U.S. defense companies are quietly preparing for a potential federal government shutdown in the coming months should Congress fail to pass a fiscal year 2011 budget or extend an existing continuing resolution, an analyst warned Feb. 10.
With the current continuing resolution set to expire the first week of March, these companies are re-examining their internal business plans, according to Stan Collender, a federal budget expert with Qorvis Communications.
“I say that there is a better-than 50-50 chance that we’re going to have one or more shutdowns, and at least one of those shutdowns will be longer than just a couple of days or a couple of hours,” Collender said Feb. 10 during a meeting with reporters at the Center for Strategic and Budgetary Assessments in Washington.
He noted that a shutdown could delay contracts and lead companies to trim their work forces.
“I wouldn’t be surprised if there are layoffs [or] furloughs,” the analyst said.
The last time the government shut down was in November 1995, and then again December 1995 and January 1996, after Republicans took control of the House and Senate. The first shutdown lasted a few days and the second a few weeks. About five days into the second shutdown, contractors began laying off employees.
Collender believes that Republicans will shut down the government, at least once, “to show the tea party folks that they were willing to do it.”
The tea party is a loose confederation of conservative voters generally aligned around cutting government spending.
The analyst said defense contractors have “already started to prepare for this possibility.”
Collender believes there will be another “short-term” continuing resolution, for no more than a month. After that, another government shutdown is possible.
“It’s not unlike what happened in ’95 and ’96, where government agencies and departments had to continuously prepare to shut down,” he said.
With a government shutdown, federal workers are unable to award contracts or release and review proposals for services.
At the same time, Collender believes that Wall Street analysts have not considered deep defense cuts as a reality.
“They seem to be pretty skeptical about the likelihood of significant defense reductions or changes in the path,” he said. “I’m not sure that the stock prices have been affected, but they will.”
In January, Defense Secretary Robert Gates announced the Pentagon had identified $154 billion in potential savings over the next five years. Those savings amount to a 5 percent of the planned funding over that period, according to a CSBA report released Feb 10.
“The fiscal 2012 budget debate is likely to be looked at as a turning point for the defense budget,” Collender said. In a year, analysts will reflect on 2012 “as the beginning of a significant change.”
This will translate into “an extremely challenging time for defense contractors,” according to Collender.
“With the path changing for defense spending, a lot of the assumptions that contractors have made in their own five-year business plans are going to have to be re-examined,” he said. “There simply won’t be as much available for all the things that the DoD said it wanted to do and was planning on doing as early as three, four months ago.
“It’s not that they’re running scared, but there are significant re-evaluations of business prospects going on,” he continued. “They’re looking at commercial applications in ways that they haven’t before, a variety of things like that.”
In addition, Collender projects 2012 “to be not only a turning point in the path of defense spending but the beginning of what will be considered a shakeout in the defense and aerospace contracting community.” Defense companies are likely to explore mergers and acquisitions while larger businesses might look to shed divisions that are not expected to profit in the immediate future.
“I’m expecting a lot more activity or at least exploration of â€¦ mergers and acquisitions within the community simply because â€¦ the path won’t be as great, the profit-making opportunities may not be as substantial,” he said.
Collender’s predictions came one day after Pentagon acquisition executive Ashton Carter warned the major defense companies not to merge. That said, Carter predicts and uptick in mergers and acquisition among lower-level suppliers.
The fight over the increase in the US debt ceiling is on hold for awhile. The Treasury Department said tax receipts were higher than expected so the ceiling may not be reached before the end of April. That will allow the debate about budget cuts to go on, perhaps until the Administration agrees to some reductions in spending that the Republicans want.
The current situation is very often compared to the 1995 â€œshut downâ€ which was caused by a battle between President Clinton and a Republican Congress.
There are a number of arguments about what government spending programs would be most affected if the US essentially ran low on money and could not replenish its supplies through the issuance of new debt. The agencies most often mentioned are those which are not necessary to the daily operations of the nation and its national defense. That might include the Department of Energy, the Commerce Department, the Labor Department, Health and Human Services or Housing and Urban Development.
A shutdown of the government might give some small hint of whether all the departments of the government, at least those represented by Cabinet seats, are necessary. Almost all politicians argue that the government is too complex and has so many agencies and pieces that it creates unwieldy bureaucracy. If there was no money to support them all, the results could be telling.
The most recently added department might be the ones shut down the first. If they remains shuttered without major effect, perhaps they could be abolished completely. Since 1977, Energy, Health and Human Services, Education, and Homeland Security have been added. One has to wonder how the federal government operated without them for nearly two centuries.
No one believes that the federal government can be shut down for a long period, even on a limited basis. But, there could be one side benefit. It would be to tell whether every part of the federal system is absolutely essential or not.
With the March 4 expiration date looming for the continuing resolution that’s funding the federal government, budget expert Stan Collender offers this advice: Prepare for a government shutdown.
It is more likely than not that Congress will fail to agree on a new budget for 2011 in time to prevent the federal government from running out of money and simply closing its doors, Collender said Feb. 10.
“My strong suspicion is that the Republicans need to shut down the government once to show the Tea Party folks that they are willing to do it,” he said during a discussion of the 2012 budget that’s scheduled to unveiled Feb. 14. “I think there’s a better than 50-50 chance that we will have one or more shutdowns, and at least one will be longer than a couple of days.”
Collender is a partner in the corporate communications firm, Qorvis, author of The Guide to the Federal Budget, and an expert on the federal budget congressional budget process — and he’s been through government shutdowns before.
In 1995 President Clinton, a Democrat, vetoed a spending bill passed by the Republican-controlled Congress that would have cut, among other things, Medicare, Medicaid, education and environmental controls.
Without a budget the government was operating on a continuing resolution — just as it is today. And when the 1995 CR expired, non-essential services simply halted.
At first the effects seemed minor. Angry motorists lined up outside closed national parks and people were unable to get passports and visas. But soon companies that relied on government business discovered there was no one to pay their invoices, no one to open bids on new contracts, and no one to accept goods that were to be delivered.
“Contractors realized that they were in ground zero of the shutdown,” Collender said.
After five days, a new CR was passed and the shutdown ended. But Clinton and Congress were still at loggerheads when that CR expired, and the government shut down again, this time from Dec. 15 to Jan. 6, 1996.
During the second shutdown, companies that depended on government business began to lay off workers, Collender said.
Layoffs are likely to happen earlier if there is a shutdown this year, he said. “I can tell you because I’ve talked to members of the contracting community and to [business] associations, and they’ve already started to prepare for this possibility.”
And as in 1995, there could be more than one shutdown. “The common assumption in Washington is that the possibility of a shutdown will come to a head March 4 and they will work out a deal. I think it is more likely that we will get a short-term CR and go through it again,” Collender said.
“I would not be surprised if there are layoffs, furloughs and project delays. The bottom line is I think it’s coming,” he said.