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77–560 2012

SEQUESTRATION: THE THREAT TO SMALL 

BUSINESSES, JOBS, AND THE INDUSTRIAL BASE 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

SEPTEMBER 20, 2012 

Small Business Committee Document Number 112–087 

Available via the GPO Website: www.fdsys.gov 


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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Sam Graves ..................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Hon. Mike McCord, Principal Deputy Undersecretary of Defense (Comptroller), Washington, DC ..................................................................................... 4 

Stephen S. Fuller, Ph.D., Dwight Schar Faculty Chair and University Professor Director, Center for Regional Analysis, School of Public Policy, 

George Mason University, Arlington, VA ........................................................... 16 

ML Mackey, Chief Executive Officer of Beacon Interactive Systems, Cambridge, MA ............................................................................................................ 17 

Laurie Moncrieff, President, Adaptive Manufacturing Solutions, Burton, MI ... 20 

Mark Gross, Founder and CEO, Oak Grove Technologies, Raleigh, NC ............ 22 

APPENDIX 

Prepared Statements: 

Hon. Mike McCord, Principal Deputy Undersecretary of Defense (Comptroller), Washington, DC .............................................................................. 31 

Stephen S. Fuller, Ph.D., Dwight Schar Faculty Chair and University 

Professor Director, Center for Regional Analysis School of Public Policy, 

George Mason University, Arlington, VA ................................................... 36 

ML Mackey, Chief Executive Officer of Beacon Interactive Systems, Cambridge, MA ..................................................................................................... 46 

Laurie Moncrieff, President, Adaptive Manufacturing Solutions, Burton, 

MI ................................................................................................................... 52 

Mark Gross, Founder and CEO, Oak Grove Technologies, Raleigh, NC ..... 58 

Questions for the Record: 

Committee on Small Business Questions for Mr. McCord and Mr. 

Ginman .......................................................................................................... 60 

Answers for the Record: 

Answers from Mr. McCord and Mr. Ginman ................................................. 64 

Additional Materials for the Record: 

Small Environment Business Action Coalition Letter for the Record ......... 73 

Center for Security Policy Testimony for the Record .................................... 76 


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HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MIKE MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

ROBERT T. SCHILLING, Illinois 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

JANICE HAHN, California 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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SEQUESTRATION: THE THREAT TO SMALL 

BUSINESSES, JOBS, AND THE INDUSTRIAL 

BASE 

THURSDAY, SEPTEMBER 20, 2012. 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 1 p.m., in room 2360, 

Rayburn House Office Building. Hon. Sam Graves (chairman of the 

Committee) presiding. 

Present: Representatives Graves, Mulvaney, Herrera Beutler, 

West, Ellmers, Hanna, Vela ́zquez, Schrader, Clarke, Chu, and 

Hahn. 

Chairman GRAVES. I will call the hearing to order. And I want 

to say good afternoon to everybody, and thank you all for being 

here today. 

We are all acutely aware that the current level of federal spending cannot be sustained. Our national debt already exceeds $16 

trillion and it is continuing to grow. Federal debt held by the public 

will reach 73 percent of GDP by the end of the fiscal year, which 

is the highest level since 1950 and about twice the share that it 

measured at the end of 2007, before the financial crisis and the recent recession. 

This type of spending absolutely cannot continue. We all hoped 

that the ‘‘Super Committee’’ would agree on a thoughtful plan to 

curb government spending to ensure America’s fiscal security. Unfortunately, this did not occur and today we are facing the possibility of an indiscriminate, across-the-board cut on January 2, 

2013, which is also known as sequestration. 

I am committed to cutting spending and getting the nation back 

on a fiscally sound course, and I am willing to make tough decisions. But I question the wisdom of using sequestration’s crude 

cuts rather than deliberate, targeted cuts. I think we all agree that 

the patient is sick, but I would rather prefer that the surgeon use 

a scalpel rather than a meat cleaver. The sweeping, unfocused cuts 

of sequestration are certain to have unintended negative consequences, including for America’s small businesses. 

Earlier this week, I heard from Perry Castro, the president and 

CEO of Allied Associates International, Inc. This year, SBA named 

Mr. Castro the Virginia Veteran Small Business Champion of the 

Year. He told me that if sequestration becomes a reality, it would, 

in one fell swoop, destroy his company. I would like to enter his 


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full statement for the record if that is okay. And without objection, 

so ordered. 

Unfortunately, Mr. Castro’s story is not unusual. We are here 

today, small firms that will be uniquely harmed by sequestration. 

It is estimated that over half of the private sector jobs lost to sequestration, which is about 960,000 jobs, are going to be small 

business jobs. And surely, I do not think that is what Congress intended. 

To better understand the effects of sequestration, today we are 

going to focus on government contracting and the Department of 

Defense (DoD) for three reasons. First, DoD spends more on government contracts than any other agency. Second, the Small Business Act places special emphasis on the role of small businesses 

and defense contracting since a strong small business segment is 

vital to the health of our industrial base and our national defense. 

And third, DoD has taken the greatest cut of all the agencies, as 

an additional $55 billion will be cut from DoD’s budget in January, 

and that is on top of the $487 billion previously cut this Congress. 

Today’s witnesses will discuss how sequestration may irrevocably 

harm the industrial base, especially in areas such as research and 

development, manufacturing, and aerospace. And we will talk 

about the lack of certainty that small businesses are already facing 

due to sequestration, at the prime and subcontract levels. And they 

will also talk about the loss to the government. Without strong 

small business participation in procurement, we will have less competition and innovation in contracting, which will result in higher 

prices to the government. 

However, while we are all talking about the DoD, all agencies 

are facing very similar challenges—unfocused cuts rather than 

smart cuts. For example, this Committee identified about $100 million in potential savings to the SBA, and we previously shared that 

with the Super Committee. However, the $75 million SBA will lose 

due to sequestration lacks focus and may put some very key lending programs at risk. The General Services Administration, which 

is an agency not exactly known as of late for its sound fiscal decisions, is only going to lose $21 million, with a quarter of that coming from the very inspector general who uncovered the GSA spending scandals. 

As we seek to return our fiscal house to order, I believe today’s 

hearing is going to help form the debate. And again, I want to 

thank all of our witnesses for being here. Today, we are going to 

do this in two panels, and I very much look forward to hearing 

your testimony. And with that I will turn to Ranking Member 

Vela ́zquez for her opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

When the Budget Control Act of 2011 was enacted last year, sequestration was included as an incentive for action. Unfortunately, 

the Super Committee was not so super and was unable to agree on 

a deficit savings plan. 

We are now facing the very sequestration that we had hoped to 

avoid. Beginning in January, it will become all too real as more 

than $100 billion in indiscriminate cuts take effect. This outcome 

should not be a surprise to anyone as it is simply the result of a 

process that has been held hostage by a few unwilling to have an 


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open mind on fiscal issues. By not agreeing on a balanced deficit 

reduction approach, we have chosen to limit our options. 

The consequences of this path are seen in the businesses we will 

hear from today. They are rightfully concerned about losing defense 

contracts and the impact it will have on their companies and employees. They have worked hard to build their businesses, and the 

current situation is simply unfair to them. Make no mistake, small 

firms will be among those hit hardest when these cuts take effect. 

Indeed, it has been estimated that for every dollar spent in the defense supply chain, 70 cents flows to small companies. These firms 

developed their business model around what they thought was a 

reliable customer, the federal government. They now face the very 

real prospects of revenue shortfalls and layoffs due to mistakes 

made in Washington. 

Of course, the impact is not just limited to businesses that contract with the federal government. Small retailers, like gas stations 

and grocers, will be hard hit by the ripple effect as unemployed 

workers scale back on consumer expenditures. Indeed, bipartisan 

estimates suggest that as many as one million jobs could be lost 

and we could see gross domestic product reduced by one-half percent. Beyond losing customers, entrepreneurs will be deprived of 

tools and resources they have relied on to grow, whether it is manufacturing initiatives at the Department of Commerce, loan programs at the Department of Agriculture, or counseling services at 

the SBA. 

So yes, it is clear that no one likes sequestration, but it is the 

path we are on. And you cannot cut spending without cutting the 

very benefits that many of our constituents enjoy every day, whether they are defense contractors, franchise owners, or the mom and 

pop restaurants on our street corners. 

For these small businesses, this makes little sense, and I do not 

blame them for their frustration. They would like a government 

that is able to problem-solve without making matters worse and 

doing so in a manner that is not so closed-minded. We cannot help 

small businesses if we do not put all the options on the table. And 

that means everything, even if you sign a pledge to Grover 

Norquist. My first priority is to small businesses, and that means 

being part of a give and take for the better of this nation. 

I yield back, Mr. Chairman. Thank you. 

Chairman GRAVES. Thank you. All right. We will start with our 

first witness, who I would like to welcome to the Committee, the 

Honorable Mike McCord, who is the principal deputy undersecretary of defense and has been in that role since January 2009. In 

this capacity he provides advice and assistance to the secretary, the 

deputy secretary, the undersecretary on budgetary, fiscal, and financial management matters. While Deputy Undersecretary 

McCord will be providing the DoD’s testimony, he is also joined by 

Mr. Richard T. Ginman, who is the director for defense procurement and acquisition policy, and he reports directly to the undersecretary of defense for acquisition technology and logistics. Mr. 

