Feeling the effects of sequestration

February 24, 2013

Occasionally, we publish blog posts, transcripts and other commentaries of interest to the Washington business community. Here is an excerpt from Feb. 14 testimony on the impact of sequestration before the Senate Appropriations Committee, chaired by Sen. Barbara A. Mikulski (D-Md.). Those testifying included Deputy Secretary of Defense Ashton B. Carter and Housing and Urban Development Secretary Shaun Donovan.

CARTER: Make no mistake, the troops are going to feel this very directly. Between now and the end of the year, we will need to sharply curtail training in all of the services. The Army reports that two-thirds of its brigade combat teams will be at reduced readiness by year’s end.

Likewise, for our much maligned civilians, you know, a lot of people think that [Defense Department] civilians are people who wake up in the Washington suburbs and get in a car and drive up [Interstate] 395 and come to an office building here. They’re not. Most of them work in depots. They fix airplanes. They maintain ships and overhaul ships. Eighty-six percent of them don’t even live in the Washington area. Forty-four percent of them are veterans. And on or around April 1st, we will need to begin to furlough many of them.

In addition to the military and civilian personnel, the effects will be devastating on the defense industry, upon which we depend.

The act of sequestration and the longer-term budget cuts, and even the prolongation of uncertainty, will limit capital market confidence in our industry, and companies may be less willing to make internal investments in their defense portfolios. The turmoil’s even greater for our sub-contractors. Many of them lack the capital structure to withstand this kind of turbulence. And I’ll just remind you that 60 cents to 70 cents of every dollar we contract goes not to the prime contractor, but is in turn subcontracted out. Many of these are small businesses. We count on them for the vibrancy and new people, new talent, fresh blood in the defense sector.

And above all, sequester will cause a spike in program inefficiency by stretching out programs and driving up unit costs. So for the force — military, civilian, our industry — the consequences are very direct and devastating.

MIKULSKI: We also understand that housing — everyone in my business community says housing is one of the sectors to lead us out of the recession. They feel that the economy is poised for recovery, but fragile and vulnerable.

DONOVAN: Because of the critical role that the Congress created for [the Federal Housing Administration], we are absolutely central to that recovery at this point. Almost half of all first-time home buyers in this country today use an FHA loan to buy their first home.

And let me just take one small example. One of the most important factors in our early recovery, particularly in the construction industry, has been multifamily construction. It has jumped dramatically. We drive about 25 percent of all that new multifamily construction. And even just to take a very small number of employees out of our — by furlough or a lack of hiring, a hiring freeze, we believe just this year that there would be about $3 billion in financing for a particular kind of multifamily construction that would not happen, with all the ripple-effects on jobs.

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