On August 1, 2012, Acting OMB Director Jeffrey Zients and Deputy Secretary of Defense Ashton Carter testified before the House Armed Services Committee on how OMB and DoD intend to implement sequestration – i.e., the mandatory budget cuts currently scheduled to occur on January 2, 2013, pursuant to the Budget Control Act of 2011.
Director Zients’ testimony was anxiously awaited in the hopes that he would clarify how OMB intends to apply sequestration at the “program, project, or activity” level. Generally speaking, sequestration requires that OMB apply uniform cuts to each nonexempt budget account, and that this same percentage reduction then be evenly applied to each “program, project, or activity” within each such nonexempt account. This clarification of how OMB intends to construe the phrase “program, project, or activity” is necessary to determine the level at which the cuts will occur, and in turn, to predict how particular contracting opportunities would be affected by sequestration.
An example – while admittedly a little simplistic – helps demonstrate this point. Imagine that a nonexempt DoD project subaccount is intended to fund contracts at Site A and Site B in fiscal year 2013, each valued at $1,000,000, thus giving that project subaccount a $2,000,000 balance. According to Secretary Carter’s testimony, DoD expects that sequestration will result in a 10 percent reduction from each nonexempt account, and by extension, from each program, project, or activity within that account. But absent further guidance from OMB, it is not clear how that 10 percent reduction would impact the individual contracts in our theoretical subaccount.
At one end of the spectrum, OMB could require that the reduction flow down to the individual contract level, meaning that the 10 percent ($200,000) reduction from our theoretical subaccount would need to be evenly applied among Sites A and B, leaving each with a budget of $900,000. While this would be an administrative nightmare to implement across the entire universe of DoD contracts, it seems consistent with the general purpose of the threatened sequestration – i.e., to evenly and inflexibly spread the pain of the budget cuts so that both political parties have a vested interest in reaching the budget targets set under the Budget Control Act of 2011 and thereby avoiding sequestration.
At the other end of the spectrum, OMB could direct that the reduction be applied at the program, project, or activity subaccount level, but not at the individual contract level. While our theoretical subaccount would see the same 10 percent reduction from $2,000,000 to $1,800,000 as in the example above, here the agency would have discretion of how to divide that remaining $1,800,000 for the work at Sites A and B. For instance, the agency could fully fund the work at Site A at $1,000,000, and fund the work at site B at only $800,000.