Ginman will be able to assist us on some of the more contract-detailed type questions. 

So with that, Undersecretary, I look forward to your testimony. 


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STATEMENT OF MIKE MCCORD, PRINCIPAL DEPUTY 

UNDERSECRETARY OF DEFENSE 

Mr. MCCORD. Chairman Graves, Ranking Member Vela ́zquez, 

members of the Committee. Thank you for this opportunity to discuss the impact of sequestration on the DoD. 

As you said, I am here today representing the Office of the 

Comptroller, which has the overall lead in dealing with sequester 

matters at the DoD, and joining me is Dick Ginman, director of Defense Procurement and Acquisition Policy. His organization is responsible for contracting and for implementing our small business 

policy through our contracts. Mr. Ginman and I have submitted a 

joint statement for the record that in interest of time I will summarize briefly, and I ask that our written statement be made part of 

the record. 

As you know, Secretary Panetta has said for months that sequestration would have devastating effects on the department and on 

national security. He urged Congress to avoid sequestration by approving a comprehensive and balanced deficit reduction package 

that the president can sign. 

As required by the Sequestration and Transparency Act of 2012, 

the Office of Management and Budget transmitted a report to Congress last week showing the impact of sequester programs across 

the department—across the federal government that is, including 

defense. That report shows that national defense programs will be 

reduced by almost 55 billion in FY 2013 by sequester, which will 

translate to a 9.4 percent cut. 

If allowed to go into effect, the lowering of discretionary caps in 

the out years would result in reductions of a similar amount each 

year from FY 2014 through FY 2021. These reductions would force 

us to change the new defense strategy that the administration introduced just a few months ago. The potential sequester would 

apply to both the base defense budget and to overseas contingency 

operations funding. The only exception is military personnel, which 

the president has exempted from the FY 2013 sequester. However, 

other DoD budget accounts will have to make up the slack for that 

exemption. Moreover, the department has little flexibility in determining where to take these cuts, the remaining cuts, which leaves 

us with limited ability to prioritize. 

We are particularly concerned that funds to support our troops 

in Afghanistan are subject to sequester under the law. We would 

endeavor to protect these wartime operating budgets as much as 

possible; however, protecting these wartime funds from sequester 

would force us to make deeper reductions in other areas, such as 

civilian personnel funding, possibly including a partial hiring freeze 

or unpaid furloughs, which would reduce our capability to perform 

other important missions. Military families and retirees would also 

be affected through cuts to base support services and to maintenance of our facilities. Commissary hours could be reduced. Funds 

for the Defense Health Program would be sequestered resulting in 

delays in payments to service providers and potentially some denial 

of service to retirees and dependents. 

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questration would also lead to disruption of DoD’s investment programs. As outlined in OMB’s report there would be the 9.4 percent 

reduction in each of the accounts that fund our investment in new 

technology and in facilities through procurement, research and development, and military construction. 

We were asked today to address the consequences of sequestration on the small business community specifically. In response, we 

would say that DoD is committed to ensuring that these essential 

business partners have their fair share of the contracting dollars. 

When the pool of available resources is diminished, as it would be 

under sequester, our ability to partner with small business is going 

to be likewise diminished, however. 

This does not alter our commitment to small business or change 

any of our small business contracting goals, but sequestration 

would reduce our overall budget, forcing us to reduce purchases 

from businesses both large and small. So 9.4 percent less money 

means we would in general buy 9.4 percent less of everything. We 

cannot devise a plan that would eliminate or even substantially 

mitigate these sequester impacts. It was designed to be an inflexible policy that was never intended to be implemented. It was a 

prod to Congress to devise a balanced comprehensive package to reduce the deficit. If implemented, sequester would be devastating to 

DoD and to every other federal agency. The best outcome for the 

DoD and for private companies large and small is for both houses 

of Congress to enact fiscal changes the president will sign, which 

will put a halt to the implementation of this inflexible law. 

Mr. Chairman, this concludes our opening statement, and we 

would welcome your questions. 

Chairman GRAVES. Thank you, Undersecretary. 

I am going to turn to Mr. West and let him open up for questions. 

Mr. WEST. Thank you, Mr. Chairman, and also Ranking Member. 

And thanks to the panel for being here and this is an issue that 

is very near and dear to my heart having spent 22 years in the 

United States Military and also being on the HASC and also being 

on this Small Business Committee. 

First of all, let me say that I did vote for the Budget Control Act 

of 2011. I did not believe that the Super Committee nor this thing 

about sequester was a good idea, but you know, people always talk 

about compromise and reaching across the aisle. So that is what 

I did. And so now I am here to talk about how do we resolve this? 

You know, when I continue to hear about taxes increased, I 

mean, we have to understand that if we increase taxes just on 

those top two tax brackets, you are only talking about $85 billion 

of new revenue per year. And when you look at our net interest on 

the debt that means that you will only fund that for 10 days. 

The federal government has a spending problem. We spend $4 

billion a year—I mean, a day. Four billion dollars a day. So when 

I look at this sequestration, while we are here talking about it, I 

want to give you the numbers from the congressional district that 

I represent in Florida’s 22. Total small businesses jobs lost due to 

sequestration. The estimation is 35,626. Total small business contract amount loss due to sequestration, $60,983,639. Total contract 


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amount loss, somewhere about 80 million. This is a big deal for us. 

We have, you know, places like Pratt Whitney. 

The first question I would like to ask is when we look at what 

is happening as far as the loss of these contractors? Are we taking 

into account that there may be some type of legal ramifications to 

these contracts being terminated that the DoD will have to then 

pay for? I mean, you are going to have an additional cost because 

of this. Correct? 

Mr. MCCORD. We would, I think we would endeavor to minimize 

that because it would not be our intention to, if it was avoidable, 

to terminate contracts; rather, we would try and—if we have within the scope of the contract the ability to buy say 10 percent less, 

we would probably do so. And we would have to scrutinize new contracts. The contracts we are already in, if the money is obligated 

and on the contract before January, it would not be affected. So I 

cannot say it is not possible, and I would ask Mr. Ginman to amplify it, but it would not be our intent to go reopen contracts if it 

is avoidable. 

Mr. GINMAN. The vast majority of our contracts are fully funded, 

fully obligated, dollars obligated on them at award. There are a 

few, particularly in the R&D world, that are incrementally funded 

but for product, fully funded. So this sequesterization reduces our 

budget authority. And so from an existing—and what that says is 

I have less money to spend going forward. There is no need for me 

to terminate an existing contract unless the product that was going 

to be delivered was now not needed into the future. But if the product continues to be needed, there is really no need for me to terminate it. What I need to do is to adjust my spending on a go-forward 

basis. 

Mr. WEST. So if on the 2nd of January this thing is not staved 

off, anything that goes into calendar year next year, if it is already, 

the contract has been awarded, there will be no affects on that contract? 

Mr. GINMAN. If I may, I will do it in two parts. 

For contracts that were awarded with FY 2012 current money or 

prior, I really do not think there will be an impact. If I have a contract that was awarded in FY 2013, since sequesterization affects 

all of—what goes into the denominator is all of the FY 2013 budget, if I put a service contract in place with equal spend and I spend 

through the first three months at that level, I would need to find 

a way through the last nine months of the fiscal year to, in fact, 

spend less on that contract. 

Mr. WEST. Now, with that being the case then, you know, the unpredictability for the workforce that is out there, you know, one of 

the things that concerned me when you look at the Warren Act, the 

Worker Adjustment and Retraining Notification Act, a lot of these 

notifications will probably need to start going out some time November, at the latest December, for a 2nd January kick-in. Of 

course, the Department of Labor sent out a recommendation that 

a lot of these businesses and the defense industrial base do not 

have to adhere to the law. Do you think that that will set them 

up for potential lawsuits down the road if they did not adhere to 

the Warren Act? 


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Mr. MCCORD. The first thing I want to say is the department, I 

think, has been—the secretary and the deputy have met with industry leaders and I think they have been clear. I am going to try 

and restate what they said, that we cannot be in the position of 

providing legal device as the DoD to corporations about their own 

relationships with their own unions and workforce. 

Mr. WEST. I understand, but the Department of Labor, which I 

also, I mean, is there no coordination between the DoD and the 

DoL for what they just sent out? I mean, I think that they can be 

setting up, you know, a lot of people that service the DoD for a 

really big pitfall if they are not careful. 

Mr. MCCORD. Well, the Department of Labor does have the responsibility and was speaking for the Executive Branch. And so we 

are deferring to them on that guidance. And I understand that not 

all corporations are satisfied with the Department of Labor’s position, but they are the person, they are the entity in the lead for 

us on that. 

Mr. WEST. If I could ask one more question, Mr. Chairman, if I 

could. 

