Pending guidance on sequestration fosters wait-and-see mindset among contractors

Defense contractors frustrated that Congress still has not found a way to avert automatic budget cuts scheduled to begin Jan. 2 might in the days ahead alert thousands of their employees that their jobs are at risk, reports Politico.

The move would likely be undertaken as an effort to compel lawmakers and President Barack Obama to resolve the budget standoff that began nearly a year ago, the story said.

The standoff stems from an agreement hammered out by Congress in 2011 and signed into law by Obama which would automatically "sequester" about $500 billion in defense spending over the next 10 years, the story said.

The Defense Department and its large vendor base have repeatedly said that such cuts would be catastrophic, the story notes. The matter of resolving how to avert the sequester is problematic because it is interwoven with a larger deadlock over taxes and spending cuts, the story said.

Defense contractors say that notifications to employees that their jobs might be in jeopardy are in keeping with the 1988 WARN Act, the story said.

In July, Lockheed Martin CEO Bob Stevens and Chief Operating Officer Chris Kubasik notified the company's U.S. employees that their jobs would be on the line if Congress fails to avert the sequester, the story said.

BAE officials said that unless they receive additional guidance or there's a solution to sequestration, they would feel the need to issue WARN notices to some or most of their employees 60 to 90 days before Jan. 2, the story said.

Other companies, such as Raytheon, have adopted a wait-and-see position pending the release of guidance from the Obama administration as to where the cuts are likely to fall.

The Labor Department in late July moved to prevent the pre-election layoff warnings by issuing a memo that said widespread notices would be a violation of the WARN Act, the story said. The law explicitly discourages overbroad notices and allows for exemptions in cases of “unforeseen business circumstances,” the memo said.
 
Sequestration qualifies as an unforeseen circumstance because there’s still a chance lawmakers will reach a deal to prevent the automatic cuts, according to the memo.

Missed Deadline

The administration failed to meet a Sept. 6 deadline imposed by Congress that required it to submit a report on how it planned to implement the budget cuts required by the sequester, reports Federal Times.

The administration is required by law to send detailed information on every account that would be affected under sequestration, including how much money would be cut from every program, the story said. Administration officials said they need more time to address the complex matter, and that they likely will provide such information by the middle of September.

Frank Kendall, undersecretary of Defense for acquisition, technology and logistics, said at a conference earlier this month that the Pentagon would have to cut 11 percent of its budget next year, the story said. Because of this, any budget-cutting plan the Defense Department might draw up would be irrelevant.

“If we have a budget, there are roughly 2,500 lines in that budget, and we have cut each of them [by] about 11 percent,” Kendall said

The DOD likely will try to find some flexibility in the cuts that will enable it to scale back its contract spending, and thus help it avoid contract breaches that could incur financial penalties, said Stan Collender, a former congressional budget staffer who now works at the public relations firm Qorvis Communications.

The result likely will be a steep reduction in the number or size of new contracts, Collender said. If the DOD has the option of buying fewer units for certain contracts or not renewing multiyear contracts, it like will exercise those, he said.

DOD procurement, research and development, operations and maintenance also will be subjected to steep cuts, he said in the story.

Sequestration Politics

On Meet the Press Sept. 9, Republican presidential candidate Mitt Romney said sequestration "is an extraordinary miscalculation in the wrong direction,” reports The Hill.

The Obama campaign subsequently noted that while Romney criticized the 2011 Budget Control Act (BCA) on NBC’s “Meet the Press,” Republican vice presidential candidate Rep. Paul Ryan (R-Wis.) defended his vote for the bill on CBS’s “Face the Nation," the story said.

BCA included sequestration as a mechanism for the supercommittee to reach a deficit-reduction deal, and the across-the-board cuts became law when the supercommittee failed, the story noted.

Romney and Republicans have sought to blame Obama for sequestration and the cuts it would bring to U.S. defense spending, but Democrats argue that a majority of Republicans in Congress, including Ryan, voted for the deal.

Romney’s called Republican support of the sequestration deal a “big mistake," the story said.