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IEC Legislative Brief: Potential Impacts of the Sequester on IEC Members

Posted in: Legislative Updates

On March 1, 2013, federal agencies will see an across-the-board automatic spending reduction take effect. The initial cut of $85 billion will occur immediately and apply equally to defense and non-defense spending, with cuts totaling $1.2 trillion over a 10 year period. However, many large mandatory programs (such as Social Security, Medicaid, veterans benefits, and low-income services) are exempt from the cuts. As a result of these cuts, federal agencies may be forced to reprioritize, down-size projects and staff, and even terminate programs.


What is the Sequester?

In an effort to address unsustainable federal spending, the Budget Control Act of 2011was enacted to establish statutory limits on discretionary spending and an automatic process of spending reductions if Congress and the President did not approve deficit reduction legislation before the cuts kicked in on January 2, 2013.

When it was conceived in 2011, the sequester was intended as a last resort. The idea of mandatory and indiscriminate federal spending cuts across all agencies was meant to be intolerable to both Democrats and Republicans, and force Congress to prioritize agency expenditures and develop a package of acceptable reductions. If Congress was unable to pass legislation by the deadline, then $1.2 trillion in automatic cuts across the federal government over ten years would be triggered.

A day before the sequester was set to kick in, Congress passed the American Taxpayer Relief Act(ATRA) of 2012. Although the ATRA managed to address one half of the fiscal cliff – the tax portion – the bill did not contain a solution for federal spending, only postponing the scheduled cuts under the Budget Control Act until March 1, 2013.

Since the start of the 113th Congress in January, legislators and the White House have been unable to strike a deal, and agencies are preparing internally for cuts to begin this Friday. Although a spending agreement may yet be reached in the days or weeks following the sequester, agencies will be forced to make budget decisions immediately.

Impact of Sequestration on Federal Agencies and Programs

A September 2012 Office of Management and Budget (OMB) report to Congress on the impact of the sequester provides preliminary estimates and classifications of the potential impact on each federal agency. The agencies, which have already been drafting their sequestration plans based on OMB’s projections, will begin operating at reduced funding levels. The precise percentages of cuts to specific programs within each department are yet unknown. However, the most likely consequence of the sequester will be agency staff furloughs – which could mean either full or partial reduction in employee hours. OMB projects the number of staff impacted to total in the “hundreds of thousands.”

Safety and Labor

A White House fact sheet released on February 8, 2013, describes the possible effects of a sequester on the enforcement activities of the Occupational Health and Safety Administration (OSHA). The White House had initially predicted that the agency could see furloughs to its inspector cadre, which would have resulted in fewer inspections. However, OSHA Secretary David Michaels recently confirmed that the agency had been granted additional flexibility by OMB and was able to “reprogram” funds. This will allow OSHA to “identify sufficient reductions -- while still being able to support our priorities and mission -- to take the required budget reductions without furloughing OSHA staff.” Cuts will instead take place in administrative areas, such as bonuses, purchases, travel, and a moratorium on new hires.

At a recent Labor Safety Roundtable hosted by the Small Business Administration’s Office of Advocacy, Deputy Assistant Secretary Jordan Barab predicted that cuts to the agency’s voluntary safety and training programs can be expected. The specific programs that will be impacted will remain unknown until the sequester is officially triggered. However, OSHA Alliances (such as the one that IEC maintains) and Voluntary Protection Programs could stand to be affected by cuts to funding.

Essential worker training and education programs managed by the government could also likely see a reduction in funds, impacting access to services. In a February 1, 2013 letter to Senate Appropriations Committee Chairwoman Barbara Mikulski (D-MD), the Department of Labor speculated cuts to its Employment and Training Administration (ETA) budget could result in “several hundred thousand fewer participants served.”

While the Department of Labor has not directly addressed the impact of the sequester on the National Labor Relations Board, the agency could experience staff furloughs regionally. This in turn could lead to a reduction in investigations or hearings due to insufficient manpower.

Small Business

IEC members looking to build or expand in the near future could feel the impact of the sequester directly with expected cuts to Small Business Administration (SBA) programs, according to the White House. The Administration estimates that SBA loan guarantees would be cut by up to $902 million, “constraining financing needed by small businesses to maintain and expand their operations and create jobs.” The Economic Development Administration (EDA) would also face financial restrictions, resulting in “more than 1,000 fewer jobs created than expected and leaving more than $47 million in private sector investment untapped.”

Federal Contracts and Grants

IEC members with federal government grants and contracts also likely stand to be impacted by the automatic cuts. According to Bloomberg Government, contractors will likely bear more than a third of the $85.3 billion in automatic cuts. Bloomberg estimates that reduced contract spending will account for $30.8 billion (36 percent) of the sequester. Most likely, contracts deemed non-mission essential will be disproportionately impacted.

As a result of the cuts, fewer new contracts are expected to be awarded and agencies might cancel pending solicitations or decide not to budget additional funding for them. Current contracts might be canceled if funds are not available for a subsequent fiscal year. Appropriations that have already been awarded for projects will not be affected, but programs under which the contracts are conducted may simply not be renewed or defunded in the next federal appropriations cycle, or suspended indefinitely.

Construction accounts and the programs they fund are likely to start see an immediate impact from sequestration. Projects that rely on federal dollars for completion – such as U.S. Army Corps of Engineers civil works, military housing and facilities construction, federal facility construction or renovation, water and wastewater infrastructure development, school construction, clean energy projects, post-disaster reconstruction, and other state and local public works – are not immune from the mandatory cuts.

Typically, under the federal Worker Adjustment and Retraining Notification (“WARN”) Act, an employer with 100 employees or more that is forced to implement a mass layoff must provide 60 days’ written notice to affected employees. Because of sequestration and because the list of specific contracts that may be affected has remained speculative until now, the Department of Labor previously decided that WARN Act notification is not required. OMB has further advised that if a contractor follows DOL’s guidance then compensation, litigation and other costs resulting from federal WARN Act liability would qualify as allowable costs and be covered by the contracting agency.

What the Sequester Means for IEC Members

The bottom line: there remains a great deal of uncertainty as to the extent of the sequester’s impact on programs and projects of importance to IEC member companies. Many agency staff are not even sure how their own jobs will be impacted, and will only begin to find out along with the rest of us when the sequester goes into effect today.

The best case scenario? Members will see little to no effect of the sequester on their business and any subsequent government contracts. Congress and the Administration may even scramble to reach an agreement when they address the expiring current funding resolution for the federal government, which runs out on March 27. The impact of the sequester is expected to be largely gradual, with furloughs taking place 30 days after cuts take effect, so government agencies and contractors can have time to adjust to projected changes.

The worst case? For those members doing business with federal work, they could see a slowing of growth in government projects. This would come as bad news at a time when new construction is beginning to pick up after several years of stagnation. Members that have applied for or expected to receive a new federal contract could find it on the chopping block before an agreement has been signed. Cancelled or stalled contracts could also have other unforeseen consequences, particularly in communities still struggling to recover from the economic recession. Congress and the Administration may choose not to do anything about the sequester, allowing both immediate cuts to remain in place as well as permit further spending reductions to total $1.2 trillion over the next ten years as required by the Budget Control Act.

In the coming days, the public will gain more clarity into the specific impacts of the sequester. IEC will continue to share updated information with our chapters as further details become available.

The White House fact sheet on the sequester can be viewed in full by clicking here

The White House also has a state-by-state projection impact of the cuts also available by clicking here.