Sequestration Preparations, Procedures, and Problems

The House Armed Services Committee (HASC) held a hearing August 1st at which the Office of Management and Budget’s (OMB) Acting Director Jeffrey Zients and Deputy Secretary of Defense Ashton Carter testified about the pending sequester – the automatic cuts to defense and domestic programs scheduled to go into effect on January 2, 2013.

Every HASC member present at the hearing, along with both witnesses, agreed that the sequester was horrible policy that should be avoided. This is consistent with the findings in Indefensible, the report from the Bipartisan Policy Center’s (BPC) Task Force on Defense Budget and Strategy. And though many of those at the hearing stressed the need for action earlier rather than later, there unfortunately continued to be substantial disagreement about what should be enacted in lieu of the across-the-board cuts.

What did we learn from the hearing? Well, for starters, we confirmed the theory that it’s very difficult to negotiate talking points. Much of the hearing was consumed by partisan bickering.

There was the occasional break, however, where congressmen and the administration’s representatives discussed the substance of sequestration. Here are the ten important takeaways, some of which represent new information, and some of which merely confirm what we have previously written:

1) According to Zients, OMB just recently began its extensive analysis of the sequester, including its exercise to determine exactly which programs, projects, and activities will be subject to the cuts. The analysis was delayed until now in an attempt to avoid disrupting OMB’s other activities for as long as reasonably possible, with the hope being that, in the interim, Congress would override the sequester in favor of more prudent deficit reduction. Zients repeatedly emphasized that the administration will be ready for sequestration and that OMB has experience working with government agencies on this type of contingency planning (e.g., in anticipation of possible government shutdowns or debt ceiling breaches).

2) For the time being, the administration expects agencies to continue normal business operations, not slowing down spending in the lead-up to sequestration. In fact, earlier this week, OMB issued a memorandum with those precise instructions to heads of government departments and agencies. The reasoning for this guidance is to keep the government operating as efficiently as possible until sequestration actually takes effect. At the same time, however, this could increase the damage if sequestration actually occurs.

3) Zients re-emphasized the Department of Labor’s (DOL) recent guidance that the WARN Act does not apply to sequester-induced layoffs. The WARN Act requires private employers with more than 100 employees to send out notifications of plant closings or mass layoffs at least 60 days before the event actually takes place. DOL termed the sequester as an “unforeseeable business circumstance” for which employers do not have to issue such notices. However, neither OMB nor DOL has the authority to grant immunity if a business is accused of violating the WARN Act, and multiple employers have expressed belief that the WARN Act applies. As BPC indicated, enforcement of the WARN Act lies with the courts, and each business must decide on an individual basis whether or not it will issue notices of mass layoffs.

4) Zients emphasized that the sequester cuts will take place in the middle of Fiscal Year (FY) 2013, meaning that a substantial portion of agencies’ funding will already have been obligated. Thus, consistent with BPC’s findings, Zients stated that the cuts to defense and non-defense discretionary spending will both exceed 10 percent. He also pointed out that the exact percentages remain unknown due to multiple factors, including that FY 2013 appropriations have not been finalized and that the defense prior-year unobligated balances – which are subject to sequestration – are yet to be determined. For these reasons, BPC’s analysis made certain plausible assumptions and found that the FY 2013 cuts will equal roughly 15 percent for defense and 12 percent for non-defense discretionary.

5) Zients confirmed that the sequester cuts will apply at the program-project-activity (PPA) level as specified in appropriations acts or accompanying reports. These definitions can change from year to year and differ in terms of granularity between – and in some cases even within – departments. Zients clarified that “OMB would apply a uniform percentage reduction at the account level, which would apply equally across PPAs within an account as identified by agencies.”

For the Department of Defense (DOD), Carter confirmed BPC’s analysis that per current law, the Operations and Maintenance (O&M) accounts will be treated differently from the investment portion (e.g., procurement, R&D) of the Department’s funds. For the latter, “more than 2,500 programs or projects are separately identified and must be reduced by the same percentage,” regardless of the importance or efficiency of the specific program or project. Meanwhile, PPAs for O&M are actually defined at the account level (e.g., O&M – Army, O&M – Navy Reserves), allowing for some modest flexibility.

In both cases, managers will have authority to decide how best to allocate reductions within a PPA, and reprogramming will allow some modest flexibility across PPAs, but Carter said that it will “at most offer a limited ability to modify the effects of sequester” and realistically “not offer a means for making wholesale revisions.” In short, he stressed that this limited flexibility would do very little to alleviate the damage caused by sequestration.

6) In line with BPC assumptions, Zients confirmed that President Obama will exempt military personnel from the FY 2013 sequester. In order to achieve the $55 billion in mandated defense cuts, however, this means that the percentage cuts to the rest of the DOD budget will have to be even greater.

DOD civilian personnel, however – and also military personnel, to some extent, even in light of the aforementioned exemption – will be negatively impacted by sequestration. Carter indicated that DOD may need to impose a partial hiring freeze or unpaid furloughs, resulting in “fewer people to fix our weapons including those damaged in war, less expert time and attention available to enter into well-crafted contracts and handle financial transactions, and less support for other critical day-to-day operations.” Furthermore, military families and retirees will suffer from reduced funding for base support services, facility maintenance, and the Defense Health Program.

7) Carter highlighted some of sequestration’s specific effects on the defense budget. He projected that they would reduce procurement from the President’s FY 2013 Budget Request by four F-35 aircraft, one P-8 aircraft, 12 Stryker vehicles, and 300 Army medium and heavy tactical vehicles. Furthermore, he pointed to the fact that decreased purchasing will cause per-weapon costs to increase and thereby require further cuts in buy sizes. Some projects will have to be delayed, such as the new CVN-78 carrier, the Littoral Combat Ship program, and the DDG-51 destroyer. Also, many military construction projects – such as erecting new medical facilities and fixing schools – may become un-executable.

8) According to Carter, cuts will likely reduce military readiness. The Deputy Secretary explained that if sequestration occurs and Overseas Contingency Operations (OCO) are not exempted, the O&M accounts in the base and war budgets become one. In that case, Carter indicated that DOD intends to protect OCO funds to the extent possible by disproportionately reducing the base budget for O&M. Such a funding reduction, Carter concluded, would almost certainly have a detrimental effect on the training and readiness of units deploying. More specifically, “some later-deploying units (including some deploying to Afghanistan) could receive less training, especially in the Army and the Marine Corps.” Additionally, Carter stated that “Air Force flying hours for pilots could be reduced by several hours a month and Navy steaming days could decline by several days a quarter.” The sequester will make the president’s new defense strategy – or nearly any effective strategy – impossible to implement, creating – in Carter’s words – “an unready, ‘hollow’ military force.”

9) Zients agreed that the negative economic impact from the sequester will be substantial. This is consistent with BPC analysis that FY 2013 sequestration could cause more than 1 million jobs to be lost over two years and a reduction of approximately half a percentage point in economic growth in 2013. Additionally, sequestration will create substantial waste at a time that efficient reforms are needed.

Carter was asked, in particular, about the effects on small businesses in the defense industry. He responded that the sequester could certainly put many of them out of business, as “the bottom of the supply chain is particularly vulnerable in times of economic efficiency.”

10) The effects of sequestration on non-defense investments and services will also be significant. Zients highlighted some of the effects of the scheduled cuts to non-defense programs, stating that “the across-the-board cuts required by the BCA [Budget Control Act] would jeopardize critical programs that improve children’s health and education, adversely impacting future generations.” Consequences will include less research from the National Institutes of Health, fewer children enrolled in Head Start, and a reduction in FBI agents, border patrol agents, and transportation safety staff.