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.
By Kenneth Corbin
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.
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.
Critics of the sequestration framework note that the Pentagon, which has been lobbying against the cuts, has offered little insight into how the cuts would be implemented should the process begin in January. Ayotte and other lawmakers have been pressing for legislation that would require the Pentagon to publish a set of projections about where the cuts might come.
But in the absence of such a forecast, a considerable uncertainty has gripped defense contractors, who have embarked on their own lobbying campaign to avert the sequestration provisions. Prominent industry figures, including Lockheed Martin CEO Bob Stevens, have warned that the sequestration would spur massive layoffs and facilities closures, while firms with large DoD businesses are refraining from making further investments for fear of the looming cuts.
“They’re not running charities,” said Steven Bucci, senior research fellow for defense and homeland security at the Heritage Foundation, a conservative Washington think tank. “They can’t operate at this level of uncertainty. And frankly neither can the Pentagon.”
Bucci and others pointed out that the defense cuts would carry a wide impact that would touch businesses in every state. The big players like Lockheed and Northrop Grumman, while they would take a hit, would be able to survive the sequestration process. But the defense supply chain, spanning everything from weapons systems to cybersecurity applications, is a complex ecosystem that relies heavily on smaller firms that may only make a single part in a larger product. Many of those businesses, as well as many of the attendant services providers, would not be able to weather the storm, he argued.
“This is going to have an effect that’s going to ripple all the way across the economy in this country and touch a lot of people. So this is not just an issue of, ‘Well this is big defense contractors. They’re all rotten guys anyway — let’s screw them,'” Bucci said. “That is not the problem here. And I like to think that management and labor are in the same boat on this one.”
Additionally, the cuts would significantly reduce the personnel levels in states’ National Guard forces and the military reserves, reducing the footprint of forces that have not only played a major role in foreign operations, but are also integral in responding to domestic emergencies such as hurricanes and other natural disasters.
“This is something that I think many of our governors aren’t even aware of at this point,” Ayotte said.
Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.