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October 12, 2012

Will Defense Contractors Push Obama Off the Fiscal Cliff?

By Russ Winter 

Defense contractors may be setting up a game of chicken to influence the presidential election. By coincidence or design, defense contractors have announced they may issue WARN notices of imminent layoffs within 60 days of the fiscal cliff sequestration.

The relatively new WARN notification law applies to employers that have 100 or more employees. It requires the the employer to issue a 60-day notification of impending layoffs of 50 or more employees. No advanced notification is required for those who have worked less than six of the last 12 months or who work an average of less than 20 hours a week.

If a plant will be closing, the employer must give notice if an employment site (or one or more facilities or operating units within an employment site) will be shut down, and the shutdown will result in an employment loss for 50 or more employees during any 30-day period.

If there will be a mass layoff, an employer must give notice if there is to be a mass layoff that does not result from a plant closing but will result in an employment loss at the employment site during any 30-day period for 500 or more employees, or for 50-499 employees if they make up at least 33% of the employer’s active workforce.
WARN notices can be deployed like sharpened claws in a political cat fight, especially with a potential defense sequester of $54.7 billion on the line come Jan. 2.

Following rumors last August that defense firms were gearing up to send out WARNs the week prior to the election, the Dept. of Labor stepped in and provided a  temporary waiver of the WARN requirement as it applies to defense contractors, stating that the layoffs “would be speculative.” Republicans’ efforts to override the waiver in a Senate Appropriation Committee was defeated in a 17-13 vote.

Incredibly, the following letter sent by Lockheed Martin to its 123,000 employees on Oct. 1 states that the Dept. of Defense anticipates no contract actions.
“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.”
Other defense contractors are being more tight lipped.

This is a high wire political game to play, if you pick the losing side. Intuitively, the defense contractors will be checking the election polls and be tempted release the WARNs in an attempt to help Romney, especially in key battleground states like Virginia.

Since the administration has said no military personnel will be at risk, a lot of the potential savings will have to come from contracts with the private sector. That’s how sequestration works.

Legislators don’t have any discretion with across-the-board cuts. It is intended to hit all affected programs equally, though the cuts to individual areas will range from 7.6 percent to 9.6 percent (and 2 percent to Medicare providers). The indiscriminate pain is meant to pressure legislators into making a budget deal to avoid the cuts. 9.4% or $54.7 billion. For the 2013 budget, a 13% cut must be made.

In reality, sequestration would cut appropriations by 10.3 percent across the Defense Department. A report released by the Center for Strategic and Budgetary Assessments states 108,000 layoffs would occur in the DoD initially — not defense contractors. The Pentagon would have to cut payroll expenditures by 13.7 percent for the last three quarters of FY 2013 to meet the requisite 10.3 percent cut for the year. The impact on procurement and R&D would be less direct, although still disruptive. The Pentagon would have to renegotiate hundreds of contracts to fit within its reduced budget. The pain will be felt later in 2013 and in 2014.

About The Author - Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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