Large defense companies and industry associations have claimed that the threatened sequestration cuts to the federal budget would cause an immediate hit to the bottom lines of contractors, their workforces and consequently the broader economy if the cuts kick in as planned on Jan. 2. A new study finds that’s not necessarily so, but that on the other hand, cuts to federal civilian employee payrolls would happen almost overnight.
In the Defense Department, 108,000 civilian full-time equivalent jobs would likely disappear right away, but sequestration’s effects on most of DoD’s contracted spending would take months or years to fully manifest themselves, according to a think tank’s close examination of the Pentagon’s 2013 spending plans and the law that mandates the automatic cuts.
The budget knife of sequestration was designed to affect all programs equally, immediately taking available funding for most federal nondiscretionary spending programs down by about 10 percent in fiscal year 2013. The idea was to create a mindless budget-cutting chainsaw that would be so destructive to federal programs that all members of Congress would come together to find an acceptable alternative.
Effects of sequestration unequal for DoD
Lawmakers have so far failed to do so, but the study by the Center for Strategic and Budgetary Assessments finds the actual effect of the cuts in the first year would be extremely unequal, at least in the Defense Department.
In 2013, most contractors will be working on projects whose funding has been obligated months or years beforehand. And sequestration has no power over any budget dollar the government has already signed up for with dollars from earlier years. “On Jan. 3, nearly all defense contractors will be working on projects where funding has already been obligated,” said Todd Harrison, CSBA’s senior fellow for defense budget studies. “There’s actually some cushion here for the defense industry. They won’t see an immediate reduction in 2013. They’ll see much less.”
The reason is that the version of sequestration that Congress cooked up in last year’s budget negotiations affects budget authority, not actual checks that go out the door of the Pentagon, usually referred to as “outlays” in federal budget- speak. And since different types of accounts spend money at different rates, the effect of the across-the-board cuts would be spread out over several years in some accounts and happen right away in others.
While every account in DoD would have to come down by 10.3 percent in terms of budget authority next year, according to Harrison’s number-crunching, actual money-out-the-door from its overarching “procurement” budget will only fall by 3.5 percent.
“This shouldn’t be news to anyone, “Harrison said. “We know that outlays for procurement don’t happen immediately. People in the defense industry know this, and when they tell you that their labor force will have to be reduced by 10 percent as a result of sequestration, it’s true, it just doesn’t happen in January of 2013. It’ll happen in the months and years that follow.”
But since DoD’s operations and maintenance (O&M) accounts tend to get drained in the same year in which Congress grants budget authority to the department, functions that are paid with O&M money will take a hit next year that’s more than double what contractors who are paid from procurement accounts will experience.
While the military personnel accounts that pay for uniformed personnel are completely off-limits from the sequestration cuts, money available to pay the salaries of civilian employees would decline by 13.7 percent, Harrison said. Unlike the cuts to contracts, those layoffs and furloughs would not come gradually.
“It would happen nearly immediately within the days and weeks after sequestration occurs,” Harrison said. “And the longer they wait, the more people they’ll have to lay off.”
Depending on how DoD manages the cuts, Harrison said that won’t necessarily mean 108,000 pink slips. In theory, the Pentagon could choose to reduce work hours for some or all of its workforce to achieve the 13.5 percent cut.
In jobs that do get eliminated, DoD would have some tricky reshuffling to do.
“It’s not like you have extra money to hire contractors to do these jobs,” he said. “Since the uniformed military is not getting cut, it might mean they get brought in to do some job functions that the civilian workforce used to do. It could also mean reduced oversight. In the past few years, DoD has made a priority of building up the acquisition workforce, and this would hit them as well. They might move people around and change job assignments. I don’t know, that should be part of their sequestration planning.”
Even though DoD has insisted so far that it’s not doing any sequestration planning, Harrison said it would be wise for them to start, via a possible loophole that would let DoD make cuts more intelligently: He said previously- enacted laws the Budget Control Act relies on for the mechanics of sequestration could give the department flexibility to avoid the indiscriminate cuts via a one- off request to Congress that would allow it to shuffle funds among the department’s various programs, projects and activities.
If Congress said yes, money from lower priority items could go to higher priority spending.
“They could start doing that planning, he said. It would be smart,” said Harrison, adding he takes DoD officials at their word that no preparations have started so far. “The downside to doing that kind of planning though is that once you show people that there are higher-priority items and lower-priority items in the budget, the lower-priority items are going to get cut no matter what. That’s why they’re not showing their hand right now.”
Sequestration would increase costs.
While Harrison’s analysis finds the impact of sequestration on contract spending would mostly be put off, it doesn’t deny that contractors will eventually be hurt. And he agrees with defense executives who argue that the renegotiation and cancellations of contracts that will inevitably accompany sequestration will translate into more costs to the government.
“This is not good policy. DoD would have to go back and renegotiate their contracts to buy in smaller quantities,” he said.
For example, the Pentagon has been planning to buy two Virginia class submarines next year. Under sequestration, it would have only enough money in the Navy’s procurement account to obligate itself for the cost of 1.8 submarines under the previously-negotiated contract with the shipyard. But since building eight-tenths of a submarine makes little sense, the Navy would probably build just one submarine instead of two.
“Then you have to go back to your contractors and say we’re only going to buy one sub this year. If you’re only going to build one a year, that price is going to be higher,” he said. “We know what that cost is, and it’s much higher.”