Defense contractors already are preparing for the layoffs and plant closures that will occur if Congress fails to reach a deal on the federal deficit this year, triggering $600 billion in automatic Pentagon spending cuts.
“We are running towards a cliff, all telling each other like lemmings that somehow this isn’t going to happen,” said Marion C. Blakey, president and CEO of the Aerospace Industries Association (AIA). “But the cliff is coming up.”
The looming threat of the automatic cuts is causing defense and aerospace companies to make legally required stock market disclosures about possible lost earnings and to consider notifications to workers and suppliers about layoffs and contract cancelations, said AIA Vice President Fred Downey.
An AIA-commissioned study found that, if the automatic cuts occur, about 1 million jobs will be lost directly by contractors and indirectly by subcontractors and others companies in the cascade of consequences resulting from plant closures and mass layoffs.
The jobs that would be lost in the aerospace and defense sector are “good, high-paying, high-tech jobs” that pay up to twice the national average wage, said Mrs. Blakey.
Sequestration — the process for the $1.2 trillion automatic, across-the-board federal spending cuts — is “fundamentally flawed an abysmal public policy,” and its consequences would be “almost unthinkable,” she said.
The automatic cuts require almost $600 billion in defense cuts over the next 10 years, and a bit less than that in non-defense spending.
By law, the cuts have to be across the board, with agencies and departments prohibited from protecting their most effective or efficient programs, as they would do in a normal round of budget cuts.
Lame-duck hope for deal
Sequestration was intended to ensure that Congress’ so-called supercommittee could reach a deal last year to get the federal deficit under control and start reducing the ballooning national debt.
It was designed to be “so draconian to make it certain people would come up with a solution,” said Mrs. Blakey.
But the supercommittee was unable to reach a compromise, and the automatic cuts will go into effect Jan. 2 unless Congress acts — either by finding ways to reduce the deficit, or by repealing the law that implements the cuts.
“It’s stupid, and it shouldn’t happen, but no one knows how to stop it,” said Mr. Downey.
The impasse has resulted from the parties failing to compromise sufficiently on a deficit-reduction plan: Republicans insist on deep cuts in entitlement spending without increasing taxes, while Democrats demand higher taxes and more moderate cuts to entitlements.
What is needed, Mrs. Blakey said, is some “good, old bipartisan, pull-to-the-middle, get in a room and exercise some leadership.”
“They have an obligation to maintain the nation’s defense,” she said.
But most observers agree that, with the atmosphere on Capitol Hill mired in election-year politics, it will be impossible to reach a deal before Election Day. A lame-duck congressional session after the election appears to offer the best opportunity for a compromise.
But companies, especially technology firms, have to make decisions about investment months ahead, and they already are being affected by uncertainty over future revenues from government contracts, Mrs. Blakey said.
“We think that [avoiding the automatic cuts] after the election will be too late,” she said.
To push Congress to make a deal, Mrs. Blakey said, the defense and aerospace sectors are “for the first time ever mounting a very aggressive public campaign.”
Management and unions are marching shoulder to shoulder for a change, she added. “This is strange bedfellows,” she said. “It tells you something about how serious this problem is.”
The defense and aerospace sectors are not the only ones affected, say industry executives.
Alan Chvotkin, vice president of the Professional Services Council, which represents firms that rely on federal service contracts, said that if there is no action by the fall on the automatic cuts, “at some point, every publicly traded company with significant U.S. government contracts will have to issue a warning to its shareholders” about possible lost revenue.
“Even if the government wants to pretend this isn’t happening, publicly traded companies don’t have that luxury. They have legal obligations,” Mr. Chvotkin said.
In addition to shareholder disclosures mandated by the Securities and Exchange Commission, companies also have an obligation under a federal law called the WARN Act to notify workers of possible mass layoffs, Mr. Chvotkin noted.
Because of the involuntary nature of the automatic cuts and other factors, “there’s an open question in the government contracting world” about whether the WARN Act applies, said Mr. Chvotkin.
Nevertheless, many companies have union contracts that require notification, and the penalties for violating the act are severe enough that companies would likely err on the side of caution, he said.
The required notice is 60 days, which means letters triggered by the Jan. 2 automatic cuts would have to go out Nov. 2, four days before the election.
“Sequestration is the sword on a string hanging over our heads,” said Mr. Downey.