Chairman GRAVES. Quick, yes. 

Mr. WEST. Yes. The key thing that I want to ask, do you think 

that if sequestration kicks in with our industrial base, especially 

manufacturing, the aerospace, the shipbuilding, and things of that 

nature, even weapons and permanent, will we be able to restart 

these industries down the road or will we maybe lose a technological and innovative advantage at some point? 

Mr. GINMAN. The manufacturing and industrial based policy office within AT&L has been and continues to pay a great deal of attention to the industrial base. They call it a sector-by-sector and 

tier-by-tier analysis, looking expressly at very low levels. What are 

the exact technologies and capabilities that we need? When we find 

that one is threatened, then we take action to attempt to protect 

it. We will continue, you know, that office will continue to do the 

analysis to ensure from an industrial-base perspective for the key 

technologies that we need, that we are looking to find ways to, in 

fact, protect them. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Chairman GRAVES. Ranking Member Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. McCord, as of September 6, Undersecretary Kendall was 

stating that he expects the DoD accounts to take an 11 percent cut. 

However, the report released by OMB last week projected at most 

10 percent decrease in funding. To what do you attribute the difference in the projected cut? 

Mr. MCCORD. Well, I guess I cannot be sure where Mr. Kendall 

got his, you know, all of us prior to the report coming out were 

using approximate numbers. It was common to say 10 percent, 11 

percent. Two things. First of all, we in the department tend to 

think almost exclusive in terms of relationship to the budget that 

we submitted and calculate differences from what our plan to do 

was in 2013 and the sequester report that OMB did was not done 

that way. It was compared to the CR. 

Second, as Mr. Ginman was describing, with respect to 2013, the 

amount of reduction across the entire 12 months is 9.4 percent, but 


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if you kind of look at the last nine months you would come with 

a figure close to what Mr. Kendall was using if you look at how 

you have to get that money out of less than a full year. 

Ms. VELA ́ ZQUEZ. Thank you. Small businesses do not have the resources that larger companies do, such as Lockheed Martin or Boeing. And they will not have the money to have the lobbyists to fight 

to keep their contracts. Given this inequality, how can you assure 

us and small businesses that their contracts will not be the first 

one on the chopping block? 

Mr. GINMAN. So I think the best answer I can give, what we buy 

is what we need for our war fighters. If there is something that we 

do not need, that will be what we stop spending on first. It is not 

going to be I need to protect large business or I need to protect 

small business. It will be I need to meet the requirements of the 

war fighter. 

So we will make our prioritization decisions based on what war 

fighters need. 

Ms. VELA ́ ZQUEZ. Well, one of the requirements are for DoD to 

comply with the 23 percent contracting goal for small businesses. 

And, you know, traditionally you have had issues and problems not 

achieving those goals. I just want to make sure that if sequestration takes place that there is a level playing field that would allow 

for small businesses to have a shot at the door. 

Mr. MCCORD. If I could just comment, amplify one point though. 

There is, if anything, perhaps too much of a level playing field because we are not going to have a great deal of discretion. We are 

going to endeavor to do exactly what Mr. Ginman said, to do the 

things that our war fighters need the most. And that was in my 

opening statement I referred to protecting the funding for the 

troops in Afghanistan as a top priority. But the law is going to 

limit our flexibility, especially in the procurement account, so we 

may not be able to go even as far as we want to to buy what we 

need. And so some levelness of playing field is enforced upon us by 

the rigidity of sequester, for good or for ill. 

Ms. VELA ́ ZQUEZ. What will it mean in terms of readiness and 

readiness if small businesses are no longer there to provide the 

products and services that are necessary for our military Because 

sequestration could very well threaten some of these small businesses? 

Mr. MCCORD. From a sequesterization perspective and our policies with small business, virtually no policy in the department that 

we have with the requirements to award to small business will 

change. There is nothing in the sequesterization law that would 

cause us to do that. We will continue to have the same emphasis 

to award to small business. We will continue to have the requirement to do the market research. If there are two small businesses 

capable of doing the work, we will continue to set aside the work 

for small business. 

Ms. VELA ́ ZQUEZ. Okay. As you know, on this Committee we have 

discussed so much throughout so many hearings. The impact of 

contract bundling. And it continues to be a prevalent program government-wise, preventing many small businesses from competing 

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pacted by discards, what measures will DoD take to ensure that 

this impediment to small business participation does not grow? 

Mr. MCCORD. The first thing I would say is that the acquisition 

workforce, again, kind of getting back to the rigidity of sequester, 

we recognize the importance of it and we would not want it to have 

it take a disproportionate hit but there is probably no part of the 

workforce that can be totally exempt, so it is going to have to be 

part of the balancing that everyone participates in if sequester happens. 

That said think it was respect to our workforce and our civilian 

workforce in particular that we would probably be strongly inclined 

toward looking at furloughs as opposed to RIFs. So the people were 

not going to try. If it is possible, I think it is not in our interest. 

It is not helpful to us to divest workers, but we may need to go 

with furloughs. So I think that we are not going to lose the expertise, although we are probably going to lose some work gears out 

of this. 

Ms. VELA ́ ZQUEZ. Let me just ask you, as we continue to work towards a solution, there are a lot of people that say that there 

should not be any cuts to defense spending. With our country facing historic deficits, should not all agencies, including DoD, makes 

sacrifices and not let all the cuts, the burden, fall on social programming? 

Mr. MCCORD. I think that is the principle embodied both in the 

Budget Control Act and really, the backup sequestration, you 

know, took that approach. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman GRAVES. Ms. Ellmers. 

Ms. ELLMERS. Thank you, Mr. Chairman. And thank you to our 

panel, Undersecretary McCord and Director Ginman. 

I represent the 2nd District of North Carolina. In North Carolina, 30,000 jobs are at risk through sequestration. In Fayetteville, 

I represent Fayetteville and the Fort Bragg area, which accounts 

for 50 percent of the local economy there. 

Sequestration may cause the government to make unilateral 

changes to tens of thousands, if not hundreds of thousands of government contracts and task orders. And I know you are aware of 

this. 

I do want to share a personal business situation in Cary, North 

Carolina. I recently spoke to Doug Bennett, president of Bennett 

Aerospace located in Cary, North Carolina. Bennett Aerospace, as 

mall defense contractor, said their business would come to a grinding halt should sequestration go into effect. And obviously, as you 

have pointed out, research and development will greatly be affected. Mr. Bennett has already lost three major projects as a result of what he is facing. 

Now, I have a couple questions. One, are you aware that in the 

House of Representatives, we have passed a couple of cases of legislation that will avoid the devastating military cuts by making other 

budget cuts to keep to the number. Are either one of you aware of 

that? 

Mr. MCCORD. Yes, we are. 

Ms. ELLMERS. Okay. Because I know you had mentioned in your 

opening statement that, you know, certainly we can all work toVerDate Mar 15 2010 00:14 Jan 11, 2013 Jkt 077560 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A560.XXX A560

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gether, with the president as well, in order to avoid this. And I 

would say that on behalf of the House of Representatives, I think 

we have definitely. I think we have definitely made an effort at 

that. 

My other question to you is, and again, I am going back to, I believe it was when you were answering Mr. West’s questions. The 

FY 2012, that any contracts that are FY 2012 that are not FY 2012 

would have no impact. Is that correct? Did I understand correctly? 

Mr. GINMAN. For existing contracts. 

Mr. MCCORD. And prior. 

Mr. GINMAN. It is FY 2012 and prior. But if the existing contract 

was funded with FY 2012 and prior funds, it is fully obligated. 

There really should be no reasons, sequesterization does not go 

after funds that were already obligated; it goes after unobligated 

funds. 

Ms. ELLMERS. Okay. So for Mr.—— 

Mr. GINMAN. It will reduce budget authority in 2012 and prior 

to the extent that they are unobligated dollars. But it will not 

cause us to go back to an existing contract already placed, already 

with funds obligated on it and make a change to that contract. 

Ms. ELLMERS. So how would we explain to Mr. Bennett then that 

he has had three major contracts canceled? 

Mr. GINMAN. I do not know the reason why the contracts were 

canceled. I am comfortable that it was not because of sequestration. 

Ms. ELLMERS. Okay. 

Mr. GINMAN. But I would be happy to either meet with Mr. Bennett or to entertain a question from him, you know, to help him 

understand where that is, but it sounds like it was in a competition 

that he did not win. 

Ms. ELLMERS. Okay. I think he would be most appreciative of 

that. 

And I guess from that perspective with the time remaining, what 

is the advice you are giving to these businesses? What guidance are 

you giving. I know I heard you mention adjusting spending as a 

possibility. What other suggestions would you have for any businesses that are faced with this? 

Mr. MCCORD. I think one of the things that Mr. Ginman and I 

have discussed is that probably the more unique a skill that a company has as a subcontractor or a supplier, probably the better 

shape they are going to be in. Of course, if they have or can diversify a little bit away from federal business, obviously that would 

probably help them in the coming months as well. 

I do not know if, Dick, if you want to talk about what we have 

seen historically. 

