Cliff-Hanger: Budget Deal’s IT Benefits Are Murky

For IT vendors in the federal market, the saga of the 2011 Budget Control Act presents some slight benefits in the very short run, even though reduced federal spending may have a longer-term impact.

The BCA set the stage for a 10-year program to control the rate of federal spending and reduce the national deficit that included a sequestration mechanism of mandatory budget cuts that would kick in if Congress and the Obama Administration failed to reach a long-term spending agreement.

While both sides reached an accommodation on federal taxes on Jan. 1, the sequestration issue — also known as the “fiscal cliff” — went unresolved. Instead, the tax bill contained provisions to delay the fiscal cliff decision by extending the time for action from early January to early March.

The good news for federal contractors, including IT providers, is that the delay allowed agencies to obligate contract funds based on current funding levels for two more months, thus granting contractors some additional revenue security, said Deniece Peterson, director of industry analysis at Deltek. The extension also gave agencies more time to plan for eventual cuts. On the downside, she noted, the delay continued the uncertainty for both agencies and contractors on what budget levels will be for fiscal years 2013 and 2014.

To accommodate the two-month delay, Congress and the administration agreed to lower the bar for sequestration cuts in fiscal 2013 from US$109 billion to $85.3 billion, compared with what was appropriated in fiscal 2012. Cuts will be shared evenly between defense and non-defense programs, according to a Bloomberg Government analysis of the tax bill. “Unless Congress makes a change before March 1, the sequester would begin,” Brian Friel, federal business analyst at Bloomberg Government, told the E-Commerce Times.

Sequestration’s Long Shadow

The tax bill contained several convoluted provisions regarding sequestration. The national security segment calls for a $42.7 billion cut in defense programs and activities, which could include associated IT spending, but the civilian — or non-defense cuts — only involve a $27.6 reduction in actual program and activity spending.

The rest of the civilian side cuts come from a $15 billion hit to Medicare and other mandatory outlays. That adds up to the $85 billion figure, which seems pretty straightforward, but another provision could force defense related agencies to lop off another $12 billion in spending. For deficit hawks displeased with the lowering of the bar on cuts, the bill includes some tax and other provisions designed to offset the sequestration adjustments. The arcane calculations for these provisions are close to incomprehensible for anyone other than legislative wonks.

Whether any of the sequestration provisions will even be imposed will depend on what Congress and the administration cobble together before the March deadline comes into play. Complicating matters is the expiration in March of a continuing resolution, which funded the federal government only through the first half of fiscal 2013, and the Republican threat to use the expiring debt ceiling measure as a vehicle to lock in budget-tightening measures.

Whatever short-term benefits arise from the sequestration delay, the inability of political leaders to come to grips with overriding budget issues is vexing — at the least — to business and technology groups.

“The current continuing resolution on federal spending is set to expire not long after the sequestration deadline. These two deadlines — without solutions in hand — continue to provide uncertainty for those in the tech sector that provide goods and services to the federal government, as well as those who participate in federally funded research and development,” Tom Gavin, vice-president for external affairs at the Information Technology Industry Council , told the E-Commerce Times. ITIC and similar groups urged the White House and Congress to address the deficit issue without resorting to the sequestration strategy.

“Sequestration was never really intended to happen. It was Congress’ and the administration’s way of forcing austerity, and even though it’s clear that all parties want to avoid formal sequestration the spirit of sequestration will remain. Budget cuts will happen — the only questions are around the mechanism and timeframe for those cuts,” Peterson told the E-Commerce Times.

“Will cuts be executed in an across-the-board, uniform way or will they be more controlled through the traditional appropriations process?” she said. “After the public relations nightmare that sequestration became, I’m inclined to believe that we will see another continuing resolution that takes us through the remainder of fiscal 2013, and establishes fairly aggressive budget caps similar to the Budget Control Act, but allows agencies the ability to determine where to implement those cuts in a way that minimizes risk to agency operations and mission.”

Dealing With Sequestration

One major defense contractor — which also provides significant IT support to federal defense and civilian agencies — is hoping that the two-month delay might result in jettisoning the whole idea.

“We are encouraged by the actions of Congress and the administration to delay the implementation of sequestration with the passage of the American Taxpayer Relief Act. We hope this is the first step towards permanent elimination of the automatic across-the-board sequestration cuts that threaten to weaken virtually all government programs and operations, damage our national security, and adversely affect our industry,” said Lockheed Martin in a corporate statement. “Until sequestration is permanently eliminated, there will be an overhang on our industry that stifles investment in plant, equipment, people, and future research and development essential to the future health of our industry,” the company said.

During the two-month interim, contractors “should be hustling to determine the worst case scenario for their affected programs and talking to agency contacts to learn which budget accounts fund their contracts and the potential percentage cuts to the relevant accounts,” Peterson advised. Contractors should also find out the priority placed on a contract, including options and modifications, to learn if they will likely be funded even under sequestration, and possible options or modifications for funding between January and March to avoid the sequestration ax.

“While it is a relief that some of the larger issues have been addressed with this legislation, it does not change the height of the cliff for contractors — it simply buys them more time to find a better-fitting parachute,” Peterson said.

The Federal Buzz: Tax Benefits for IT; Privacy Standards

The federal tax bill enacted in early January included a provision that benefits the IT industry. The research and development tax credit, which had expired at the end of 2011, was retroactively extended through 2013. The extension was supported by IT industry groups.

“The R&D tax credit is truly a skilled-jobs credit, with approximately 70 percent of the benefits attributable to salaries of educated professionals performing U.S.-based research. This credit leads to more innovations, patents, businesses, and jobs, and, as a result, tax revenue,” said Robert Hoffman, senior vice president of the Information Technology Industry Council.

The federal Chief Information Officers Council has released a set of recommendations concerning IT privacy which were developed in support of the federal Digital Government Strategy. Issued last May, the strategy is designed for “harnessing the power of digital technology and enabling citizens and the federal workforce to securely access government information, data, and services anywhere, anytime, and on any device,” the privacy document said.

The recommendations should enable federal agencies “to identify and account for such data, to analyze and address the privacy and security risks that may be associated with such data, and to provide individuals with the knowledge, assurance, and trust that their data will be collected, maintained, used and shared in a manner consistent with their expectations,” said the council.