Sequestration’s head pops up, for a peek at continuing budget uncertainty

The Congressional Budget Office recently advised Congress that unless full-year appropriations for 2024 get enacted by April 30, the White House might be obligated to initiate sequestration. You know, those “limits” on spending. But the shutdown deadline for six big agencies occurs this Friday. To find out how contractors are preparing, the Federal Drive with Tom Temin talked with Stephanie Kostro, the Executive Vice President for Policy at the Professional Services Council.

Interview Transcript: 

Tom Temin  Why April 30th when appropriations could run out this Friday at midnight?

Stephanie Kostro It’s a great question. The Congressional Budget Office responds to requests from members of Congress regarding budget implications of legislation that has either been passed or is that under consideration? And they put together this memo back in January. They too then talked about April 30th and unpacking that a little bit. If you go back to the Fiscal Responsibility Act of 2023, which helped us avert, you know, avoid a debt ceiling issue, it also set caps for FY 24 and FY 25 funding. What it also did was say that if you don’t have the full year appropriations bills, and there are 12 of them passed by April 30th, you will trigger sequestration of 1%. Now that is a significant amount for some agencies. For example, the Department of Defense. And so, everyone is looking at April 30th as the hey, we’ve got to get out of this continuing resolution do loop and into full year appropriations so that we can avoid that. What the March 13th CBO memo did was lay out the different scenarios of what happens if we are under a continuing resolution versus what happens if we are under full year appropriations. And that’s what makes it interesting.

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Tom Temin I means there’s a little bit more pressure on Congress if they care. I mean, some members of Congress would like the 1% sequestration to occur. Will that pressure them to do something this week? We thought it would be passed last week. The remaining six departmental bills.

Stephanie Kostro Well, Tom, you will remember that we entered 2024 under a Laddered C.R., which is to say, some of the four of the appropriations bills under a CR were going to expire earlier than the remaining eight. What Congress did earlier this month was passed what we were jokingly calling a half-bus. You know, we’ve got omnibuses which cover everything. Cromni-buses is where some of them are under CR and some of them are under regular appropriations. This half-bus actually passed six of the 12 full year appropriations bills. But in many cases, these were the low hanging fruit. This was Veterans Affairs, Transportation, HUD, interior. Ag(riculture) was a little bit, controversial only because there was an increase in the Supplemental Nutrition Assistance Program or SNAP. But that half-bus was relatively non-controversial. The remaining six are more controversial. It’s Department of Defense, it’s Department, Homeland Security and border security, etc.. And so, we’re looking to have those bills passed by the March 22nd deadline, which of course is later this week. What happens under the Fiscal Responsibility Act. And I’m just going to call it the FRA. What happens under the FRA if you are under a continuing resolution until April 30th, it will require sequestration for Defense, about 1%. The non-defense agencies are underspending here and in fiscal year 24, and their CR funding is actually below the level set, by the FRA. So, under sequestration, Defense does take quite a big hit. And so, we’ve got lots of people in industry, particularly the defense industry, going, hey, how can we prepare? What can we do? How can we talk to Congress about the importance of getting this done? There are also, of course, any time a CR runs out under the looming threat of a shutdown. And we were also talking to member companies about that.

Tom Temin And we’re speaking with Stephanie Kostro, executive vice president for policy at the Professional Services Council. Probably you would need to point out to your members that 1% across the board or whatever. That doesn’t mean the department is going to make a 1% cut on every line item. For example, they’ve got pay increases coming next year, they’ve got fuel and rent and things. So therefore, there’s not a lot of places they can necessarily cut evenly. So, it might fall disproportionately on contracting dollars in some cases.

Stephanie Kostro That’s exactly right. You know when they talked about sequestration just generally it is about a salami slice across the board. Everybody gets cut the same amount. But we know historically that they do try to protect military personnel pay and benefits, etc.. So, it is contractors who bear the brunt of sequestration. We learned that more than ten years ago when we underwent this, a similar situation. And as we look forward, you know, we are encouraging our contractors who are members of PFC and even those who aren’t, to go ahead and start talking to their contracting officers. One statement I made earlier in our discussion here, Tom, is some of these FRA, I guess hooks are already being felt in the Department of Defense, and we saw that in what they submitted for their FY 25 budget request just again earlier this month. That budget request is a straight line for things like artificial intelligence. A high priority for the Department of Defense. But they are not increasing funding because they don’t want to, quote unquote, bust the caps that are set by the FRA. And so, we are seeing real world translations of the FRA into what the Department of Defense is submitting. Another area is space. They are not necessarily increasing to the extent they want to because of the downward pressure from the legislation that was passed last year.

Tom Temin And they’re also slowing down or spreading out acquisitions of major platforms like submarines and ships in the request for 2025. The result being flow down of the slowdown to the thousands and thousands of subcontractors.

Stephanie Kostro That’s true as well, Tom. You know, we’ve heard from senior defense officials in the last few weeks about how they would like us as industry to invest in things like shipyards. But unfortunately, when you spread out the funding for these major platforms, there’s not a financial incentive to actually invest in shipyards and keep them running until those large platforms come through or large ship classes come through. We are talking with Department of Defense officials about what it means to spread things out that way, what it means for investments that companies are willing to make because they think there is a large probability that either things are going to fulfill themselves the way the department wants them to, or something can get sidetracked in the in the coming years. And so, we are working very closely with our member companies about how to talk to department about that.

Tom Temin Yeah, there’s a dissonance between the demand signals that the Defense Department would like to be able to communicate to industry, to foster that dip in investments in the DIB both services and things, contractors. But what they’re actually getting for appropriations means they can’t.

Stephanie Kostro That’s true. That’s true. And there’s a similar dynamic over on the civilian agency side. If we take ourselves out of the Department of Defense for a moment, many of them, because of that half-bus have their full year appropriation. But as we move forward, if everybody gets their full year approved appropriation, they might actually be cut going forward because some of them are overspending. So, this goes back to your question about how to apply a sequestration order across the board. Again, some programs are going to lose out more than others. And if you look at that Congressional Budget Office memo, they lay it out pretty clearly about what cuts may be coming under a CR, a continuing resolution or under full year appropriations. And so, I encourage everyone out there, if they’re interested, to look up that memo and check out to see where defense agencies fall and where non-defense agencies fall.

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Tom Temin I guess in the ideal world, they could get their work done this week for 2024. And then, golly, they’ve got six months to write 12 appropriations bills and negotiate them. I don’t know what better things they have to do, but that would seem like a good priority.

Stephanie Kostro I think it’s fair to say if you’re a betting person, you are not going to bet that we will have full year appropriations for fiscal year 25 as of October 1st. Just history tells us that’s not going to happen. But also in a presidential election year, with a lot of Senate and House seats up in the air, I suspect we’re going to start 25 with a CR. And I don’t think I’m alone in thinking that.

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