Analyst suggests contractors are bluffing on sequester layoffs

The dire warnings from defense contractors that they will have to immediately begin laying off workers when sequestration takes effect on Jan. 2 are unfounded, according to a new analysis from the Center for Strategic and Budgetary Assessments.

But the Defense Department’s civilian workforce would quickly face steep reductions of up to 108,000 workers as a result of the potential $56.5 billion cut to defense spending, the analysis found.

Todd Harrison, the analyst who wrote the CSBA report, said that it would take several years before contractors would feel the full 10 percent across-the-board cut under sequestration, because funds already obligated to contractors would not be affected by the sequester.

“Few immediate layoffs, if any, are likely to occur as a result of sequestration going into effect on January 2nd, because on Jan 3rd virtually all contractors will be working on projects and activities where funding has already been obligated and thus is not subject to sequestration,” Harrison wrote in the report released Friday.

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“It will be three or four years before defense companies feel the full impact of sequestration,” he said. This gives industry more time to adjust employment levels through natural attrition and early retirements rather than forcing immediate layoffs.”

Defense contractors such as Lockheed Martin have warned about mass layoffs under sequestration, and Lockheed’s CEO Bob Stevens has said as many as 10,000 employees could lose their jobs under the $500 billion, 10-year across the board cut.

Stevens stirred up a political firestorm when he suggested that Lockheed might send out layoff notices to all 123,000 of its employees the Friday before the election tied to sequestration’s Jan. 2 date, due to federal reporting requirements that require 60-day notices for layoffs.

The Labor Department responded by issuing guidance that told defense contractors isthesuing layoff notices were “inappropriate” under the Worker Adjustment and Retraining Notification (WARN) Act.

Republicans responded by accusing the Obama administration of trying to hide the job losses from sequestration before the election.

Sequestration has become an issue in the presidential campaign, with Mitt Romney blaming President Obama for the cuts to the Pentagon that Defense Secretary Leon Panetta says will be devastating for the military.

The potential for a round of mass layoff notices right before the election turn has helped turn the issue of defense cuts into a debate about jobs, which has given it a more prominent role in the campaign.

A Lockheed spokeswoman said the company continues to "carefully evaluate" how sequestration will impact its programs, customers and employees, and that the company would also consider what the administration says next month when it releases information about implementing sequestration that was mandated by Congress. 

Harrison’s analysis found that the Defense Department budget would be cut by 10.3 percent across all the accounts that the sequester affects, which does not include military personnel due to an order from Obama.

The $56.5 billion that would be cut from the defense budget under sequestration is based on the president’s 2013 budget request, and could vary slightly depending on the size of the eventual 2013 budget.

Harrison said that if sequestration goes into effect for just a few weeks before Congress fixes it, the impact would likely be minimal, because the renegotiating of contracts due to the reductions would not be completed in that short time frame.

One of the things that sequestration would not do, according to Harrison, is force the closure of military bases. Sen. Lindsey Graham (R-S.C.) warned of base closures from sequestration during a series of events with other Republicans earlier this month.

— This story was updated at 5:13 p.m.