Mr. GINMAN. You know, as we spend less, there are going to be 

less opportunities. I mean, we have put the budget out for 2013 

and we have allocated where our priorities are and what they are 

and that is what companies use to plan and look. If sequestration 

hits, it is a 9.4 percent hit at every line item level we have that 

is visible and capable of being seen. 

Ms. ELLMERS. Okay. All right. Well, thank you, gentlemen. I appreciate your input. Thank you very much. And I yield back the remainder of my time. 

Chairman GRAVES. Ms. Hahn. 


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Ms. HAHN. Thank you, Chairman Graves, Ranking Member 

Vela ́zquez. Thank you, Mr. Undersecretary McCord and Mr. 

Ginman for taking the time today. 

I am really glad we are holding this hearing on this specific issue 

because I know that we, specifically on this Committee and I am 

sure the rest of our colleagues in Congress, understand the importance of small businesses as it relates to the recovery of this economy and the job creation that we know comes directly from our 

small businesses. So the threat of sequestration at this time, when 

they are beginning to recover, it could be devastating. 

I have only been here in Congress a little over a year, and I came 

to Congress last July just to see one of the most bitter partisan 

fights I think this country has ever seen. I voted against the Budget Control Act because I thought it was a bad idea then and it has 

proven to be a very bad idea. I did not think it was my job or any 

of us who came to Congress to set automatic across-the-board budget cuts. And I voted against it because I did not think it was also 

my job to turn over my authority to a Super Committee to make 

the decisions for this country. And I think it is bearing out today 

that these automatic cuts will damage our economy, specifically to 

our small businesses. 

One of the things I think we stand to lose because of sequestration is the innovation, specifically by our small businesses, who 

stand to suffer the most damage from the loss of federal governments. Can either one of you maybe give the Committee a specific 

example of the type of technology or innovation you fear that we 

could lose if sequestration goes through? 

Mr. GINMAN. I do not have one off the top of my head. 

Mr. MCCORD. Yeah, I guess we do not have a good example in 

that the cuts going forward are kind of going to be spread everywhere. And our SNT area is not going to be exempt, so there will 

be impacts there, but I guess I am not familiar enough to know 

what specific projects might be the ones that fall by the wayside 

as we deal with 9 percent less, the thing that we would have done 

with our 13th SNT funding that will now have 91 percent. I agree 

with your premise; there will be an impact down the road. It is 

hard for me to assess in advance what projects will not be selected 

perhaps because we cannot afford to fund them all. 

Ms. HAHN. Let me get a little more specific. I know in my district 

in California, we have benefitted from new, innovative technology 

that has saved government agencies time and money and even 

saved lives. And some of these businesses were able to do this 

through the SBIR grant program. And we know that seemingly unrelated research can often lead to inventions that prove useful for 

defense and other purposes. And given that nondefense, discretionary spending includes virtually all research and development at 

agencies like the National Science Foundation, the National Institutes of Health, and NASA. Are you worried that sequestration to 

these non-defense programs could negatively impact our national 

security and competitiveness. Is it probable that research for NASA 

or NIH could benefit our national defense. And maybe you could 

give us a sense, this Committee, on the role that non-defense research plays in our national defense. 


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Mr. MCCORD. Well, we certainly understand and I think the administration touched on this, that the effects are bad on our agency 

as well as other agencies. Secretary Panetta, as the former Budget 

Committee chairman, used to looking across, you know, the spectrum when he was here as a member, certainly understands that 

as much as we talk about and think about the impact on ourselves, 

of course, primarily as a DoD, that is what we are doing and what 

we are talking about. He does recognize the impacts are damaging 

and that across-the-board cuts do not make any more sense for domestic agencies like NIH, than they do for us. So yes, we certainly 

understand that concern and share it. 

Ms. HAHN. Thanks. Because I did not want us to get in a thought 

process in Congress that it is defense and then it is nondefense 

cuts because I think there is a huge relationship between some of 

our traditional nondefense research that actually has played into 

technology and innovation that has clearly benefitted our national 

security. 

Thank you. I yield back my time. 

Chairman GRAVES. Ms. Clarke. 

Ms. CLARKE. Thank you very much, Mr. Chairman. And I thank 

the ranking member. I thank Undersecretary McCord and Mr. 

Ginman, Director Ginman, for this very sobering conversation. I 

just sit here and I remember the debate distinctly about sequestration. And I just wonder why we are so surprised. Or you know, 

there is this major concern. The concern would have been we could 

have compromised with one another. We could have worked with 

anybody to make sure that we would be sitting here during a hearing trying to avert what can be catastrophic. But we are here nonetheless and so I have a few questions to ask. 

Mr. McCord, you indicated that you foresee a possibility where 

the sequestration could be averted at a late point, yet you will have 

triggered some of its effects. Understanding that would cause a disruption across the board, can you extrapolate at this point or quantify the level of disruption that would be caused and how long it 

might take to rectify? 

Mr. MCCORD. Well, the type of disruption we are talking about 

are both things that can be quantified, and I think things that cannot be easily quantified, such as moral impact. If you start telling 

people we are about to furlough you or we are about to lay you off, 

and one of the things I know the deputy secretary feels strongly 

about is that we not do that until we are absolutely certain it is 

necessary because it conveys a message to your workforce and to 

the contracting workforce, as well, that you do not want to send 

unless it becomes you are kind of at that irrevocable point. 

In terms of other impacts, again, that we do not want to trigger, 

certainly as Mr. Ginman said, we do not want to go into contracts. 

There is no reason for us to go into existing contracts. That is not 

going to be productive. 

I think the other thing that we recognize that we cannot really 

fix is that uncertainty creates its own bad dynamic. I think Chairman Bernanke talked about that recently in front of one of the 

other committees, and that we understand that that is out there 

today and there is not a great deal we can do. So what we are trying to do, and I think what the administration, the OMB director’s 


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memo at the end of July, told people to keep continuing normal operations while we see if there is a way out. And so that is what 

we are still doing but the uncertainty still remains in people’s 

minds, understandably. 

Ms. CLARKE. Yes. It has a very dampening effect. 

I would like to get a better idea of the baseline we are using 

there. As it stands, the surge is ending in Afghanistan and the 

troops will be coming home soon. And I understand the concept of 

readiness means the ability to respond to any threat, anywhere 

across the globe. However, with the evolving nature of warfare 

moving toward reliance to a certain degree on drones and other 

military technologies, are we making projections at the same or 

similar cost of readiness that has, I guess, been the contemporary 

meaning of readiness? And in the future, as it stands right now 

with the troops in the field or is there something that you are adding to this equation now going forward that you may put into your 

thinking should sequestration be a part of that equation? 

Mr. MCCORD. I hope I am going to be able to answer the question. I think there were sort of two parts of it. 

Sequestration, the readiness impact of either the drawdown or of 

changing the technology is probably not going to help us in any 

way that is material, especially as we look at, say, comparing 2012 

to 2013. The situation is just not changing enough in a way that 

would produce any dramatic savings. The reduction in wartime 

spending that comes with the drawdown was already planned and 

is not really going to help us. Wartime spending is subject to sequester but having less of it does not lessen the impact. It is kind 

of an unusual player in the sequester equation. So I do not really 

see any windfall from that respect or any major changes in operational concepts or readiness concepts that is going to materially 

affect the discussion that we have been having or that you probably 

have had with your constituents. 

With respect to going forward, I think Mr. Hale, my boss, and 

the vice chiefs of the services testified this morning, and I know 

Mr. West was there, that there are going to be readiness impacts 

of reducing funding for training, things like that. So that, if sequester happens, is going to be a readiness impact of sequester impacting readiness, but the vector going the other way of readiness 

changes affecting sequester I do not think is really going to be 

much of a factor. I hope that is responsive to your question. 

Ms. CLARKE. That is helpful, sir. And I thank you for your testimony here today. Mr. Chairman, I yield back. 

Chairman GRAVES. Ms. Chu. 

Ms. CHU. Mr. McCord, thank you for being here today to testify 

about this important matter. 

As you know, the defense budget for FY 2011 was 700 billion, 

which is over half of discretionary spending in the federal budget. 

With defense spending making up such a significant portion of our 

budget as we work together to implement a balanced deficit reduction plan, we will inevitably have to make some cuts to defense 

spending. 

I agree with you that sequestration is not a good policy, and in 

fact, I voted against the Budget Control Act, which engineered it. 

Sequestration would have such a devastating effect on every fedVerDate Mar 15 2010 00:14 Jan 11, 2013 Jkt 077560 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A560.XXX A560

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eral agency and thousands of small businesses who would be directly affected by the reduced number of federal contracts and subcontracts and indirectly affected by the decrease in economic activity. 

But my question to you is as we negotiate a better deficit reduction plan, how do we make strategic cuts to the Defense Department that will not threaten our national security while helping us 

to bring down the mounting deficit? 

Mr. MCCORD. Well, we feel, the secretary feels strongly, that we 

did that in presenting the budget that is before the Congress now 

that I guess will not be probably dealt with fully until at least after 

the election. 

