[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-148]
SEQUESTRATION IMPLEMENTATION
OPTIONS AND THE EFFECTS
ON NATIONAL DEFENSE:
ADMINISTRATION PERSPECTIVES
__________
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
AUGUST 1, 2012
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HOUSE COMMITTEE ON ARMED SERVICES
One Hundred Twelfth Congress
HOWARD P. ``BUCK'' McKEON, California, Chairman
ROSCOE G. BARTLETT, Maryland ADAM SMITH, Washington
MAC THORNBERRY, Texas SILVESTRE REYES, Texas
WALTER B. JONES, North Carolina LORETTA SANCHEZ, California
W. TODD AKIN, Missouri MIKE McINTYRE, North Carolina
J. RANDY FORBES, Virginia ROBERT A. BRADY, Pennsylvania
JEFF MILLER, Florida ROBERT ANDREWS, New Jersey
JOE WILSON, South Carolina SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey JAMES R. LANGEVIN, Rhode Island
MICHAEL TURNER, Ohio RICK LARSEN, Washington
JOHN KLINE, Minnesota JIM COOPER, Tennessee
MIKE ROGERS, Alabama MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania DAVE LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas NIKI TSONGAS, Massachusetts
DOUG LAMBORN, Colorado CHELLIE PINGREE, Maine
ROB WITTMAN, Virginia LARRY KISSELL, North Carolina
DUNCAN HUNTER, California MARTIN HEINRICH, New Mexico
JOHN C. FLEMING, M.D., Louisiana BILL OWENS, New York
MIKE COFFMAN, Colorado JOHN R. GARAMENDI, California
TOM ROONEY, Florida MARK S. CRITZ, Pennsylvania
TODD RUSSELL PLATTS, Pennsylvania TIM RYAN, Ohio
SCOTT RIGELL, Virginia C.A. DUTCH RUPPERSBERGER, Maryland
CHRIS GIBSON, New York HANK JOHNSON, Georgia
VICKY HARTZLER, Missouri BETTY SUTTON, Ohio
JOE HECK, Nevada COLLEEN HANABUSA, Hawaii
BOBBY SCHILLING, Illinois KATHLEEN C. HOCHUL, New York
JON RUNYAN, New Jersey JACKIE SPEIER, California
AUSTIN SCOTT, Georgia RON BARBER, Arizona
TIM GRIFFIN, Arkansas
STEVEN PALAZZO, Mississippi
ALLEN B. WEST, Florida
MARTHA ROBY, Alabama
MO BROOKS, Alabama
TODD YOUNG, Indiana
Robert L. Simmons II, Staff Director
Jack Schuler, Professional Staff Member
William (Spencer) Johnson, Professional Staff Member
Lauren Hauhn, Research Assistant
C O N T E N T S
----------
CHRONOLOGICAL LIST OF HEARINGS
2012
Page
Hearing:
Wednesday, August 1, 2012, Sequestration Implementation Options
and the Effects on National Defense: Administration
Perspectives................................................... 1
Appendix:
Wednesday, August 1, 2012........................................ 53
----------
WEDNESDAY, AUGUST 1, 2012
SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL
DEFENSE: ADMINISTRATION PERSPECTIVES
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
McKeon, Hon. Howard P. ``Buck,'' a Representative from
California, Chairman, Committee on Armed Services.............. 1
Smith, Hon. Adam, a Representative from Washington, Ranking
Member, Committee on Armed Services............................ 2
WITNESSES
Carter, Hon. Ashton B., Deputy Secretary of Defense, U.S.
Department of Defense.......................................... 6
Zients, Hon. Jeffrey, Acting Director, Office of Management and
Budget......................................................... 4
APPENDIX
Prepared Statements:
Carter, Hon. Ashton B........................................ 68
McKeon, Hon. Howard P. ``Buck''.............................. 57
Smith, Hon. Adam............................................. 60
Zients, Hon. Jeffrey......................................... 62
Documents Submitted for the Record:
``Long-Run Macroeconomic Impact of Increasing Tax Rates on
High-Income Taxpayers in 2013,'' by Dr. Robert Carroll and
Dr. Gerald Prante, Ernst & Young LLP....................... 79
Witness Responses to Questions Asked During the Hearing:
Mr. Bartlett................................................. 105
Mr. McKeon................................................... 105
Questions Submitted by Members Post Hearing:
Mr. Courtney................................................. 114
Mr. Langevin................................................. 114
Mr. McKeon................................................... 109
Mr. Schilling................................................ 115
Mr. West..................................................... 116
SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL
DEFENSE: ADMINISTRATION PERSPECTIVES
----------
House of Representatives,
Committee on Armed Services,
Washington, DC, Wednesday, August 1, 2012.
The committee met, pursuant to call, at 10:05 a.m. in room
2118, Rayburn House Office Building, Hon. Howard P. ``Buck''
McKeon (chairman of the committee) presiding.
OPENING STATEMENT OF HON. HOWARD P. ``BUCK'' MCKEON, A
REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED
SERVICES
The Chairman. The committee will come to order. Good
morning, ladies and gentlemen.
The House Armed Services Committee meets today to receive
testimony on the Administration's implementation options for
sequestration. Joining us today is the Honorable Jeffrey
Zients, the Acting Director of the Office of Management and
Budget, and the Honorable Ashton Carter, the Deputy Secretary
of Defense.
Although this is the first day of August, when you look at
the calendar there are only a handful of legislative days left
to resolve the devastating across-the-board cuts to our
military known as ``sequestration.'' The House has already
passed a measure that would achieve the necessary deficit
reduction to resolve sequestration for a year. However, the
Senate has yet to consider any solution other than the
President's proposal, which was defeated unanimously. And since
he offered that failed proposal 6 months ago, the President has
been virtually silent on the issue.
This impasse and lack of a clear way forward has created a
chaotic and uncertain budget environment for industry and
defense planners. In part because of this rising tide of
uncertainty and in part to help build the political will to
resolve sequestration, this Congress has repeatedly requested
information from the President and the Office of Management and
Budget on exactly how sequestration will be implemented. We
understand that planning for sequestration won't lessen the
damage, but failing to plan for it will make a terrible
situation worse.
In fact, this hearing appears to have prompted a flurry of
activity within the Administration. On Monday, the Department
of Labor issued guidance on the applicability of the WARN
[Worker Adjustment and Retraining Notification] Act, urging
employers not to notify employees regarding potential job
losses before the elections. Just yesterday, the President made
the long-awaited determination that military personnel accounts
will be exempted from sequestration. And, Director Zients,
yesterday you issued a memo to Federal agencies that is a small
step in the right direction. So there is even more to discuss.
I also know we will hear a lot today about balanced deficit
reduction, so I want to address the issue briefly. Despite
claims that the President's budget request reduces the deficit
by $4 trillion by proposing $2.50 in spending cuts for every $1
in new revenue, these claims are off the mark by nearly 90
percent. The savings are propped up by a series of budget
gimmicks, claiming spending reductions that are actually tax
increases and counting spending reductions that are already in
law. It claims $848 billion in savings from ending the wars in
Iraq and Afghanistan by counting funds that all would admit
would not be requested in the first place.
But even if that is the foundation for the President's
solution, let the Senate bring some version of it to a vote.
Then we will have a conference and sort out our differences.
Until that happens, it is my sincere hope that we can each end
much of this uncertainty here today.
As one senior military official recently told me, America's
inability to govern ourselves past sequestration plays directly
into the hands of those who spread the narrative of American
decline and will ultimately thrust us into a more dangerous
world. If this is not enough to compel action and
straightforward talk on the part of the Administration, I do
not know what is.
Thank you for being here, and I look forward to your
testimony this morning.
I also request that my full remarks be submitted for the
record.
Mr. Smith.
[The prepared statement of Mr. McKeon can be found in the
Appendix on page 57.]
STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON,
RANKING MEMBER, COMMITTEE ON ARMED SERVICES
Mr. Smith. Thank you, Mr. Chairman.
I, too, thank our witnesses for being here today.
And I completely agree with the chairman that sequestration
is a problem right now. I think this committee has done an
excellent job of bringing attention to that reality. Folks who
think that because sequestration doesn't actually kick in until
January that we have until then are completely wrong. The
impacts of the uncertainty of whether or not sequestration is
going to happen are having a definite impact on our economy and
not just defense. Remember, sequestration hits the entire
discretionary budget, not just the defense budget. It actually
hits a little bit of the mandatory spending, as well, and has a
profound impact on private employers' decisions going forward
about what to invest in.
It is impacting the economy right now. The best thing
Congress could do would be to find a solution right now to
that. Also, the uncertainty of what is going to happen with the
tax cuts that are set to expire at the end of this year is also
a major problem for the economy. Delaying on all this is a
huge, huge challenge. And that uncertainty is having as big an
impact as anything right now on our inability to get our
economy moving again. So I agree with the chairman completely
that we need to focus attention, that this is a problem right
now that needs to be addressed as soon as possible.
It is also worth noting that sequestration was a bad idea
in the first place. It was based off of the Gramm-Rudman-
Hollings bill back in the 1980s. Both of those plans, the
architects of which have said we never meant for it to be
implemented. It is a terrible idea; it is horrible policy. It
was only meant as a forcing mechanism. It was going to be so
awful, so hideous, that everyone would have to get together and
agree to prevent it.
But we now have seen what was, I think, obvious even before
we passed the Budget Control Act and the reason that I didn't
vote for it, the problems of determining how to deal with our
deficit--you know, how to address it, what to cut, what revenue
to raise--are so serious, and there is so much difference that
we can, in fact, go through even something as bad as
sequestration rather than find the solution.
So, you know, putting a gun to the head of the economy as a
so-called forcing mechanism to deal with the deficit was a bad
idea from the very beginning and one that I hope we never try
again. But, again, the chairman is right--a problem right now
that we have to address.
I really want to thank our witnesses for being here, Mr.
Zients in particular, and also for offering a solution. The
White House has put out a variety of different solutions. The
Democrats in the House have. Every time the Republicans in the
House have put up a bill to deal with sequestration, there has
been an alternative offered by the Democrats.
Now, the Senate is, regrettably, a different story, because
right now the difference is, Democrats and Republicans have a
different approach to this. And in the Senate, nobody actually
controls the Senate because it takes 60 votes to do anything.
So you would have to, in the Senate, have the Democrats and the
Republicans agree to get anything out of the Senate.
So I think the solution here isn't, you know, hoping that
at some point the Senate acts. The solution is to get all
Democrats and all Republicans to come together and try to
figure out what a reasonable approach to this is. Really, the
problem is there is just a fundamental disagreement on that.
And we have had that debate; we will have it again today.
Personally, I think revenue has to be part of the equation.
As I have said before, if you look at the Republican proposal
that says we shouldn't cut defense, we should cut taxes by even
more, and we should balance the budget, the math simply doesn't
add up unless you cut everything else in our budget--Medicare,
transportation, education, health care, everything else--by 50
percent. Nobody supports that. The Republicans don't even
support that. They haven't proposed it.
So let's be realistic about the choices we face and
realistic about the fact that revenue has to be a piece of the
equation. Again, as I have said before, if you are absolutely
committed, as this committee is--and I do not doubt that--to
providing for the common defense, to make sure that our service
men and women have the support that they need to defend this
country, then you ought to be willing to raise the money
necessary to pay for it. I think that has to be on the table.
But I do agree with the chairman that it is time for all
parties concerned to come together and try to find a solution
to this very damaging problem. And I think this hearing is
helpful in that. Again, I thank Mr. Zients, Mr. Carter for
being here to have that discussion.
And I hope we can begin to make some progress toward a
solution. It is great that this committee is shining a light on
how big the problem is. I think we all get that now. We now
have to move past that to finding some way to solve the problem
so the sequestration does not happen.
And, with that, I yield back, and I look forward to the
testimony and the questions and answers.
[The prepared statement of Mr. Smith can be found in the
Appendix on page 60.]
The Chairman. Thank you.
Mr. Zients.
STATEMENT OF HON. JEFFREY ZIENTS, ACTING DIRECTOR, OFFICE OF
MANAGEMENT AND BUDGET
Mr. Zients. Mr. Chairman, Ranking Member Smith, and members
of the committee, good morning, and thank you for having me
here. I am here to discuss the Joint Committee sequestration.
These are the automatic spending reductions for fiscal year
2013 required by the Budget Control Act.
I want to start by reiterating a point made when the
President signed the Budget Control Act last August.
Sequestration, by design, is bad policy, and Congress should
pass balanced deficit reduction to avoid it.
The intent of the sequester was to use the threat of
mutually disagreeable cuts to both defense and nondefense
programs to force Congress to enact a compromise deficit-
reduction plan. If allowed to occur, sequestration would be
destructive to domestic investments, national security, and
core Government operations.
A CBO [Congressional Budget Office] report estimated that
on an annual basis defense spending would be cut by
approximately 10 percent, while nondefense funding would be cut
by almost 8 percent. The actual percent cuts would be even
greater, given that one-fourth of the fiscal year will already
have elapsed by January 2nd. These cuts would be across the
board and indiscriminate.
There has been a lot of focus on the defense cuts, which
Deputy Secretary Carter will address in a moment. But we would
face equally harmful domestic cuts, with sequestration causing
severe harm to many of the investments most critical to our
country's long-term economic growth.
More than 16,000 teachers and aides would lose their jobs.
Close to 700,000 young children and mothers would lose
nutrition assistance. A hundred thousand kids would lose their
places in Head Start. The FAA [Federal Aviation Administration]
would face significant cuts in operations. Food safety and
workplace safety inspections would be cut back. The number of
FBI [Federal Bureau of Investigation] agents, Border Patrol
agents, and transportation safety staff would decline. And the
NIH [National Institutes of Health] would have to halt or
curtail vital scientific research, such as research into cancer
and childhood diseases.
The President's detailed submission to the Joint Committee
last September and his February budget both included a plan to
responsibly avoid these cuts, making tough choices to reduce
the deficit with a balanced package of spending cuts and
revenue increases. The President's plan included $2.50 in
spending cuts for every dollar in revenue and, overall, over $4
trillion in deficit reduction, far exceeding the amount that
was required by the Joint Committee to avoid sequestration.
Recently, attention in Congress has focused on seeking
information from the Administration on planning and preparing
for sequestration. I want to stress that in the very
unfortunate event that Congress fails to pass a balanced
deficit-reduction package and avoid sequestration, the
Administration will indeed be prepared to issue the
sequestration order on January 2nd and to manage its
implementation. But let me be very clear: No amount of
planning--no amount of planning--will mitigate the damaging
effects of sequestration.
Moreover, our planning must be deliberate so that we avoid
inadvertently triggering some of the negative effects of
sequestration. We do not want to waste scarce resources or
disrupt critical Government operations. To make this vivid, the
right course is not to spend time moving around rocks at the
bottom of the cliff to make for a less painful landing. The
right course is to avoid driving off the cliff altogether.
Implementation of sequestration would be governed by the
procedures set forth in the law. And I want to emphasize that
the law provides OMB [Office of Management and Budget] and
agencies with very little flexibility or discretion in
implementing sequestration. It would be a uniform percentage
reduction at the account level, which would apply evenly,
equally, across programs, projects, and activities.
Because Congress has not yet made progress toward enacting
balanced deficit reduction, the Administration is taking a
number of actions to prepare for a possible sequestration.
Earlier this week, OMB issued guidance to agencies and will
engage with agencies on matters necessary for issuing the
sequestration order. I have also notified Congress of the
President's intent to exercise his authority to exempt all
military personnel accounts from sequestration if it were to
occur.
And regarding Federal contractors, earlier this week the
Department of Labor issued guidance on the WARN Act, clarifying
that contractors are not required to issue WARN Act notices to
their workers in advance of January 2nd and that doing so would
actually be inappropriate in light of the underlying purposes
of the act.
So we are taking the necessary steps, but, as I stated, no
amount of planning will mitigate the damaging effects of
sequestration. Sequestration is a blunt, indiscriminate
instrument designed to force action--force Congress to act.
It is August 1st. Five months remain for Congress to work
together to pass balanced deficit reduction and avoid the
sequester. The Administration stands ready to work with
Congress to get the job done.
Thank you, and I look forward to taking any questions.
[The prepared statement of Mr. Zients can be found in the
Appendix on page 62.]
The Chairman. Thank you.
Dr. Carter.
STATEMENT OF HON. ASHTON B. CARTER, DEPUTY SECRETARY OF
DEFENSE, U.S. DEPARTMENT OF DEFENSE
Secretary Carter. Thank you, Mr. Chairman, Ranking Member
Smith, members of the committee. Thanks for the opportunity to
be here with you today. I am pleased to join my colleague, Mr.
Zients. And I will focus, of course, on the impacts of
sequestration on the operations of the Department of Defense.
Let me begin, though, if I may, by thanking you all for
your continuing support to our Department and our service
members and military families, not only in Afghanistan but
everywhere around the world. It is much appreciated.
I just returned on Friday from a 10-day trip around the
Pacific theater, where I had the opportunity to meet with our
troops stationed in Hawaii and Guam, the Republic of Korea,
Japan. For over 70 years, the presence of our service men and
women has been a critical guarantor of peace and prosperity in
the Asia-Pacific region. In the climate of peace and stability
created by the U.S. military presence, first Japan rose and
prospered, then South Korea, then Southeast Asia, and now China
and India. We intend to remain a Pacific power for decades to
come because we believe this region is one where an important
part of our future lies. Our new defense strategy calls for
exactly that. And that is one of many reasons why the subject
of this hearing is so important to all of us.
Mr. Chairman, if it is acceptable to the committee, I would
like to ask that my full statement be submitted for the record,
and I will just continue with some----
The Chairman. With no objection, so ordered.
Secretary Carter. Secretary Panetta and I have been
emphasizing for many months that sequestration, if it is
allowed to happen, would have a devastating effect on defense.
While I will focus on the impact on the Department of Defense,
Acting Director Zients' testimony makes it clear that the
effects on the operations of nondefense agencies would be
equally devastating.
He has already described the mechanics by which
sequestration would work, and I would refer you to my prepared
statement for a more detailed treatment of the mechanics of
sequestration as they would apply particularly to the
Department of Defense.
I will briefly highlight some of the impacts of
sequestration that are specific to DOD [Department of Defense],
but much of what I say could be echoed by nondefense Government
managers and also by industry managers who furnish critical
goods and services to the Federal Government. While I can
describe many of sequestration's impacts on DOD, it is not
possible to devise a plan to implement it that somehow
eliminates these consequences or even mitigates them
substantially.
The intent of sequester was to use the threat of mutually
agreeable cuts to both defense and nondefense programs,
implemented inflexibly and mindlessly, to force Congress to
enact a compromise deficit reduction plan. It was never
designed to be implemented. Sequestration, therefore, if it
were allowed to happen, would introduce senseless chaos into
the management of every single one of more than 2,500 defense
investment programs, waste into defense spending at the very
time we need to be especially careful with the taxpayers'
dollar, inefficiency into the defense industry that supports
us, and would cause lasting disruptions even if it only
extended for 1 year.
Sequestration in fiscal year 2013 would seriously disrupt
our forces and our programs. Over the longer term, the lower
spending caps in fiscal 2014 through fiscal 2021 would require
that we substantially modify and scale back the new defense
strategy that the DOD leadership, working under the guidance of
the President, so carefully developed just a few months ago.
If sequestration is triggered, its impacts would be, as I
said, devastating for defense. Given the recent announcement
that the President will exempt military personnel funding from
sequestration, the cuts in the rest of DOD funding will be
about 10 percent. Under sequestration rules, moreover, this
same percentage cut must apply individually to literally
thousands of defense programs, one by one.
Overseas contingency operations, or OCO, funding would be
subject to sequestration. That is, of course, wartime war
support funding. Supporting our warfighters in combat is
obviously our highest priority; we would therefore endeavor to
protect wartime operating budgets as much as possible,
including the key operation and maintenance accounts. This is
possible to do in part because the O&M [Operation and
Maintenance] accounts contain OCO as well as base budget
funding, and these two categories of O&M funding merge together
during execution of the DOD budget. We could therefore reduce
the base budget portions of O&M disproportionately and spare
the OCO portions. We could take similar steps, as needed, in
other accounts that include OCO funding.
