military cooperation and "emerging security challenges facing the alliance." But they’ll also talk Afghanistan in the wake of President Hamid Karzai’s visit to Washington and his appearance with President Barack Obama today. We’re guessing the "Zero Option" will be discussed, as NATO allies are keen on what the U.S. will do in Afghanistan post-2014 and in recent days the notion the U.S. could pull out altogether is one of the offerings on the table. Neither Panetta nor Dempsey would discuss it at yesterday’s Pentagon briefing.

Dempsey: "You know, we’ve said, I think, from the start that no option is entirely off the table. It’ll depend on the conditions. … What’s the mission? What’s the requirement to protect the force while it’s accomplishing that mission?  Over what period of time? And as the secretary said, we have provided options, not to the president yet, but to the national security staff.  And I — as you know, I would — I don’t speak about options until I’ve had a chance to speak to the president himself, so I’m not prepared to say any more than that."

Reporter: "But have you considered that one particular option, either of you? Dempsey (testily): "I’m not prepared to say any more than that."

Internal reporters on a plane on Dempsey’s trip: Jim Garamone. External reporters on a plane: N/A.

The Visit

WSJ: Zero Dark Afghanistan: Karzai’s dysfunction meets Obama’s detachment. http://on.wsj.com/Zzc5t2
Time: Who’s the decider on the future of Afghanistan? http://ti.me/ZvK9WN
National Journal: Obama and Karzai’s rocky history. http://bit.ly/RJdPAQ

Noting

FP (Kane): An Army of None (why the Pentagon is failing to keep its best and brightest). http://atfp.co/11kMLfy
Small Wars: The benefits of a paramilitary force in Mexico. http://bit.ly/XpsiBp
Duffel Blog: Chief to airmen: just say no to autoerotic asphyxiation. http://bit.ly/VTLmGt
Defense News (Intercepts blog): Sequestration almost happened when the stakes were lower. http://bit.ly/13julLu

Hageling

Eliot Cohen: Hagel’s war service isn’t the point. http://wapo.st/VTHC7l
WSJ: Obama and Hagel bonded over Iraq. http://on.wsj.com/WGPGHU
Columbus Dispatch (Thomas): Senators right to ask Hagel tough questions. http://bit.ly/ZAPqfO
NPR: Two political cartoonists’ take on Hagel. http://n.pr/10lsCH4