Many agencies already reacting to sequestration threat, panelists say

Though the White House has directed federal agencies not to spend time planning for automatic spending cuts pending a post-election budget deal, many already are pondering or have taken austerity steps that affect contractors, private procurement specialists say.

“The Office of Management and Budget says it’s business as usual, which is a nice thing to say, but is impossible to do,” Beth Ferrell, a partner at the law and policy firm McKenna Long and Aldridge, said at a Monday panel staged by the nonprofit industry group TechAmerica.

Noting that many agencies already have changed their acquisition strategies, she advised federal contractors to expect agencies to plan for “sacrifices” that include furloughs, salary cuts and not replacing retirees. Agencies also might narrow the field of future contracts to those that are mission-critical, which is “in the eye of the beholder,” Ferrell said.

She predicted a “fundamental shift to rethinking insourcing and outsourcing,” a preference for “mature technologies over research and development” and a rise in contractor bid protests at a time when the government is reducing high-risk, time-and-materials and best value contracts in favor of technically acceptable, lowest price and open-quantity awards in which companies assume more risk.

“People fight when money is tight,” Ferrell said. But there are limits to what the government can legally do in reopening contracts, particularly those that already are funded. “It’s not worth keeping the government happy if it’s eroding your profit,” she added.

David Taylor, managing partner of Capitol Solutions and a veteran staffer on Capitol Hill and at OMB, noted the investing community reacted negatively in 2011 when President Obama and House Republicans failed to reach a budget deal, as measured by drops in the Dow Jones industrial average, and again when talks inside the so-called congressional super committee collapsed.

The nation’s debt ceiling will have to be raised again in late February 2013, according to the Treasury Department. The Congressional Budget Office forecasts a new recession if various tax cuts expire on schedule without a new budget deal while Moody’s threatens a credit downgrade, Taylor noted.

If the sequestration mechanism from the 2011 Budget Control Act kicks in this January, Taylor said, then nondefense agencies in fiscal 2013 will have to cut $38 billion for fiscal 2013 (nominally 9.4 percent, but because the fiscal year will already have begun, the annual equivalent would be closer to 12.5 percent).

“A continuing resolution is not an appropriations bill, and agencies are only supposed to spend what is obligated, not what is authorized,” Taylor said. Hence in spending less, the goal of most agencies will be to “maintain staff levels and keep the lights on.” They will reprogram funds among operational accounts, though OMB and the appropriations panels will have a role, he said, adding “Information technology and procurement decisions will be delayed” and no funds will be spent on construction. New planning will be on hold as well, he predicted.

Paul Carliner, managing partner at Carliner Strategies and a former Senate staffer, noted that agency officials who read September’s mandatory report from OMB on sequestration’s likely effects have not seen guidance at the program or project level, only at the larger account level. He offered some guidance on likely post-election solutions to the nation’s fiscal stalemate.

Congress’ coming lame-duck session will have to factor in the scheduled expiration of the 2001 and 2003 tax cuts, temporary payroll tax cut, expiring unemployment benefits, expiring alternative minimum tax, and the six-month continuing resolution, which ends March 27, 2013. “Any two issues of these issues could tie up either chamber for weeks,” he said, recalling that the 1986 tax reform talks took an entire year.

“The election will determine a huge part of the solution, not just the results but how they are interpreted or spun,” Carliner said. “Is there a mandate that the public delivered to Congress?”

As the electoral races have tightened, “this doesn’t appear to be a wave election,” he said, which suggests that party control of the House and Senate may not change dramatically. After Nov. 6, “listen to the tone in both parties; are they talking conciliation and compromise, or are they message-driven?” he advised. “Look at when the meetings are taking place -- are they urgent?”

If Obama wins, the meetings will happen sooner, but if Republican candidate Mitt Romney wins, then “it gets complicated, because he wants 90 days’ time” and Republicans would seek some spending cuts before agreeing to raise the debt ceiling, Carliner said.

Carliner said lawmakers should buy some time with “some symbolic tax revenues and some haircuts to spending” and delay sequestration pending a macro plan.

The two “wild cards” are the possibility of an inconclusive election -- including a split between the popular vote and the Electoral College verdict -- and a negative reaction by the financial markets if investors feel that Washington is unable to come up with a long-term fix.

One discouraging sign, he said, is that a majority in Congress has been in office for less than six years and has no institutional memory of across-the-aisle deal-making. “But it’s still doable,” he said.

Polls show that the public favors compromise, Taylor added, and the party caucuses, regardless of who wins, will be asking themselves who will take the blame for a failure.

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