However, especially in the Army and the Marine Corps, this
action would lead to a correspondingly much larger impact on
base budget O&M and, hence, on readiness of those Services. We
would seek to minimize effects on readiness of units deploying
in the near term, but we could probably not do so fully. As a
result, some later-deploying units, including some deploying to
Afghanistan, could receive less training, again, especially in
the Army and the Marine Corps. Under certain circumstances,
reduced training could also impact the readiness of other units
to respond to new contingencies should they occur. Obviously,
sequestration would also affect training in the other Services,
the Navy and the Air Force, as well.
Next, sequestration would force DOD and, for that matter,
other Government agencies to reduce funding for civilian
personnel. We would probably have to release temporary
employees and impose at least a partial hiring freeze. We might
also have to impose unpaid furloughs on our civilian personnel.
You can imagine the effect on the output, not to mention the
morale, of these defense employees who conduct so many of the
Department's essential support functions, from repairing
weapons to conducting needed oversight and audits.
Military families and retirees would be adversely affected
by sequestration. For example, we could be forced to cut back
on base support services, facility maintenance, and maintenance
of Government-owned family housing. Commissary hours might have
to be reduced. Funds for the Defense Health Program, which
provides health care for retirees and military dependents,
would be sequestered, resulting in delays in payments to
service providers and potentially some denial of medical
services.
These various sequestration actions, taken together, would
represent a major step toward the creation of an unready,
hollow military force. Military readiness would therefore be
added to the list of programs and other departments harmed by
sequestration, as has been described by Mr. Zients.
Sequestration would also inevitably lead to universal
disruption of DOD's investment programs. As I noted, under
current rules that govern the sequestration process, every one
of our more than 2,500 procurement programs, research and
development projects, and military construction projects would
each be indiscriminately reduced, each by exactly the same
percentage.
Some managers would be forced to buy fewer articles, fewer
weapons. Reductions in buy sizes will cause unit costs of
weapons to rise, which will in turn result in further cuts in
buy sizes. In cases where we cannot feasibly reduce the
quantity of items bought, we would have to delay projects,
which is also economically inefficient. Many military
construction projects could be rendered unexecutable by
sequestration. We would be forced to delay fixing schools,
defer construction of new medical facilities, delay
environmental cleanup, and so forth.
While we can foresee the harmful effects of sequestration,
as I explained earlier, the nature of the sequestration
mechanism makes it impossible to devise a plan that eliminates
or substantially mitigates them. We are working with OMB to
understand this complex legislation, and we are, as I have
described, assessing impacts. But we are still 5 months from
January. I am hoping, to quote Secretary Panetta, that
Congress, both Republicans and Democrats, will exercise the
necessary leadership to make sure that sequestration is
detriggered. In the unfortunate event that sequestration is
actually triggered, we will work with OMB, and like all the
Federal agencies affected by this law, we will be ready to
implement it.
While we will not fail to prepare for sequestration, we are
equally worried about a different type of error. This would
occur if sequestration does not happen but we end up triggering
some of its bad effects anyway. For example, we do not want to
unnecessarily alarm employees by announcing adverse personnel
actions by suggesting that such actions are likely. For
efficiency reasons, we do not want to hold back on the
obligation of funds, either for weapons projects or operating
programs, that would have been obligated in the absence of a
possible sequestration. Nor do we want to cut back on training,
which would harm military readiness in a period when we face a
complex array of national security challenges.
Finally, we understand that private companies that serve
the Department of Defense and constitute important members of
our national security team will be making decisions on issues
related to sequestration. They face many of the same dilemmas
we do, and a number of them have expressed to me their alarm at
such a wasteful and disruptive way of managing the taxpayers'
money and the talents of their employees. We will continue to
consult closely with them, along with OMB and other Government
departments. The best thing that can happen for our industry
partners, as well as the Department, is for the Congress to
enact a balanced deficit-reduction plan that halts
implementation of this inflexible law.
I believe that what I have just outlined makes clear that
sequestration would be devastating to DOD, just as it would be
to every other affected Federal agency. Secretary Panetta and I
strongly believe that we need to deal with the debt and deficit
problems in a balanced way and avoid sequestration and that
this will require legislation that both Houses of Congress can
approve and the President can sign.
The men and women of our Department and their families need
to know with certainty that we will meet our commitments to
them. Our partners in the defense industry and their employees
need to know that we are going to have the resources to procure
the world-class capabilities they can provide and that we can
do so efficiently. The American people, our allies, partners,
friends, and potential foes the world over need to know that we
have the political will to implement the defense strategy that
we have put forward. And that is why Secretary Panetta and I
urge action now.
Thank you again for all you do to support our men and women
in uniform here at home and around the world. Thank you, and I
would be happy to take your questions.
[The prepared statement of Secretary Carter can be found in
the Appendix on page 68.]
The Chairman. Thank you very much.
The Department of Labor's guidance notwithstanding, each
company must decide for themselves if and when they are
obligated to provide advance notices to their employees of
impending layoffs. The criteria established by the WARN Act is
that such layoffs be reasonably foreseeable.
Two weeks ago, I asked the CEO of Lockheed Martin; the CEO
of EADS North America, who is the chairman of the National
Defense Industrial Association and the former Deputy Director
of OMB; the president of Pratt & Whitney, who is the chair of
Aerospace Industries Association; and a small-business owner
who is on the board of the National Association of
Manufacturers, I asked these four people the following
question: Can you each confirm at this time that layoffs are
reasonably foreseeable? Their unanimous answers were ``yes.''
I also asked each of them if they believed they were
obligated by the spirit of the letter of the WARN Act to give
conditional notices to employees that may be laid off as a
result of sequestration in advance of making a final
determination regarding which specific employees will be let
go. None of them disagreed.
Finally, I asked them if any of the exemptions to the 60-
day notice WARN Act requirements are applicable in this
situation. For example, could the companies they represent
claim that layoffs from sequestration were sudden, dramatic,
and unexpected? Here is what they said:
``We don't believe so.''
``No, they are well forecasted and anticipated.''
``We knew months in advance and could see it coming.''
``I would agree with my colleagues. The law on the books
today says that sequestration will occur on January 2nd, not
conditional or contingent on anything. That is the law of the
land, and we are obligated to plan on it. We have a fiduciary
responsibility to our boards, to our shareholders, and our
employees to plan based on the laws that are on the books
today.''
Director Zients and Secretary Carter, if the largest
defense contractor and senior elected representatives of the
National Defense Industrial Association, the Aerospace
Industries Association, and the National Association of
Manufacturers all believe that layoffs are, and I quote,
``reasonably foreseeable,'' and the WARN Act applies, why do
you disagree with them?
Mr. Zients. Well, I think the important thing here is that
it is the Department of Labor that issued guidance. They
oversee the WARN Act. That happened earlier this week, so
subsequent to the hearing that you are describing. And they did
that in response to questions that had been raised by
contractors in the defense industry and contractors who do
business with other Government agencies.
And DOL [Department of Labor], as that agency that is
responsible for implementing the WARN Act, provided the
guidance. And the guidance makes clear that contractors are not
required to issue WARN Act notices 60 days in advance of
January 2nd. And they go on to say: And to do so would be
inconsistent with the purpose of the WARN Act. These potential
plant closings or layoffs are speculative and unforeseeable, so
to give blanket notices both wastes taxpayer resources and
creates unnecessary uncertainty.
So, clearly, the companies that you just talked about need
to absorb this guidance from the Department of Labor, which is
very clear, and they need to make their own decisions, but I
think the Department of Labor has responded to questions from
contractors with the guidance that they gave earlier this week.
Secretary Carter. Mr. Chairman, I can't add anything on the
legal side. That is the interpretation of the Department of
Labor.
I will say, I mean, I sympathize with my colleagues in the
defense industry, in the sense that they, like we, are on the
horns of this dilemma. On the one hand, this should not happen,
and nobody wants it to happen. And we don't want to begin
taking actions now to tear ourselves to pieces in the
expectation of something that is really stupid if it happens 5
months from now. On the other hand, we don't want to be in a
position where we are completely flatfooted 5 months from now
either.
So that is where we are. And I sympathize very much with
them. And this gives them, as they discuss with their boards
and their counsels, as they make their own decisions, this is
legal guidance that they can take as input.
But the underlying issue here is that we have a lot of
people who depend on us to behave in a more or less predictable
and responsible way. And this puts them in a lousy position,
this prospect of sequestration, which is why, as I said, the
Secretary and I--and Mr. Zients has said the same thing--
Secretary Panetta and I have been saying for months, we've got
to head this off. It is very damaging. Just having the shadow
over us is damaging, as this discussion illustrates.
The Chairman. I think we already, as Mr. Smith pointed out
and I have said repeatedly, we are already in sequestration.
They are already making decisions, they are already doing
things, because it is the law of the land.
Let me ask, did either the OMB or DOD provide input into
the Department of Labor's opinion?
Mr. Zients. OMB plays a role, as you probably know, in
clearing guidance from all agencies. So OMB played its normal
role of clearing interagency guidance.
Secretary Carter. Mr. Chair, we did not, no. The Department
of Defense didn't, though the--as I said, there is a sensible
result here of not having people tear themselves apart about
something that I hope doesn't happen. But we don't have a role
in making the legal determination, no.
The Chairman. Hope really probably isn't good enough to
build a strategy on. They are going by based on what the law of
the land is.
Have you or anyone else in your organization given any
guidance to industry, either verbal or written, not to issue
conditional WARN Act notices to employees before the election?
Secretary Carter. Speaking of Defense?
The Chairman. Both of you.
Secretary Carter. No, we have not given separate guidance
from the Department of Labor. We have made available to our
contractors, as I assume everyone does to all Government
contractors, the Department of Labor's guidance on the WARN
Act.
Mr. Zients. The Department of Labor's guidance issued
earlier this week is the only guidance that has been given out.
The Chairman. Let me ask that question again. Have you or
anyone else in your organization given any guidance to
industry, either verbal or written, not to issue conditional
WARN Act notices to employees before the election? Yes or no?
Secretary Carter. No. No. No.
Mr. Zients. No.
The Chairman. Thank you.
Director Zients, in your testimony you stated that you
cannot estimate the percentage reduction and the amount of the
reduction by program, project, and activity until Congress
enacts all fiscal year 2013 appropriations.
Can you explain, please, why the OMB couldn't make certain
reasonable assumptions, like the DOD appears to have done, to
begin its analysis?
For example, why couldn't you use the President's budget
request as a baseline, or the House-passed appropriations, or a
continuing resolution funding level? After all, in the case of
the Department of Defense, the difference between the House-
passed appropriation and the President's request is 1 percent.
I think most analysts would like those odds, 99 percent
certainty of what the funding will ultimately be.
Mr. Zients. I would say that the CBO estimates have a
decent methodology, but the problem with CBO's estimates or
anyone's estimates at this point is you have to make a series
of assumptions. You have to understand what the appropriation
level is going to be. One has to understand unobligated
balances on the defense side and what they are going to be. One
has to understand mandatory spending for those programs that
are going to be subject on the mandatory side to sequestration.
Furthermore, you then have to understand how that spending is
going to interact with PPAs [Program, Project, or Activity].
So it is a very complex exercise. I think the estimates
that Dr. Carter provided of 10 percent on an annual basis in
DOD and 8 percent for the domestic programs are likely in the
range.
I would suggest that our energy, our time is much better
spent avoiding sequestration through balanced deficit reduction
rather than trying to massage numbers that we all agree will
have a devastating impact on both defense and domestic
programs.
The Chairman. However, you cannot spend your time doing
that and Dr. Carter can't spend his time doing that. We, the
Members of Congress, have to spend our time doing that.
Mr. Zients. Absolutely.
The Chairman. So what you are saying is you basically will
implement the law as written, and it will be a straight,
across-the-board cut of roughly 10 percent to every single
program, every single line item.
Mr. Zients. Well, the guidance that we gave yesterday----
The Chairman. I mean, this is what----
Mr. Zients [continuing]. Has us working with agencies to
understand which programs are exempt and which programs are not
exempt. So, clearly, if a program is exempt from sequestration,
it will not be subject to such a cut.
The Chairman. Right.
Mr. Zients. And that is the kind of work----
The Chairman. And that is the personnel.
Mr. Zients. It is not only personnel. There are other
accounts that we would have to go through by looking at the
Budget Act of 1985, looking at the BCA [Budget Control Act],
how programs have changed, what new statutes have come in
place. It is a complex exercise to understand which accounts
are exempt and which ones are not.
The Chairman. But you have given----
Mr. Zients. That is obviously an important part of the
across-the-board cut, because if an account is exempt, it is no
longer in the denominator, if you will, and therefore----
The Chairman. Right. So you have listed what accounts will
be exempt. And then everything else will be cut line item by
line item, across the board, evenly?
Mr. Zients. That is what the law says.
The Chairman. Thank you very much.
Mr. Smith.
Mr. Smith. Thank you, Mr. Chairman.
Just to be clear--and I think you were very clear in your
opening statement, but to follow up--you are looking at the
options for if, you know, God forbid, this comes to pass, we
have to implement it. You are not completely ignoring it and
just waiting.
Mr. Zients. Well, I mean, fortunately or unfortunately, OMB
has experience working with agencies to plan for
contingencies--Government shutdown, possible debt ceiling. We
know how do this.
Mr. Smith. Right. You went through it, like, four times
just----
Mr. Zients. And so we know how do this. And as Dr. Carter
said, we will be ready. We will be ready at DOD; we will be
ready across the Government if, unfortunately, Congress doesn't
do its job and pass balanced deficit reduction.
At the same time, we want to do it in an efficient way.
There are 5 months between today and January 2nd. That is
plenty of time for Congress to pass balanced deficit reduction.
And at the same time, it is more than enough time for us to be
ready for the unfortunate possibility of January 2nd coming to
be and we have to implement the sequester.
We will be ready. But, really, that is not where the energy
should be spent. The energy should be spent on passing balanced
deficit reduction to avoid what everybody agrees is bad policy.
Mr. Smith. Right. And there is no question, I think your
testimony has been clear, that you both think sequestration is
completely awful and should be avoided in any way possible at
this point.
Mr. Zients. Absolutely.
Mr. Smith. And then on the WARN Act, that is a legal
question, and we will skip the legal. But neither one of you is
suggesting that defense contractors or, you know, people in the
transportation industry or any of those, you know, shouldn't be
concerned. I mean, there is clearly an impact on jobs. We don't
know what specific jobs, and that is what makes the WARN Act
difficult, because you don't know specifically who is going to
be laid off at this point. But, clearly, there is a lot to be
concerned about if you are a defense contractor or a defense
worker, and neither of you would dispute that, I assume.
Secretary Carter. No.
Mr. Zients. Absolutely. I mean, if we have an across-the-
board $109 billion cut indiscriminately done, there will be bad
consequences, no doubt. And the sequester was designed to be a
forcing function, not to be a policy that was going to be
implemented.
Mr. Smith. Absolutely. And the WARN Act is a very narrow
question of whether or not you know specifically who is going
to be laid off. And, you know, part of the legal obligation
that the Budget Control Act puts you all under is to issue
guidance on how should we implement this. But, clearly, there
is a lot to be concerned about if you are a worker under any
Government contract.
Mr. Zients. Yes.
Mr. Smith. I mean, that is an interesting thing about these
hearings, as has been pointed out by some of my colleagues,
that, you know, we have had hearings about the devastating
impacts of cutting Federal Government spending on defense
workers at the same time we have complained that somehow
cutting Federal Government spending on other workers doesn't
have any impact on the economy. It does, whether it is just
defense or not.
And as you both have said, it is a matter of finding the
balanced approach to solve this problem. And there is a clear
gulf between the two parties on what the best solution to that
is. But I don't think there is any gulf between us on how
devastating sequestration would be and on how important it is
that we work to prevent it.
Thank you. I yield back.
The Chairman. Thank you.
Mr. Bartlett.
Mr. Bartlett. Thank you.
I have four quick questions for Director Zients. With
succinct answers, hopefully we can get through all of them.
Sequestration, depending on how it is administered, it
could be truly catastrophic. As our witnesses acknowledged in
their opening statements, the Budget Control Act specifies that
sequestration be implemented in accordance with section 256(k)
of the Balanced Budget and Emergency Deficit Control Act, which
states that, ``except as otherwise provided, the same
percentage sequestration shall apply to all programs, projects,
and activities, or PPAs, within a budget account. Defense
programs, projects, and activities have been defined in the
past as the most specific level of budget items identified for
defense appropriations, the related classified annexes and
explanatory statements, and the budget justification documents
as subsequently modified by congressional action.''
This level of application may render some programs
unexecutable based on resulting order quantities that are not
economical or efficient to manufacture or produce.
Additionally, some investments for low-quantity orders may not
be able to be fully funded even with reduced quantities.
Director Zients, how do you define PPAs for the purpose of
sequestration of defense accounts?
Mr. Zients. Well, I think Dr. Carter said there are about
2,500 PPAs across the Defense Department. Across the
Government, there are tens of thousands of PPAs. And as you
said, each one of those will receive an across-the-board cut.
Mr. Bartlett. Will sequestration be implemented at the
individual program, project, and activity, or at a higher
aggregate level to afford agencies some amount of discretion
and flexibility?
Mr. Zients. The law is clear: It needs to be implemented at
the PPA level.
Mr. Bartlett. What accounts will comprise the basis of
available funds subject to sequestration on January 2, 2013?
Mr. Zients. It will be those accounts that are determined
to not be exempt. And it will also include unobligated balances
on the defense side and the mandatory programs that are subject
to sequestration.
Mr. Bartlett. Which exact spending accounts will or will
not be subject to sequestration?
Mr. Zients. Those that are not exempt will be subject to
sequestration, as I just described. Also, unobligated balances
on the defense side are subject to sequestration, as are the
mandatory spending programs that are not exempt from
sequestration.
Mr. Bartlett. Can you provide us with a list of the exempt
accounts?
Mr. Zients. That is the exercise that we launched
yesterday. And we will be developing that list.
Mr. Bartlett. Will the authorities provided in section
258(b) of the Balanced Budget and Emergency Deficit Control Act
of 1985, providing flexibility among defense programs,
projects, and activities, be used?
Mr. Zients. We are analyzing how the 1985 act interacts
with the BCA. And that is central to determining what accounts
will be exempt and which ones will not be exempt.
Mr. Bartlett. Will the Department of Defense be granted any
flexibility to apply sequestration in order to adjust programs
and ensure continuation of critical investments?
Mr. Zients. The Department of Defense will do what the law
says. It will apply across-the-board cuts at the PPA level and
then make decisions within PPAs, the most rational decisions
possible.
Mr. Bartlett. On what basis and at what level will that
authority be given?
Mr. Zients. According to the law.
Mr. Bartlett. In my prepared question here, it states that
``except as otherwise provided.'' How do you interpret that?
Mr. Zients. I need more context in order to understand what
your question is.
Mr. Bartlett. If you could take a look, please, at 256(k)
and for the record tell us what you think ``except as otherwise
provided'' means.
Mr. Zients. We will do so.
[The information referred to can be found in the Appendix
on page 105.]
Mr. Bartlett. Thank you.
The President's budget request for fiscal year 2013 for
national defense exceeded the revised discretionary spending
limits by approximately $5 billion. Should such a funding level
be appropriated for fiscal year 2013, would the additional $5
billion be subject to sequester and included in the calculation
of the available funds?
Mr. Zients. Well, that depends on whether Congress does
what we all agree needs to be done, which is, if balanced
deficit reduction is enacted and the sequester is avoided,
then, no, we return to the security/nonsecurity caps.
If under the very unfortunate situation where sequester
kicks in on January 2nd and the caps are defense and
nondefense, that $5 billion would be subject to a different
sequester, not the Joint Committee sequester but the cap
violation sequester.
Mr. Bartlett. Thank you very much for your succinct
answers. We got through five questions, not just four. Thank
you very much.
Mr. Zients. Thank you.
The Chairman. Thank you.
And just to follow up, the section that he was referring
to, number four, that you will be giving him the information on
says, ``Except as otherwise provided, obligations in
sequestered accounts shall be reduced only in the fiscal year
in which a sequester occurs.''
Yesterday, the Secretary of the Department of Education
said if sequestration kicks in and education will be affected,
as you pointed out--and I am glad to hear somebody talking
about--I have only been talking about the defense side. We
understand that that is half of the equation. But he said any
cuts to education would be put off until the next year, the
next education year. By what authority will he be doing that?
