The challenge of cutting 8.5% from federal agency budgets

September 30, 2012

For many contractors, a new White House report on sequestration turned out to be frustratingly sparse.

With more than 300 pages of charts and numbers, the Sept. 14 document had plenty of information. But it failed to answer a company’s most pressing question: “Is my contract in jeopardy?”

That happened, in part, because the language of the legislation that created sequestration — which dates back to 1985 — results in different interpretations by different agencies.

When Congress and the White House planned this round of automatic cuts last year, they adopted language written into the Gramm-Rudman-Hollings budget amendment of 1985. That language requires that cuts be applied equally to each “program, project and activity.”

Those seemingly straightforward terms can actually mean very different things for different agencies.

For instance, if the Navy has ordered eight new ships, the construction of each might be listed as a program for budget purposes. Ordered to cut about 8.5 percent of spending from each of those programs, the Navy can’t simply decide to buy seven ships; it must instead find ways to make each of the eight ships 8.5 percent less expensive.

Other decisions will be simpler. The Pentagon has a series of “operations and maintenance” accounts, used to buy everything from spare parts to lawn mowing services at military bases. Planners don’t have to buy 8.5 percent fewer spare ball bearings for tank turrets; they can decide to eliminate some areas of spending entirely to make sure they don’t run out of more critical items.

The cuts also require agencies to avoid creating new expenses. Pentagon Chief Financial Officer Robert Hale recently told Congress, for instance, that the Defense Department would be unlikely to lay off workers because layoffs can obligate the Pentagon to pay severance and separation benefits.

“We’d probably have to have a hiring freeze, and I suspect we’d have to consider unpaid furloughs,” he said.

The implementation date poses an additional problem. The cuts are set for Jan. 2, 2013, months after the fiscal year begins on Oct. 1. Agency heads ordered to cut, say, 8.5 percent from a particular program must manage to find the money to pay for that cut in the last nine months of the year.

It’s a tangled web. At each department, the language of the statute exempts some programs, while making others face drastic reductions.

In one example, the State Department’s entire Administration of Foreign Affairs Working Capital Fund was made exempt from cuts. That fund pays for administrative services, such as printing and reproduction, motor pool operations and information technology desktop support for State’s foreign affairs offices. Many of those services are provided by contractors.

At the same time, the State Department’s Administration of Foreign Affairs Diplomatic and Consular Affairs Programs account faces a $1.1 billion cut from a $15.9 billion total budget.

That account covers human resources, including training and human resources management, and again some of that work is done by contractors.

The bottom line for contractors is that OMB has not been able to provide much detail on which contracts are at risk because each agency has its own definitions of “program, project and activity.”

The best way to get more information remains picking up the phone and talking with a specific contracting officer about how to handle any cuts before the axe starts to fall in January.

Sean Tucker is assistant managing editor at Herndon-based Deltek, which researches the government contracting market and can be found at www.deltek.com.

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