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Sequestration

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Sequestration is the plan to reduce government spending by requiring across the board spending cuts. The cuts are to happen in January 2013.

Background

The Budget Control Act passed by Congress in 2011 required the Defense Department to cut $487 billion over 10 years from its budget - $47 billion in the first year (FY12). Plus if a bi-partisan group of Representatives and Senators could not agree on additional cuts then the government would have to impose an additional $1.2 trillion over 10 years in cuts to spending. The additional cuts are to come half from Defense Department and the other half from other Federal agencies. These additional cuts are called sequestration. The bi-partisan group of Congressmen could not come to agreement on the additional cuts so now sequestration is to take place the first of 2013. The Budget Control Act also had provisions dealing with raising the federal debt limit and require spending cuts to more than offset any new spending.

Cuts To Spending

Sequestration causes primarily a spending reduction in FY13. Afterwards the defense budget starts growing at a rate of 10% per year per the Cato Institute. The problem is the sudden cuts made in January to meet the sequestration law would be across the board and without much thought to the long-term consequences. If cuts are made to everything critical programs will be delayed throughout the Federal government. The primary impact of sequestration is not real cuts but lower spending growth. However, in January many programs will be reduce or delayed. Lockheed is projecting that sequestration will cause them to layoff 10,000 employees.

Layoffs

Sequestration will result in companies and the Federal government having to lay people off since there will not be work for them to do. The Federal Worker Adjustment and Retraining Notification (WARN) Act requires companies who are planning to layoff a large number of people to provide at least 60 days’ notice of the pending layoff. Some states like New York have longer notice periods. Large companies working for the Federal government are going to have to issue layoff notices to their employees starting in October to meet the WARN Act requirements.

Where Will The Cuts Be?

There has been little to no guidance from Federal agencies as to where the sequestration cuts will be made which means companies can not plan for the cuts and how best to respond. Those companies having to issue layoff notices will have to notify many more people than might actually be laid off since they do not know what programs will be reduced. One good point to sequestration is that it will only apply to funds that have been planned but not under contract yet. Contracts that are already funded should not see much impact.

Future

Congress can pass a law reversing, cancelling or delaying sequestration. With the Presidential elections in November this might not occur, if it does, until December.

Plan For Sequestration

You should begin planning for sequestration now. It is anticipated that contracting officers will be working to fund as many critical contracts as possible before January to lessen the impact of sequestration. Speeding up contract funding does have the result of forcing deeper cuts on the remaining programs. Check all of your existing contracts to confirm how much of the contract has been funded. For contracts that are not fully funded, you might contact the contracting officer and see if they can fund more of the contract. Begin to develop contingency plans for what you might do to respond to cuts to your contracts. Stay in touch with your contracting officers and government contacts to discern any direction as to what will be reduced.

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