Mr. Zients. That is not the case. The way----
The Chairman. Okay. That is what he----
Mr. Zients. As we all know, the school year starts in
September----
The Chairman. Right.
Mr. Zients [continuing]. So the 2012-2013 school year----
The Chairman. Well, actually, I was on a school board, and
the board I was on, the school year started in June. Their
fiscal year ran June to June.
Mr. Zients. Well, in terms of how we fund.
The Chairman. Right.
Mr. Zients. So September through early summer. So the, what
the Secretary clarified was that the 2012-2013 school year
would not be impacted by sequester. However, there would be
very devastating consequences to the 2013 through 2014----
The Chairman. They will have 2 years?
Mr. Zients. No. That money would have to be taken out
within the fiscal year, which as you all know ends September
30th. So there would be devastating cuts to the next school
year. So Education, like all departments, would have to live
under the law and do their fair share of these devastating
across-the-board cuts.
The Chairman. Thank you very much.
Mr. Reyes.
Mr. Reyes. Thank you, Mr. Chairman.
Gentlemen, welcome.
GAO [Government Accountability Office] has stated that,
regardless of the possible effects of any sequestration,
agencies must continue to comply with the requirements of the
Impoundment Control Act, with ``impoundment'' defined as any
action or inaction by an officer or employee of the Federal
Government that precludes obligation or expenditure of budget
authority.
Our committee has received testimony that indicates that
there is an observable slowdown and reduction in contracts and
orders. Questions this morning for you are: What is OMB's
position on contracts funded with fiscal year 2012
appropriations but executed in fiscal year 2013? Will agencies
be allowed to delay contracts to preserve flexibility or
accelerate contracts prior to January 2nd to protect programs?
What is your guidance?
Mr. Zients. We have been very clear in yesterday's guidance
that we expect agencies to continue normal business operations
and to not slow down in any way.
Mr. Reyes. And have you noticed the same thing that we have
noticed? Is there any indication from your perspective that
these things are occurring?
Mr. Zients. Well, I will defer to Dr. Carter, because two-
thirds of contracting is at DOD, and I know he has been
tracking the obligation level there.
Dr. Carter.
Secretary Carter. I have been concerned about exactly the
phenomenon you are raising that Mr. Zients addressed, which is
that we begin to experience the deleterious effects of
sequestration even if sequestration, which we all hope, doesn't
take place.
I don't see that in the obligation rate statistics yet. I
have some anecdotal evidence to that effect from our
contracting officers and procurement officials. We are not
seeing it show up in the numbers yet.
And, of course, as I said, the guidance that we were given
yesterday, which I think is very sensible, which is, let's not
self-sequester before we have to, if we end up having to, which
of course we don't want, and our program managers to keep
operating in the most efficient manner that they had planned
to, so they are giving good defense value for the taxpayer
dollar. We want them to keep on keeping on, if they are
managing well, doing it the sensible way, not starting to do it
in a nonsensical way.
Mr. Reyes. And I was interested in your response about not
providing guidance to industry leaders. But what about
providing guidance within the Government? As it pertains to
violations of the Antideficiency Act, if a director or program
leader would--you know, they have to plan long-term--and
sequestration kicks in, what guidance are you providing
managers about not being in violation of the Antideficiency
Act?
Mr. Zients. Well, I think agencies are well aware of the
Antideficiency Act. Sequester has not taken place at this
point. Hopefully it never will. Agencies are instructed, as I
said, to continue their normal business operation, which means
to continue to spend at the appropriate level. Obviously, not
to in any way violate the Antideficiency Act, at the same time
not to slow down spending.
Mr. Reyes. Well, it seems to me like that puts them in a
catch-22 situation. They need to plan ahead. For instance, you
mentioned the cutbacks that would affect Customs and Border
Protection. They have to make those kinds of--as a chief, you
have to make those kinds of plans.
Mr. Zients. Those cuts do not occur until the sequestration
order is issued on January 2nd. And again, I think the job of
everybody here is to ensure that we never get to that point,
that Congress passes a balanced deficit reduction that avoids
the sequester, and agency operations continue.
Mr. Reyes. Well, I agree with you, but our track record
isn't that good here in Congress.
Mr. Zients. We will be ready, if Congress fails----
Mr. Reyes. So there are managers out there that could
conceivably, you know, from my experience, could conceivably be
in violation. And I am just wondering, is somebody taking that
into account, and giving that kind of guidance----
Mr. Zients. They cannot be in violation.
Mr. Reyes [continuing]. And that kind of cover?
Mr. Zients. They have their appropriations level, and they
are spending that appropriation level prudently. If on January
2nd, the level of spending is reduced by $55 billion on the
defense side and $55 billion on the domestic side, agency
managers will be ready to implement that. So we will be ready.
Again, I think that we have prepared for these types of
contingencies before. OMB knows how to do it. DOD knows how to
do it. Agencies know how to do it. The thing that we have to
focus on right now is avoiding this situation altogether.
Mr. Reyes. Thank you, Mr. Chairman.
Secretary Carter. May I just add to that if I may, for
clarification that you all may not need, but to make sure all
of our program managers understand. The key point is that funds
they obligate between now and when sequester hits, if it hits,
will not be subject to sequester. So they are not going to have
to retroactively adjust activities they put on contract during
this period, those activities, per se. I mean, we are going to
make sure all of our program managers, I think most of them do
understand that, but that is where the guidance is helpful
because it makes clear to everybody: Go ahead and obligate the
funds that you have appropriated to you in the way that is
appropriate. Do your defense mission or whatever your other
mission is in an efficient way, and sequester isn't going to
retroactively apply to what you do now.
The Chairman. Thank you.
Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman.
Mr. Zients, part of what you have got to do at OMB is to
provide economic forecasts, employment forecasts, whether there
will be more or fewer people unemployed in the future. As you
know, there has been several studies about the economic
consequences of sequestration. Do you have any doubts that if
sequestration were to take effect that there would be
substantial numbers of people lose their jobs, and that it
would be detrimental to the economy?
Mr. Zients. I think that is absolutely is case. As I said
earlier, if you take $55 billion out of the defense budget and
an equal amount out of the domestic side, teachers will lose
their jobs, people that work at the FAA will be furloughed or
potentially laid off, same situation with Border Patrol. So it
has a significant impact across the board.
Mr. Thornberry. As you know, some studies have estimated 1
to 2 million people in the defense industry could lose their
job. Do you think that is about right?
Mr. Zients. I don't have any basis for evaluating that
estimate, but clearly the impact both in the defense industry
and in other industries would be significant.
Mr. Thornberry. Okay, I want to go back to the Department
of Labor guidance for just a second. Would the Department of
Labor guidance that says it would be inappropriate to send out
WARN Act notices be any sort of immunity for a contractor who
would get sued later by employees who were laid off?
Mr. Zients. You know, I am not a lawyer, and I am certainly
not a labor lawyer. I think the DOL guidance is very direct.
Clearly, companies need to work with their legal counsel to
interpret that guidance.
Mr. Thornberry. Well, and I would assume you would say they
ought to learn from their experience, too. If they have been
sued in the past over these issues and it takes years to
resolve those lawsuits, then that would factor in at least
because they send out the notices.
Mr. Zients. Yeah, I would assume that each situation,
having spent time in the private sector 20 odd years, each
situation is different and has to be evaluated. I think we have
pretty clear guidance from the Department of Labor as to the
current situation with sequestration, and clearly company
leadership needs to work with their legal counsel to interpret
it.
Mr. Thornberry. Sure. Can I get back to the Department of
Education issue for just a second? I don't fully understand
that. Is it the fact that all of the Education money is sent
out to the school districts before January 2nd?
Mr. Zients. No.
Mr. Thornberry. Then how can it be that some of the money
that would be--well, here is what is going on in my mind. You
said sequestration will apply to unobligated balances of the
Department of Defense. If a school district has not spent all
of their school funds why is that not an unobligated balance?
Mr. Zients. Well, first of all, the way the law works,
unobligated balances outside the Department of Defense are not
subject to sequestration. So let me clarify that. It is only
unobligated balances at the Defense Department that are subject
to sequestration. But at the end of the day, the Department of
Education has the same across-the-board cut. It is X billions
of dollars. It has to reduce its spending in fiscal year 2013
by that amount. So by funding the school year that is about to
begin, it will have a big impact on the school year, the
following school year, because the Department of Education has
to hit that number of taking that money out. It would have a
devastating impact on kids and education across the country.
Mr. Thornberry. Yeah. Now, you made that clear and I
understand that part. What I don't understand completely is
whether OMB has discretion to determine when those across-the-
board cuts will occur. Can they occur on February 2nd, or
September 2nd, depending on OMB's discretion? Why is it----
Mr. Zients. Well, you know there is----
Mr. Thornberry [continuing]. In the case of schools it will
be several months after----
Mr. Zients. There are so many different types of programs,
and PPAs across the Federal Government. As you know, some
programs are seasonal, so more spending might be up front, in
which case you need to save up front. Some might be back-end
loaded, in which case the money is going to come out of the
later months of the fiscal year.
By the end of fiscal year 2013, each agency has to achieve
that across-the-board cut in each one of those PPAs. There is a
lot of complexity. There is a lot of nuance. I think it is hard
to generalize about how that will be achieved.
Mr. Thornberry. Well, do you have discretion at the OMB to
determine when those across-the-board cuts will occur within
the time period from January 2nd to September 30th?
Mr. Zients. Well, the sequestration order is issued January
2nd. That means that $55 billion has to come out on each side.
That means that agencies need to think through how they are
going to end their fiscal year with the savings achieved. And
in every situation it is different, and in every situation it
is going to be very difficult. And remember, if these 8 to 10
percent numbers had been cited up front based on the CBO
estimates, 8 percent on the domestic side, 10 percent on the
defense side, they are actually skipping higher than that,
because on January 2nd we are actually a quarter into the
fiscal year. So those are more like 10, 11, 13, 14 percent
cuts.
The Chairman. Thank you very much.
Ms. Sanchez.
Ms. Sanchez. Thank you, Mr. Chairman. Thank you, gentlemen,
for being before us. My first question is for Director Zients.
Did you have a vote on the Sequestration Act?
Mr. Zients. On the Budget Control Act?
Ms. Sanchez. Yes.
Mr. Zients. No, I am not a Member of Congress.
Ms. Sanchez. Thank you. And Secretary Carter, I would ask
you the same question. Did you get a vote on that?
Secretary Carter. I did not.
Ms. Sanchez. Thank you. So, Mr. Chairman, the Budget
Control Act was neither authored nor passed by the
Administration. The enactment of the Budget Control Act is
really the responsibility of this body, the United States
Congress. And as our witnesses stated in their testimony, the
only body that can turn the course of this policy is us, not
them. So everybody here wants to discuss the negative impacts
of sequestration. I think, you know, there is probably other
committees that have been doing this.
Mr. Turner. Excuse me, will the gentlewoman yield? Will the
gentlelady yield for just a moment?
Mr. Turner. I mean, the President did sign it. It's not a
vote----
Ms. Sanchez. But the gentlemen in front of us----
Mr. Turner. It wouldn't have become law if the President
hadn't signed it. I voted no, by the way.
Ms. Sanchez. Taking back my time. We know the impacts of
the sequestration law, loss of jobs, cancelation of programs
across the board, less teachers, less programs to support our
children, less programs for our senior citizens. However, I
don't think that the solution is to exempt the Department of
Defense. I think that we need to sit down and in a logical
manner go through and figure out what we need to cut. And this
is the law as it is right now. It will go, I think it is a--it
is wrong to go percentage by percentage across the line, but I
think that we need to, as leaders in this country, sit down. I
know that I talked to a number of my leaders from both major
and small businesses, and in, you know, in my conversations
with--I had a CEO express to me that the impact of
sequestration, the uncertainty is weighing down the company. He
said to me, I can't even make decisions for my company,
Loretta, because really it is making me crazy not to be able to
lead my company.
I know that with this sequestration California is due to
lose something like 150,000 jobs. I mean, we are really on the
line for this. And I don't want to see sequestration triggered,
but I do think that we all need to sit down in a very calm
manner and look through and figure out where we are going to
make cuts, both in the Department of Defense and in all of the
other places of our budget.
So I would just urge my colleagues to sit down in a
constructive way and work through this and stop this whole
uncertainty that is going on.
And I yield back, Mr. Chairman.
The Chairman. Thank you. Mr. Jones.
Mr. Jones. Mr. Chairman, thank you very much. And I was
listening very carefully to Ms. Sanchez, and for me personally,
I have Camp Lejeune Marine Base down in the district and the
depot down in the district, and the anxiety of the
sequestration is mounting each and every day. And one of my
biggest concerns is, quite frankly, and Mr. Director, probably
you or Dr. Carter could answer this for me. But if we do go
into sequestration, the mental health programs within the
Department of Defense, which I think now are very much stressed
with the PTSD [Post Traumatic Stress Disorder] and the TBI
[Traumatic Brain Injury], at what point do we go to within the
5 months that you get to a point that everyone that is going to
be on any type of list to be advised that you will not continue
in this position; if we cannot come to a resolution in the
House, which I think both parties want to try to do that, at
what point are you in that 5-month period of time that you have
to start notifying? I know that is based on the labor laws or
whatever, but give me an idea of that element. And also, if you
would, how do you anticipate the best you can the threat to the
mental health programs within the Department of Defense?
Secretary Carter. Well, thanks for asking that question,
because I absolutely share your concern. We have of necessity,
and sadly, learned a lot about the mental health consequences
of combat over the last decade and have really tried to advance
the art with which we service our wounded warriors. And there
is no question about it, this is caught up like everything else
we do in sequester. Obviously, we try, as we are going to try
everywhere we can, within the pretty brutal constraints of the
law as it is written, to protect the most essential parts of
our caregiving for PTSD, traumatic brain injury, and so forth.
And obviously, we are not in a position to say we are going
to be perfectly successful in doing that because we do have
these big cuts indiscriminately applied. But we will certainly
try.
And just in closing, I just appreciate the community
support of Lejeune. I was just down in Lejeune a few weeks ago
and you are great to our people down there and we are grateful
for it.
Mr. Jones. Doctor, thank you very much, and Mr. Director,
if we get into December and there has been no resolution by
Congress, then the process starts. So does it start before
December if there is no resolution by Congress to stop
sequestration?
Mr. Zients. Well, we are going to be very mindful of being
ready, and at the same time not doing things that are wasteful
and disruptive. But if we are in that very unfortunate
situation where the sequestration order needs to be issued on
January 2nd, we will be ready to do so.
Mr. Jones. Okay. Mr. Chairman, I yield back my time.
The Chairman. Thank you.
Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman. I would like to thank
the witnesses. I think we can stipulate that just about
everybody on this committee thinks sequestration is a bad idea.
I do. And we don't want to see it happen. I don't. I think we
can also stipulate that it is bad for the economy for civilian
workers in the Defense Department, and people who work for
contractors and DOD contracts get laid off. I think it is
equally bad for the economy, by the way, for teachers and
firefighters, and people who work for highway contractors to
get laid off, too.
And I want to apologize to the witnesses. I think you have
done a very good job explaining an indefensible problem that
they have been saddled with. Normally I like to ask the
witnesses questions, but I think that that is probably not the
right thing to do this morning because the answer to the
sequestration problem lies on our side of the table, not yours.
And I would just say with great respect and affection for
all of my colleagues, I think it is time for us to start to say
what we are for and not what we are against to fix this
problem. Understand that repealing sequestration increases the
national debt by a trillion dollars. That is what it does. So
if we repeal this, we have to take responsibility for what we
would do instead. I, by the way, think that replacing that
trillion dollars is not nearly enough. I think we need a $4
trillion deficit reduction plan. I would stick with the
trillion dollars that most of us voted for last August 2nd, and
I would do the following on top of it: In Medicare, I would say
that people have to wait a little longer before they can get
their Medicare benefits. I personally support a plan that would
say for each year that you are under 55 years of age you have
to wait a month to get your Medicare benefits to vest beyond
65. So I would say to a person 45 years old, you get Medicare
when you are 65 years and 10 months old. I would do the same
thing with Social Security. The roof did not cave in on my head
when I said those things. I know that there are sacred things
you can't say in American politics. We need to start to say
them.
I would favor some reductions in domestic areas of the
budget. I am from New Jersey. I would favor reductions in beach
erosion funds from the Federal Government if we also had
reductions in crop subsidies and other funds that benefit other
areas of the country. I think it is time we have to do those
kind of things. I don't think that every housing authority
should have a job training program, and the Department of Labor
has many job training programs. I think we can do that.
I think that the wealthiest 2 or 3 percent of Americans
should pay slightly higher income tax in order to reduce the
deficit, and I think every dollar they pay should go to our
deficit reduction.
And I also think that we can reduce defense spending,
personally, below the level that is in the sequester. I
wouldn't go to the $495 billion, but I think we could do a bit
beyond the 495 that is already in the bill. But the way we
ought to do it, is have statutory caps on defense
appropriations where each year this committee and our younger
cousin, the Defense Appropriation Subcommittee, would make
decisions about rational and intelligent ways to allocate those
reductions. I think, for example, that our footprint in Asia
and Europe is a bit too large and could be reduced. I think
that a nuclear arsenal that can blow up the world 24 times is
quite sufficient and it could modernized and reduced in cost.
I frankly think that changes in the military healthcare
system, which would be painful and politically unpopular, we
have an obligation to discuss them and consider them in a fair
and balanced way.
Now, I do not expect any of my colleagues to agree with all
or any of what I have said. If you agree with it, fine. If you
disagree with it, fine. But I do think it is fair to expect
each of our colleagues on and off this committee, if they want
to say they are against sequester to say what they would do
instead. If you are not prepared to say how you would replace
that trillion dollars of addition to the national deficit, then
I think that that is kind of unfair to the witnesses here.
Look, I hope and pray that on January 2nd that sequester
order is never issued. It is very bad for the country and for
this economy. But the power to stop that is with us, ladies and
gentlemen, not with the gentlemen here testifying this morning.
And the way to stop it, and I think the chairman of the
committee deserves great credit for a long time, really for 10
or 11 months, at educating the Congress and the country on the
consequences of sequester. I commend him for that. But we as a
group have to move to the next step. Okay, we can stipulate to
the fact that we all don't like this. Now, what are we going to
do about it? And I have put forward some ideas. I know they are
quite controversial. I think others should put their ideas
forth and then let's go about our business, do our job, pass a
law, put it on the President's desk, and repeal sequester that
way.
I yield back the balance of my time.
The Chairman. I thank the gentleman, and I mentioned
earlier that we had passed legislation not to get rid of the
trillion dollars, not to eliminate that, merely to pay for the
first year of it, to move it out of--you have presented some
items which I applaud your doing that, however, many who are
facing election in November who are in tighter races are not
going to step up and do that.
Mr. Andrews. Well, if the chair will yield, my race may
have just gotten a lot tighter. But, and I say it with great
respect for the chairman because he has not practiced this sin
in my opinion. We have been pushing things out to the future
around here for 40 years. We keep having commissions and
delays, and that is what got us into this problem. I think the
time is for us to make some decisions.
The Chairman. I am in agreement with you on that. The
gentleman talked about we have 5 months left. We have 2
legislative weeks left before we leave for the election to go
home and tell people what a great job we are doing. And then we
come back after the election and you know what the environment
here will be like. People that have lost their elections that
are given a desk down in the basement, saying don't miss any
votes, to try to solve something that is very, very important
that we haven't been able to solve for a year-and-a-half. And
so I am frustrated with that, and I think that it is very
important that we do that. In the meantime, though, they do
have a responsibility to let the people know what they can
expect. We have a responsibility to fix this. I am just not
very optimistic at how we are going to go about that.
Mr. Forbes.
Mr. Forbes. Thank you, Mr. Chairman. Mr. Zients, you opened
the door to my questions when you were willing to speak for the
entire Administration and say that the Administration stands
ready to work for Congress and also, you were very freely
willing to opine as to which actions of the Administration, or
which actions of Congress you thought were responsible or not
responsible, and also, which ones you thought were realistic or
not realistic.
So my first question to you, you have heard Mr. Carter's
testimony today about how devastating and horrible the
atrocities that are going to come from sequestration. You also
heard the ranking member say that he voted against that. I
voted against that. Do you believe that it was reasonable to
use a draconian method such as sequestration to force Congress
to do anything?
Mr. Zients. Let's go back and review the history here.
