The debt ceiling bill must traverse a tortured path to become law. Nothing’s guaranteed quite yet. But presuming it becomes law, it will put defense and non-defense spending under caps in place, even with a military pay raise staying in place. Contractors are already analyzing what it all means, as is Federal Drive with Tom Temin, along with his guest David Berteau, President & CEO of the Professional Services Council.
Tom Temin And David, you have read the 99 page report, 99 pretty brief by congressional standards, but still a lot of stuff that’s hard to decipher and spending caps. Plus, no real agency by agency spending plan. And that, to you leads to some pretty tough questions.
David Berteau Tom, thank you for having me on here. And you’re right, it’s only 99 pages. But of course, like many legislative proposals, you actually have to refer to the underlying provisions that are being modified in order to tell what the language actually does. But the big deal for us is, is the money side. As you well know, without funding, there’s no contracts. Right. And the work that contractors do is not just for the money. It’s actually to keep the agencies operating and moving forward. Everything from legacy systems modernization to day to day operations to innovation for the future. So this Fiscal Responsibility Act puts some real constraints around spending for FY 24. Now, Tom, we’re on the eve of the 1st of June. June, July, August, September. We’re only four months away from the start of fiscal year 24. So there’s not a lot of time to figure it out. And this bill, while it sets overall caps, as you point out, doesn’t distribute that money. Agency by agency, appropriations bill by appropriations bill, except for defense and for part of VA.
Tom Temin Right. So they, in a sense, missed an opportunity to do some important work towards not having a, lord knows how long, continuing resolution in fashioning this. They still have the question of actually getting around to appropriations for 2024, which doesn’t seem too likely at this point.
David Berteau No, you’re right. And we’ve only had some agencies have had two appropriations on time in the last 17 years. Others have had one on time, and that was in FY 2009. So that’s quite a while back, 15 years ago, for many agencies. So we expect to start the fiscal year under a C.R. The question is, how long will it last? And actually, one of the interesting provisions here is if we’re still under a C.R. on January 1st, which is true more than half the time, then there will be an automatic 1% reduction from the FY 23 spending level. C.R.s typically last year’s level carried forward into next year with no new starts and no stops. That 1% reduction could be a big deal depending on your estimates of inflation especially.
Tom Temin Right. And you also questioned whether the DoD’s legislative proposal to allow it to start new programs, even under a C.R. That’s kind of in doubt now, too.
David Berteau Well, it’s a really interesting proposal. It’s in that every year the Defense Department sends up several tranches of legislative proposals. They get developed inside DoD. They have to be cleared by the Office of Management and Budget before they’re submitted to Congress. The third tranche released a couple of months ago, had a very interesting provision that said that they would allow the Air Force – and presumably if the provision was adopted, it would apply to the other military departments as well – would allow the Air Force to spend some research and development money on new starts, even though you were under continuing resolution and new starts are being very limited in scope, very focused. And the language tied to this from OMB made it clear this is in response to the need to move faster because of the threats from China. I don’t know what in the bill would require that and would make you want to do that. And this is designed to be something the authorizing committees would pass. All the appropriate just have to do is not interfere with it. And it would allow some of that to start to take place. Very interesting idea. Probably even more important under the Fiscal Responsibility Act than it was before. Hard to tell how that’s going to work out.
Tom Temin Right. And it’s also worth noting that the last year’s NDAA didn’t really get done till the stroke of minutes to the deadline, which was not the end of the fiscal year, but the end of the calendar year. And now here we are four months, as you point out, toward the end of the fiscal year. Will they get that NDAA done by the end of the fiscal or the calendar? That’s also up in the air.
David Berteau Big question as well. Now for defense, this bill does allow you to do two things. That’s not true for most civilian agencies. It actually sets a target. So we know what the amount would be. That gives both the authorizers and the appropriators something to aim for. They don’t have to have a congressional budget resolution in order to do that. For the civilian agencies, on the other hand, that’s not at all the case, although there is a amount set aside for the VA that VA has merged with MilCon, military construction, in a separate appropriations account. Other appropriations, the other nine appropriations bills for the federal civilian agencies, we don’t know how much they’re going to get. If you cap it at FY 23 levels, that doesn’t necessarily mean each agency will get what it got into FY 23. This really has to be worked out very, very quickly. And and I don’t have a clue how this is going to play out. And what we know is that if you don’t know how much money you’re going to get next year, you’re not as eager to spend this year’s money. And again, there’s only four months left in this fiscal year.