If we were to do another round as a way to, say, deal with sequester, we understand that defense would be on the table. It is 

hard for us to assess at this point exactly—to say give a number 

of what we could live with as a change, if any, but we would want 

to be part of the conversation if there was another look at a new 

budget deal. But we feel that what we have done so far was strategically based and although people have disagreed with particular 

aspects of it, such as the air guard, that the broad outlines we 

think have been pretty compelling to people, and the secretary is 

concerned that we will have to walk away from that in some material way if the sequestration happens with no further adjustment. 

Ms. CHU. Okay. I want to also talk about the contracts that are 

given to small businesses. You said that the DoD would still fund 

contracts from the prior year and these would not be subject to 

cuts. How would the DoD handle the contracts that small businesses won but those contracts that have not yet been funded? And 

what if the contracts that were given last year were multi-year contracts that extended beyond 2013? Would they also be subject to sequestration? And also, under sequestration, would small businesses 

lose the number of contracts or just get a smaller dollar amount 

per contract? And how would you ensure that the Defense Department’s goal to give small businesses 22 percent of contracts and 32 

percent of subcontracts, how would you ensure that that goal is 

met? 

Mr. GINMAN. The existing contracts that are there, there is no 

need to do that. Multi-year contract and the careful definition of a 

multi-year, the department only has eight of those. All of them are 

large businesses. Multi-year—if what you meant by multi-year was 

a contract that had options in it that I would exercise into the future, while the effect of sequestration within whatever budget line 

item I am in, if in fact I need the requirement and I do not have 

enough money to spend it, I would have to renegotiate the option 

to bring it down to the dollar level I could afford. 

Many of the contracts that we write, understanding that the 

money that we ask for is not always necessarily what we get, we 

tend to write options—contracts with options in them with the 

flexibility to order varying levels. So my hope would be in most of 

those levels of those types of contracts, we would, without having 

to renegotiate, simply be able to exercise the option at a lower dollar value. 

Ms. CHU. What about this 22 percent of contracts? 


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Mr. GINMAN. So as I said earlier, no direction with regard to 

awarding business to small business will change as an effect of sequestration. We simply wind up with 9.4 percent less money. We 

will continue to work to do that. Undersecretary Kendall, the deputy secretary, and the secretary have all issued letters recently 

looking to improve. The deputy secretary has made it mandatory 

that for all senior executives within the department that have any 

responsibility for spending money have as an element in their personnel evaluations how did they do in getting work to small business. Secretary Kendall recently issued one in three very specific 

areas saying we know small business can operate in these areas. 

We want you to increase the percentage by 10 percentage points. 

I have recently issued one looking at those orders that are small 

dollar values, the below $150,000, remind people that it is our policy to set those aside and ask him to do that. 

And we have reinforced the Office of Small Business Policy within the department. Created a very sophisticated tool to be able to 

facilitate market research to help contracting officers find better 

opportunities for small business so that we can meet the goal. 

Ms. CHU. Thank you. I yield back. 

Chairman GRAVES. I do want to echo the words of the undersecretary in that and you pointed out that the goal for the Super Committee was not sequestration; it was a prod. The goal of the Budget 

Control Act was for the Super Committee to find savings to help 

pay down the debt. Unfortunately, they failed and now we have to 

deal with this. 

But with that, what we are going to do is we have two votes and 

we are going to recess for approximately 30 minutes. When we 

come back we will set the second panel out there. And I want to 

thank the Undersecretary, Mr. Ginman, both of you for being here 

today. We appreciate it very much. And with that we will recess 

again for approximately 30 minutes and then we will be back. 

[Recess.] 

Mr. WEST. We will continue on with the hearing for today and 

now we will have our introductions for panel number two. 

I would like to introduce Stephen Fuller. Our next witness is 

Professor Stephen Fuller, the Dwight Schar faculty chair and university professor, as well as director at the Center for Regional 

Analysis, School of Public Policy at George Mason University in Arlington, Virginia. Professor Fuller is an expert in the field of urban 

and regional economic development. He has authored over 500 articles, papers, and reports in this field, including his newest report 

released this morning, which looks at the economic impact of the 

Budget Control Act of 2011 on small business. Thank you for testifying today, Mr. Fuller. You may begin. 


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STATEMENTS OF STEPHEN S. FULLER, PH.D., DWIGHT SCHAR 

FACULTY CHAIR AND UNIVERSITY PROFESSOR, DIRECTOR, 

CENTER FOR REGIONAL ANALYSIS, SCHOOL OF PUBLIC 

POLICY, GEORGE MASON UNIVERSITY; M. L. MACKEY, CEO, 

BEACON INTERACTIVE SYSTEMS, ON BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION; LAURIE 

MONCRIEFF, PRESIDENT, ADAPTIVE MANUFACTURING SOLUTIONS; MARK GROSS, FOUNDER AND CEO, OAK GROVE 

TECHNOLOGIES. 

STATEMENT OF STEPHEN S. FULLER 

Mr. FULLER. Thank you, Mr. West and Committee Members. I 

want to go back to July of this year when I released another report 

called ‘‘The Economic Impact of the Budget Control Act of 2011.’’ 

The analyses in that report set the stage for my comments today 

and it identified the loss of 2.1 million jobs nationwide by the year 

2013 or during 2013 from the Budget Control Act or if sequestration is implemented. My subsequent analyses have established the 

fact that these impacts will disproportionately affect small businesses and their workers, workers in small businesses which suffer 

more than 50 percent of the projected job losses due to spending 

reductions mandated under the Budget Control Act. These job 

losses would show up in small businesses that are prime contractors. Also, subcontractors, suppliers, and vendors, and also thirdly, 

the businesses that support the retail and consumer service needs 

of laid-off workers and the loss of their labor income. This latter 

class of small businesses span the economy, although we find it 

more concentrated in retail and consumer service sectors. The direct impacts, the federal contractors who are small businesses that 

would be impacted by sequestration, would involve the loss of 

about 158,000 jobs. It just represents about 34 percent of the prime 

contractors. Overall, the loss of jobs that is attributable to small 

businesses is about 51 percent. 

The difference is important. What it says is that the concentration of small business impacts are among subcontractors, and suppliers, and vendors, and those businesses that provide services supported by the payroll spending of laid-off workers. In fact, they represent 58 percent. Small businesses in these other categories represent 58 percent of the job losses that would result from sequestration. It is 58 percent of 1.4 million jobs. It is a very significant 

impact. 

And what is more important about this, these companies have 

less control over their destiny. They are the subs. They are the suppliers. They are the vendors. And in many cases, they do not even 

know that they are working on a federal contract. And so as large 

companies adjust to changes in federal spending, clearly they are 

going to be impacted, too, as they adjust. One of the typical adjustments is they bring work back from the small—their subcontractors into the main company. They have much deeper pockets and 

can adjust financially and take time to restructure and reposition 

their businesses. Small businesses do not have that capability. 

I am going to skip forward because time is short. 

The small businesses are less able to sustain themselves when 

they experience a contract loss, whether they be a prime or a sub. 


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Due to the more limited economies of scale that characterize the 

operations of most small businesses, the loss of even a small portion of their projected backlog or a cancellation of a contract could 

result in these firms becoming unsustainable. Small businesses 

typically do not have the financial resources to sustain unprofitable 

operations for a sufficiently long term to permit restructuring alternative market or product development. 

It should be noted that all of these calculations of job impacts associated with sequestration only measure the job equivalent of the 

direct spending reductions and their subsequent impacts. What 

they do not include are any consideration of induced failures of 

small businesses from partial losses of federal contracts or subcontracts. The literature shows that small businesses are much 

more vulnerable than big businesses to changes in the business climate. And one of the principal reasons for this is that they have 

a much smaller margin of operation. Their profit margins are 

smaller. They cannot adjust as quickly to changes in the business 

environment, and so with a small reduction in spending, may actually force them out of business. So these of the collateral effects 

have not really been considered. 

The workers for small businesses face some of these same problems. Employees in small businesses may be more specialized or 

less networked than employees in larger businesses, making their 

reemployment more challenging than for employees working in 

large businesses that may be experiencing cutbacks or cancellations in federal contracts. Workers in larger businesses have the 

opportunity to reassignment to another division. You do not find 

that in small businesses. Or perhaps a transfer to another location. 

Small businesses have very little options. 

To me the key takeaway from all of this analysis is that besides 

bearing a disproportionate impact or potential impact of federal 

spending reductions, small businesses are more vulnerable to actions they cannot control. The larger businesses can move the contracts around and the small businesses are sitting there waiting for 

something to happen. The fact that 58 percent of all of the job 

losses are in the secondary kinds of functions I think highlights the 

vulnerability of small businesses. Most importantly, beyond the 

loss of jobs it is the survivability of these small companies from 

partial reductions in federal spending or federal contracting that 

they might be doing. Thank you very much. 

Mr. WEST. Thank you. 