Mr. Forbes. No, sir, I am just asking. I only have 5
minutes. I just want you to tell me whether you think it is
responsible or not responsible.
Mr. Zients. The majority----
Mr. Forbes [continuing]. Not responsible. Pardon me?
Mr. Zients. The vast majority of members of this committee,
both Democrats and Republicans, voted for the Budget Control
Act. The decision was made----
Mr. Forbes. Mr. Zients, you stated in your testimony that
you thought certain actions by Members of Congress were
irresponsible. I am asking you, do you think it was responsible
to use an action as draconian as sequestration to force
Congress to----
Mr. Zients. The Budget Control Act said the sequestration
was law and order to force balanced deficit reductions.
Mr. Forbes. Mr. Zients, are you willing to just say what is
responsible when it is to your favor? Are you willing to tell
us? If you don't have an opinion whether it is responsible----
Mr. Zients. Did I think that it would be responsible to
implement the sequester? Absolutely not. But a balanced deficit
reduction----
Mr. Forbes. Do you think it was responsible to use that as
a forcing mechanism?
Mr. Zients. It was--you all wrote the law.
Mr. Forbes. Mr. Zients, I am just asking you if you thought
it was responsible.
Mr. Zients. I think it was responsible to implement
balanced deficit reduction.
Mr. Forbes. Did you think it was responsible to use a
draconian method such as sequestration----
Mr. Zients. I think whatever it takes to get balanced
deficit reduction.
Mr. Forbes. Do you think it was responsible for the
President to sign that measure into law?
Mr. Zients. I think given the situation with the debt
ceiling, I think the President was presented that bill. It
passed both Houses of Congress, and the President signed the
bill.
Mr. Forbes. And you testified before the Senate on February
14th, and this was a quote, you told the Senate, ``The
President is not proposing that the sequester go away. The
sequester is a very important force and function for us to do
deficit reduction.''
So is it your thought that sequestration with all its
atrocities, even though it may be, in effect, holding national
defense blackmail, is a proper tool if it forces deficit
reduction?
Mr. Zients. There are 5 months remaining for Congress to
act. What is holding us up right now is the Republican refusal
to have the top 2 percent pay their fair share.
Mr. Forbes. Okay, Mr. Zients, and let's go to----
Mr. Zients. The balanced deficit reduction to replace
sequester----
Mr. Forbes. Mr. Zients, let's go to your partisan statement
that you just made about Republicans and Democrats and say
this: You mentioned the fact that the President has put forward
a realistic alternative to this. You also come in here and
state it is Congress' job to fix this. Do you acknowledge that
the President has at least some responsibility to come in and
stop sequestration from happening?
Mr. Zients. The President has put forward on two
occasions----
Mr. Forbes. I am just asking you----
Mr. Zients. In September of 2011 a balanced deficit
reduction plan to avoid sequester.
Mr. Forbes. Mr. Zients, do you feel that he has some
responsibility to put forward a realistic proposal?
Mr. Zients. He has done so on two occasions.
Mr. Forbes. All right, now, the one occasion that you
mentioned in here was his budget. This is a copy of his budget.
Do you know how many votes this budget got in the Senate of the
United States Congress?
Mr. Zients. That budget was not voted on in the Senate.
Mr. Forbes. It was voted down 99----
Mr. Zients. It was a Republican gimmick called the Mulvaney
Amendment which did not have the President's policies included
in it.
Mr. Forbes. It was voted down, 99 to nothing. Mr. Zients,
do you know how many votes that budget got in the House of
Representatives?
Mr. Zients. That budget was not voted on.
Mr. Forbes. It was voted down by every single Member of
Congress. Mr. Zients, don't you think a realistic proposal
should have a single vote from at least 1 out of 535 Members of
Congress in some committee or some forum and can you tell me a
single proposal that the President of the United States has put
forward to stop sequestration that has gotten a single vote out
of the Senate or the House of Representatives?
Mr. Zients. What you are referring to was not the
President's budget. It was a gimmick.
Mr. Forbes. Mr. Zients, I am just asking----
Mr. Zients. Again, the root cause of the problem----
Mr. Forbes [continuing]. For you tell me if there is any
proposal that you can put forward today, any proposal that the
President has put forward to stop sequestration that has gotten
a single vote in a Senate committee, on the Senate floor, a
House committee, or the House floor.
Mr. Zients. The root cause of the problem here is the
Republicans refusal to ask the top 2 percent to pay their fair
share.
Mr. Forbes. Mr. Zients, I understand your partisanship. I
am just asking you if you can tell me that that proposal--can
you point to such a proposal? Then your answer is no.
And then my second question is this: If you can't point to
any such proposal that has gotten a single vote, can you
honestly sit there and say that the President has a realistic
proposal if it can't garner a single vote in the Senate or the
House, and with that, Mr. Chairman, I yield back.
The Chairman. Thank you, Mrs. Davis.
Mrs. Davis. Thank you, Mr. Chairman. And I appreciate the
opportunity for the hearing today. And I just want to share
with my colleague that he was asking about the Administration,
but in actuality before the Rules Committee recently the
Democrats did put forth a proposal to offset sequestration, and
that didn't go very far. And so there are opportunities to do
that. And unfortunately, as it was just mentioned, if we don't
address the top 2 percent paying their fair share, then we are
not going to get where we need to go.
One of the things that you brought forth today is really
the impact on our military families. And I know that everybody
on this committee has consistently been very, very strong when
it comes to our military families. But in addition to the
problems that we would see as a result of sequestration, we
also have tax cuts that will go away for our military families
that would mean significant, significant problems to them,
whether it is the child tax credit, a number of other
opportunities that they have had over the last number of years,
and I wonder if you could comment on that? Because we would
have a real impact on our families if we are not able to move
forward.
One of the things that struck me the other day when we had
the defense industry here is they were suggesting in order so
solve this problem, and we know this is true, everything has to
be on the table.
Mr. Zients. That is right.
Mrs. Davis. We have to be willing to look at a debt deficit
reduction package----
Mr. Zients. I think you bring up a good point.
Mrs. Davis [continuing]. That is going to make a
difference. Please.
Mr. Zients. My understanding is both the House and the
Senate Republicans and Democrats agree that middle-class
families should not experience a tax increase at the end of
this year. My understanding is there is a consensus around
that. The Senate has passed a bill which will ensure that
middle-class families, families earning under $250,000--and in
fact all Americans under their first $250,000 of income would
have no tax increase. And I would encourage the House to pass
that bill so we can take away that uncertainty for all middle-
class Americans that their taxes will indeed not go up on
January 1st.
So why not where there is an area of agreement go ahead and
provide certainty to those families and those individuals and
to our economy that taxes will not go up on middle-class
families.
Mrs. Davis. Thank you, I appreciate that. And I would
challenge my colleagues on that as well because that is the one
way that we can begin to give some certainty, I think, to the
economy as a whole.
Mr. Zients. Absolutely.
Mrs. Davis. Could you comment, further, though, on
additional cuts that would occur under sequestration for our
military families? How would those be felt? And I guess going
to Secretary Carter as well, you have a lot of contact with the
industries that support our defense, and what have you heard
from them in terms of what they really feel Congress should be
focusing on right now?
Secretary Carter. I think you captured it just a moment
ago. My colleagues in the defense industry are beholding this
situation unfold with the same kind of alarm that we are
expressing in the departments and agencies that have to manage
things. It is no way to do business and you know the best of
them have very carefully tried to give us good value and manage
their facilities and their programs and their technology and
their people in an optimal way for us, and this just throws
everything they are trying to do in a cocked hat, so I think
they are hoping for the same thing that everybody here has been
talking about, which is that we can find a way not to do this
to ourselves. And so I just associate myself with them in every
way. They are trying to manage on our behalf a situation that
is really untenable.
Mrs. Davis. Thank you. Thank you, Mr. Chairman, I yield
back.
The Chairman. Thank you.
Mr. Miller.
Mr. Miller. I think my colleagues will find consolation in
the fact that we will be given the opportunity to vote on the
floor tomorrow to extend all of the Bush era tax cuts,
including those for the middle class as well.
Mr. Zients, as the Director of OMB, Acting Director, I
guess, of OMB, what is the law today regarding the Bush tax
cuts, what is called tax cuts? How do you interpret the law
today?
Mr. Zients. They are set to expire.
Mr. Miller. When?
Mr. Zients. At the end of the year.
Mr. Miller. And do you make any plans in regards to that in
your forecasting of your budgeting that there will be more
revenue brought into the Government because they expire?
Mr. Zients. Well, the President's plan assumes that there
will be no tax increases on families earning less than
$250,000.
Mr. Miller. No, that is not my question. My question is, as
the Bush tax cuts are today, what is the law? The law is they
will expire at the end of the year. So at the end of the year
what type of forecasting do you do to prepare for that?
Mr. Zients. Well, the President's plan has the tax cuts not
expire for families under $250,000. I don't think all of that--
--
Mr. Miller. But that is not the law.
Mr. Zients. Let me finish.
Mr. Miller. No, sir. What is the law? They expire, correct?
What do you have to do? If it is the law, you have to prepare
for those tax cuts expiring, correct?
Mr. Zients. I don't really understand the intent. What type
of preparations are you talking about? I think we all agree
that it is----
Mr. Miller. Do you forecast having additional revenue
coming into the Government?
Mr. Zients. I am sorry?
Mr. Miller. Do you forecast additional revenue coming into
the Government?
Mr. Zients. The policy is protect those families----
Mr. Miller. From any of the tax cuts. No, sir.
Mr. Zients. Yes, we do. We have money coming into the
Government under the assumption that the top 2 percent will not
have----
Mr. Miller. And how much money will that be?
Mr. Zients. Over a decade it is about a trillion dollars,
$850 billion in the expiration of the tax cuts and the estate
tax.
Mr. Miller. So he plans on part of the law not expiring,
but sequestration you are not planning on any of it because
somebody has made the statement, and Mr. Carter, I would like
for you to tell me who made the statement that sequestration
was never intended to happen, but----
Mr. Zients. I don't think anyone would debate whether
sequestration was intended to happen.
Mr. Miller. But it is the law.
Mr. Zients. Sequestration was the forcing function to
balance the deficit reduction.
Mr. Miller. But it is the law.
Mr. Zients. The root cause problem here----
Mr. Miller. Is the law.
Mr. Zients [continuing]. Is the refusal of Republicans to
acknowledge the top 2 percent have to pay their fair share. And
we do have that trillion dollars.
Mr. Miller. Mr. Zients, was the President's budget ever
voted on in the Senate?
Mr. Zients. The President's budget itself was not voted on
in the Senate.
Mr. Miller. The President's budget, was it ever voted on in
the Senate?
Mr. Zients. No.
Mr. Miller. Does it concern you that in a Democratic-
controlled Senate by Harry Reid, that Harry Reid would not even
bring up the President's budget for a vote?
Mr. Zients. What concerns me is that we have 5 months to do
balanced deficit reduction----
Mr. Miller. No, that is not--my question is regarding the
President's----
Mr. Zients. And that the refusal to acknowledge that the
top 2 percent have to pay their fair share----
Mr. Miller. Sir. Sir, it is my time. Sir, it is my time.
Does it concern you and the President that the Democrat-
controlled Senate would not, in your words, vote on the
proposal that the President of the United States gave to this
Congress?
Mr. Zients. What concerns me is we have 5 months to enact
balanced deficit reduction to avoid sequester.
Mr. Miller. Sir, I have a minute-and-a-half left and I am
going to ask you again, and I will ask you until the time runs
out. Does it concern the President that Harry Reid and the
Democrat Senate would not bring up the President's proposed
budget?
Mr. Zients. What concerns me is that the vast majority of
Democrats and Republicans in this committee voted in favor of
BCA, which has as a forcing function sequestration and there
has been no progress by Republicans to acknowledge that we need
a balanced package that includes further spending cuts and
requires the top 2 percent to pay their fair share.
Mr. Miller. I would expect you to be political in your
comments today, but you have not answered my question. Does it
concern you or the President that the President's budget was
not voted on in the Democrat-controlled United States Senate?
Mr. Zients. My energy and my concern is how we use the next
5 months to balance deficit reduction and try to avoid the
sequester.
Mr. Miller. Can you explain to me then, sir, why you waited
until yesterday to put out any type of discussion in regards to
what was going to be exempt from what agency? I mean, now you
are saying--we have actually had 6 months prior to that.
Mr. Zients. Well, let's assume that all of us agree that
the energy should be put against avoiding the sequester. No one
thinks it is good policy. As I said on multiple occasions, OMB
and agencies will be ready in the very unfortunate situation if
January 2nd comes and the sequester order needs to be issued.
The Chairman. Thank you. Mr. Courtney.
Mr. Courtney. Thank you, Mr. Chairman, and I thank you for
conducting this hearing. I would just like to again walk
through a few points with the witnesses. It was almost exactly
a year ago that the Budget Control Act was passed. In fact, the
Administration had initially asked for just a clean bill in
terms of avoiding default on the full faith and credit of this
country. They were not the ones who were insisting on a
sequestration-backed mechanism for deficit reductions, isn't
that correct?
Mr. Zients. That is right. I mean, the history here is that
Republicans refused to do balanced deficit reduction last
summer, and the threat of default led to the Budget Control
Act.
Mr. Courtney. Thank you, and Mr. Carter, in your testimony,
you mentioned the fact that the design of the Budget Control
Act actually incorporated the Gramm-Rudman Sequestration 1985
Act, which is sort of the basic structure of how sequestration
would take place.
Again, you have been through a few rodeos in terms of past
budgets. I mean, the fact is that Gramm-Rudman was on the books
for a number of years. I mean, it was a bumpy ride before
finally Congress reached a point where we balanced the budget
actually in the early 1990s. You know, I would just note that
when it passed, Congressman Gramm was on the record saying it
was never the objective of Gramm-Rudman to trigger sequester.
The objective of Gramm-Rudman was to have the threat of the
sequester force compromise and action. And that is precisely
the thinking with the Budget Control Act, that again was
enacted just about almost exactly a year ago, isn't that
correct?
Secretary Carter. That is my understanding as well, yes,
both of the past and the recent past.
Mr. Courtney. And at the time the Speaker was actually
boasting in public that he got 98 percent of what he wanted in
terms of negotiations with the White House. Again, this was
certainly something that had more than bipartisan
participation. In fact, the Speaker claimed he got 98 percent
with the deal that was finally voted on and sent to the
President a year ago.
I would like to just also go to one point which my good
friend Mr. Forbes was trying to claim that there was not a
single proposal that the White House has offered that has been
voted on and approved by either the Senate or the House in
terms of deficit reduction. And I would actually point out that
in the 2011 Republican budget plan, where they claimed $5.7
trillion in savings, $1 trillion of those savings was war
savings in the OCO account. And I realize, you know, today the
chairman, who is also someone I have a great deal of respect
for, now claims that that is a gimmick. But the fact of the
matter is we are going to spend $98 billion in Afghanistan this
year, isn't that correct?
Mr. Zients. That is right. And CBO scores those savings,
the OCO savings, and importantly, by capping OCO, we are
closing the backdoor on discretionary spending.
Mr. Courtney. Right.
Mr. Zients. So those are real savings as determined by CBO,
and importantly, closes the backdoor so that we cannot in any
way increase the cap.
Mr. Courtney. And I want to be clear. I am not doing this
as a gotcha point. I mean, the fact of the matter is there
actually is some overlap between budget documents that have
been voted on by the vast majority of the Republicans in the
House and what the President actually put forward. And I think
we should go back to Mr. Gramm's admonition when the Gramm-
Rudman sequestration was first passed that really it is really
a mechanism to force compromise and action. And there really
are some working parts that we can begin to get to that point
and avoid the cataclysmic results.
Mr. Zients. And we are where we are, but 5 months remain,
and there is plenty of time to do balanced deficit reduction
and avoid the sequester.
Mr. Courtney. I would just note that, back in eastern
Connecticut where I come from, people get it, we have fought
two wars on a credit card, and that post-2014 it is not going
to be down to zero, but we are going to be bringing down that
process of pouring money into Afghanistan. And those are real
savings. That is real money that this Government is not going
to be expending. And to me, you know, for the Administration to
offer that as a way of reducing the budget and hitting the
Budget Control Act targets, which again the Republican budget
in 2011 used precisely the same measure, is at least one piece
of how we can solve this problem. And again, I don't know if
you want to comment on that.
Mr. Zients. It is driven by the policies of ending the war
in Iraq and drawing down in Afghanistan.
Mr. Courtney. Thank you. I yield back, Mr. Chairman.
The Chairman. You know, I would think that the gentleman
would know, serving on this committee, that whether a
Republican or a Democrat proposes using OCO funding that we are
carrying out into the future for 10 years a trillion dollars
knows that it is not going to be spent because we know that we
have pulled the troops out of Iraq and we will pull all of the
troops out of Afghanistan by 2014. And so we don't need to
carry that into the future.
And I have said it is a gimmick whether a Republican or a
Democrat proposed it.
Mr. Courtney. Well, I respect that. I would just note,
though, that certainly your caucus is on record supporting that
type of approach. And I would yield back.
The Chairman. Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Zients, it has been a pleasure having you here in front
of the Armed Services Committee. We are not usually of the
habit of hearing such partisan statements in what is really a
bipartisan committee. We don't usually hear people throw around
Republican and Democrat, but you have very, very well. I want
to commend you on your broken record of your partisanship with
respect to the fiction of the fact that this Administration has
a budget or a plan.
We have already established, although you have tried to
denie it over and over again, that there has been not one
single vote in the Senate, not one single vote of support in
the House or one Member of the House or one Member of the
Senate who supports the President's so-called budget.
The lack of that support means you have no plan. We are in
August, August. There is not one thing on the table that we
could pick up that has the support of the House or the Senate
that would solve this problem that comes from the President. I
can't imagine what it would be like to have the title of
Director of Office of Management and Budget and to have had no
support in Congress for a budget. I would probably, if I was
you, would want to stand in front of Congress and blame
Congress instead of blaming the fact that you have no plan. You
keep saying Congress should act. Congress should act. You are
absolutely right, but you know, Congress by the Constitution,
we can't do it alone. We have to have the President. Just as
the President signed the act that causes sequestration, again,
a bill I pointed out that I voted against, the President has
full responsibility for sequestration, having voted for it,
having endorsed it coming out of the House and the Senate, and
then signed it himself, and also his responsibility for having
essentially pulled out of the ``super committee'' [Joint Select
Committee on Deficit Reduction], having provided no plan for
the supercommittee to have an action that would have then, in
effect, avoided sequestration.
What we are dealing with now, though, is two things. One,
your statements on the WARN Act, and I want to ask you a couple
of questions about that. We have people who are faced with the
effects that sequestration might be coming. We have contractors
that are concerned that they are going to have civil penalties
and additional actions against them as a result of failure to
notify employees that they might be laid off as a result of the
threat of sequestration. You said the Department of Labor has
issued a guidance so that no one need provide those notices.
So let me ask you first. You have said you weren't a
lawyer, but you might not be a lawyer, but you might, I know,
have an understanding of the authority of the position you sit
in, so let's start with your position. Do you have any legal
authority or ability to waive the penalties in the WARN Act for
noncompliance under the threat of sequestration?
Mr. Zients. No, I do not believe so.
Mr. Turner. Okay, let me go then to the Department of
Labor's own guidances. Here we have the U.S. Department of
Labor's fact sheet with respect to the WARN Act, and they
expressly state, an employer who violates the WARN Act
provisions by ordering a plant closing or mass layoff without
providing appropriate notice is liable for, boom, boom, boom.
And it lists all of these things that they are liable for. And
then it says, the Department of Labor--this is their document--
since it has no administrative or enforcement responsibility
under WARN, cannot provide specific advice or guidance with
respect to individual situations. This is their document. I am
assuming you don't disagree with it?
Mr. Zients. I think the Department of Labor is the expert
here.
Mr. Turner. Did you disagree with their document?
Mr. Zients. They are the experts.
Mr. Turner. Right. Their document goes on to say:
Enforcement of WARN requirements is through the United States
District Court. Then you go to the actual regs that are with
respect to the WARN Act, and it says: The Department of Labor--
these are the actual Federal regulations--the Department of
Labor has no legal standing in any enforcement action and
therefore will not be in a position to issue advisory opinions
of specific cases.