Tom Temin We’re speaking with David Berteau, president and CEO of the Professional Services Council. So that makes it hard for agencies to plan. And therefore, they tend to pull in on spending because they don’t know what’s going to happen and that cascades down into what contractors can do to plan for their own fiscal financial futures.
David Berteau That does. It absolutely does. And if we do end up with a continuing resolution, which is probably pretty much a certainty for the start of fiscal year 24. The question is, do we have an agreement on the spending levels at that point? Can we get that wrapped up and out the door before Christmas, as you point out that we typically do? Or does it extend into next year? Next year, of course, is an election year. And once you get into an election year, kind of seems like we’re already there sometimes, doesn’t it? But once you get into an election year, it’s much harder to cut those kinds of deals. We really need to avoid the risk of multiple sequential continuing resolution. Three months into December, another three months into March, then get through the whole fiscal year and then you’re only weeks away from a presidential election. So you probably get another C.R. for FY 25. And on beyond there, it would be a disaster for federal operations.
Tom Temin And even if they were to somehow come up with budgets, if the caps that are in place because of the most recent bill, again, not law yet, but we presume it will be after they get the party flanks kind of in line, it would probably be below the inflation level because inflation isn’t what it was at the peak of a year ago, but it’s still there five, 6%, four or 5%. And then you couple in a healthy pay raise for the civilian and defense sides that squeezes out money for these discretionary acquisition spending. Fair to say?
David Berteau Yes. Let’s look at the numbers. Right. So we know that OMB’s directed inflation estimates for FY 24 budget was 2.4%. FY 24 starts in four months. Inflation right now is not showing any sign of being under 2.4% by the time you get to October. And if it’s over 2.4% in October, then it has to go below 2.4% at some point during the fiscal year for that to make sense. Odds are inflation will be higher than what’s built into the budget. On top of that, agencies are getting only the same amount of money, unless you’re defense or VA, only the same amount of money as you got in FY 23. So that means you’re not even getting that 2.4%, you’re getting zero. But built into that is a 4.6% pay raise, as you point out, both for civilians and for uniformed personnel. This is a prescription for really tight squeezes elsewhere. History says when there’s tight squeezes elsewhere, contractors end up paying more than their fair share of that contribution. That’s what we’re worried about.
Tom Temin And I wanted to ask you, too, about something that we’ve noticed. You have noticed, I think our colleague Jared Serbu, wrote about it at Federal News Network.com and a couple of my guests in recent weeks have commented on it. And that is oddly, there was no real strong guidance from the Office of Management and Budget to agencies about what to do in the case of a debt ceiling crisis or whatever you want to call it, the ceiling being reached. They do this regularly when C.R.s come around or when there’s the threat of a lapse in appropriations, but no real guidance this time around. And we’re going to be there again sooner than anyone realizes.
David Berteau Tom, this is the 11th time in the last 13 years that we’ve had a debt limit crisis. So it’s reasonable to assume it’s not going to be the last. Right. It’s almost now become an annual exercise. Now, if this bill passes, it punts it until 2025. So we can get through all of 2024 without another debt ceiling crisis. But it is coming on it. There was no guidance out from OMB, as you mentioned, and in our conversations with agencies, and you can see it through reporters conversations as well. They were all over the map. We had agencies that said we don’t have a problem. We have plenty of appropriations. Well, that’s true. But if Treasury doesn’t have the cash to pay the bills, then it doesn’t matter how much appropriation you have. We had agencies says this is just going to be like a government shutdown. Let’s figure out who’s essential and who’s not. Let’s figure out where we issue stop work orders, but without a lapse in appropriations that make no sense at all. PSC argued that in fact we could take a different approach and urged OMB instead of looking at shutting down. Instead, send the signal that even if under default, the government is still operating fully functioning. Because what’s going to happen if we default, more than likely we get a deal really quickly, right? Because you’d see a lot of big problems in the financial marketplace affecting everybody globally as well. Plan for that. Plan that you’re not going to be shutting down. Keep it going. We’d love to see OMB wrestle with that question. We desperately need agencies to have the guidance because we heard over and over again, hey, we’re waiting for guidance from OMB and we don’t have any yet.