Thanksgiving 2013 and the Fiscal Cliff

I am here to wish everyone a Happy Thanksgiving (unless of course you read this after the break), but also to give myself a little boost.  It seems like we are getting closer and closer to a “solution” to the Fiscal Cliff.  In case you missed it, there are a lot of things coming down from the government that are leading us like lemmings to potentially a worse recession that before… but the news continues to get better.

Everyone talks about sequestration and the fiscal cliff as if they are the same thing – they are not.  Sequestration = budget cuts.  Fiscal cliff = sequestration + tax increases.  It appears that the President and Congress are well on the way to at least figuring out 1/2 the equation (taxes) and the other 1/2 (cuts) will most likely get kicked down the road a little longer.

Stay tuned… there is bound to be a race to 12/31 to get it all done, just like I thought it would.

PS – For those of you just checking in before taking the rest of your use or lose time – Happy Holidays, I will see you again next year.  *smirk*

WARN Act and Sequestration

Bradley Arant Boult Cummings issued an instructive client alert discussing the impact of the Worker Adjustment and Retraining Notification Act (29 USC 2101-2109) on Department of Defense contractors whose contracts may be terminated or reduced in the event of sequestration.

Generally, the WARN Act requires employers with at least 100 employees to provide written notice to affected employees 60 days before ordering certain plant closings or mass layoffs if they are reasonably foreseeable. Employers that do not give the required notice may be liable for back pay and benefits, as well as civil penalties.

The client alert identifies a Department of Labor advisory letter, as confirmed by a September 28 executive memorandum, as providing guidance to DoD contractors “whose contracts may be terminated or reduced in the event of sequestration on January 2, 2013.” Those contractors are not required to give the 60-day WARN Act notice to employees working under those contracts.   The memorandum also provides that if a DoD contractor has followed a course of action consistent with DoL guidance, then any resulting employee compensation costs for WARN Act liability as determined by a court, would qualify as allowable costs.

The client alert cautions that the DoL guidance is generally a “best practices” statement, not a binding legal decision, and that the executive memorandum contains a disclaimer and may not answer all of a contractor’s business and legal questions. The alert advises that contractors “may want to dig a little deeper before making your decision about whether or not you follow the Executive Memorandum and Guidance Letter or take the more conservative approach of complying with the WARN Act.”

For more information, see the client alert.

 

The Sequester Train Has a Schedule to Keep

Buried in a stack of electronic links on the OMB webpage is a report issued on 9/14/2012 (7 days after the administration’s due date) concerning the sequestration “crisis/issue/thing” looming for 2013. Over a mere 158 pages, OMB attempts to provide specifically vague information related to where the axe will be used and where the scalpel will be used.  One key note early in the report …

As of the date of this report, no appropriations bills have been enacted for FY 2013. Accordingly, consistent with the assumptions required by the STA, the estimates for the level of sequestrable budgetary resources and resulting reductions assume that budget accounts with discretionary appropriations are funded at the annualized level provided by a CR at a rate of operations as provided in the applicable appropriation act for FY 2012, plus any funding enacted as advance appropriations for FY 2013. The annualized level, which is a preliminary estimate, is calculated by taking FY 2012 enacted appropriations net of any recurring rescissions and changes in mandatory programs (CHIMPs). The level is also adjusted for any transfers mandated by law.

Continuing in the report, the HUGE impact that many in the contracting arena feel is coming seems elusive.  First, remember this is a 9 year plan – the big $1.2 trillion in cuts comes down to $110B per year.  Next, consider that contracts do not account for all government spending that is possible.  Once you factor out all direct payments (even though some are still susceptible to sequester) and insurance (although some of this is still considered for sequester too), the contract spending for 2012 was about 42%.  Going forward, let’s assume all the cuts would be made to contracts though, just for giggles.  Last, consider that total federal spending on EVERYTHING is at $2.5 trillion for FY2012.

I admit my spending total above represents ALL spending and the sequestration would only cut into the “sequestrable” (mainly discretionary) base.   But, we are talking about contractors here, so let’s continue along that line.

THIS IS WHERE I ASK YOU TO HOLD ON TIGHT FOR A MENAGERIE OF NUMBERS AS THE ACCOUNTANT IN ME WORKS THEM OVER…

Based on 2012 spending to date on USASpending.gov, total contracts are $365B.  The cuts, according to the report, have to be somewhere around 10% overall or $36.5B for contracts (assuming all sequestrable spending is contracts).  There are over 100,000 prime contractors listed (over $0 dollar value award).  So, each of those contractors would take a relatively small hit of about $365,000.

Then again, let’s say the 80/20 rule applies and that 80% of the dollars go to the top 20% of the awardees.  So 20,000 prime contractors sharing that $36.5B burden would come down to $1.8m per prime awardee – no small figure for some at the bottom of that tier, but still relatively small in relation to dollars spent.