So, although you won't acknowledge it, their documents
acknowledge it, the statement by the Department of Labor that
people need not provide WARN Act, warning notices under the
threat of sequestration has no effect. It is not worth the
paper it is printed on. It may be the desire of the
Administration that no one do that, but it certainly isn't
reality. It is a fiction. And now then to reality. The reason
why people----
Mr. Zients. May I respond?
Mr. Turner. The reason why people have to do that is in
addition to no plan from this Administration, we also have no
detailed understanding from the Administration what the effects
of sequestration would be. You can't provide us one document
that shows what is going to happen if sequestration hits,
correct? Do you have one for us today?
Mr. Zients. In our testimony, both Dr. Carter and I
illustrated----
Mr. Turner. Specifically. Do you have documents that
specifically show who gets cut, who loses jobs, what programs
stopped?
Mr. Zients. One can't do that at this point.
Mr. Turner. The answer is no, right.
Mr. Zients. The answer is----
Mr. Turner. You just haven't done it. You are before us
with no ability to provide us any of that.
Mr. Zients. The answer is----
Mr. Smith. I am sorry, if you want to give a speech, give a
speech. The witness has to get more than 2 sentences out of his
mouth if you are asking him a question. It has to be said, if
you just want to badger the witnesses, you know, you can do
that and not put it in the form of the question.
Mr. Turner. I have the answer. The answer is no.
The Chairman. The gentleman's time has expired. Mr.
Johnson.
Mr. Johnson. Thank you, Mr. Chairman. Just a few questions,
or just a couple of statements, I am sorry, that I would like
to make. I want to thank you all for joining us, and I am sorry
that we have dragged you from your actual governing
responsibilities to attend this spectacle, this attempt by
House Republicans to wash their hands of their own mess and lay
the blame on the President. It is an election year, after all.
The responsibility to govern is something I know both of you
take seriously, which is more than I can say about this Tea
Party Republican House of Representatives, which brings me to
an important point.
Why exactly are we here? I will answer that question. We
are here because last summer the House Republicans, bowing down
to their Tea Party base, refused to honor the financial
commitments of the United States Government and threatened to
undermine the full faith and credit of their own country.
Scrambling to deal with that manufactured crisis, Congress
broke through the gridlock and enacted legislation that would
impose sequestration unless we agreed on a balanced approach to
meeting our budget targets. And now instead of working on that
balanced approach, the approach every serious economist says is
necessary, what do the House Republicans do? They passed the
Ryan budget. They cut unemployment. Excuse me, they cut
employment and training programs. They cut food stamps, low-
income home energy assistance. They cut healthcare for
children, the sick, and the poor. They cut foreclosure
prevention. They cut taxes for the rich. And they loaded up the
defense authorization with pork, an East Coast missile shield,
nuclear facilities no one wants, and billions of dollars of
waste far in excess of the caps under the Budget Control Act.
They want to have their pie sisters' cherry pie and eat it
too. This hearing is not about the Obama administration and
sequestration. It is about the Republican Party's abdication of
its responsibility to govern and the terrible results.
Now, the Tea Party Republicans during the debt ceiling
negotiations insisted on sequestration as a part of the deal to
keep America from defaulting on its debt for the very first
time in our history.
Mr. Zients, what would have happened if we had not broken
that gridlock and which branch of Government was responsible
for this sequestration policy? And last but not least, Mr.
Zients, I would like to ask you whether or not the
Administration is willing to meet our budget targets by
adopting a balanced approach that involves a measure of
spending reductions and a measure of revenue increases.
Mr. Zients. In terms of the debt ceiling negotiation, I
think it had a bad impact on the economy during that period of
time. I cannot imagine and don't even want to think about the
impact that it would have had on the economy if we had not--if
we had actually defaulted.
Mr. Johnson. And in fact, just the threat of it----
Mr. Zients. It is unimaginable. The threat of it alone had
a bad impact on the economy at a period of time when we could
hardly afford further bad news.
You know, I think balanced deficit reduction is the key
here. Further spending cuts, and revenue with the top 2 percent
paying its fair share. You are right, independent economists,
Bowles-Simpson, Rivlin, all of them have at the center of their
plan balance, spending cuts, and revenue. It is the lack of
balance, it is the insistence that we can do spending cuts only
that is the root cause problem here that has us in a situation
where we are 5 months out and we have not yet replaced the
sequester. Balanced plan is the key to moving forward and
making sure that we do not have to implement what we all would
agree is a bad policy of sequester.
Mr. Johnson. So what you are suggesting is that it is this
very Congress who has compelled your attendance today that is
the very problem that they have called you here from----
Mr. Zients. Congress needs to pass a balanced deficit
reduction that the President can sign into law and avoid the
sequester.
Mr. Johnson. I thank you, Mr. Zients, and I yield back.
The Chairman. Thank you.
Mr. Shuster.
Mr. Shuster. Thank you, Mr. Chairman, and thank the
witnesses for being here today. I would like to remind
everybody that the House Republicans have acted. We passed a
budget. The Senate has not acted. If you would go back to the
White House and I would ask you to encourage the President to
do like he did on the cyber bill and show some leadership. He
wrote an op ed, and all of a sudden the Senate starts to take
up a cyber bill. He needs to maybe write another op ed and
insist that the Senate draw up a budget, whatever their budget
is, pass something. Let's get into conference. Let's talk about
it. But to sit here and say we have done nothing is just not
accurate. We have passed a budget. In fact, we have passed one
for the past 2 years. So that is something that needs to be
corrected in the record here today.
My question, though, goes to Dr. Carter, concerning
multiyear procurement authority, the multiyear contracts. What
percentage of what we procure today are in those types of
multiyear contracts?
Secretary Carter. I can't give you an exact percentage. I
can actually find it out for you, but it is fairly small. But
they are very important, because multiyear contracts can be
much more efficient. Because you lengthen the horizon of the
manufacturing----
Mr. Shuster. Savings?
Secretary Carter [continuing]. Base. So it is much more
efficient, and sequester, if it occurs, would affect the
payment on those contracts in the future. So it is a partial
exception to the thing I was describing earlier about obligated
funds not being----
Mr. Shuster. And it will expose us to Federal Government to
termination liability considerations, is that correct?
Secretary Carter. In general for changes, adjustments of
the kind that would be called for in sequestration, when you
negotiate a multiyear contract, you negotiate variable numbers
because we actually never know what our appropriation is going
to be year by year.
Mr. Shuster. But my question is, there is liability there
for us if we break this contract?
Secretary Carter. There is. It is less efficient if the
quantities go down.
Mr. Shuster. So has the Department of Defense or OMB taken
into consideration what kind of dollars we are talking about,
because if we cut those contracts and we cut them down, there
is still going to be a cost somewhere there. So has there been
an analysis done on any of those multiyear contracts?
Mr. Zients. Contract by contract, and you are right there
will be tremendous inefficiencies both in terms of quantities
having to be decreased which loses economies of scale, delaying
things.
Mr. Shuster. I understand, but have you done any analysis
on that?
Mr. Zients. No specific analysis on that at this point.
Mr. Shuster. Is that something you can shield so that, for
instance, I guess the F-35 [Lightning II fifth-generation
stealth fighter jet] would be one of those multiyear contracts.
Can we shield those? Is that something that----
Secretary Carter. The F-35 is not yet at this point in its
lifetime subject to multiyear contracts. But we can, and all of
our program managers know how to make those adjustments. They
are just, as Mr. Zients said, grossly inefficient.
Mr. Shuster. But under the BCA will you be able to exempt
those? Have you done an analysis into that?
Mr. Zients. As we have talked about, it is across the board
at the PPA level. You have got to go PPA by PPA. Some PPAs
might have one contract in them in which case that has to be
cut. Others might have multiple contracts in which----
Mr. Shuster. So there is some ability to do that.
Mr. Zients. Sorry?
Mr. Shuster. There is some ability to shield some of those
multiyear contracts?
Mr. Zients. Yeah. It really has to go PPA by PPA. It is
going to be different at the Defense Department than it is
going to be at Education, than it is going to be at
Agriculture. It is a very----
Mr. Shuster. So that begs the question. Are you considering
that?
Secretary Carter. Yeah, but we would certainly take
advantage--we are going to take advantage of any flexibility
that we can find.
Mr. Shuster. That is something you should be doing, right?
Because you will be standing----
Secretary Carter. Absolutely. But unfortunately, there is
just so little flexibility in sequester. It is not much help,
but we will take advantage of every bit of flexibility we can,
if this happens to us, to continue to try to deliver best value
we can for the taxpayers' defense dollars. And I am sure all of
the other managers around the Government will try to do the
same.
Mr. Shuster. I appreciate that, but again it brings me back
to what I started. The House Republicans have acted and again,
I would urge you to go talk to the President to have him show
some leadership on this to get the Democratic-controlled
Senate--as I last knew, the Democrats control the Senate so to
sit here and say that we haven't acted is just not true.
Mr. Zients. In 20 odd years in the private sector
inevitably you do a lot of negotiations. In order to come to
the table, you have to have two reasonable parties in order to
get something done.
Mr. Shuster. Propose something. Propose something. Get it
passed in the Senate.
Mr. Zients. Spending-only approach, 2 percent aren't paying
their fair share. It is not a starting base for a balanced
budget.
Mr. Shuster. Again, what 2 percent is that, to make sure
that I am clear on that. Is that people, single folks that earn
over $200,000 and a couple over $250,000? Is that the correct
number?
Mr. Zients. It is the package that is coming before you
which ensures there is no tax cuts for 98 percent of Americans
families who are----
Mr. Shuster. So that means as a former small business owner
and you have been in the private sector, if I am a Subchapter S
Corporation, sometimes my tax return would show over $250,
$300,000, but I don't take that money home.
Mr. Zients. The President's plan protects 97 percent of
small businesses.
Mr. Shuster. I take that money and invest it back in my
business.
The Chairman. The gentleman's time has expired.
Mr. Shuster. It is going to hurt the job creators.
The Chairman. The gentleman's time has expired. Mr. Barber.
Mr. Barber. Thank you, Mr. Chairman. And thanks to our
witnesses for testifying here today. As the newest Member of
Congress, I was not here to vote on sequestration. Thank
goodness. Had I been here, I would not have voted for this
irresponsible plan. This is an irrational way to deal with the
budget deficit and our national debt. Sequestration represents
a failure of leadership in Congress and is absolutely the wrong
approach to getting our fiscal house in order. It would have a
devastating impact on the two military installations, the
service members, the civilian personnel, and defense
contractors that are the major economic drivers in my district.
And it would bring serious harm to funding for border security,
a priority for me and for my district, to education, to public
safety, disability services, and essential services for the
most vulnerable members of my district.
If a family took an approach like sequestration to manage
its budget, it would cut mortgage payments, utility bills,
food, clothing purchases, child care, and all of the rest by
the same amount across the board. Obviously, no family would or
could do this. And while I was not here to vote against
sequestration last fall, I am here to help stop it. I came here
with the full intention of working across the aisle to solve
problems, and I have been told countless times that this is a
pretty naive proposition. But I remain hopeful that common
sense and bipartisanship will yet prevail.
My question is for you, Dr. Carter. I am very concerned
about all of these potential cuts across the board to both
military and to domestic spending. But I would like to focus,
with your help, on the Department of Defense, since that is
such a critical area in my district and, of course, in many
others.
Could you please help us by identifying three critical
national security priorities that absolutely must be protected
whether we have deep cuts under sequestration or some other
formulation?
You know, Congressman Jones spoke to one that is of grave
concern to me, how we treat our military members for Post
Traumatic Stress Disorder and for TBI. And there are others, I
am sure. But could we have your view on what are the three most
critical national security priorities that must be protected?
Secretary Carter. Well, the first one that obviously comes
to mind is our wartime spending and support to the forces that
are engaged in the fight in Afghanistan. As I indicated in the
opening, that is largely but not exclusively OCO funding. And
the bad news is that OCO is subject to sequestration.
The only slight silver lining on that cloud is that the
operations and maintenance part of OCO and the base part of OCO
become one account in the year of execution, which, said
differently, without all the gobbledygook, is that we can take
money from ordinary O&M, training, readiness here at home in
order to keep the troops in the field funded in a way that we
really owe them. But that makes the hit on the readiness here
back at home even harder. So you are shifting the pain away
from the theater, which is the responsible thing to do, but you
make it even heavier.
Second thing I would say is, that is not entirely possible
for the other parts of OCO that are not operations and
maintenance. And we are going to have to find other ways there
to provide the materiel and so forth that the troops need in
the field.
Otherwise, I could go on and on, but let me just take a
few. I think military medical care was cited already.
Obviously, that is an area where we will work very hard, within
the limits of this very rigid law, to do everything we can to
make sure that there is no impact on the care we give wounded
warriors, families, and so forth.
And, of course, the exemption of military personnel is one
way of signifying our faith in the importance of ordinary
soldiers, sailors, airmen, and marines.
So those are four or five responses to your question. There
are many.
Mr. Barber. Thank you, Dr. Carter.
The Chairman. Thank you.
Mr. Conaway.
Mr. Conaway. Thank you, Mr. Chairman.
Gentlemen, thank you for being here.
Mr. Carter, Secretary Carter, if sequestration happens--and
none of us want it to, and we are going to work real hard, and
yada, yada, to not allow that to happen, but it is the law of
the land. And it looks to me like there are an awful lot of
contracts that will either be terminated or rescoped at a point
in time as a part of the sequestration. Have you got any sense
yet as to what the associated costs will be with terminating
and rescoping these contracts?
Secretary Carter. The contract termination per se is not
required, in the sense that if you have already obligated
money--that is, it is on contract--that obligated fund is not
subject to sequestration. So this would be--the extant
contracts would not be affected.
Mr. Conaway. So you are not anticipating terminating any
contracts that haven't yet been funded?
Secretary Carter. They do not have to be terminated on
account of sequestration.
Mr. Conaway. Yeah.
Director Zients, Government-wide, this problem is going to
be thousands and thousands of contracts and obligations. Would
you anticipate that you have the authority to do some sort of a
class waiver, class deviation? Or would you have to go at it
contract by contract, task order by task order?
Mr. Zients. As you point out, there are hundreds of
thousands of contracts Government-wide. About two-thirds of the
$535 billion of contracting we do is at DOD. On the other
third, I think you have to go contract by contract, understand
where we are not going to exercise options, where are we going
to make modifications, where do you need to consider
terminations. It is a very inefficient, as we talked about,
very labor-intensive exercise.
Mr. Conaway. Right. Well, as a predicate to all that, have
you given guidance to all of the executive branch agencies and
everyone that--I mean, this falls under your umbrella of
responsibility. Have you started to give them that guidance? Is
there going to be a training and everything else go on? Are you
giving any guidance whatsoever on this?
Mr. Zients. The guidance we gave yesterday, as you know,
was focused on exempt and nonexempt accounts and, importantly,
instructed agencies to continue business as usual, their normal
operations. If we get to a point where January 2nd and the
sequestration order is kicking in, we will have prepared
agencies on contracting and other issues.
Mr. Conaway. So they will have enough workforce in place,
trained and ready to go, to do it----
Mr. Zients. As you know, the acquisition workforce is
stretched----
Mr. Conaway [continuing]. With the same efficiencies that
the----
Mr. Zients. As you know, the acquisition workforce is
stretched to ensure that we are moving from----
Mr. Conaway. All right.
Mr. Zients [continuing]. No-bid contracts to competition,
from cost-plus contracts to----
Mr. Conaway. Right.
Mr. Zients [continuing]. Fixed-price contracts. So this
is----
Mr. Conaway. Well, reclaiming my time, the effect on the
Department of Defense is about, we think, $55 billion the first
year. That is net. Either one of you have an estimate as to--
once you start doing these adjustments, terminations, whatever
it is, it triggers penalty payments and other kinds of things,
as well as the costs of defending and all this kind of stuff.
Do we know what the gross is going to be in order to net back
down to 55?
Mr. Zients. Well, the $55 billion is the money that would
be, unfortunately, taken away. You are right that spending
underneath that $55 billion would be inefficient.
Mr. Conaway. Okay. But doesn't that add to the problem? And
then you have to----
Mr. Zients. It means the money that you have left will be
less efficiently spent, yes.
Mr. Conaway. So can you give us a guess yet as to what the
gross expenditure is going to be at to be cut in order to make
up for that inefficiency?
Mr. Zients. Again, you are cutting $55 billion. The
remaining money will not be as well-spent because of the
inefficiencies we have described.
Mr. Conaway. All right.
Let me ask you this question. Dr. Carter, you said earlier
that if, during the first quarter, all these agencies get their
money obligated and pushed out, then it is not subject to
sequestration at that point in time.
Mechanically, how does that work? Are we going to have some
sort of a mass rush across Government to get everything spent
and done during that first quarter and pushed out to the
recipients so that--how do you cut, at that point in time, if
everything has been spent?
Secretary Carter. Well, it is what it is. If they have
obligated funds----
Mr. Conaway. So how do they comply with the law, though,
Dr. Carter if----
Secretary Carter. They have to meet their sequestration
target with the amount of funds that are not obligated at that
date. So this is a subject that we will go through with all of
our program managers one by one.
Mr. Conaway. So this is just the Department of Defense. The
rest of Government----
Secretary Carter. No, the same principle would apply to any
agency that is doing contracting.
Mr. Conaway. All right.
Secretary Carter. Just the way the law works.
Mr. Conaway. All right.
We collectively and, in particular, the Administration
seems to be taking the attitude with respect to sequestration
of the fellow who fell off the 10-story building. As he is
passing the fifth floor, he is saying, ``So far, so good. So
far, so good.'' We have five floors left, we have 5 months
left. And I am not sensing a lot of leadership.
And I understand the macho, that you have to pound away,
Mr. Zients, about the balanced--and all those kinds of things.
But there are those of us who have similar opinions, held just
as strongly, that we have a spending problem, not a revenue
problem. In 2005, 2006, and 2007, the rates currently in place,
these horrible rates that this President extended, raised money
the old-fashioned way, it increased Federal revenues the old-
fashioned way: more people working and growing the economy. And
that would be a balanced approach.
And I yield back.
The Chairman. Mr. Critz.
Mr. Critz. Thank you, Mr. Chairman.
Thank you, Mr. Zients, Dr. Carter, for being here.
Mr. Zients, my questions are more about clarification. You
had mentioned the tax, or not extending the tax cuts for the
top 2 percent. Now, are you talking about on income that is
earned over $200,000 or anyone who earns over $200,000?
Mr. Zients. Yes, the first $250,000 for a family or
$200,000 for the individual----
Mr. Critz. Would still receive the tax cut.
Mr. Zients. Yeah. So it is income above that.
Mr. Critz. Okay. So----
Mr. Zients. And it is that group that we need to have pay
their fair share so we have a balanced approach here.
Mr. Critz. Now, what is the estimate of how much money that
would raise over the next--I think the estimate is over 9
years, right, not over 10? Or is it over 10?
Mr. Zients. I think it is 10. It is about $850 billion.
Mr. Critz. Eight hundred and fifty billion. And
sequestration is $1.2 trillion, but I guess with interest
savings it is really like $984 billion or something like that?
Mr. Zients. That is correct. That is correct.
Mr. Critz. So that leaves a gap of, by my estimate, $134
billion that would then still have to come through cuts if we
used all of the income or revenue from the elimination of those
tax cuts to go definitely toward--or strictly toward
sequestration.
Mr. Zients. The President's plan actually has about $1.2
trillion of revenue, so revenue that goes beyond just the
expiration of the 2001-2003. But you are right, there also are
further spending cuts. So the balance here is not simply the 2
percent paying their fair share; it also is further spending
cuts in health care and other nonmandatory programs--I am
sorry, other mandatory non-healthcare programs.
Mr. Critz. So if we have $134 billion over 9 years to cut,
then that works out to be, what, $10 billion, $15 billion per
year, $7.5 billion defense, $7.5 billion domestic programs. Is
that close estimates?
Mr. Zients. Well, there is also--your $10 billion to $15
billion sounds correct. But discretionary, let's remember that
as part of BCA we have already saved a trillion dollars.
Mr. Critz. Yeah.
Mr. Zients. So there are mandatory programs, as I just
mentioned, both on the healthcare side and non-healthcare side,
that the President's budget and his submission to the Joint
Committee last September articulate savings in those areas.
Mr. Critz. And just to clarify, as well, the bill that I
believe we are going to vote on tomorrow that has come over
from the Senate, will that have that $850 billion in revenue?
