Obama administration’s promised payouts to defense firms likely unneeded

The Obama administration is unlikely to make payments to defense contractors to cover severance costs caused by across-the-board Pentagon cuts, according to defense analysts.

The prospect of the payouts has sparked a political firestorm, with congressional Republicans comparing them to bribes and saying they'll do anything possible to stop the government from making the payments.

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But the likelihood of the payments being made is actually quite remote, defense analysts say, because the companies won’t feel the effects of sequestration immediately.

The government also is not planning to cancel contracts the day the cuts take effect.

All the same, the Office of Management and Budget sweetened the pot in guidance to defense firms last week.

OMB said that federal agencies would cover companies’ costs if they have to lay off employees due to sequestration prior to a 60-day federal notification requirement.

“They’re promising something because they know they won’t have to do it,” said Todd Harrison, a defense budget analyst at the Center for Strategic and Budgetary Assessments.

Lockheed Martin, BAE Systems and EADS North America all responded to the OMB guidance by dropping plans to send out the layoff notices before sequestration takes effect — which could have come just four days before the election.

Republicans in Congress cried foul, accusing the Obama administration of hiding job losses before the election and ignoring the law.

Sens. Lindsey Graham (R-S.C.) and John McCain (R-Ariz.) vowed to block any payments from the administration.

They also sent a letter to 15 defense contractors Friday telling the contractors to follow the law and issue the 60-day notices under the Worker Adjustment and Retraining Notification (WARN) Act.

“Despite the Administration’s guidance not to issue WARN notices now, it is our fear that, should you rely on that guidance and fail to comply with the WARN Act requirements, you will be setting your company up for serious legal and financial repercussions,” the senators wrote.

“The Congress should not put the taxpayers on the hook if a private company fails to follow the law.”

Lockheed Martin responded to the letter in a statement to The Hill Friday, in which the company suggested it wouldn’t need the payouts offered by the Obama administration.

“Our decision to delay sending sequestration-related WARN notices to our employees was based on new information that clarified the timeline for implementing sequestration budget cuts,” Lockheed spokeswoman Jennifer Allen said.

“If sequestration occurs, we will adhere to the law and provide affected employees the full notice period required by the WARN Act at the appropriate time.”

Democrats have also pointed to guidance from the Defense Department — issued at the same time as the OMB’s — that said contracts would not be cancelled on the day sequestration takes effect.

Harrison published a study earlier this year on that point. He argued that defense companies would be harmed deeply by sequestration — but it would take time because the companies already have contracts they are working on that won’t go away on Jan. 2.

“Even if sequestration did go into effect and they cut the programs, it wouldn’t happen right away. They’d still have more than 90 days to do it,” said Larry Korb, a defense analyst at the liberal-leaning Center for American Progress.

The administration also has a second failsafe. If companies did in fact lay off workers immediately due to sequestration, there’s a chance that the WARN Act would not apply because the cutbacks are an “unforeseeable event.”

The administration made this argument in July guidance from the Labor Department telling contractors it was “inappropriate” to issue layoff notices due to sequester.

“The essential point the administration is making is that the prospect of sequestration is, at this juncture, mere conjecture. And conjecture does not trigger the 60-day obligation,” said William Gould, who was chairman of the National Labor Relations Board under President Clinton.

But Republicans disagree, arguing that sequestration has been the law for nearly a year now, and it’s very clear it would cut the Pentagon’s budget $55 billion in 2013. There have been industry-driven studies suggesting as many as 1 million jobs would be lost under sequestration, which would cut defense budgets $500 billion over the next decade.

“Make no mistake about it. The looming sequester is very real and the impacts will be felt in every corner of our economy,” McCain and Graham wrote to the defense firms.

“Despite efforts by the Administration to ignore the facts, sequestration and the WARN Act are the law of the land.”

Republicans have also questioned the legality of the administration’s promise. Graham called it “patently illegal” and Sen. Jim Inhofe (R-Okla.) said the administration was “bribing” defense firms.

The lawmakers have focused on a line in the OMB guidance that told contractors they would be protected from incurring WARN Act costs, but only if they did not send out notices before sequestration occurred.

“This guidance, like the Labor Department’s before it, is flimsy and lacking in its legal grounding,” said Mackenzie Eaglen, a defense analyst at the American Enterprise Institute.

“The law states that sequestration will take effect in January. Only another law will change that. Until those laws change, no guidance fully offers protection to industry on a matter adjudicated in federal courts.”

An administration official said that the OMB guidance simply applies longstanding rules about what costs are allowable in government contracts to a specific context, and it does not create new obligations for agencies or taxpayers.

Of course, the administration’s pledge is only an issue if sequestration actually does take effect, something that most Republicans and Democrats want to avoid.

Several defense analysts — particularly those who are growing tired of the political fighting surrounding sequestration — say the events this past week make it clear that both sides are playing a game of chicken with the WARN Act layoffs fight.

The Obama administration’s promise to cover contractors’ costs came as it was looking to stop the layoff notices coming out before the election. One industry insider noted that the guidance came three days before a state 90-day deadline. Republicans, meanwhile, are upset they can no longer use the defense firms to bolster their arguments that the Obama administration is threatening 10s of thousands of defense jobs.

The contractors, who tend to shy away from partisan politics, were caught in the middle after starting the fight, perhaps inadvertently, by threatening the layoff notices to try and spur action on sequestration.

“All this is really just a sideshow,” Harrison said. “I think it’s unfortunate because it’s distracting from the real serious impact of sequestration longer term."

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