April 29, 2013
There’s been a lot of political posturing about the potential impact of sequestration on federal agencies and how it will affect everything from national security to air travel. But lost in the rhetoric is a clear-eyed examination of what the across-the-board spending cuts, which took effect in March, could mean in real terms for federal spending.
In January, the research advisory firm Forrester predicted that federal technology spending will grow by 7 percent in 2014. In February, taking sequestration into account, Forrester revised that prediction. The new growth forecast is 6 percent, just a 1 percent decrease from the earlier prediction. According to Forrester, the majority of spending decreases will not be due to sequestration, but to existing cost-saving measures in federal IT -- things like consolidating data centers, adopting cloud-based services, and increasing the reliance on commercial off-the-shelf products.
The federal government is looking at roughly 7.6 percent in cuts from proposed budgets through 2021. But entitlement programs and a handful of programs exempted from the law were not subject to sequester, so they actually will continue to grow. By the time sequestration is lifted, the government will spend $4.41 trillion annually -- instead of the projected $4.48 trillion agencies would have spent without sequestration.
To put it another way, the cuts we are seeing that seem so drastic actually represent less than 2 percent of federal expenditures.
So realistically, all this talk about devastating cuts and how they will result in a hollow force with agencies no longer being able to function, may largely be political theater. Any draconian cuts to budgets will lead to cuts to jobs; and no one in Congress wants to deal with losing jobs in his or her district. So it behooves politicians to be as dramatic as possible when threatened with cuts, even if they are not that large.
A Closer Look at Cuts
None of this is to say there won’t be some short-term ramifications. In the remaining months of the fiscal year, the $85 billion to be cut will be divided roughly equally between defense and non-defense accounts.
On the non-defense side, emergency and disaster relief aid, advanced appropriations from past years, program integrity funds, farm subsidies, extended unemployment benefits, Medicare reimbursement to providers, and supplemental nutrition programs for women and children all will be cut. Major exemptions exist for the majority of Medicare and Medicaid programs, Pell grants, and funding for the Veterans Affairs Department and Social Security.
The defense industry has less money protected by mandatory programs than its non-defense counterparts, so the defense discretionary budget will take the largest hit. What is included in that? Spending on military personnel was exempt, but that’s about it. Base funding, war funding, unobligated balances from previous years, and pay for civilian defense employees (in the form of furloughs) are all affected.
Cuts will come at the program and project level. Defense cuts equal 7.8 percent, which will feel like a 13 percent cut when spread over seven months. Non-Defense cuts equal 5 percent. Executed over seven months, that reduction will feel like a 9 percent cut.
Where will program cuts be felt most strongly? And what does this mean for the relationship between government and the private sector?
Independent of sequestration, an OMB report in September 2012 anticipated the Air Force would lose about $4.9 billion in new procurement money this year, the Army $2.7 billion, the Navy and Marine Corps $5.9 billion, and other Defense agencies about $2 billion. Perhaps more alarming is that Defense agencies in total were expected to lose more than $27 billion in operations and maintenance funds and $7 billion in research, development, test, and evaluation funds.
These cuts already are affecting the contracting community. Agencies across the board are tightening up on services spending, and government is likely to streamline its cost structure, reduce purchases not related to mission critical systems, and make fewer large scale acquisitions.
Contractors have heard anecdotally that agencies may not be able to pay for work on current projects, but may still require the work to be done because government contracts stipulate that payments are subject to availability of funds.
Additionally, acquisition personnel are now required to justify that contracting activities are essential to their agency’s mission. Add-ons may become a relic of the past, and contracts could be reduced in scope. Re-competes and option year awards on large contracts will become less common, because federal agencies will have a harder time justifying them.
As a result, there are likely to be shorter contract periods of performance. Governing bodies also have been very clear that no new contracts should be created unless absolutely necessary. Existing contracts should mostly be safe from cancellation, although expect to see modifications, especially on large contracts up for renewal or re-compete through September.
The consistent message from procurement shops and IT management personnel has been focused on reducing information technology costs by cutting excessive service contracting while ensuring mission fulfillment. There seems to be considerable momentum behind ideas like strategic sourcing and shared services as a means of reducing IT management fees.
It is true that the government -- and the private sector -- will definitely feel the effects of sequester, and agencies and the companies that serve them will have to scrutinize spending. The idea that the sky is falling, however, seems to be far from inevitable.
Tim Larkins is a market intelligence consultant for immixGroup. He can be reached at email@example.com
(Image via NinaM/Shutterstock.com)
April 29, 2013