Our next witness is Ms. M. L. Mackey, CEO of Beacon Interactive Systems in Cambridge, Massachusetts. Her company was 

started 18 years ago, and for the last decade has been active as a 

federal small business contractor. Through government contracts, 

her innovative firm has developed effective and cost-saving software products used within the DoD. Ms. Mackey is testifying today 

on behalf of the National Small Business Association. Thank you 

for being with us, Ms. Mackey, and you may begin. 

STATEMENT OF M. L. MACKEY 

Ms. MACKEY. Good afternoon, Congressman West and Ranking 

Member Vela ́zquez, and the members of the Committee. Thank you 

for the opportunity to testify here today and for your tireless efforts 


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to promote economic development and job creation in America’s 

small business community. Your continued leadership on critical 

issues, such as the one before us today and your collective ability 

to understand and shed light on the challenges facing small business in the federal marketplace is invaluable and greatly appreciated. 

My name is M.L. Mackey, and I am the CEO of Beacon Interactive Systems, a small business located in Cambridge, Massachusetts. I am also on the board of trustees of the National Small 

Business Association. 

Eighteen years ago, my husband and I co-founded our company 

out of our rent controlled apartment on Beacon Street. We built the 

company as a provider of commercial systems, initially providing 

software products to companies like Olympus, MetLife, and IBM. 

For the past nine years, we have worked as a federal contractor delivering efficiency, improving, and cost-savings applications to the 

DoD. The Navy is currently using products we developed through 

the highly successful Small Business Innovation Research (SBIR) 

program to improve performance of the equipment maintainers deployed across U.S. Fleet Forces Command, the sailors who keep our 

ships mission-ready. At full deployment of our software, initial estimates on cost savings and cost avoidance are in excess of $40 million; all on an initial SBIR investment of $5.5 million. This is the 

kind of cost savings and efficiency improvements that small business provide for the DoD, exactly the approach needed in these 

austere times. 

I, along with many of my counterparts across the country, am 

very concerned with the proposed arbitrary approach to sequestration. Simply cutting the top-line of nonexempt agency budgets is 

not based on a rational assessment of the relatively effectiveness 

or usefulness of various programs. It has the potential to devastate 

key programs and specifically to have a disproportionate impact on 

small business. While major program cuts will be necessary inside 

federal agencies, these cuts should be made with a purposeful and 

thoughtful approach. In order to not only insure an equal impact 

across the defense industrial base, but also to ensure a rational approach that does not gut the advances made in government procurement to this point. 

Today, I am speaking to you as someone who has already felt the 

effects of this uncertainty. We, like many other businesses in this 

sector, have had to tighten our belts in anticipation of the rough 

times ahead. In spite of successful pursuit of new opportunities, we 

have purposefully trimmed our workforce. This is counter to how 

we have strategically built our business over the last 18 years. Previously, once we closed a big opportunity, the first thing we did was 

evaluate our team and act on ways to improve our capabilities, like 

defining new roles and hiring new employees. This approach has 

not only kept us viable, but has helped us expand our business and 

create jobs. Unfortunately, give the uncertainty surrounding sequestration, this is not the approach we are taking now. 

I am by no means the first business owner, nor will I be the last, 

to tell a congressional panel that sequestration will have major, 

negative impacts in areas ranging from business survival to national security. Nor will I be the last to argue that something must 


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be done to stabilize our economy. Surely Congress can craft a more 

deliberate and careful approach than the current strategy, which 

will lead to considerable job loss and greater economic uncertainty 

at a time when job creation and economic growth remain a top priority for our country. 

The federal contracting and acquisition systems are overtaxed 

and have struggled with efficiency and transparency issues for 

years. This problem will only get worse with sequestration in place. 

The contracting staff of Federal agencies will likely face major personnel reductions under sequestration. As a result, we are likely to 

see an increase in contract bundling and less efficient, less predictable contracting system. This will have a major impact on small 

business contractors who are likely to be the first to go on many 

projects. According to NSBA’s most recent Politics of Small Business Survey, 99 percent of small business owners are registered to 

vote, 97 percent said that they regularly vote in national elections, 

and the 25 percent of small business owners who have contacted 

their elected officials on a small business issue have done so on the 

matter of contracting. 

Small businesses create efficiencies. We are agile and flexible, 

which saves the government money. We believe that program managers and contracting officers should be incentivized to create efficiencies and cost savings through increased work with small business, not the other way around. Small businesses around the country are waiting on funds from previously awarded contracts, large 

businesses are contemplating mass layoffs, and the end users, our 

men and women in uniform and the people who are served by our 

Federal Government, are waiting for products and services they expected months ago. 

Washington needs to set their differences aside and not use the 

excuse of an election year or partisan gridlock to shortchange 

America’s small businesses and the broader public. We cannot afford to wait and fix our economy or shore up our industrial base 

after it has been decimated. If sequestration happens, DoD contracts being competed now or in the near term may be canceled 

with little recourse for contractors. Business owners do not know 

which opportunities are real and which are illusory, causing a massive waste of our limited resources. Businesses are frozen, in need 

of personnel, but unable or willing to hire because of this uncertainty. 

Congress, to its credit, has increasingly recognized the benefits 

of small business engagement. The small business contracting reforms incorporated into Title XVI of the 2013 National Defense Authorization Act (NDAA) are a positive step forward and incent behavior that incorporates the efficiency and cost-savings approach 

that our small business are known to provide. These are the kind 

of proposals that will push the federal government toward greater 

efficiency. 

I know that pointing out problems is far easier than finding solutions. The path ahead will definitely be challenging. Having said 

that, as a small business owner, I can state unequivocally that we 

are a critical component of the solution to our government’s fiscal 

concerns. 


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I applaud this Committee for your vigilance in promoting small 

business-friendly policies and your work to reinforce the idea in 

your colleagues that small business is a value-added proposition for 

the government and an enabler of innovation and growth. 

I appreciate the opportunity to be here today. It is an honor and 

a privilege, and I welcome your questions. 

Mr. WEST. Thank you, Ms. Mackey. 

Our next witness is Laurie Moncrieff, president of Adaptive Manufacturing Solutions in Burton, Michigan. Adaptive Manufacturing 

Solutions formed by Ms. Moncrieff in 2007, is a group of small tooling and manufacturing companies that work together to bid on contracts. She is also president of Schmald Tool and Die, one of the 

companies within Adaptive Manufacturing Solutions, a small tooling and die company which has been in her family for over 60 

years. She is testifying today on behalf of the National Defense Industrial Association. Thank you for testifying today, Ms. Moncrieff, 

and you may begin. 

STATEMENT OF LAURIE MONCRIEFF 

Ms. MONCRIEFF. On behalf of the 1,756 corporate and over 

96,000 individual members of the National Defense Industrial Association (NDIA), I would like to thank Chairman Sam Graves, 

Ranking Member Nydia Velazquez, and all the members of the 

Committee for holding this important hearing. 

We are all painfully aware that in the past 10 years the U.S. has 

experienced an economic downturn second only to the Great Depression. The most severe impact has been experienced by small 

businesses. 

Even in a good economy, small businesses have to navigate barriers and challenges. But through this downturn, we have seen it 

at an unprecedented magnitude. The resulting erosion has decimated many critical sectors that are still widely needed and in demand to produce product worldwide and also recognized as integral 

to part of our national innovation system. The vast majority of the 

companies classified in these critical industries are small businesses with less than 50 employees. 

As a representative of small business and manufacturing, I ask 

each of you to consider how can we ever revitalize these industries 

that have sustained considerable economic injury, encourage innovation and invention, increase production and demand, and support 

and approve national security if small businesses are hit with yet 

another blow from astounding budget cuts the DoD faces with sequestration? 

The challenges of the last 10 years have made it difficult to find 

and identify individual businesses in these segments. It can be easily demonstrated that these companies hold irreplaceable intellectual knowledge, which may not reside in the prime contractor community. Yet with the structure of the supply chain today, small 

business innovation and value-added work is often unrecognized, 

unrewarded, and under-represented in government contracting. 

Some examples of companies and communities that could in the 

future or have already been impacted include TACOM LCMC 

awards of the FHTV, M–ATV, FMTV, Stryker, and HMMWV include $539.6 million directly to small businesses and an additional 


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$563.5 million in subcontract awards through March in FY 2012. 

The totals of over $1.1 billion in the first half of the year, demonstrating the importance of small business in this supply chain. 

A manufacturer of High Tech ‘‘Hot Press’’ furnaces used in the 

manufacture of ceramic body armor plates will simply shut their 

doors if this demand for sustainment of furnaces is decreased or 

eliminated. There is no other application for these furnaces outside 

of the military. It would take us between 18 and 24 months to get 

this business operational yet again. 

A small manufacturer who makes ‘‘high strength’’ carbon used to 

produce armor felt the impact of demand decrease back in 2010 

when the DoD allowed this key component to be diverted to support other worldwide demand. When DoD later wanted to reinstitute the manufacture of body armor, it suffered a 12–month 

lag in delivery times for body armor in theater. We cannot afford 

to repeat this scenario. 

