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Looming Sequestration’s Potential Impact on the Air Force and Navy

The hot topic of budget sequestration that has been simmering all summer continues to heat up. We have been focusing efforts this week looking at the latest Office of Management and Budget (OMB) report that was released last Friday outlining the impact of potential budget sequestration on federal agencies. This entry will focus on defense – namely Air Force and Navy.
The OMB report, required under the Sequestration Transparency Act of 2012 (STA) signed by the President in early August, was intended to provide Congress with an impact assessment at the program, project, and activity (PPA) level for each agency. What OMB was able to provide, albeit a week past the STA deadline, was a much more basic assessment at the budget account level, including the top-line FY 2013 reductions by budget account and sequester/exempt classifications by budget account. 
The Budget Control Act (BCA) of 2011, the law that started all the latest sequestration wrangling, established a uniform percentage reduction across “all programs, projects, and activities within a budget account” unless otherwise exempted. According to the OMB report, under the assumptions outlined by the STA, the sequestration would result in a 9.4 percent reduction in non-exempt defense discretionary funding. Sequestration would also require a 10 percent reduction to non-exempt defense mandatory programs. These rates would be applied to defense accounts related to the FY 2012 discretionary base of $580 billion and mandatory base of $679 million respectively.
OMB provides very limited detail about each budget account in the report. Yet, there is still some useful information that shows how sequestration would impact these two departments.
Notable Exemptions and Sequestration Amounts
The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) as amended, identifies programs that are exempt from sequestration and subject to special rules. Further, an administration cannot choose which programs to exempt or what percentage cuts to apply. The percentage cuts in OMB’s sequestration report and the identification of exempt and non-exempt accounts reflect the requirements set forth in the BBEDCA. 
The notable exemptions (>$200m) and sequestration amounts (>$200m) per budget account for DHS are shown below.

Dept./Bureau
Budget Account
Total Budget Amount ($M)
Exempt Amount ($M)
Sequestration Amount ($M)
Air Force
 
 
 
 
Military Personnel 
Military Personnel, Air Force 
29,971
29,971
-
 
National Guard Personnel, Air Force 
3,147
3,147
-
 
Reserve Personnel, Air Force 
1,747
1,747
-
 
Medicare-Eligible Retiree Health Fund Contribution, Air Force 
1,442
1,442
-
 
Medicare-Eligible Retiree Health Fund Contribution, National Guard Personnel, Air Force 
277
277
-
Operation and Maintenance 
Operation and Maintenance, Air Force 
47,056
1,659
4,267
 
Operation and Maintenance, Air National Guard 
6,388
254
577
 
Operation and Maintenance, Air Force Reserve
3,501
84
321
Procurement 
Other Procurement, Air Force 
24,204
525
2,226
 
Aircraft Procurement, Air Force 
21,936
550
2,010
 
Missile Procurement, Air Force 
7,380
275
668
Research, Development, Test, and Evaluation 
Research, Development, Test and Evaluation, Air Force 
 
35,658
6,758
2,717
Revolving and Management Funds 
Working Capital Fund, Air Force 
 
24,963
24,883
8

 

Dept./Bureau
Budget Account
Total Budget Amount ($M)
Exempt Amount ($M)
Sequestration Amount ($M)
Navy
 
 
 
 
Military Construction 
Military Construction, Navy and Marine Corps 
3,618
538
290
Military Personnel 
Military Personnel, Navy 
28,341
28,341
-
 
Military Personnel, Marine Corps 
14,316
14,316
-
 
Reserve Personnel, Navy 
2,037
2,037
-
 
Medicare-Eligible Retiree Health Fund Contribution, Navy 
1,409
1,409
-
 
Medicare-Eligible Retiree Health Fund Contribution, Marine Corps 
880
880
-
 
Reserve Personnel, Marine Corps 
672
672
-
Operation and Maintenance 
Operation and Maintenance, Navy 
50,979
5,330
4,291
Procurement 
Other Procurement, Navy 
7,656
289
692
 
Aircraft Procurement, Navy 
23,837
5
2,240
 
Shipbuilding and Conversion, Navy 
22,774
-
2,141
 
Procurement, Marine Corps 
3,943
45
366
 
Weapons Procurement, Navy 
3,926
4
369
 
 
 
 
 
Research, Development, Test, and Evaluation
Research, Development, Test and Evaluation, Navy 
19,120
221
1,777
Revolving and Management Funds 
Working Capital Fund, Navy 
25,488
25,488
-

Implications
As was widely expected across the industry, the key areas impacted by sequestration would be Operation and Maintenance and the procurement of aircraft, shipbuilding and weapons systems. Research, Development, Test and Evaluation activities would also be significantly impacted. Personnel areas are exempt.
While it will take time for the details to fully come to light on which specific programs would be impacted, if sequestration were to occur what it would mean is a natural disruption to those O&M and procurement contracts. In addition, some contracts that may duck the sequestration bullet in these areas may experience collateral damage of delays, postponements and scope reductions. At this point, without detailed PPA information, that may be as precise as we can be.

 

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