A season of gridlock

Funding season is in full swing on Capitol Hill, with appropriations subcommittees in both chambers passing spending bills to fund the government for fiscal year 2014. But the flurry of activity is not being mistaken for movement by Congress-watchers. The gap between the between what the Republican-led House and the Democrat-led Senate want to spend on discretionary programs is approaching $100 billion. While the differences between the two parties aren't literally irreconcilable, there's almost no chance of a compromise to emerge before the current continuing resolution funding the government expires on Sept. 30.

Congress faces a few options at the end of the fiscal year. Most probably, the government will be funded by a short-term continuing resolution at levels required under the Budget Control Act, to run through the calendar year.

After that, Congress could turn to full-year continuing resolution for 2014.

The sequester sets discretionary spending caps for 2014 at $966 billion – slightly higher than 2013 levels. Any appropriation above that amount passed by Congress without revoking sequestration would be subject to cuts. Republicans are seeking to fund the government at sequestration levels, while Senate Democrats have allocated $1.058 trillion for appropriations bills.

If fiscal year 2014 turns out, as expected, to be another year of belt-tightening under the rigors of cuts required under the Budget Control Act, contractors will at least be prepared, said Kevin Plexico, vice president for information solutions at Deltek. He notes that the sequestration cuts for fiscal 2013 were no't implemented the way they were originally spelled out, with agencies having some measure of flexibility to direct cuts where they wanted. "This lessened the impact from what it would have been, and I think contractors have benefited from that," Plexico said in an interview with FCW.

Plexico said that for contractors, certainty about a full year of sequestration is on some level preferable to the uncertainty that attended last year's budget talks. "Last year, we thought that we had to avoid sequester or the sky would fall. Then the sky fell, and it wasn't as bad as we thought it would be," he said. "Now we're resolved to a difficult environment," he said.

It's unclear what spending will look like if sequestration becomes a permanent fixture of the federal budget. Agencies took advantage of a lot of one-off savings opportunities for 2013 that won't be available down the road. Erica McCann, manager of procurement policy at the trade group TechAmerica worries that the true impact of the Budget Control Act has yet to be felt. "Everyone seems to be operating at slightly reduced levels, but not to the extent that they need to be in order to comply" with sequestration.

Plexico agrees that in 2014 and beyond, agencies are going to "build in more permanent reductions to budget baselines to make sure they're able to operate at sequestration levels for years to come." That could mean layoffs for federal employees instead of the furloughs that were used in 2013, he said, and contracts could be reduced in scope. If federal employment is reduced, that could mean less demand for computer hardware and software. "Traditional IT services are going to be pressured," as agencies pursue consolidation initiatives with an eye to saving money.

McCann worries most about IT firms whose government business amounts to five percent or less of their net revenue. Those firms "might walk away from wanting to do business with the government," deciding it's not worth the hassle of trying to make sales forecasts into a continuously changing budget climate. "The reason that's particularly concerning is that you're losing valuable, innovative solutions that the government needs at time like this," McCann said. "When you're trying to focus on saving money, it's not the time to be shooing companies away from the federal market"."

The Defense budget is facing a steeper decline than civilian agencies, with the rapid decline of overseas contingent funding compounding sequestration cuts. Defense Secretary Chuck Hagel warned senators in a July 10 letter that mandatory reductions would require, "disproportionately large cuts" to investment and modernization. At the same time, Plexico observed that there are a few sweet spots in the strapped Pentagon budget, including cybersecurity and unmanned aerial vehicles. Contractors shouldn't expect general growth, he said, but they should be looking to position themselves for growth opportunities that emerge.

The jury is still out on whether companies have weathered the storm, or if the worst is yet to come. "I have not gotten the sense from any of the companies that [sequestration] was as bad as they thought it could be or expected it to be," Plexico said.

McCann added that firms are ultimately most concerned about the lack of clarity coming from the government and appropriators. "They're waiting for the hammer to drop" in 2014 and in 2015, she said.