Mr. Zients. The Senate bill ensures that no family with
less than $250,000 has any tax increase. And as you point out,
for families with more than $250,000, that first $250,000 is
also protected. It extends that middle-class tax cut for 1
year, while not extending the tax cuts for the wealthiest 2
percent, consistent with the wealthiest 2 percent need to pay
their fair share.
Mr. Critz. And that will raise the $850 billion?
Mr. Zients. In essence, yes.
Mr. Critz. In essence. Okay.
And just to clarify, too, because you both have said it,
that sequestration takes effect January 2nd----
Mr. Zients. Yes.
Mr. Critz [continuing]. And becomes law--or is law, but it
becomes effective January 2nd, but it is really until the end
of the fiscal year that each agency has to show the savings.
Because, like, at Education, their money is already spent for
that school year, so they have to take it out of the next. And
the same with Defense. If they have already obligated money
through the end of this year, then whatever is left in their
pot is where they have to----
Mr. Zients. On January 2nd, we will be a quarter of the way
through the fiscal year, so the 8 and 10 percent cuts that we
cited on the domestic and defense side actually are higher
percentages, because they have to be applied to that 9-month
period of time.
Mr. Critz. Right. Right.
Okay. I just wanted some clarification. I appreciate your
indulgence. Thanks for being here.
I yield back.
The Chairman. Thank you.
Mr. Wilson.
Mr. Wilson. Thank you both for being here today.
And I want to thank Chairman McKeon for his leadership. I
think it has been very revealing, Mr. Chairman, the information
that the American people are receiving today. Very important
for the American people. It has direct impact on the citizens I
represent.
I am very grateful I represent Fort Jackson, the initial
Army training facility. I represent Parris Island. We are very
proud of the Marines that are trained there. Marine Corps Air
Station, Beaufort Naval Hospital. I represent North Airfield.
And in the new district I represent of Aiken County, I now will
be in the neighborhood of Fort Gordon and the Eisenhower
Medical Center. So I've got wonderful people, military
families.
And as chairman of the Military Personnel Subcommittee, I
am very, very concerned about what I have heard today.
And, in particular, Dr. Carter, yesterday, in advance of
this hearing, the President announced that he would exempt
military personnel accounts from sequestration. Can you please
describe in more detail whether these accounts will be exempted
in whole or in part, or to what extent?
Secretary Carter. The law gave the President until early
August to make that determination. He did decide to exempt
military personnel in toto. So it is, that part of our budget
will be exempt from sequestration. That means that the rest of
the budget, of course, has to bear a larger share of the cuts,
but we certainly think that is a fair and a practical thing to
do.
It is fair because it is the right thing to do by our
troops in a time of war. It is a practical thing to do because,
the way the military personnel regulations and laws work, it
would be very difficult to take that much money out of the
military personnel account if it weren't exempted. For example,
we cannot furlough military personnel. We can furlough civilian
personnel and, sadly, might have to do that if sequester
happens. We can't do that with military personnel. The only way
we could accommodate a cut of that size would be to do things
like stop accessions, which is very unhealthy for the force;
stop bringing in new people; stop permanent change-of-station
moves, which means everybody freezes in place and we can't move
anybody around.
So as you thought about applying sequester to the military
personnel account, it is particularly unpleasant. As I have
said, sequester is very unpleasant in general to everything we
do. It would be particularly unpleasant to that. So it is in a
bad situation; this is making the best of a bad situation, to
exempt military personnel.
Mr. Wilson. And, actually, you said it was stupid. And that
is just unfortunate for our country.
And as you mention about furloughs and accession, related
to that is something else, and that is, does the exemption of
military personnel accounts from sequester mean that even more
military personnel will have to be separated to offset the loss
of savings from pay and benefits?
Secretary Carter. No, because the entire military personnel
account is protected in this way. What will suffer
disproportionately as a consequence is readiness of the force
that exists, modernization, research and development, test and
evaluation. All of the other major accounts will suffer as a
consequence.
Mr. Wilson. Additionally, in your testimony you indicated
this will affect our service members who are serving overseas,
actually in the line of fire. In June, the Commandant of the
Marine Corps expressed concerns about, quote, ``a hollow
force,'' the same statement of Secretary Panetta, if the
President exempts military personnel accounts.
Do you agree with the Commandant? If the O&M accounts are
sequestered, how will the Department ensure that service
members are properly trained and equipped?
Secretary Carter. Well, this is the kind of tradeoff one
doesn't want to have to make but is made under sequester.
Past 2013, when these very mechanical cuts are imposed, I
think that the entire leadership of the Department has made
clear and the President made clear in the budget that we
submitted for fiscal 2013, which of course didn't presume
sequestration but did contain his intent on this matter, we do
understand that military personnel are going to have to be part
of meeting our budget target in the future.
Remember, we already have in our 2013 budget $489 billion
of cuts. We have already taken that in Defense. We did include
military personnel in that, because to do otherwise would, as
you suggest, be unbalanced and would mean that we would have a
hollow force of the same size.
Mr. Wilson. Thank you very much.
The Chairman. Thank you.
Mr. Wittman.
Mr. Wittman. Thank you, Mr. Chairman.
Secretary Carter, Honorable Administrator Zients, thank you
so much for joining us today. We appreciate you taking the
time.
Secretary Carter, let me ask you, you had previously
testified before us that sequestration would affect CVN-78
[Gerald R. Ford class supercarriers], our LCS [Littoral Combat
Ship] programs, our DDG-51 [Arleigh Burke class guided missile
destroyer] programs. Can you elaborate a little bit more on
that in looking at how it will affect the different
shipbuilding accounts? Specifically, how is it going to affect
the Ohio class replacement submarine? We know one of the models
for procurement and construction has been the Virginia class
submarine, and it is critical to our force projection there in
the Asia Pacific. We know how important that is.
And can you also comment, too, on how sequestration would
affect our shipbuilding industrial base and, specifically, the
suppliers and vendors that support that industrial base?
Secretary Carter. Excellent question. And I share all the
concerns that are implied there.
Sequester does apply to each and every program line item.
And some programs have both an R&D [research and development]
line and also a procurement line, and sequester applies
separately to the R&D line and the--so this is a detailed pain
for each and every management of each and every one of our
programs, which leads to inefficiency.
And to get to your shipyards, you know, our shipyards plan
out their work years in advance so that they operate in the
most efficient way. And this will cause us to make very
inefficient adjustments in each and every one of them. So it is
a sad waste of the taxpayers' procurement dollar to run things
this way.
Mr. Wittman. Sure.
How would it affect the Ohio class replacement? Would it
delay that? How would it affect that program, in your
estimation?
Secretary Carter. I will get back to you with a more
detailed answer.
Mr. Wittman. Okay.
Secretary Carter. But at this point in the Ohio class
replacement program, that is going to be largely R&D money.
Mr. Wittman. Sure.
Secretary Carter. So it will affect the rate at which we
accumulate the design content of the Ohio class replacement.
And, obviously, we will work as hard as we can to make sure we
don't slow the overall project down as a consequence, but there
will definitely be a risk of that.
Mr. Wittman. Let me ask you, in your understanding of the
shipbuilding supplier industrial base, do you think that with
this uncertainty that is building with sequestration, do you
think there is a possibility that any of those small businesses
would go out of business in the interim?
Secretary Carter. Yeah, I do. The bottom of the supply
chain is particularly vulnerable in times of economic
inefficiency, which this would engender.
We work very hard to protect particularly the small
businesses that supply Defense. And the reason for that is that
small businesses are particularly vibrant, they are good
sources of technology, they breathe new life and new talent
into the defense sector, which we need. So we are always
concerned about the small businesses, and we will work hard to
keep them in the game.
Mr. Wittman. Sure.
How difficult and costly would it be to reconstitute that
small-business supplier industrial base for our shipbuilding if
it were unfortunately to be affected by sequestration?
Secretary Carter. Well, we worry all the time about exactly
that, not, by the way, just in the context of sequestration,
but budget cuts in general and just management day to day. It
is very hard once you lose a specialized supply chain
contributor to regain that specialized expertise. So once you
lose it, it is very expensive to regain. So, better to keep it
in the business in the long run, which is why our whole
industrial base policy is such an important part of what we do
in defense.
Mr. Wittman. Let me ask you, I want to point to some
comments that have been made about BRAC [Base Closure and
Realignment]. You know, there has been a lot of back and forth
about BRAC. And when Secretary Panetta came and testified
before us February 15th, 2012, he said very specifically that,
in looking at the total context of defense spending, is that
the Administration's policy was to pursue a BRAC in 2013 and
2015. And, as you know, I put an amendment in both the
appropriations side and the authorization side to set aside
BRAC in 2013.
I was surprised when President Obama, though, visited
Richmond, Virginia, and he did a sit-down interview, and his
quote on BRAC was this. He says, ``You know, I don't think now
is the time for BRAC.'' He said that on July 15th. He went on
further to say, ``We just went through some base closings, and
the strategy that we have does not call for that.''
And I am just wondering, was the President misspeaking
there? Because it was very clear to me that Secretary Panetta
said that it was this Administration's policy to pursue BRAC in
2013, and then his comment on July 15th just seemed to be
counter to that. So I just wanted to get some clarification
from you.
Secretary Carter. No, the President is right; we did not
build into our 2013 budget submission any savings or any
presumption about BRAC for the very simple reason that that is
not an authority we have. That is an authority only Congress
has. And so there was never any prospect and is no prospect of
any BRAC in 2013.
Down the road, if we continue to have reductions in overall
defense spending, it will be a necessary corollary of that,
that we will have to revisit BRAC. But that is obviously not
going to happen in 2013.
Mr. Zients. I want to be clear that it is not only no
savings in 2013, there were no savings in the 5-year window----
Secretary Carter. Yes. I am sorry.
Mr. Zients [continuing]. Of the defense budget. And I think
the President has been very clear, this is not the economic
time, given the fragility of the economy, for doing BRAC.
Secretary Carter. So we didn't build that into our budget
submission.
Mr. Wittman. Okay. Very good.
The Chairman. The gentleman's time has expired.
Mr. Wittman. Thank you, Mr. Chairman.
The Chairman. Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
And, gentlemen, thank you for being here.
And I did not vote for sequestration. I know that
commitments were made at the highest level in both parties that
this would never happen and we wouldn't be sitting here today,
but we are. And, unfortunately, for me, as a man with a wife
and a soon-to-be 13-year-old boy, I am quite honestly tired of
the blame game. I am going to live under whatever we do for a
long time in this country, and I and the rest of the freshman
class want to get this resolved.
But I would like to, if I could, Mr. Zients, talk with you
about a couple of things. If you listen to the President, he
has essentially said, well, if you all would just pass my
budget, everything would be okay. Well, he didn't get a single
vote for his budget from Democrats or Republicans. So that is
not my fault, that it didn't pass. I mean, it wasn't supported
by his own party. Same with his jobs bill.
And as I have listened to the President come out and talk,
he has talked more about the Buffett rule than he has anything
else. And I understand you have said, and I take you at your
word, that he is going to be--that his tax bill is coming to
the House. I assume we will have his total language. And you
said it would generate somewhere in the range of $850 billion
over 10 years. Is that----
Mr. Zients. That is right.
Mr. Scott. Okay. We spend approximately $10 billion a day
in this country. Is that fair enough, give or take a--okay.
The Buffett rule generated $47 billion over the course of
10 years. So, over the last 18 months that I have been here, as
an American I have listened to my President present a proposal
for corporate-jet tax increases that would fund the Government
for 45 minutes and a Buffett rule that funds the Government for
10 or 11 hours.
The bottom line is this: This Tax Code that we are living
under today, the one that we are living under today, generated
$2.567 trillion in 2007. It generates less than that today.
Part of it is the global recession, but part of it, with due
respect to the President, part of it is the class warfare that
he is perpetuating. And with due respect, there is a difference
in taxing schedule S income and taxing W-2 income.
Why would--now, you are obviously a smart guy. But if you
are a schedule S business owner and you are going to pay
schedule S taxes at approximately 40 percent under the
President's proposal or you could convert to a schedule C and
pay them at what he says should be a lower rate than we even
have today, why wouldn't you convert your schedule S to a
schedule C and pay at the lower tax rate?
Mr. Zients. Well, a couple things here. First of all, the
President presented a very detailed plan to the Joint Committee
that had $4 trillion----
Mr. Scott. But would you answer the schedule S versus
schedule C?
Mr. Zients. I operated in the economy----
Mr. Scott. Sure. I did, too.
Mr. Zients [continuing]. During the Clinton administration,
which is the level of taxation that we are talking about
returning to. I can say personally that there was plenty of
incentive to grow my businesses. My businesses when I started
were about----
Mr. Scott. The budget was balanced.
Mr. Zients [continuing]. One hundred people; today they
employ about 4,000 people.
Mr. Scott. The budget was balanced.
Mr. Zients. Plenty of incentive to grow businesses in the
type of tax economy that we are going to--or tax regime that
the President recommends that--or proposes that we return to so
that the top 2 percent are paying their fair share.
The President is also in favor of tax reform----
Mr. Scott. Are those that are paying nothing paying their
fair share, according to the President?
Mr. Zients [continuing]. The top 2 percent are paying their
fair share. No one with incomes under--no family with income
under $250,000 is paying any more.
Mr. Scott. Let's go back to----
Mr. Zients. But the President also is, to your point, the
President is very much in favor of tax reform so we have a
simpler system, lower rates.
Mr. Scott. Has he presented a proposal?
Mr. Zients. He has set forward principles and looks forward
to working with Congress.
Mr. Scott. He has not presented a proposal, with all due
respect.
Mr. Zients. Tax reform is a very complex terrain, but the
principles are----
Mr. Scott. Absolutely.
Mr. Zients [continuing]. There, and the President looks
forward to engaging----
Mr. Scott. And he has been President for 4 years, and it is
time for him and the Administration to stop blaming George
Bush.
The bottom line is--the bottom line is we are spending $10
billion a day in this country. Your revenue estimate--and I
asked this of another member of the Administration, the only
member of the Administration that the President has allowed to
meet with the freshman class, which represents about 20 percent
of Congress now--the revenue estimate that you have, how is
that derived?
Mr. Zients. The revenue estimate in the President's
proposal of $1.6 trillion?
Mr. Scott. The budget for fiscal year 2013----
Mr. Zients. Right.
Mr. Scott [continuing]. How--the total receipts----
Mr. Zients. It is derived by having the top 2 percent pay
its fair share, by us returning to the Clinton-era tax rates,
and by ensuring that deductions are limited to 28 percent for
the wealthiest 2 percent. That creates about $1.6 trillion. As
you said, there are some other specific proposals, like the
corporate tax piece. That is how we get there.
And, again, the President would love to do tax reform in
order to simplify and lower rates.
Mr. Scott. You are the director of the budget office. And
with due respect, the President's assumptions, what you all
have given us in your assumptions assumes that the revenue from
corporate taxes doubles over the 24 months between 2011 and
2013.
Mr. Zients. I don't believe that to be the case. The
President's tax reform proposal on corporate is tax-neutral.
Now, you have the economy growing and picking up pace. We are
not where we need to be----
Mr. Scott. I think that is part of the problem, is that the
President's definition of growth and his Administration's
definition of growth is 1.5 to 2 percent. And, quite honestly,
it just doesn't get us there.
Mr. Zients. Well, if Congress would enact the American Jobs
Act, we would have better growth.
Mr. Scott. And the President was asked----
Mr. Zients. And if we got rid of----
Mr. Scott [continuing]. On four separate occasions by my
office specifically to give us an----
The Chairman. The gentleman's time has expired.
Mr. Scott [continuing]. Outline of where the money would
go, and he refused.
The Chairman. Just to clarify something that Mr. Wittman
brought up, I remember in a meeting with Secretary Panetta in
my office--I don't know if you were there, Dr. Carter--but the
request of us was that we have two BRACs going forward in the
strategy. Is that correct?
Secretary Carter. Yes. He has asked for authority to begin
BRAC in 2013. That would not have led to any BRAC activity,
obviously. In the process, there is a commission and so forth.
The Chairman. But it was the Administration request of us.
We didn't put it in our bill, but it was his request at that
time.
Secretary Carter. That was.
The Chairman. Thank you.
Mr. Palazzo.
Mr. Palazzo. Thank you, Mr. Chairman.
Also, I would like unanimous consent to introduce a report
by Ernst & Young titled ``Long-Run Macroeconomic Impact of
Increasing Tax Rates on High-Income Taxpayers in 2013.'' Can I
enter that for the record?
The Chairman. No objection, so ordered.
[The information referred to can be found in the Appendix
on page 79.]
Mr. Palazzo. Okay. I am going to quote from it in a second.
But, first of all, you know, we ask ourselves why we are here.
And if we are honest with ourselves, we can just look back over
decades of fiscal mismanagement of this country by both
parties, both Republican and Democrat, and maybe one or two
independents if they were out there at the time. But, you know,
we have just made some poor fiscal choices year after year
after year.
And, you know, we--pointing fingers at this time is not
going to resolve sequestration. You have mentioned over and
over, both of you on this panel, that we have 5 months to avert
sequestration. And we need to be working together. We don't
need to be engaging in, you know, partisanship or playing the
blame game. Whether you voted for the bill or whether you
didn't vote for the bill, it is facing us. It is coming at us
very quick, like a fast-moving train.
And if sequestration is allowed to take effect, we know it
is irresponsible, and we know the damage that it is going to do
is irreversible. But you did mention some things on the
President's plan to raise the revenue through taxing the 2
percent that you say don't pay their fair share. I think 5
percent of the top earners pay almost 40 percent of our total
revenues.
But that report I just mentioned actually kind of analyzes,
I think, what the President's plan is. And those businesses
that you are talking about employ 54 percent of the private-
sector workforce and pay 44 percent of Federal business income
taxes. The number of workers employed by large flow-through
businesses is also significant. More than 20 million workers
are employed by flow-through businesses with more than 100
employees.
The report--and this is from the executive summary, and the
report goes on to pretty much say that these higher marginal
tax rates result in a smaller economy, fewer jobs, less
investment, and lower wages. Specifically, this report finds
that the higher tax rates will have significant adverse
economic effects in the long run, lowering output, employment,
investment, the capital stock, and real after-tax wages when
the resulting revenue is used to finance additional Government
spending.
You know, that is food for thought. But I would like to ask
some questions. We are here to talk about--this is the House
Armed Services Committee, and I want to get some more questions
from Mr. Carter, or Secretary Carter, on how sequestration is
going to affect our military personnel.
You testified that if the President elects to exempt
military personnel funding in fiscal year 2013, the out-year
cuts would force the Department to make substantial reductions
in military personnel in units in the years beyond fiscal year
2013.
With the President having just recently announced that
military personnel accounts are exempted, could you please
clarify when additional reductions in military personnel would
commence? Would it not occur until after fiscal year 2014 or
later, or would the Department have to start taking steps in
fiscal year 2013 to responsibly draw down the force beginning
at a later date?
Secretary Carter. What the President did was exempt from
sequestration in fiscal year 2013 military personnel. As I
said, that was both a decision made on principle and one that
was practical, given the limitations on how we could have--the
draconian way in which such cuts would have had to be taken.
In the longer run, over the course of the next 10 years,
particularly as we absorb the $489 billion worth of cuts we
have already absorbed, military personnel, that part of our
budget will be taken into consideration in those cuts, as it
was in the 2013 budget that we submitted. Because to do
otherwise would be to unbalance.
But what the President was doing was avoiding something
associated with sequester in 2013, which is a particularly
absurd--given that all of sequester is absurd--a particularly
absurd impact on that account in 2013. And that was absolutely
the right thing to do, because, otherwise, we would have had to
have done some very drastic things to----
Mr. Palazzo. Thank you----
Secretary Carter [continuing]. Accommodate the sequester.
Mr. Palazzo [continuing]. Secretary Carter.
Would any of these reductions rely heavily on involuntary
separations?
Secretary Carter. We are trying, in the plan that we
submitted for 2013 and the out-years, which, again, is the
first $489 billion, and we would endeavor to do that in
whatever circumstances that we found ourselves, to avoid or at
least minimize involuntary separations. In fact, we have built
our whole drawdown, particularly in the Army and the Marine
Corps, on the principle of minimizing--we can't eliminate
entirely--minimizing involuntary separations.
Mr. Palazzo. Thank you.
