by Lee Moon, Iona Moon – president and founder of Iona Moon, a California, MD-based defense management consulting firm with over 300 clients nationwide; and
by Larry Groves, GCC Associates – a retired Marine Colonel and president of GCC Associates, a Vienna, VA-based defense acquisition consulting firm.
The impending ‘fiscal cliff’ has the potential to seriously impact the Southern Maryland region if it is not avoided by a cooperative effort of the administration and congress in the next few weeks. When the subject was brought up in the final presidential debate both candidates agreed it could not be allowed to happen. So far, neither has brought forth a substantive plan to prevent it, yet an agreement must be reached soon if it is to be avoided.
The ‘fiscal cliff’ is actually a perfect storm of mandatory budget cuts across all federal programs, and expiring tax credits that will reduce the government’s ability to borrow. On Jan. 2, 2013, without interventions, these measures become law. Together they represent the greatest government austerity since 1968.
‘Sequestration’ has the most potential to devastate the defense industry that is the economic backbone of this region, removing nearly $500B from the defense budget over next ten years. The same dollar amount will be cut from programs across all other government spending, however defense shoulders 50 percent of the cuts, although it accounts for only 20 percent of the federal budget.
This results in a cut of 9.4 percent from DoD budgets and 8.2 percent from civilian agencies in FY 2013. Worse, because DoD leaders have refused to plan for sequestration, the Defense Department will have already spent 25 percent of its pre-sequestration budget when the cuts occur, leaving the savings to be found within the remaining 75 percent of the ’13 budget.
In order to comply with the law, all major programs will take a hit. Expect to see planned procurements delayed and cancelled, contracts terminated, contract options not exercised and open procurements rescinded. As a result, the potential impacts on employment and small business are staggering (source: Aerospace Industry Association brief, October 30, 2012):
- Over 1 million jobs lost from defense cuts alone
- Professional/business services hardest hit
- All states affected
- Risk to small and defense-only suppliers
- Risk to service and support contractors
- Reduced investment in company R&D
- Reduced competition, increased unit costs
The Congressional Budget Office has projected unemployment will rise to over 9 percent with a loss of 108,000 civilian jobs in DoD, and a total federal workforce reduction of twice that number. The contractor workforce will take a 450,000-jobs hit.
Secretary of Defense Leon Panetta said of the cuts: “This mechanism would force defense cuts that would do catastrophic damage to our military and its ability to protect this country.”
In addition to DoD, cuts are slated to occur to vital programs including: air traffic controllers and TSA screeners, USDA production meat inspectors, U. S. Coast Guard, Bureau of Prisons, U. S. Marshals and FBI, Head Start and support to local schools. Secretary of Education Arne Duncan said, “Sequestration would be devastating to education and Washington leaders are ‘just playing chicken with the lives of the American people.”
So what is the likelihood of this nightmare scenario becoming reality? Avoiding the ‘Fiscal cliff’ requires a lame-duck congress to cooperate with the administration to ‘kick the can’ by delaying sequestration and extending the Bush-era tax cuts. In this era of the ‘continual’ Continuing Resolution, we have become accustomed to the eleventh-hour save.
The administration certainly has a stake in preventing it. President Obama recently obligated the government to pay the legal fees for any contractor sued for not issuing layoff notices required under the WARN Act. Even lame-duck congressmen have to return to their home states and face constituents impacted if they fail to act.
The implications are real and the consequences are dire to our economy, our national security and many of our livelihoods. We can only hope our leaders place those concerns above partisan politics in the next few weeks.