The manufacturer of carbon tooling, special foils, and other 

unique production products are all supported and maintained by 

small businesses, many of whom only have two to three people per 

company in their operations. If lost, it could take up to 24 months 

to replace such lost capabilities. 

Miller-Holzwarth, a 2007 recipient of the SBA Subcontractor of 

the Year recently announced the closing of their doors. The business located in Ohio manufactured periscopes, vision blocks, ballistic window armor, and had been in the defense industry for over 

35 years. Among the issues that impacted their decision to close 

was the potential of budget cuts with sequestration. There are 

many other businesses like that that we could see similar instances 

arising. 

It is documented that small businesses are critical to the economy. Thirteen times more patents per employee, 99.7 percent of all 

employer firms are small businesses. 

There are several ways we could strengthen small business and 

increase the value to the government, presenting a win-win situation. 

We can encourage more sourcing to small business. The executive office of the president in management and budget published a 

memorandum dated February 11, provided examples of savings in 

excess of $383 million due to targeted set-asides to small business. 

Develop a program to reverse engineer ‘‘low hanging fruit’’ already in the DoD inventory. 

Review processes of DCMA, as many have minimal value and are 

costly to small business as well as government. 

Many great products and processes originate in small businesses. 

However, they struggle to connect and bring their product to market. We must work towards the support of more robust avenues for 

these products to reach the federal and commercial market. 

Streamline and reduce the amount of paperwork and effort required to find and bid on contracts. 

We need to celebrate and support the strength that small businesses bring to the market and better leverage these valuable resources. There are many ideas of how to reduce cost, but with 

every decision there are many unintended consequences. We must 

consider how decisions could support, uphold, and encourage small 


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business, innovation, and growth, and revitalize critical industrial 

sectors. These actions will move us forward to create jobs, improve 

the economy, and our national security. It is time to step up and 

support the industrial sector and the small businesses which are 

the backbone of our country. Thank you. 

Mr. WEST. Thank you, Ms. Moncrieff. 

I now yield to Ranking Member Vela ́zquez to introduce our final 

witness. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

It is my pleasure to introduce Mr. Mark Gross. Mr. Gross is the 

founder and CEO of the Oak Grove Technologies, a service-disabled, veteran-owned small business located in North Carolina. 

Prior to starting his business, he worked for DoJ’s antitrust division and in management-level positions of several Fortune 500 

companies. Additionally, Mr. Gross served on the SBA Veterans 

Advisory Committee and was a founding member of the American 

Legion’s Small Business Task Force. Welcome to the Committee. 

STATEMENT OF MARK GROSS 

Mr. GROSS. Good afternoon, Ranking Member Vela ́zquez, Congressman West, and members of this Committee. Thank you for the 

invitation to come before you and share my concerns relating to the 

topic of sequestration and the impact it is having on small businesses today and the potential impact it will have on small businesses in early 2013. 

I am a veteran of the United States Army, founder of Oak Grove 

Technologies, a service-disabled veteran-owned small business focused on training, strategic communications information technologies, and intelligence and analytical services. We employ over 

390 employees, over 70 percent of those are veterans, and over 20 

percent of those are service-disabled veterans. Geographically, we 

are dispersed in 21 states, Africa, Afghanistan, and Iraq. 

The threat of sequestration creates uncertainty, which paralyzes 

small businesses. Most small businesses do not have the robust or 

diversified contract portfolio supporting their operations. Small 

businesses often wait until they have a contract before they acquire 

the resources necessary to perform the contract. Without reasonable assurances of future business, small businesses cannot plan 

for the future and are not likely to invest in the company’s growth 

by acquiring additional equipment, facilities, or personnel. However, small businesses that fail to invest or grow will find themselves less competitive for the opportunities that do remain. 

Many of the business owners that I speak with in North Carolina, excuse me, are taking a similar approach as we are considering the uncertainty of sequestration. We are putting expansion, 

infrastructure, expenditures, and indirect hiring on hold. We are 

forced to prepare for the worse case in order to regroup and/or recover. Oak Grove Technologies has in the past year purchased over 

200 acres of land in Richmond County, Hoffman, North Carolina, 

which is the most economically disadvantaged company [sic] in the 

state. It is adjacent to Camp Mackall Army Air Field, where we 

support training for special forces, military information support operations, and civil affairs soldiers. We are putting much of our 

planned construction on hold, minimizing our marketing campaigns 


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and trade show participation, and in general, tightening our belts 

because of the uncertainty surrounding sequestration. 

Sequestration in the short term will have the most impact on the 

agency’s budget for operations and service contracts that are a 

large part of that budget. Most small business federal contractors 

provide the government with services rather than products because 

there are fewer barriers to entry in the service market than the 

market for manufactured items and supplies. For supplies, companies need personnel, equipment, facilities, distribution channels, et 

cetera. For services, companies just need people. It is easier for an 

agency to eliminate two data processors from a contract than to 

eliminate a section of a fighter jet. By cutting services in a greater 

proportion than products, sequestration will affect many more 

small business contractors than large contractors. 

A small business with 10 federal contracts will feel the effects of 

a loss of one of those 10 contracts more than a company with 100 

contracts that loses 10 of those contracts. Although both scenarios 

reflect a 10 percent cut in each company’s contracts, larger companies have a greater ability to reallocate personnel and idle resources to other contracts because of the large number of contracts 

remaining. Large contractors, moreover, are more likely to have 

commercial and/or international contracts that can offset the effects 

of the stymied federal market. Small businesses rarely have the 

ability to diversify in this manner. 

We completely understand the necessity of budget cuts, especially while we have two military conflicts ending. However, an 

across-the-board cut will hurt everyone. Although the same economic engine that powers America, small business will be the one 

that suffers most. 

I appreciate the opportunity to address this Committee today. 

Thank you for all you do for us, and I welcome any questions. 

Mr. WEST. Thank you. And thank you for your service in the 

Army. Army Strong. 

I would like to start with a simple question. DoD just told us earlier, and if you were here you saw the first panel, that they would 

not be terminating contracts but yet we just found out that the Air 

Force has reported it may cancel the tanker contract with Boeing 

and Northrop is laying off about 600. One of my big concerns, of 

course, is the trickle-down effect, not just to the small business but 

also to the suppliers and the subcontractors that you all use. What 

do you see as being those effects in your line as far as to those suppliers and the subcontractors that some of you alluded to earlier 

from the effects of sequestration? 

Mr. GROSS. Congressman, I think many of us small businesses, 

the predominance of our contracts are subcontracts from larger 

contractors, Oak Grove included. When the large contractors feel 

the squeeze, there is a trickle-down effect to the subcontractors, 

whether it is in rates, whether it is in reduction in your staff, or 

they will take some of the positions in-house. It is certainly something we are concerned with currently on a number of the operations that we are involved in in contracts, so I definitely think it 

is going to happen for certain and it is definitely a concern. 

Ms. MACKEY. So I would answer that question in terms of how 

it specifically affects small business. So when you ask about sort 


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of the down-line of your supply chain, I would also perhaps, if I 

could expand that question to your up-line, who you have relationships to that you are the subcontract to? Who do you team with 

as other small businesses? So as small business, sometimes people 

say to me, oh, you are the CEO of a business. I go, you know, it 

is a small business. Maybe it is not quite as glamorous as you 

think. I spend a lot of time doing a lot of things. I do not have a 

lot of time to build relationships. So the relationships, the extended 

team that I have, took a long time to get in place. And I think some 

of the trickle-down that Dr. Fuller was talking about is that it will 

be very difficult for me to recoup all that time and investment in 

relationships. I hope that is helpful. 

Mr. WEST. Dr. Fuller, is there a concern in your analysis that 

you see as we start to push out and decimate the small business 

contributions to the defense industrial base that maybe there will 

be more of a monopoly by some of the larger businesses and companies and therefore you could end up seeing higher costs because 

you reduced the amount of competition? 

Mr. FULLER. That is certainly one of those collateral impacts that 

need some attention. I think we have seen this in very recent days 

where some of the very large defense contractors are talking about 

mergers and we have seen increasing acquisitions. I guess my biggest concern is that first, the numbers are really big. We are talking about a million jobs among small businesses and two million 

overall. So the small businesses just are extremely exposed, and 

they are exposed in a way that I think the other witnesses have 

illustrated so well, is that they in effect are sitting ducks. They are 

at the mercy of the primes in so many cases. And I have seen as 

we have analyzed these data that approaching 60 percent of the potential job losses coming out of companies that are not primes and 

who are small businesses, that they have very little recourse. And 

adjusting is not an option to them. They go out of business increasingly and I think we—I am more concerned that we are losing the 

innovative talents of small businesses either because they are 

threatened at this point or they actually go out of business later 

on as times get tougher. 

Mr. WEST. Last question. Ms. Moncrieff, you kind of alluded to 

it. The start-up time. If you go to zero, I mean, how long does it 

take to kick this back in? You know, because the question I asked 

to the first panel, are we looking at an industrial base at capacity 

and capability and therefore, our technological advantage and innovations may be lost? So I would like to get your input as far as 

what would it take, what type of timeline you would look at to try 

to recover yourself to get back to a full operating capacity or capability? 