Or, let’s put the burden on the top 10 contractors.  [Sorry]!  $3.6B in reduction is a LARGE chunk to take out of someone’s revenue stream, even if the top 10 contractors accounted for $92B in contract spending.  So, by taking 1/3 of the revenue from the Top 10, you could save the rest from any cuts at all?

When it comes down to it, there isn’t a politician alive that wants to take money out of constituents’ pockets, but the cuts will have to be done.  As I look at the landscape (ever changing as it may be) it may not be so good to be a big guy in a big pond right now.  If the government can make cuts to contracts to the fewest contractors possible, there is a good chance that those getting under $25million wouldn’t see a cut or hiccup (cue the big lobbyists to take another approach).

I only throw out these numbers to set your mind at ease (maybe).  When it comes down to it, the responsibility lies with each contractor to avoid the impact as best as possible.  I am still a firm believer in efficiency and effectiveness and there are a lot of solutions out there to increase these tasks.   This reminds me of a joke (with names removed to protect the innocent).

Two xxxxxxxxx biologists were in the field one fine summer day.  While following a game trail, they came across a pair of tracks.  “Look! a pair of tracks” The first [biologist] said while pointing to the ground.  “Those are deer tracks,” the other [biologist] replied.  “Oh no,” she said to the first, “Those are definitely moose tracks.”  With this, they began to argue. In fact, they were still arguing when the train hit them.

Don’t be caught unaware when the Sequester Train rolls in to the station.

 

Sequester in Brief

I was asked to prepare some information for budgeting for next year and realized that I hadn’t spent nearly enough time getting to know sequestration.  I basically knew that they keep jurors from talking to the public and viewing media that may influence their opinions… WAIT – that is jury sequester.  With federal sequestration, I could talk about it intelligently, but hadn’t learned what I really needed to learn about the topic. So, the following is my paraphrased opinion to my boss on what sequestration is and is not…

Sequestration is the mechanism provided for balancing the budget of the US government in the Budget Control Act of 2011. Under this mechanism, there are not “cuts” per se to the operating budget of the US, but caps put in place that – if overspent – would result in cuts in so-called “non-exempt discretionary spending.” I think this is really just a mincing of words – a cut is a cut regardless of how it happens. Also, the rest of the story is that the cuts in spending would actually go to paying down the national debt. See also “fiscal cliff” as it pertains to a CBO report.

There are two ways to avoid the sequestration – 1) enact a budget that comes in under the caps, or 2) raise the existing caps on spending (which was the solution for the 2012 deadline).

Graphic from the Congressional Budget Office showing difference in 2012 spending and 2013 caps.

Although the politically charged number is $1.2 trillion, current estimates by the OMB indicate around $7.0 billion for 2013 in sequestration under current proposed appropriations. However, since there have been no appropriations bills enacted, there is a Continuing Resolution that carries with it the threat of sequester based on 2012 levels. The difference between 2012 and 2013, as projected by the Congressional Budget Office, would be more like $487 billion. The CR basically allows current spending levels until Congress can act. Bottomline – there are plans out there that get us where we need to be, but no one is acting (supposedly only because of the election cycle).

Specific guidance from President Obama is due out this week on what areas and programs may be affected.  In the end, if/when sequestration DOES happen we can expect the following:

  • More cuts to current programs that are tightening their belts already.
  • More cuts of planned projects that will be delayed until a TBD date.
  • More requests from government personnel to reduce prices to the government to enable activities to continue.
  • More requests from government personnel to discount existing contracts or modify them accordingly.

In my opinion, the likelihood that out-and-out “sequestration” happens is about 30%. However, everyone knows that cuts are coming regardless of the sequestration. Caps will still be lower than 2012 and spending will still be down across the board.

Another Take on Sequestration

I know I ranted about sequestration, but I guess it finally hit home for me when one of my students asked what I thought about it. I am in the DC metro area and I teach in the DC metro area, so it made sense that I would hear such a question.

Of course, it got me to thinking and got me to click on a news article that came up in a feed. The article came from Federal Computer Week, but referenced some wonderful (for an accountant like me) numbers and statistics from the Professional Services Council.

By now, everyone in government contracting circles knows the figure $1.2 trillion. One of the things the PSC starts to get into is the breakdown by agency of the cuts (estimated of course).

What I also found interesting is that the Obama administration is scheduled to release a report to Congress sometime in September related to what needs to be done to achieve the cuts. In under a month, we may have some clarity on what is going to happen.

I say “going to happen” because there is every indication that the cuts will happen and that a deal won’t be reached across the aisle. I think a lot of that depends on the results of the election. Regardless of who wins in November, the race will be on to curtail the cuts.

So, as you mull over the graphic above, think about the agencies you are doing business with and start to think of the ways in which you can save them money. The more efficient and effective you become in delivering to the government, the more competitive you will be going into these cuts.

What tools or processes do you know of “off-the-shelf” that can do that?