Peering Over the Fiscal Cliff

Many government contractors and other business are standing on the edge of the fiscal cliff that occurs on January 1, 2013; namely, the automatic 10% government-wide across the board cuts known as “sequestration.”  For those who have not been watching Congress make sausage, there is a divide between Democrats and Republicans about what the fix should be.  In essence, Democrats think the primary fix lies in doing away with the Bush-era tax cuts for the wealthy, and Republicans think that cutting entitlement programs is the primary fix.  While both sides have made this about class warfare, the true fix lies somewhere in the middle.  For all their bluster, Congress knows this.        

Nevertheless, this provides little solace to employers, especially those whose cash flow depends upon government payments.  They are all asking: are we headed for a plunge when the 10% across the board cuts kick in?  Even more importantly, they are asking what to do, and how to tell their employees and investors.   Frankly, a good answer can be gleaned from the actions of the Defense Department’s largest contractor who, based on government guidance, has taken a measured approach.    Specifically, we know that as long as current contracts are funded through the end of the fiscal year (September 30, 2013), the automatic cuts arising from sequestration will have little immediate effect.  So, for any company peering over the cliff, the goal should be to look at their pipeline of business and their contracts supporting them to make certain they are adequately funded before automatic cuts kick in. 

What is interesting about this is how the panic for employers began and how a measured approach was achieved.  Led by Lockheed Martin, the Aerospace Industries Association told the Defense Department in June 2012 that they would be issuing WARN Act notices to their employees in November to prepare for layoffs in January 2013 resulting from sequestration.  This led the government to take an unusual election-year step.  In July 2013, The Department of Labor issued nonbinding guidance saying that WARN Act notices would be inappropriate due to the “lack of certainty” over the automatic budget cuts.  On September 28, 2012, the Office of Management Budget issued guidance saying the government may pay the costs of contractors who failed to comply with the WARN Act due this lack of certainty. 

This appears to be what Lockheed Martin was waiting for.  On October 1, 2012, Lockheed Martin issued a public statement on its website.  See http://www.lockheedmartin.com/us/news/enr/1001-sequestration.html.  In this notice, Lockheed Martin stated: 

“After careful review of the additional guidance provided by the Office of Management and Budget and the Department of Defense, we will not issue sequestration-related WARN notices this year. The additional guidance offered important new information about the potential timing of DOD actions under sequestration, indicating that DOD anticipates no contract actions on or about 2 January, 2013, and that any action to adjust funding levels on contracts as a result of sequestration would likely not occur for several months after 2 Jan. The additional guidance further ensures that, if contract actions due to sequestration were to occur, our employees would be provided the protection of the WARN Act and that the costs of this protection would be allowable and recoverable.” 

This statement pretty much says it all, and takes an approach this writer recommends, assuming each contractor has assured itself that their contracts are also fully funded through the end of the fiscal year.  

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas

 

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