Analysis: Sequestration would drive contractors over 'fiscal cliff'

Monday - 6/18/2012, 9:59pm EDT

Marion Blakey, President and CEO, Aerospace Industries Association

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Defense contractors are growing increasingly worried about the automatic, across- the-board budget cuts, known as sequestration, set to take effect in January.

The Office of Management and Budget told Congress in late April agencies hadn't yet begun planning for the cuts and instead called on lawmakers to come up with an alternative.

But the contracting community appears to be bracing for the possibility of deep damage to their bottom lines and possibly even mass layoffs.

"Believe me, we'd like to not plan for it either," said Marion Blakey, the president and CEO of the Aerospace Industries Association, in an interview on In Depth with Francis Rose. "But unfortunately, sequestration is the law. It is in place, and it will take a law to overturn it. And we do not see anything moving through Congress right now to fix what almost everyone says is horrific fiscal and public policy."

Sequestration a 'fiscal cliff' for contractors

As damaging as sequestration would be to agency budgets and to the economy as a whole, contractors are particularly vulnerable, Blakey said.

"From a contractor's standpoint, we also are looking at a fiscal cliff that's coming at us," she said.

The mentality of Washington, D.C. is centered around the government, Blakey said, which often stands in stark contrast to the needs of the defense industrial base.

"The defense community is a business community," she said. "We have to be driven by what is sound and responsible from the standpoint of investors, from the standpoint of shareholders and employees. You have to do the right thing by the people who, in fact, are supporting the industry."

For example, Blakey mentioned the 1988 WARN Act, which directs employers to give workers at least 60 days' notice in the case of impending plant closures or mass layoffs. That means it could be as early as this fall that contracting companies are faced with notifying employees of layoffs.

"So this isn't something that's happening in 2013; it's very real now," Blakey said.

Business, not politics

The fact that notices would come shortly before the presidential election could spell disaster for incumbent lawmakers and the President, Politico noted last week.

But Blakey said it would be simply a matter of contractors doing what the law requires.

"This is business, not politics," she said, adding that companies' legal departments should make the final determination about when such notices would be sent out.

"We're in a fog of uncertainty here," Blakey said. "How do you invest? How you you hire? How do you train, when you don't know what's in the future in terms of what are really massive cuts."

Until Congress acts — by repealing sequestration as Blakey called for, or coming up with an alternative set of cuts — the defense industry will continue to face intolerable levels of uncertainty, she said.

"Right now, we're talking about Russian roulette with all the chambers full, because we know this will happen unless they take action," she said. "But they need to do it, and they need to do it now, not wait until a lame-duck session or till 2013. By that point, a lot of the damage will be done."

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