Business leaders leave D.C. with hopes on sequester dimmed

By Mary Shinn
Cronkite News

WASHINGTON – A delegation from the Arizona Technology Council came to Washington this week hoping to persuade Congress to stop automatic spending cuts that would hurt state defense contractors and could lead to layoffs.

But council President Steve Zylstra came away from their meetings with Arizona lawmakers with the feeling that the so-called “sequester” may be unavoidable.

“Republicans are not going to give unless the president comes to the table with some spending cuts,” Zylstra said.

At stake are as many as 35,000 defense-related jobs in Arizona and thousands more jobs in health care and other sectors that analysts say could be lost if the full sequestration cuts – $1.2 trillion in federal spending over nine years – are allowed to take effect.

Sequestration was called for in the 2011 budget deal in which Congress and the White House pledged to find that level of cuts or taxes, or have the cuts take effect automatically. About half the cuts would be in the defense budget and half in domestic spending.

The cuts were originally set to take effect on Jan. 2, but a last-minute deal pushed them back to March 1. With no new deal on the horizon, Congress adjourned Friday and is not scheduled to return to Washington until Feb. 25, just days before the cuts would kick in.

“Sometimes I bang my head on the desk thinking about Congress,” said Steve Macias, the owner of Pivot Manufacturing in Phoenix.

Macias is a defense subcontractor, the type of business that experts say could be among the hardest hit by sequestration.

Even if Congress comes up with a last-minute deal to avert sequestration – or stop it shortly after it takes effect – Macias said they have already done damage to the industry by creating an environment of uncertainty, making contracts difficult to secure.

While Congress may be used to such last-minute deals, the continuous delays are making large contractors more cautious, he said.

“People are absolutely pulling back,” Macias said.

Macias said he began pursuing more commercial work when the war in Iraq began winding down, and that commercial contracts kept sales at his small machine shop steady between 2010 and 2011.

But not every subcontractor is as well-prepared.

Dan Stohr, a spokesman for the Aerospace Industries Association, said large companies faced with reductions in federal spending will bring contracting work in-house as they look to cut costs. That means less work for subcontractors, who are often less able to absorb the loss, he said.

“Smaller companies are very nimble and very integrative, but they are operating on very thin margins,” Stohr said.

These businesses will be hit harder because they can’t diversify as easily as large companies, they don’t employ a large staff to strategize for changing markets and they don’t have large cash reserves, Stohr said.

It was Stohr’s association that funded the George Mason University study of job losses linked to Defense Department cuts. That report said up to 35,000 jobs in Arizona were at stake, giving Arizona the ninth-highest number of defense-related job losses in the country.

Federal agencies themselves are predicting dire consequences if the cuts take effect. In letters this month to the Senate Appropriations Committee on the impact of the sequester, 20 agencies and departments predicted furloughs, reduced benefits to needy Americans, curtailed services, layoffs and canceled contracts.

Dan Henderson agrees that there will be an impact. Henderson, the economic development director for the city of Gilbert, said that if the Defense Department cut all nonessential spending by about 9 percent across the board, as called for, jobs would be lost.

But Henderson said he doubts job losses would be seen on the scale projected in the George Mason study.

He said many companies have been working hard to diversify in the face of the sequester. He pointed to Orbital Sciences in Gilbert, which recently expanded its communication satellite program, as an example of this trend.

Orbital has worked to boost the commercial side of its business, said spokesman Barron Beneski. But he said the company remains wary of the sequester.

“We, like all companies, are watching it closely,” he said.

Scott Selle, who was in Washington this week with the Arizona Technology Council delegation, said he was surprised Congress and the White House had let things get this far.

Selle, executive vice president of mid-sized defense contractor Nammo Talley in Mesa, said the sequester is undesirable for both the government and businesses. But after their meetings with the state’s lawmakers in Washington, he said, it seems to him sequestration is “a coin toss.”

“My grave concerns that the sequester would not be implemented were not resolved by my discussions,” he said.