The Chairman. Thank you.
Director Zients, I know you were planning on leaving at
12:30, but we do have one more Member. I understand you have
agreed to stay for that.
Mr. Zients. Absolutely.
The Chairman. And I thank you for that.
Mr. Lamborn.
Mr. Lamborn. Thank you, Mr. Chairman.
Thank you both for being here and staying a few minutes
longer. I appreciate that.
Mr. Zients. Please.
Mr. Lamborn. Director Zients, what is the OMB position on
contracts funded with fiscal year 2012 appropriations but
executed in fiscal year 2013? In other words, will agencies be
allowed to delay contracts to preserve flexibility or
accelerate contracts prior to January 2nd in order to protect
programs?
Mr. Zients. We assume, or we are instructing agencies to
continue their normal business operations. That was central to
yesterday's guidance. Agencies that have--or, sorry, contracts
that are fully obligated will not be impacted. Unobligated
balances, as we have talked about, are subject to sequester. So
contracts that are not obligated would be subject to sequester,
or to the ramifications of sequester.
Mr. Lamborn. Okay. Thank you.
And for either one of you, in the event that fiscal year
2013 begins under a continuing resolution, which is looking
more and more likely, how will sequestration calculations be
applied?
I will restate that. If fiscal year 2013 begins under a
continuing resolution, will OMB consider apportioning based on
post-sequestration estimates or based on fiscal year 2012
levels?
Mr. Zients. We will assume business as usual. And,
obviously, if unfortunately we are in an event where, January
2nd, the sequestration order is implemented, we will be ready
to implement.
Mr. Lamborn. Okay.
Mr. Carter, do you have anything to add to that?
Secretary Carter. I don't, no. That is accurate.
Mr. Lamborn. And as a follow-up, in that event will changes
be retroactive to the beginning of the fiscal year once the
appropriations bills are passed?
Mr. Zients. No.
Mr. Lamborn. Okay.
Mr. Carter.
Secretary Carter. Same answer.
Mr. Lamborn. Okay. I appreciate your both being here. Thank
you.
Mr. Chairman, I yield back.
The Chairman. Thank you.
Mr. Smith.
Mr. Smith. Thank you.
Just quickly, I want to thank both of our witnesses for
being here and the discussion. About half the discussion I
think was a useful discussion about how do we get out of this
problem, and the other half of this discussion was simply, you
know, the majority's attempt to try to blame the Administration
for the entire problem.
Mr. Turner observed that, you know, you were being
partisan. I think, just for your explanation, normally on the
Armed Services Committee the members of the committee are very
partisan, but our witnesses are from the DOD and they don't
really fight back. And today we finally had someone who was
willing to punch back. So that was about the only thing that
was different.
I think that, you know, was not the most useful exchange
that we have had. And I would ask that if we are going to have
witnesses up from the White House, you know, don't cut them off
every 2 seconds. I mean, if you are not getting the answer you
want after a sentence, that is fine. But, otherwise, it is just
embarrassing to the committee to not give the witnesses a
chance to at least get two words out of their mouth in between
questions.
But, again, I think the chairman's intentions were very
good in this hearing: to finally, you know, start having the
discussion about how we get out of this. Not all Members lived
up to your intentions, but the discussion at least is moving
forward. And I think it was very useful to have, you know,
people from the White House and the committee have the
discussion about how we can get out of what we all agree is,
you know, a problem that we must avoid. And the sooner, the
better. Not a January 2nd problem. The sooner we can come up
with a solution, the more certainty we can have in the economy
and the better we can help turn things around.
So I thank the chairman for attempting that and succeeding
in part, at least.
I yield back.
The Chairman. Thank you.
I think that this is a bipartisan committee. And I think
this is probably, in my time, the first time that we have had a
witness come that has actually told us what Republicans should
do and what Democrats should do. And I think that got us off on
a track that I was uncomfortable with, and I wish it hadn't
happened.
But for you to state your position, that the worst thing
that could happen is Republicans are not willing to raise
revenue, as I said in our earlier meeting and at my opening
statement, we have taken action. And this isn't private
industry; we talked a little bit about how that works. This is
the Congress of the United States, and we are directed by the
Constitution. And the Constitution lays out a framework where
we resolve problems, and that is, one body passes legislation,
the other body passes legislation, and then you have a
conference and try to resolve the differences. And we find
ourselves hung up because the Senate hasn't taken action.
Director Zients, one final follow-up question. Is it the
case that the President's negotiators first raised the
sequester mechanism during the debt-ceiling negotiations with
the House?
Mr. Zients. I don't know the history of that negotiation.
The Chairman. Okay. That has been my understanding, that
that is where it came from. And is there a way that you could
find out and get back to us for the record?
Mr. Zients. I was not part of those negotiations. We can--
--
The Chairman. Do you know anybody that was in there that
you could ask?
Mr. Zients. Let me see what kind of follow-up we can do.
[The information referred to can be found in the Appendix
on page 105.]
Mr. Zients. At the end of the day, the vast majority of
members of this very committee, Democrats and Republicans,
voted in favor of the BCA.
Mr. Smith. Mr. Chairman, could I just throw something in
there that I meant to say earlier?
You know, I didn't vote for the BCA. I completely
understand the Members who did. Because the other piece of it
is, nobody likes sequestration, but no one wanted the debt
ceiling to be breached either. That was, you know, the
complete, terrible choice that we faced. So the Members who
voted for it, the President who signed it, it wasn't, ``Yay,
sequestration.'' It was, ``We have to stop the debt ceiling
from being breached.'' And that was the only option on the
table, D or R. I totally understand the Members who said, I
don't like sequestration, but----
Mr. Zients. Furthermore, we are where we are, as you have
pointed out. It is the law. We have 5 months. We all agree we
need to avoid it. Let's focus our energy forward to do balanced
deficit reduction to avoid the sequestration.
The Chairman. Thank you very much.
This hearing is adjourned.
[Whereupon, at 12:41 p.m., the committee was adjourned.]
=======================================================================
A P P E N D I X
August 1, 2012
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
August 1, 2012
=======================================================================
Statement of Hon. Howard P. ``Buck'' McKeon
Chairman, House Committee on Armed Services
Hearing on
Sequestration Implementation Options and the
Effects on National Defense: Administration Perspectives
August 1, 2012
Good morning ladies and gentlemen. The House Armed Services
Committee meets today to receive testimony on the
Administration's implementation options for sequestration.
Joining us today is the Honorable Jeffrey Zients, the Acting
Director of the Office of Management and Budget, and the
Honorable Ashton Carter, the Deputy Secretary of Defense.
Gentlemen, thank you for joining us.
Although this is the first day of August, when you look at
the calendar there are only a handful of legislative days left
to resolve the devastating across-the-board cuts to our
military known as sequestration. The House has already passed a
measure that would achieve the necessary deficit reduction to
resolve sequestration for a year--however, the Senate has yet
to consider any solution, other than the President's proposal,
which was defeated unanimously. And since he offered that
failed proposal 6 months ago, the President has been virtually
silent on the issue. This impasse, and lack of a clear way
forward, has created a chaotic and uncertain budget environment
for industry and defense planners. We heard from some of those
leaders 2 weeks ago that even though cuts are scheduled for
implementation January 2nd, companies are required to assess
and start planning now, in accordance with the law--and,
sequestration is the law right now. Just because there is
bipartisan consensus that sequestration is bad and should be
replaced, it doesn't mean that we can wish away the law. The
President wanted sequestration in the Budget Control Act and he
got it. Let us also not forget that it was the President who
put defense ``squarely on the table'' last spring. Until the
President and the Senate come to the table with a proposal to
resolve the cuts, we have no choice but to proceed as if
sequestration will happen.
In part because of this rising tide of uncertainty and in
part to help build the political will to resolve sequestration,
this Congress has repeatedly requested information from the
President and Office of Management and Budget on exactly how
sequestration will be implemented. With two million Active
Duty, civilian, and private sector jobs at stake it is
unconscionable this information has been denied to Congress,
the Department of Defense and our industry partners. Make no
mistake, we understand--planning for sequestration won't lessen
the damage. But failing to plan for it will make a terrible
situation worse.
One bright light of bipartisanship in this impasse was the
overwhelming House and unanimous Senate passage of the
Sequestration Transparency Act--legislation requiring the
President to submit a report to Congress detailing how the
Administration plans to implement the budget sequestration
cuts. So this hearing is very timely, and seeing as the
President already has that legislation on his desk, gentlemen,
I think it's time to cut to the chase and start talking.
In fact, this hearing appears to have prompted a flurry of
activity within the Administration. On Monday, the Department
of Labor issued guidance on the applicability of the WARN Act,
which requires notification to employees in advance of massive
layoffs. Just yesterday, the President made the long-awaited
determination that military personnel accounts will be exempted
from sequestration. And Director Zients, yesterday you issued a
memo to Federal agencies that was a small step in the right
direction. So there is even more to discuss.
The panel of defense industry leaders testified before this
Committee that barring any additional guidance, they must
proceed as if sequestration will become a reality, and under
the requirements of the WARN Act notify their employees that
they may well be laid off in the coming months. As one CEO put
it, the Administration's failure to issue any guidance on
sequestration has completed obscured the industry's near-term
horizon with a ``fog of uncertainty.'' We asked them for the
specific guidance they needed. They've responded and I have to
say, input from the Department of Labor wasn't on their list.
That's because the Department of Labor's own fact sheet on
the WARN Act says it is inappropriate for the Department to
issue guidance on the applicability of WARN Act. Nevertheless,
on Monday night the Department of Labor urged employers not to
follow the requirements of the WARN Act before the election. So
instead of bringing his party in the Senate to the negotiating
table to resolve sequestration, the President has focused on
preventing advance notice to American workers that their jobs
are at risk.
Despite the fact that we can all agree that sequestration
will cause job losses and that is the law of the land, the
President's Labor Secretary found a lot of excuses to explain
why layoffs aren't foreseeable. I guess the conclusion is that
the Administration doesn't believe Americans deserve the common
courtesy of being given a couple of months notice before they
lose their jobs. In the end, it doesn't matter. Each company
will have to make its own conclusion as to whether or not the
layoffs are ``foreseeable.'' But I don't want to dwell on that
ill-conceived guidance. Business leaders will do what they
think is in the best interests of their employees and
shareholders, and we are here today to talk about OMB's
planning.
Director Zients, you have argued that no amount of planning
or reports will turn the sequester into anything other than the
devastating cut in defense and non-defense programs that it was
meant to be. I fear this means many of our questions will go
unanswered and our hearing will be used solely as an
opportunity to push for the wholesale adoption of President
Obama's budget plan.
I know we'll hear a lot today about ``balanced deficit
reduction,'' so I want to address the issue briefly. While the
President's so-called ``balanced'' plan may sound fair, it
quickly collapses under scrutiny. In a recent op-ed, Director
Zients, you argue this ``balanced'' approach finds $1.2
trillion in savings, and reduces the deficit by $4 trillion by
proposing $2.50 in spending cuts for every $1 in new revenue.
But the numbers simply do not add up.
The $2.50-to-$1 ratio was arrived at by a series of budget
gimmicks, claiming spending reductions that are actually tax
increases and counting spending reductions that are already in
law. It claims $848 billion in ``savings'' from ending the wars
in Iraq and Afghanistan by counting funds that we all would
admit will not be requested in the first place. And most
troubling, it raises taxes on hard-working Americans and
threatens an already weak economy. But even if that's the
foundation for the President's solution, let the Senate bring
some version of it to a vote. Then we'll have a conference and
sort out our differences.
Until that happens, it is my sincere hope that we can end
much of this uncertainty here today. Our allies are getting
anxious and our adversaries emboldened. As one senior military
official recently told me, America's inability to govern
ourselves past sequestration plays directly into the hands of
those who spread a narrative of American decline and will
ultimately thrust us into a more dangerous world.
If this is not enough to compel action and straightforward
talk on the part of the Administration, I do not know what it
is. I look forward to your testimony this morning.
Statement of Hon. Adam Smith
Ranking Member, House Committee on Armed Services
Hearing on
Sequestration Implementation Options and the
Effects on National Defense: Administration Perspectives
August 1, 2012
Thank you, Mr. Chairman. I, too, thank our witnesses for
being here today. And I completely agree with the chairman that
sequestration is a problem right now. I think this committee
has done an excellent job of bringing attention to that
reality. Folks who think that because sequestration doesn't
actually kick in until January that we have until then are
completely wrong. The impacts of the uncertainty of whether or
not sequestration is going to happen are having a definite
impact on our economy and not just defense. Remember,
sequestration hits the entire discretionary budget, not just
the defense budget. It actually hits a little bit of the
mandatory spending, as well, and has a profound impact on
private employers' decisions going forward about what to invest
in.
It is impacting the economy right now. The best thing
Congress could do would be to find a solution right now to
that. Also, the uncertainty of what is going to happen with the
tax cuts that are set to expire at the end of this year is also
a major problem for the economy. Delaying on all this is a
huge, huge challenge. And that uncertainty is having as big an
impact as anything right now on our inability to get our
economy moving again. So I agree with the chairman completely
that we need to focus attention, that this is a problem right
now that needs to be addressed as soon as possible.
It is also worth noting that sequestration was a bad idea
in the first place. It was based off of the Gramm-Rudman-
Hollings bill back in the 1980s. Both of those plans, the
architects of which have said we never meant for it to be
implemented. It is a terrible idea; it is horrible policy. It
was only meant as a forcing mechanism. It was going to be so
awful, so hideous, that everyone would have to get together and
agree to prevent it.
But we now have seen what was, I think, obvious even before
we passed the Budget Control Act and the reason that I didn't
vote for it, the problems of determining how to deal with our
deficit--how to address it, what to cut, what revenue to
raise--are so serious, and there is so much difference that we
can, in fact, go through even something as bad as sequestration
rather than find the solution.
So, putting a gun to the head of the economy as a so-called
forcing mechanism to deal with the deficit was a bad idea from
the very beginning and one that I hope we never try again. But,
again, the chairman is right--a problem right now that we have
to address.
I really want to thank our witnesses for being here, Mr.
Zients in particular, and also for offering a solution. The
White House has put out a variety of different solutions. The
Democrats in the House have. Every time the Republicans in the
House have put up a bill to deal with sequestration, there has
been an alternative offered by the Democrats.
Now, the Senate is, regrettably, a different story, because
right now the difference is, Democrats and Republicans have a
different approach to this. And in the Senate, nobody actually
controls the Senate because it takes 60 votes to do anything.
So you would have to, in the Senate, have the Democrats and the
Republicans agree to get anything out of the Senate.
So I think the solution here isn't hoping that at some
point the Senate acts. The solution is to get all Democrats and
all Republicans to come together and try to figure out what a
reasonable approach to this is. Really, the problem is there is
just a fundamental disagreement on that. And we have had that
debate; we will have it again today.
Personally, I think revenue has to be part of the equation.
As I have said before, if you look at the Republican proposal
that says we shouldn't cut defense, we should cut taxes by even
more, and we should balance the budget, the math simply doesn't
add up unless you cut everything else in our budget--Medicare,
transportation, education, health care, everything else--by 50
percent. Nobody supports that. The Republicans don't even
support that. They haven't proposed it.
So let's be realistic about the choices we face and
realistic about the fact that revenue has to be a piece of the
equation. Again, as I have said before, if you are absolutely
committed, as this committee is--and I do not doubt that--to
providing for the common defense, to make sure that our service
men and women have the support that they need to defend this
country, then you ought to be willing to raise the money
necessary to pay for it. I think that has to be on the table.
But I do agree with the chairman that it is time for all
parties concerned to come together and try to find a solution
to this very damaging problem. And I think this hearing is
helpful in that. Again, I thank Mr. Zients, Mr. Carter for
being here to have that discussion.
And I hope we can begin to make some progress toward a
solution. It is great that this committee is shining a light on
how big the problem is. I think we all get that now. We now
have to move past that to finding some way to solve the problem
so the sequestration does not happen.
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DOCUMENTS SUBMITTED FOR THE RECORD
August 1, 2012
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
August 1, 2012
=======================================================================
RESPONSE TO QUESTION SUBMITTED BY MR. MCKEON
Mr. Zients. As I stated at the hearing, I was not part of the debt
ceiling negotiations in 2011 and I do not know who first raised the
sequester mechanism in those negotiations. However, it is clear that
the sequester mechanism had bipartisan support, as evidenced by the
fact that the Budget Control Act of 2011 was passed by both houses of
Congress with bipartisan majorities. Rather than focusing on past
negotiations, Congress should work together to enact bipartisan,
balanced deficit reduction to avoid the sequestration. [See page 51.]
______
RESPONSE TO QUESTION SUBMITTED BY MR. BARTLETT
Mr. Zients. Section 256(k)(2) of the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended (BBEDCA), states that,
``[e]xcept as otherwise provided, the same percentage sequestration
shall apply to all programs, projects, and activities within a budget
account.'' Pursuant to this provision, the same percentage reduction
will be applied equally at the program, project, and activity level
within each sequestrable account, unless another provision of law
expressly directs that sequestration be implemented differently. [See
page 15.]
?
=======================================================================
QUESTIONS SUBMITTED BY MEMBERS POST HEARING
August 1, 2012
=======================================================================
QUESTIONS SUBMITTED BY MR. MCKEON
Mr. McKeon. Do you agree that sequestration is now the law and that
barring the passage of further legislation, signed by the President, it
will have to be implemented?
Mr. Zients. The Balanced Budget and Emergency Deficit Control Act
of 1985, as amended, is law and, barring enactment of bipartisan
deficit reduction that allows us to avoid sequestration, it will have
to be implemented. I urge the Congress to avoid sequestration by
enacting bipartisan balanced deficit reduction that the President can
sign. Since Congress has not made progress on enacting balanced deficit
reduction, in July, OMB issued a memo to agencies that outlines the
initial steps to prepare for the possibility that OMB will issue a
Joint Committee sequestration order on Jan. 2, 2013. The memo also
notes that additional steps would need to be taken over the longer-
term. Should Congress fail to act, OMB will be ready to issue the
sequestration order on January 2, 2013, as required by law.
Mr. McKeon. Whose responsibility is it within the Executive Branch
to interpret the Budget Control Act and issue guidance on its
application? Can this responsibility be delegated? Has it been
delegated?
Mr. Zients. The Budget Control Act of 2011 (BCA) assigns various
responsibilities to the Office of Management and Budget (OMB). OMB
interprets the relevant provisions of the BCA to carry out the
responsibilities assigned to it by law, and it has not delegated this
function.
Mr. McKeon. What is OMB's estimate of the percentage reductions by
agency and account, after exemptions have been fully considered?
Mr. Zients. As set forth in the Sequestration Transparency Act of
2012 (STA) Report submitted to the Congress, the estimated percentage
reductions range from 7.6 to 10.0 percent. However, these estimates are
preliminary and are dependent on a number of assumptions required by
the STA. If the sequestration were to occur, the actual results would
differ based on changes in law and ongoing legal, budgetary, and
technical analysis.
Mr. McKeon. Will unobligated prior-year funds be subject to
sequestration cuts? Will there be any special considerations for
unobligated funds that are intended for multiyear contracts?
Mr. Zients. Section 255(e) of the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended, provides that: ``Unobligated
balances of budget authority carried over from prior fiscal years,
except balances in the defense category, shall be exempt from reduction
under any order issued under this part.'' Therefore, only unobligated
balances in the defense category are subject to sequestration. At the
appropriate time, OMB will work with the Department of Defense (DOD)
and other agencies to determine how to address key questions affecting
contracting and other areas.
Mr. McKeon. Current law provides that, 20 days after the final
sequester order, either house of Congress may proceed to consider a
joint resolution that can ``modify'' or ``provide an alternative'' to
the sequester order. Does the President intend to propose a resolution
to Congress that would reorder the Department of Defense sequester to
shift reductions among defense accounts?
Mr. Zients. The sequestration modification provision referenced in
your question is section 258A of the Balanced Budget and Emergency
Deficit Control Act of 1985, as amended (BBEDCA). On August 2, 2012,
the Senate Parliamentarian ruled that section 258A does not apply to
the Joint Committee sequestration. Consistent with the Senate
Parliamentarian's ruling, OMB has independently concluded that, based
on the statutory text of BBEDCA, the sequestration modification
provision in section 258A is not applicable to the Joint Committee
sequestration.
