Sequestration Threatens Tech Firms, DoD Contractors and National Security

With half a trillion dollars in defense cuts looming, technology firms and other defense contractors could be in store for major layoffs and facilities closures if sequestration plan takes effect.

WASHINGTON -- Defense contractors, including some of the biggest players in IT, could face a significant drop-off in their government businesses if the automatic spending cuts resulting from last year's debt-ceiling agreement take effect in January, experts warned on Tuesday.

budget   cuts sequestration

The cuts, formally known as "sequestration," would slash military spending by $500 billion over the next decade, building on $487 billion in spending reductions included in last summer's Budget Control Act that raised the federal borrowing limit.

"We are facing a grave threat to our national security that Congress created with the debt ceiling agreement," Sen. Kelly Ayotte (R-N.H.) said in a keynote address here at an event hosted by TechAmerica, a prominent national advocacy organization representing the technology industry.

"I'm not someone who thinks that we shouldn't reduce defense spending responsibly," Ayotte said, but warned that the sequestration would take a "meat ax approach" with indiscriminate cuts that would trigger widespread layoffs throughout the defense industrial base.

Just last week, the National Association of Manufacturers released a study projecting that if the defense cuts were to take effect, more than 1 million private-sector jobs would be lost by 2014, elevating the overall unemployment level and lowering GDP by nearly 1 percent.

That argument, perhaps more than concerns over the erosion of national security by sharp cuts in military staffing levels, has the potential to make defense sequestration a "sleeper issue" in the November election, Ayotte said.

That's because under federal law, all but the smallest employers are required to provide advanced notice to workers ahead of mass layoffs or plant closings. Unless Congress acts, major defense contractors such as Lockheed Martin and Boeing will almost assuredly have to send those so-called WARN Act notices out at least two months before the first wave of sequestration cuts take effect in January, meaning that they could arrive before the November election. Those cuts, depending upon what programs they target, could extend across the constellation of defense contractors, potentially hitting tech firms with large government business lines such as HP, IBM and Unisys.

"I wouldn't want to be in a district or up for reelection either with thousands of WARN Act notices coming right before my election when as a member of Congress I didn't take the responsibility to resolve this before the election in a responsible way for the American people," Ayotte said.

Along with Senate colleagues like John McCain (R-Ariz.) and Jon Kyl (R-Ariz.), Ayotte is backing legislation that would avert the sequestration cuts with a provision to reduce the federal workforce through attrition and freeze the salaries of government workers.

She acknowledged that it is more important than ever for a bipartisan effort at overhauling the tax code and reforming entitlement programs, but warned that the sequester, which would be triggered by the failure of lawmakers to reach a deal on long-term deficit reduction following the debt-ceiling agreement, would be a damaging blow to the economy at a time when the unemployment rate stubbornly hangs above 8 percent.

"It's not a time to use the defense industrial base or to use our national security as some kind of political chip," Ayotte said.

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