Sequestration Worst-Case Scenario: $45B in Canceled Programs

MARINE CORPS BASE QUANTICO, Va. — No one knows for sure whether mandatory cuts to defense spending under sequestration will occur, but contractors should prepare for the worst, a budget specialist told hundreds of vendors gathered here Sept. 25.
Sequester, triggered by the failure of a congressional “super committee” to carve $1.2 trillion from government spending, will immediately rip $54 billion from Defense Department coffers on Jan. 2.
“The impact of sequestration on DoD will undoubtedly be greater than the impact on civilian agencies,” said Thomas Petruska, president of Contracts Unlimited, a White Post, Va.-based government-contract consulting firm.
It was perhaps an unwelcome message at the annual Modern Day Marine technology exposition here, where hundreds of vendors are showcasing their products and services.
Petruska laid out the probable impact of sequestration. He estimated it could result in the ultimate cancellation of $45 billion in military equipment purchases.
“Research and development may be drastically curtailed,” he said. “We could be looking at as much as a 15 percent budget reduction for programs … rather than the 10 percent others have estimated.”
Slashing $500 billion from defense spending over 10 years — $54.7 billion up front from the nine remaining months in fiscal year 2013 — could cost 108,000 civilian jobs within the Department of Defense alone, he said.  The federal government would likely shed a total of 208,000 jobs. The already depressed economy could lose more than 1.6 million jobs, he said.
As far as civilian agencies, the cuts would likely prompt the closure of 246 control towers nationwide and the furlough of more than 1,000 air traffic controllers. Another 9,000 Transportation Safety Administration workers and 1,600 Customs and Border Protection inspection officers would also be furloughed or laid off, according to studies Petruska cited.
Some businesses could be insulated from drastic cuts because Pentagon bean counters can pick and choose among line items within those funding authorities, Petruska said. That is a departure from what many defense officials have said, claiming a main objection to sequester as structured is that it culls 10 percent from every line item in the defense budget. Petruska contended that the mechanism would pull money evenly only from funding authorities, not individual outlays.
“Determining what critical programs must be retained and what inefficient programs need to be eliminated will be difficult,” he said. “But … existing contracts will be scoped or terminated in whole or in part.”
As soon as Nov. 2, government contractors, in accordance with the Worker Adjustment and Retraining Notification act, could begin to issue 60-day notices to employees who could be given pink slips come Jan. 2.
“It would be a good idea to take steps to make sure you are in the best position possible to be prepared for sequestration,” Petruska said. “Determine if your product or service has an immediate need … and resist doing work that is not set forth in your contract.”
Petruska warned that the government might find legal avenues to avoid paying contractors cancellation fees for terminated contracts. Government lawyers could argue in court that the 2011 Budget Control Act from which sequestration sprang, was a “public good.”
The “fiscal cliff” can still be avoided, Petruska said. The threat of a renewed recession may inspire Congress to reach an agreement to cancel, delay or amend sequestration after the election, he posited.
“I don’t think the Congress will implement a budget plan. I think sequestration will occur,” he said. "There are a lot of people in the country who feel smaller government, less government should be a goal … and they may tell their representatives back home that smaller government and less spending is good for the country. But they forget that there are other impacts that could happen.”
The numbers show that if sequester were canceled and the Bush-era tax cuts allowed to expire, the deficit would shrink from $1.1 trillion to $1 trillion. National GDP will increase slightly. Unemployment would decrease from the current 8.3 percent to 8 percent.
Petruska acknowledged the economic improvement was meager, but “it would help,” he said.
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Topics: Defense Department, DOD Budget