The Good News and Bad News about the Government Shutdown

tim larkins small pic. 67x84by Tim Larkins, Senior Manager, Market Intelligence

The bad news:  The shutdown cut about 0.6% off forecasted 4th quarter GDP growth. An estimated 100,000 jobs were lost across the country (it is unclear how many of those will be recovered), and the shutdown pushed consumer confidence to its lowest point in 8 months.

The good news:  Government spending will continue. The main hit was felt by services contractors, because they can never recoup lost billable hours from those 3 weeks. However, the IT products that agencies needed a month ago will still be needed in a month, so they’ll still be purchased. Albeit forecasts are off… but at the end of the day IT product companies will still realize the revenue.

The most recent legislation suspended the debt ceiling until February 7, and the Continuing Resolution (CR) funds government discretionary budgets at an annualized level of $986 billion until January 15. There is no reason to believe that a budget deal will be reached, so we can expect further last minute CRs to occur throughout the year. Hopefully we’ll see an omnibus that will at least provide appropriations for certain agencies – so that those agencies will no longer have to reference FY12 or FY13 budget numbers and agencies can begin new programs.

But regardless of whether we see more CRs or an omnibus, you can expect agencies to remain hesitant to make large purchases (as they were last year). The $986 billion is $19 billion above the post sequestration Budget Control Act (BCA) caps – so unless Congress amends the BCA, we’ll be going through another round of sequestration again in FY14. I expect we’ll see a flurry of RFP activity in March/April again as agencies will want to hold on to funds and not obligate them until August/September (they know the contracting process takes 5-6 months).

A Look at the Next Two Weeks…And Beyond

Steve Charles_headshot _7-23-2013_65x85by Steve Charles, Co-founder and Executive Vice President

With the Washington Nationals now eliminated for sure from this season’s baseball playoffs, Washington the city and the market can focus fully on handicapping the possibility of a government shutdown next week.

Just in case, the White House issued a memo this month on agency operations during a “potential lapse in appropriations,” the proper word for shutdown. It’s two pages, followed by a 12-page attachment on details of contracting, grants administration, and payment processing during a lapse. In essence, for the government to spend anything, it would have to be for “excepted” activities, mainly essential and emergency requirements, lest an agency fall out of compliance with the Antideficiency Act.

But let’s presume Congress will find some way of avoiding a shutdown. For sales planning purposes, how else can you think? A shutdown wouldn’t likely last more than a few days anyhow. Less clear is how much spending authority your federal customers will actually have in terms of both dollars and the authority itself.

If you have a scholarly bent, the Government Accountability Office has long tomes (GAO Red Book) online covering appropriation law, dating back to the Civil War era. But for more immediate practical purposes, pay attention to the term of a continuing resolution. In theory they could do it a couple of days at a time. In practice, the term will revolve around the Obamacare defunding gambit and the debt ceiling deadline around October 17.

Regardless, agencies only have spending authority at the yearly rate, prorated for the months approved. So an agency with an annual budget of $1 million in an account would have authority to spend only $250,000 during a three-month CR.

But like your Swiss wind-up watch, this year has complications. Namely, sequestration, which at this writing is still in effect. Will the CR live within the 2014 Budget Caps of the Budget Control Act (Sequestration levels) or will it ignore them and apply the sequestration holdbacks later in the year?  Expect some agencies to remain cautious, others will try and spend what they can early and worry about holdbacks later.

When approaching government customers, remember any spending under a continuing resolution, aggressive or conservative, must be mappable back to an authorized program funded by appropriated dollars in the previous year. Agencies can’t initiate new programs under a CR, but they can engage better ways to do what is already under way. That’s the smartest way to position your offerings now.

Beyond the current budget vicissitudes, here are a few of the long-term trends we’ll be staying on top of in the next year:

  • How  to sell products in a services-oriented environment. Infrastructure as a Service, utility-based computing, application sharing ⎯ these are all changing how the government looks at IT. Perhaps this by-the-month mode of buying is at some level driven by unpredictable spending authority.
  • Extreme price sensitivity, seen in the growing use of lowest-cost, technically acceptable procurements, shared services, and in the growing practice of analyzing competing contract vehicle prices. Keep an eye open for the “prices paid database” promised by OFPP.
  • Development of rules and practices to fill out the policies designed to ensure a safe electronics supply chain. Our big concern is whether the government is prepared to pay what it costs for tested, certified parts through bonafide channels.
  • Expect  more pressure to participate in strategic sourcing programs. The government wants to pay less and we need to show them how we’re lowering our costs of sales.

Hoyer Pessimistic about FY14 Budget Compromise

photo_Rick_65x85by Rick Antonucci, Analyst

In a press interview, Minority Whip Steny Hoyer, representative from Maryland, stated that he did not believe there was any chance Congress would pass a budget before October. The budgets passed by the Republican led House and the Democrat led Senate have a $91 Billion disparity and Hoyer says that the Republicans are unwilling to go to conference until the Senate reduces their budget to match that of the House. He feels certain that the ongoing stalemate will lead to the next fiscal year starting with a continuing resolution (CR). Additionally, this will keep the current funding levels unchanged from FY13 which mean sequestered levels will likely remain intact for the time being. This setback reflects the longstanding impasse within Congress over the federal budget as Congress hasn’t passed a formal budget since 2008, instead relying on series of continuing resolutions and appropriations bills to keep the government operating. The President’s budget attempts to remedy this disparity with a plan that reduces the deficit while still fully funding each new initiative.

So what does this mean for you as we head into FY14? Since a continuing resolution’s sole purpose is to keep the government from shutting down, budget levels do not change and there are no new starts. Most agencies under the current CR are operating under FY12 levels. Agencies in this situation are usually more hesitant to pursue major initiatives or make strategic purchases, instead focusing on day to day operations. There are exceptions, however, DOD, DOJ, USDA, NASA, DHS, and DOC will have some more flexibility in creating new programs as they have been granted appropriations bills to provide funding beyond the CR.

Is there an end in sight? Not until there can be some kind of compromise between the House and Senate proposed budgets. However, just because there have been severe cuts due to sequestration does not mean that there is not money out there. While new program starts are scarce during continuing resolutions, opportunities exist within operations and maintenance budgets, particularly in the area of refreshes and license renewals. Also, expect some agencies to seek Congressional approval to shift money around to pursue their high priority initiatives.

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