Defense firms united on sequester fears, but divided on issuing layoff notices

The CEOs of 13 top defense contractors told Sen. John McCain (R-Ariz.) that the looming threat of sequestration is already dragging on the defense industry, in what is the clearest window yet into industry thinking about the budget cuts.

But the statements also highlighted divisions in the industry over how quickly sequestration will lead to job losses — and whether it will require mass notices to employees about potential cutbacks before the November election.

McCain released the responses from the CEOs of 13 defense contractors on Monday, after he and six other senators requested information from the companies in July about the potential impact of the $55 billion sequestration cut to defense spending in 2013.

Republicans have tried to pressure the White House to release more information about how sequestration would be implemented and its effect on the defense industry and national security. 

Echoing McCain, all of the contractors complained that the lack of guidance from the federal government has made it exceedingly difficult to plan for the across-the-board reductions.

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“Sequestration introduces an unprecedented level of uncertainty that will undermine these efforts and cause dramatic program and personnel dislocation within our industry, with our government customers, and will disrupt the lives of a significant portion of our 120,000 employees and their families,” Lockheed Martin CEO Bob Stevens wrote.

The White House will issue a congressionally mandated report this week that will detail how sequestration would be implemented, after missing the deadline for releasing it last week.

It’s unclear how much the Obama administration report will clear up for defense contractors, particularly when it comes to the potential for canceled contracts and immediate losses should the 2013 defense budget take a $55 billion hit.

The uncertainty was evident in the CEOs’ responses to the specific question about whether and when they felt they would need to issue layoff notices under the Worker Adjustment and Retraining Notification (WARN) Act, which requires 60 days’ notice before mass layoffs or plant closings.

Stevens said in June that Lockheed could have to send the notices to all 123,000 of its employees the Friday before the election, due to the Jan. 2 start date for sequestration.

But as The Hill first reported over the weekend, many other defense companies are hesitant to follow Lockheed’s lead, and they indicated as much in their letters to McCain.

The issue became politically charged after the Labor Department issued guidance saying it would be “inappropriate” to issue the WARN notices due to sequestration. Republicans responded by accusing the Obama administration of trying to hide job losses before the election, and some lawmakers, such as Sen. Lindsey Graham (R-S.C.), urged the contractors to send the notices anyway.

Lockheed wrote to McCain that it was still planning to send the notices, and defended itself against the Labor Department by saying sequestration “will undoubtedly lead to facility closures and significant job loss.”

“I do not look forward to sending these notifications, but in the absence of more clarity and certainty in how sequestration will be implemented, we have an obligation to tell them that their jobs are potentially at risk,” Stevens wrote.

BAE Systems has also suggested it might reluctantly send the notices, and CEO Linda Hudson told McCain that, “due to the complexity of the situation, the Act itself and legal precedent, we believe that unless something changes, we may have no choice but to eventually do so.”

General Dynamics said it might decide to issue conditional notices to targeted employees in “defense business units likely to be most impacted,” while EADS said that without further guidance it will act in the “spirit of this law” and send notices to employees in “federal contract activities.”

“Clearly, the intent of the Act is to provide employees with time to prepare for known events that may impact their employment,” EADS CEO Sean O’Keefe wrote. “Without a doubt, sequestration could be just that kind of event.”

But others indicated they would not be sending any notices, at least not until after sequestration takes effect.

United Technologies CEO Louis Chenevert said the long lead times associated with defense contracts make it so the company would probably not need to send the notices prior to Jan. 2.

Huntington Ingallis CEO Mike Petters said that it would not anticipate sending notices unless the government cancels contracts. “To date, we are not aware of any effort to delay contract actions or awards in anticipation of sequestration caps on budget authority,” Petters wrote.

Exellis CEO David Melcher said the company did not anticipate issuing notices unless it receives stop orders from defense customers.

Raytheon, SAIC and others said that the uncertainty makes it difficult to predict job losses requiring WARN notices, suggesting they would not follow Lockheed’s lead and send the notices en masse before January.

“We are not yet in a position to accurately predict whether and when we would issue such notices absent specific guidance as to how sequestration would impact Boeing programs,” Boeing CEO Jim McNerney wrote.

A study released last month by the Center forStrategic and Budgetary Assessments found that it will take time before contractors actually feel the effects of sequestration on their bottom line, suggesting that layoffs right on Jan. 2 are not necessary.

The first deadline for the WARN notices tied to sequestration will occur in less than a month, as New York has a state law requiring 90 days’ notification. That will provide the first concrete signal of how hard the industry will wind up pressing the notifications to prod Washington to stop the sequestration cuts.

Both Democrats and Republicans want to avert the cuts, but the two parties disagree about how to find alternate deficit reduction to replace them, and each has blamed the other for the gridlock.

— This story was updated at 4:47 p.m.

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