Go ahead and Google “Sequestration.” As of the completion of this post, the hits for “sequestration” are around 7.2 million hits, a very modest number by Google standards (for a cross reference, Google hot dog eating contest and consider the incomprehensible 35 million hits). My first thoughts about sequestration take me to a trial setting where a court can order isolation of a jury during a high profile criminal trial (John Grisham’s Runaway Jury anyone?).
The contrast to sequestration as portrayed in a Grisham novel and the reality of sequestration as it will occur on January 2, 2013, couldn’t be more stark and, frankly, alarming.
Many of us have tried desperately to repress the memories of the partisan debate regarding the debt ceiling and the fallout resulting in the passage of the Budget Control Act of 2011 (“BCA”). The BCA is slated to take effect on January 1, 2013, when through a measure called “sequestration” discretionary spending caps will kick in and be effective for the ensuing 10 years, all in an effort by Congress to reduce the deficit by over $1 trillion (US) dollars. The net effect of sequestration on the Department of Defense would be immediate budget cuts of nearly $500 billion and much, much more to come in ensuing years—this in addition to the already recommended $500 billion in recommended cuts. For those of you who may be wondering, the US Defense budget is about 19% of the overall US budget and the Department of Defense will take about 50% of the sequestration hit.
Under sequestration, the amount of funds otherwise appropriated to a branch of government is "sequestered" by the US Treasury and not delivered to the agencies to which Congress originally appropriated the funds. Up until now, certain categories of government spending were exempt from sequestration, including defense. Not anymore. According to the Foundry, if implemented, the impact of sequestration in accordance with the BCA “would be devastating, with a significant disruption of ongoing programs and initiatives, facility closures and substantial additional personnel reductions that would severely impact advanced manufacturing operations, erode engineering expertise, and accelerate the loss of skills and knowledge….”
Even more ominously, in a November 2011 letter, Secretary of Defense Leon Panetta warned lawmakers that sequestration [enacted over the next 10-year period] will be “devastating,” yielding “[t]he smallest ground forces since 1940,” “a fleet of fewer than 230 ships, the smallest level since 1915.” According to most defense analysts, sequestration in accordance with the BCA will quietly eliminate the long-standing US defense policy of being able to engage in a two-front war.
The “fiscal cliff” (which you will hear a lot about in the months leading up to the election) is a perfect storm which includes (1) sequestration (immediate cuts on January 2, 2013), (2) Bush-era tax rates expiring (December 31, 2012), and (3) the absence of a budget (the reason why we have the BCA is due to the inability of Congress to pass a budget for consecutive years). The American public sector and private sector will get a preview of the significant effect this fiscal cliff—and, more specifically, sequestration—will have on October 1 of this year. The reason why can be summed up by taking a quick look at the Worker Adjustment and Retraining Notification Act.
The Worker Adjustment and Retraining Notification Act (“WARN”) was passed to protect workers, their families, and communities by requiring most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs. Employees entitled to notice under WARN include managers and supervisors as well as hourly and salaried workers. WARN requires that notice also be given to employees' representatives, the local chief elected official, and the state dislocated worker unit. Advance notice gives workers and their families some transition time to adjust to the prospective loss of employment, to seek and obtain other jobs, and, if necessary, to enter skill training or retraining that will allow these workers to compete successfully in the job market. Several states require an additional thirty 30 calendar days’ notice in addition to 60-day notice required by WARN.
Because the sequestration contemplated by the BCA takes effect on January 2, 2013, contractors and subcontractors who know that their funding will be at best tied up due to sequestration (and at worst that there may be no funding at all) will have to make a decision to notify employees of the pending layoff. The 60-day notice deadline will conveniently occur right on November 1, only days before the November 6 federal and state elections.
Mackenzie Eaglen makes a compelling case that such cuts are devastating to the Department of Defense and provides a comprehensive listing of what the cuts mean to the military. Projects that are in process will likely be discontinued, the cancellation of contracts that are not deemed to be exempt will lead to personnel layoffs, and there will likely be a massive influx of early retirement of servicemen and servicewomen looking for new careers in an already suffering employment sector. Even worse, a logical place for veterans to serve is on the civil side of the defense industry, precisely where the greatest concentration of retraction of jobs and other opportunities will be felt.
What’s more, direct cuts to the military will magnify the effect that sequestration will likely have on the thousands of government contractors and subcontractors in the private sector. According to the Governmental Accounting Office, in 2009 there were approximately 766,000 service contractors, which number (according to my reading) does not include the chain of subcontractors that manufacture components or provide one-off services to government contractors. Most of the companies affected are not the companies that produce billion dollar planes and things that explode. On the contrary, many of those companies are small companies started by entrepreneurs that have never set foot on a military base but are integral partners in keeping America safe.
To say that sequestration will have a major impact on the economy is an understatement. Many changes loom large for the defense-related industry and they are quickly approaching. Stay tuned.