Mr. McKeon. What guidance will be issued to Federal departments and
agencies regarding the obligation and expenditure of funds during the
first quarter of FY13?
Mr. Zients. In July, OMB issued a guidance memorandum to agencies
concerning the potential Joint Committee sequestration. That memorandum
stated that agencies should continue normal spending and operations. In
the event a continuing resolution for FY 2013 is enacted, OMB would
issue guidance to agencies on the apportionment of funds available
under the continuing resolution, as is OMB's ordinary practice whenever
there is a continuing resolution.
Mr. McKeon. Sequestration may cause the Government to make
unilateral changes to tens of thousands, if not hundreds of thousands,
of Government contracts and task orders. How will the Government manage
this level of contract dislocation?
Mr. Zients. Sequestration would impose a significant acquisition
management burden on the agencies. If sequestration occurs, it will be
a difficult and time-intensive process to determine how individual
contracts should be modified, terminated, or otherwise impacted by the
reduction in funding. This work would be highly disruptive and would
need to be handled on a case-by-case basis to ensure that both the
contractor and the taxpayer are treated fairly. Conducting these
planning activities prematurely could have adverse effects on the
contracting community and on taxpayers. That is why it is imperative
that Congress acts to avoid sequestration by enacting balanced deficit
reduction.
Mr. McKeon. When will OMB provide the federal agencies guidance on
how to handle this volume of work?
Mr. Zients. In July, OMB issued a guidance memorandum to agencies
concerning the potential Joint Committee sequestration. That memorandum
stated that agencies should continue normal spending and operations.
Until Congress acts, the Administration will continue to work, as
necessary, on issues related to the sequestration and its
implementation. OMB will issue additional guidance regarding
sequestration in the months ahead as necessary.
Mr. McKeon. Clarity and assurances by the Government during this
period of uncertainty can be of significant help to industry as they
carry out their own planning and preparation for the period ahead. Will
OMB provide clarification and assurances that programs with fully
funded contracts awarded prior to October 1, 2012, will not be subject
to sequestration?
Mr. Zients. Contracts fully-funded with prior year money will not
be subject to sequestration in FY 2013. We will work with agencies,
often on a case-by-case basis, in order to determine how sequestration
would affect different contracts. It is important to note, however,
that conducting these planning activities prematurely could have
adverse effects on the contracting community and on taxpayers. That is
why it is imperative that Congress promptly acts to avoid sequestration
by enacting balanced deficit reduction.
Mr. McKeon. Typically, OMB would have issued initial guidance to
Federal agencies regarding the preparation of their FY14 budget
requests by now. How does your guidance address sequestration? What
assumptions are you making about sequestration as you currently build
the FY14 budget?
Mr. Zients. OMB issued guidance to agencies on preparing their 2014
Budget submissions on May 18, 2012. That guidance makes clear that the
Congress can and must act to avoid sequestration. The 2014 Budget will
need to make hard choices: the discretionary caps put in place by the
BCA continue to sharply constrain discretionary spending. Accordingly,
the 2014 Budget will build upon the BCA and the 2013 Budget's
framework, which called for over $4 trillion in deficit reduction that
would far exceed the amount required to avoid sequestration. The 2014
Budget will continue to cut lower-priority spending in order to create
room for the most effective investments in areas critical to economic
growth and job creation, including education, innovation,
infrastructure, and research and development.
Mr. McKeon. What information can you provide regarding the impact
that sequester would have on essential public safety responsibilities
such as homeland security, food safety, and air traffic control
activities?
Mr. Zients. Sequestration would have significant negative effects
on a variety of important Government activities, including public
safety. For example, sequestration would likely force the Federal
Government to significantly reduce the total number of active law
enforcement agents. The Federal Aviation Administration, which ensures
air traffic is safe, would face significant cuts in operations. The
Department of Agriculture's efforts to inspect food processing plants
would be curtailed.
Mr. McKeon. Given that the FY13 sequestration requires a specified
amount of reductions, the longer that sequestration actions are delayed
past January 2, 2013, the larger the cut that would need be applied
over the remaining period of FY13. Will the Administration be ready to
execute sequestration on January 2, 2013, and, if not, why not?
Mr. Zients. The Administration firmly believes that the Congress
should take action to enact a balanced deficit reduction plan in order
to avoid sequestration. That said, given the Congress's lack of
progress on enacting balanced deficit reduction, beginning work on what
needs to be done in advance of issuing a Joint Committee sequestration
order is both responsible and necessary. Until Congress acts, the
Administration will continue to work, as necessary, on issues related
to the sequestration and its implementation. The Administration will be
ready, if necessary, to issue a Joint Committee sequestration order on
January 2, 2013.
Mr. McKeon. Will agencies be allowed to adjust programs through
major reprogramming actions? Will the Administration seek an increase
in the General and Special Transfer Authority caps for FY13 and, if so,
by how much?
Mr. Zients. Many agencies, particularly small agencies, do not have
any existing transfer authority. Even for those that do, however, no
amount of transfer authority is enough to mitigate a sequestration of
this magnitude. Our focus should not be on trying to mitigate the
impacts of sequestration. It is bad policy by design, and no amount of
shifting funds around will change that or mitigate its impacts. That is
why the Congress must act to pass a balanced deficit reduction package
and avoid sequestration.
Mr. McKeon. If military personnel accounts are exempt, how will
sequestration cuts be applied to the Services? Will military personnel
account totals be included or excluded in Service totals when the
percentage distribution to PPAs is calculated?
Mr. Zients. On July 31, OMB notified Congress of the President's
intent to exercise his authority under section 255(f) of the Balanced
Budget and Emergency Deficit Control Act of 1985, as amended, to exempt
all military personnel accounts from sequestration. Exempting these
accounts does not affect the total amount of the Joint Committee
sequestration, but it excludes the funding in these accounts from
calculations of the uniform percentage reduction required in non-exempt
accounts. The same uniform percentage reduction would be applied to
each non-exempt PPA in the defense category.
Mr. McKeon. If military personnel accounts are exempt, what are the
consequences for other Departmental PPAs?
Mr. Zients. On July 31, OMB notified Congress of the President's
intent to exercise his authority under section 255(f) of the Balanced
Budget and Emergency Deficit Control Act of 1985, as amended (BBEDCA),
to exempt all military personnel accounts from sequestration. Exempting
these accounts does not affect the total amount of the Joint Committee
sequestration, but it excludes the funding in these accounts from
calculations of the uniform percentage reduction required in non-exempt
accounts. Therefore, exempting military personnel accounts would
increase the uniform percentage reduction required in non-exempt
accounts in order to achieve the total amount of the Joint Committee
sequestration. The same uniform percentage reduction would be applied
to each PPA within a non-exempt account.
Mr. McKeon. What steps, if any, will the Administration take to
ameliorate WARN Act requirements in advance of sequestration's January
2, 2013, effective date? Would this guidance be issued over 90 days
prior to the execution of sequestration?
Mr. Zients. The Department of Labor (DOL), the agency charged with
implementing the WARN Act, released guidance on the WARN Act on July
30, 2012. The DOL guidance explained that, in the context of the
prospective across-the-board budget cuts that may occur on January 2,
2013, WARN Act notice to employees of Federal contractors is not
required 60 days before that date, and in fact would be inappropriate,
given the lack of certainty about how the budget cuts will be
implemented and the possibility that sequestration will be avoided
before January.
Mr. McKeon. The Committee received testimony from industry
witnesses, including the former Deputy Director of OMB, that the actual
budget impact of sequestration will go far beyond the Budget Control
Act requirement of a $55 billion FY13 topline reduction when the costs
of contract cancellations, claims, personnel severances and other
related actions are factored in. Do you agree or disagree with this
observation and why? Do you have an estimate of how much in additional
cuts could be required to achieve the BCA net FY13 topline reductions?
Mr. Zients. The Joint Committee sequestration will have far-
reaching consequences for a wide range of Government programs,
including national security and critical investments necessary to
foster economic growth. It is impossible to quantify the full impact
that these arbitrary, across the board reductions can have. That is why
the Administration firmly believes that the Congress should take action
to enact a balanced deficit reduction plan in order to avoid
sequestration.
Mr. McKeon. The volume and magnitude of contract modifications and
contract terminations will cause price changes for both prime and sub-
contractors. Under current Government contracting rules, contractors
will likely submit requests for equitable adjustments. What actions
will OMB and the DOD, particularly DCAA and DCMA, need to take to
respond to this volume of work?
Mr. Zients. If sequestration were to occur, some contract
modifications would be required, and contractors would likely submit
equitable adjustment requests as a result. Responding to these
adjustments would be costly and time consuming for the Government's
contracting professionals in order to ensure that both the contractor
and the taxpayer would be treated fairly. With respect to DCAA (Defense
Contract Audit Agency) and DCMA (Defense Contract Management Agency) in
particular, I defer to the Department of Defense as to how this would
be managed at the appropriate time.
Mr. McKeon. Does the Department plan to use transfer authority
after a possible sequester to avoid the impact on certain PPAs,
including OCO? On what transfer authority will the Department rely?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. In advance of sequestration, does the Department plan
to adjust its recruiting goals or place any freezes on separations,
including retirements?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What is the requirement for providing advance
notification to service members prior to making involuntary
separations?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. If FY13 funding is sequestered, will the DOD have to
implement a reduction in force (RIF) within its civilian workforce?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. If civilian reductions are planned and a RIF is
implemented, how many civilians will be let go to achieve the savings
necessary to comply with funding reductions? Will civilian jobs be
eliminated on the basis of tenure or on the basis of critical skill
sets?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What are the costs associated with a RIF, and would
those additional costs be recovered through higher civilian reductions?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. In compliance with 10 U.S.C. 1597, the DOD has
established guidelines for the manner in which reductions in the number
of civilian positions within the Department are made. The DOD is
required to notify employees 60 days prior to the effective date of any
civilian reduction or furlough action. In addition, 10 U.S.C. 1597 also
states that the DOD may not implement any involuntary reduction or
furlough of civilian positions until the expiration of the 45-day
period beginning on the date on which the Secretary submits to Congress
a report setting forth the reasons why such reductions or furloughs are
required. Does the DOD intend to submit this report to Congress? If so,
when?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Has a plan for the reduction of civilian personnel been
initiated? What is the communication plan to provide information to
civilian employees? If no plan has been initiated, why not? Has any
guidance been issued to prevent such planning?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Do you intend to take a balanced approach to civilian
and military personnel reductions, or will military or civilian end
strength be disproportionately impacted by sequester?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What is the position of the Department of Defense on
the allowability of any WARN Act compliance costs that result from
sequestration? Is the Department prepared to accept financial
responsibility for any and all costs incurred from compliance by
contractors with the requirements of the WARN Act through advance
agreements or other established mechanisms?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Absent the passage of legislation, signed into law by
the President, that modifies sequestration, do you agree that layoffs
are reasonably foreseeable?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Do you agree that Federal law requires contractors to
provide notice of mass layoffs or plant closings at least 60 days prior
to implementing such actions?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Do you believe that any of the exceptions of the WARN
Act apply? For example, are layoffs under sequestration ``sudden,
dramatic, or unexpected''?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What is your position on the assessment of many in
industry that, barring additional guidance, WARN Act notices will have
to be sent out before January 2nd?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Sequestration may cause the Government to make
unilateral changes to tens of thousands, if not hundreds of thousands,
of Government contracts and task orders. How will the Department manage
this level of contract dislocation?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What methodology will you use to determine if contracts
will be terminated or modified? How will you determine estimated costs
associated with contract modifications?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Do you have a preliminary estimate of the potential
termination costs and increased contract costs due to renegotiation and
reinstatement of contracts? If not, how do you know how much you will
have to cut in order to generate $55 billion in net savings?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Would any resultant terminations be characterized as
terminations for convenience? Why or why not?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Is it possible that major defense acquisition programs
could be terminated due to sequestration?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Have you issued Department-wide guidance regarding the
awarding of new FY12 fourth-quarter or FY13 first-quarter contracts, as
well as whether to exercise options on existing contracts? If not, when
will you issue guidance? What criteria will you offer contracting
officers who must make these decisions?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Modifications to contracts pursuant to sequestration
may cause major defense acquisition programs to reach either a
significant or critical cost breach under Nunn-McCurdy. How will the
DOD handle such occurrences? To limit disruption to major defense
acquisition programs, will the Administration seek Congressional relief
for Nunn-McCurdy breaches solely caused by sequestration?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Have any major defense acquisition programs started to
plan for sequestration? For example, have any programs delayed contract
awards planned for fiscal year 2012 or slowed spending plans so that
they can carry over additional funds to fiscal year 2013?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. The Department of Defense is typically reluctant to use
``re-opener'' clauses in its contracts. In light of the numerous
unknowns attached to sequestration, will the DOD include ``re-opener''
clauses in contracts awarded after October 1, 2012?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Sequestration would potentially take effect while you
were in the final stages of constructing the FY14 request. What impact
would this have on your budget building process?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What steps has the Department taken to assess the risks
and identify potential implications to missions and critical skills and
competencies?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Given that OCO funds are subject to sequestration, how
will the Department continue to support ongoing operations in
Afghanistan?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Can you please provide an assessment of the impact on
ongoing operations and the safety of United States military and
civilian personnel?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Can you please provide an assessment of the impact on
the readiness of the Armed Forces, including impacts to steaming hours,
flying hours, and full spectrum training miles, and an estimate of the
increase or decrease in readiness (as defined in the C status C-1
through C-5)?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. If OCO accounts are sequestered and money is pulled
from the base budget to cover the costs of war, as General Dempsey has
suggested, what will be the impact to the Army and Marine Corps
procurement and O&M accounts?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Have you started to revise the current strategic
guidance? The Department has previously stated that the current
strategy will have to be revisited in the event of sequestration. The
last guidance took nearly a year to develop. What will you do in the
absence of a defense strategy when sequestration takes effect?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Given that the FY13 sequestration requires a specified
amount of reductions, the longer that sequestration actions are delayed
past January 2, 2013, the larger the cut that would need be applied
over the remaining period of FY13. Will the Administration be ready to
execute sequestration on January 2, 2013, and, if not, why not?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. Will agencies be allowed to adjust programs through
major reprogramming actions? Will the Administration seek an increase
in the General and Special Transfer Authority caps for FY13 and, if so,
by how much?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. If military personnel accounts are exempt, how will
sequestration cuts be applied to the Services? Will military personnel
account totals be included or excluded in Service totals when the
percentage distribution to PPAs is calculated?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. If military personnel accounts are exempt, what are the
consequences for other Departmental PPAs?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. What steps, if any, will the Administration take to
ameliorate WARN Act requirements in advance of sequestration's January
2, 2013, effective date? Would this guidance be issued over 90 days
prior to the execution of sequestration?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. The Committee received testimony from industry
witnesses, including the former Deputy Director of OMB, that the actual
budget impact of sequestration will go far beyond the Budget Control
Act requirement of a $55 billion FY13 topline reduction when the costs
of contract cancellations, claims, personnel severances and other
related actions are factored in. Do you agree or disagree with this
observation and why? Do you have an estimate of how much in additional
cuts could be required to achieve the BCA net FY13 topline reductions?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. McKeon. The volume and magnitude of contract modifications and
contract terminations will cause price changes for both prime and sub-
contractors. Under current Government contracting rules, contractors
will likely submit requests for equitable adjustments. What actions
will OMB and the DOD, particularly DCAA and DCMA, need to take to
respond to this volume of work?
Secretary Carter. [The information was not available at the time of
printing.]
______
QUESTIONS SUBMITTED BY MR. LANGEVIN
Mr. Langevin. In the event that FY13 begins under a continuing
resolution, how will sequestration calculations be applied?
Mr. Zients. Pursuant to sections 251A(7) and 253(f)(2) of BBEDCA,
the sequestration would be applied against the annualized amount
available under the Continuing Resolution.
Mr. Langevin. You note in your testimony that the Department cannot
even substantially mitigate the effects of sequester and that there are
significant risks of triggering adverse consequences even if sequester
does not happen. When must Congress act in order to forestall this
possibility?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. Langevin. Sequestration would potentially take effect while you
were in the final stages of constructing the FY14 request. What impact
would this have on your budget building process?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. Langevin. Given that, per the Budget Control Act, Congress
determined that OCO funds are subject to sequestration, how will the
Department continue to support ongoing operations in Afghanistan?
Secretary Carter. [The information was not available at the time of
printing.]
______
QUESTIONS SUBMITTED BY MR. COURTNEY
Mr. Courtney. Please describe any impact of sequestration on
existing multiyear procurement contracts. For example, FY13 is the last
year of a five-year block buy of Virginia class submarines--how would
sequester impact the last year of that contract and, specifically,
impact the two submarines set to begin construction in FY13?
Mr. Zients. Sequestration would impose a significant acquisition
management burden on the agencies, and it would adversely affect nearly
every multiyear procurement contract. However, any effects on specific
contracts depend on decisions by agencies that have not yet been made.
Mr. Courtney. Please describe any impact of sequestration on
existing multiyear procurement contracts. For example, FY13 is the last
year of a five-year block buy of Virginia class submarines--how would
sequester impact the last year of that contract and, specifically,
impact the two submarines set to begin construction in FY13?
Secretary Carter. [The information was not available at the time of
printing.]
______
QUESTIONS SUBMITTED BY MR. SCHILLING
Mr. Schilling. Do you believe that the President took into account
single points of failure in our national security and industrial base
when making these ``difficult choices'' in his budget?
Mr. Zients. Although many difficult choices had to be made in its
development, the President's FY 2013 Budget fully supports the defense
strategy announced in January 2012, which was the product of several
months of deliberation among DOD's most senior leaders as well as
extensive engagement by the National Security Staff and the President.
The Administration is committed to maintaining a healthy industrial
base and always considers effects on the industrial base in its
planning.
Mr. Schilling. Because the Senate has not yet passed a budget or
any appropriations bills, Congress is very likely headed towards a
Continuing Resolution (CR). How will a CR change the calculations you
will do for sequestration?
Mr. Zients. Pursuant to sections 251A(7) and 253(f)(2) of BBEDCA,
the sequestration would be applied against the annualized amount
available under the Continuing Resolution.
Mr. Schilling. If you already know how you must implement
sequestration by law and the high likelihood of a CR being the base
from which you take your numbers off of, why do you not already have
fair estimates of the cuts to departments, agencies and programs?
Mr. Zients. The Sequestration Transparency Act of 2012 Report
submitted to Congress last week contains preliminary estimates of the
required cuts based on FY 2012 funding levels. However, appropriations
legislation that is actually enacted for the fiscal year beginning on
October 1, 2012 will change the estimates provided in the report. Other
legislation, including any enacted changes to direct spending levels
between now and January 2, 2013, as well as changes in the level of
unobligated balances in the defense function, could also affect these
estimates. Depending on the timing of the discretionary Final
Sequestration Report for FY 2013, the discretionary spending limits
could be adjusted as provided by section 251(b)(2) of BBEDCA, which
would change the allocation of the Joint Committee reductions between
the defense and nondefense functions. In addition, OMB continues to
review the application of various provisions of BBEDCA to specific
programs and accounts. For all of these reasons, it is impossible to
calculate the exact amount of reductions that will be required in any
given account at this time.
Mr. Schilling. How long will it take you to make the necessary
calculations for sequestration and how much time will agencies and
programs have to prepare for those cuts--ie, your implementation time?
Mr. Zients. OMB has experience in executing budget enforcement
provisions and will be ready, if necessary, to issue the Joint
Committee sequestration order on January 2, 2013.
Mr. Schilling. Director Zients stated that obligated balances would
be factored into the cuts. How will this affect the industrial base--
both organic and private?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. Schilling. What precisely does the personnel funding exception
from Sequestration entail?
Secretary Carter. [The information was not available at the time of
printing.]
Mr. Schilling. You pointed out that our Intelligence Community gets
much of its funding from the DOD budget. Can you expand on the exact
impacts to our ability to react and respond to threats this would
cause? Can you also talk about the trickle-down effect to how this will
affect our homeland security forces?
Secretary Carter. [The information was not available at the time of
printing.]
______
QUESTION SUBMITTED BY MR. WEST
Mr. West. Should the sequester take effect, how do you feel the
monetary and military aid given to Israel, with respect to the Arrow
Weapons System and David's Sling Weapons System, be affected.
Secretary Carter. [The information was not available at the time of
printing.]
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