Ms. MONCRIEFF. I, myself, am not going to be impacted, and I 

think, I guess I cannot say it like that. I am not as concerned about 

my impact as some of the other companies that I work with because I went through an economic time five years ago where I lost 

75 percent of my business overnight. So when I got into government contracting, what I did is I purposefully contracted first direct with the military knowing that should there be a downturn, 

you are in a worse position if you are in a subcontract mode. 


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Now, on the innovation piece, there are 16 industries that are 

key to innovation, 13 times more patents per employee, and a lot 

of these folk are behind the scenes. Without them in business, you 

cannot make anything anymore. So there are businesses that are 

upstream from them that will lose the ability to make product. And 

we have got a lot of product in the military that we have one supplier left in the country. We have one manufacturer for chaff for 

our jets. No other manufacturer in the United States. They are already struggling. To rebuild them, it is not just time; it is an incredible amount of money. I do not know that we would have the 

ability to bring that back. So there are a lot of industries that I 

think it is not just a matter of time but it is the amount of money 

to rebuild those industries down the road. 

Mr. WEST. Thank you. And I yield to Ranking Member 

Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Gross, with the wars in Iraq and Afghanistan coming to a 

close, there has been a concerted effort among federal agencies to 

promote entrepreneurship among veterans coming home, and one 

of the issues is high unemployment among veterans that are coming back. It seems DoD is the largest provider of contracts to all 

veterans. How do you think sequestration will impact the decision 

of these veterans to enter the federal marketplace? 

Mr. GROSS. That is a great question. I think if you look at acrossthe-board cuts, especially in DoD, most of the veterans coming out 

are more than likely looking at opportunities within DoD based on 

their background, their skills, their training. With less opportunity 

within DoD, obviously it creates far more competition and it makes 

the barrier to entry far greater. I think for companies like myself, 

you know, veterans hire veterans. It is what we do. And so for us, 

you know, a down, a decrease in DoD dollars, unfortunately, that 

is generally who gets impacted. 

Ms. VELA ́ ZQUEZ. Mr. Fuller, in your study you estimate that 45 

percent of job losses will come from small businesses, and you also 

discussed the fact these losses will have on other mom and pop 

shops that are patronized by employees of defense contractors. 

Does your estimation of job losses also include this multiplier effect 

or do you expect the impact to be even greater? 

Mr. FULLER. The numbers that have been cited include the indirect effects as well. And also, the scope of our work, even though 

we are focused on DoD because it is the single largest source of federal contracting, includes all the non-DoD agencies. So this is even 

a bigger problem than we are talking about. And we are at 51.6 

percent of all of the potential job losses coming from small businesses, and that would include those subcontractor suppliers and 

vendors as well as those companies across—you find them in every 

single county in the country that are supported by the spending of 

those jobs that might be terminated. 

Ms. VELA ́ ZQUEZ. Thank you. Ms. Mackey, while the cuts to DoD’s 

discretionary spending will be significant, there will also be 75 million dollars in cuts to SBA. And SBA is the agency in charge of 

making sure that small businesses get their fair share of federal 

contract dollars. So what will the cuts to these agencies mean for 


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small businesses and their ability in the federal marketplace to 

enter the federal marketplace? 

Ms. MACKEY. The SBA is the agency that watches all our small 

businesses’ backs. We need to make sure that they stay in the 

game and funded in a way that they can perform effectively. The 

challenges that are going to come up around contracting and deciding with limited resources who to contract and when, we need to 

make sure that that level playing field you were talking about 

stays level by having an ombudsman, by having people that watch 

and make sure that we are not doing the bigger contracts because 

then we can get more of the money committed, but just leaving the 

small business contracts because we have to cut some out; we 

might as well cut the smaller ones. We need to keep the whole industrial base performing and engaged through the difficult times 

ahead. 

Ms. VELA ́ ZQUEZ. Thank you. Thank you. 

Mr. WEST. Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Dr. Fuller, does government spending create jobs? 

Mr. FULLER. Yes. 

Mr. MULVANEY. And the lack of government spending causes us 

to lose jobs? 

Mr. FULLER. Yes. 

Mr. MULVANEY. And using your numbers, I think you said that 

this sequester, you have got it at $115 billion in FY 2013. I think 

the number we use around here is $110 billion. It leads to roughly 

$215 billion in loss of GDP and 2.1 million jobs lost. Am I reading 

this correctly? 

Mr. FULLER. That’s correct. 

Mr. MULVANEY. Okay. I recognize the fact that there is not a perfectly inverse relationship between spending cuts and jobs lost and 

spending increases and job loss, but just running the basic backof-the-envelope numbers, Dr. Fuller, using your numbers, the $800 

billion stimulus that we had here several years ago should have 

created 15 million jobs and at the two times multiplier that you 

have, should have added $1.6 trillion or 10 percent to our GDP. 

And I just have not seen it yet. And I am sympathetic to folks who 

come in here and say that government spending will cost us jobs, 

but I am very much concerned about making the same argument 

the other way in light of the fact we have just been through that 

economics experiment where we spent $800 billion and did not get 

anywhere near 18—excuse me, 15 million jobs. In fact, there is another report that you wrote that said that $1 billion in investment—excuse me $1 billion—in government savings would lead to 

28,500 jobs, which means that the $110 billion represented by this 

cut would be 3.1 million jobs but conversely, the stimulus should 

have created 21 million jobs. 

And I guess my question, Mr. Fuller, it is not as much a question 

as much as it is a comment to anybody who is willing to listen. I 

believe, Mr. Chairman, that these cuts will hollow out the military. 

I do believe that. And I believe that is where we should be focusing 

our attention. I think it is disingenuous of us as a party to have 

railed against government spending for the last two years as not 


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creating government jobs and then running to that argument the 

very first time we actually have job cuts. 

Let me ask you this, Dr. Fuller, have you done an economic analysis of the impact of jobs in this country of adding $110 billion of 

additional debt when 77 cents of every dollar borrowed is printed 

by the Federal Reserve? 

Mr. FULLER. I have not done that analysis. No. 

Mr. MULVANEY. Is it fair to say that adding to our debt burden, 

especially in light of the fact that we are printing effectively 77 

cents out of every dollar that we borrow, would have a negative impact on GDP and on job growth in this nation? 

Mr. FULLER. I think we could manage this process much more effectively than we have done, and the stimulus, while I believe that 

the idea of a stimulus could have been more productive than it 

was, I do not think it was executed very well. It is quite easy to— 

it is how you spend the money that is important, and we can run— 

we know what we are going to cut back when we begin to cut back 

DoD spending, and we know that it has a job impact. And so it is 

important to know that there are costs associated with these decisions. It does not mean there are not benefits. And you might be 

able to cite some of the benefits. If these monies were spent in another way, they might have a different kind of impact. The point 

is that this economy cannot accommodate this kind of loss this 

quickly. It would throw the economy into another recession. It 

would add a point and a half, maybe two points to unemployment. 

And so we need to know what the consequences are. 

Mr. MULVANEY. Have you seen the studies, Dr. Fuller, that indicate that traditionally when countries have debt that exceeds 90 to 

100 percent of their GDP that it annually takes one percent off of 

their GDP growth? 

Mr. FULLER. I would agree that having more debt—having the 

debt levels we have is not good for our economy either. That is a 

different question than do we take it out of the backs of small businesses. It is how we do this that ought to be discussed and not 

whether it is done. 

Mr. MULVANEY. And Dr. Fuller, just so I understand, the numbers that you used, were they just the defense cuts or were they 

the entire sequester? 

Mr. FULLER. The 2.1 million job losses is the entire sequester as 

spread across the nondefense agencies as well. 

Mr. MULVANEY. Thank you, Dr. Fuller. 

Mr. Chairman, I will say again, you and I have worked tirelessly 

over the last two years trying to make the argument that government spending does not create jobs, and yet now I see us relying 

almost exclusively on the argument that reducing this spending 

will cost us jobs. We cannot have it both ways, and in fact, by doing 

this I feel we open ourselves up to claims of hypocrisy. The sequester cuts will harm the military. There is no question about it. It 

will harm our ability to defend our nation. And I continue to think 

that that is the focus that we should be taking and we should focus 

instead not on the job losses that come from the sequester. I think 

it is easy to make the argument; hard to prove the argument. I 

think instead it should be focusing on where else we could save the 


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money instead so that we can move the money from wasteful programs into actually defending the nation. 

With that I thank you and I yield back the balance of my time. 

Mr. WEST. The chairman yields back. And I would like to dovetail off what my good colleague said because I do not support, you 

know, looking at the DoD as a job creation program. But when I 

go to the Constitution and I look at Article 1, Section 8, and a lot 

of the tasks that are listed for us as members of Congress, to define 

and punish piracies and felonies committed on the high seas and 

offenses against the law of nations; to declare war, grant letters of 

Marque, rules concerning captures on land and water; to raise and 

support armies but no appropriation of money, to that use shall be 

for a longer term than two years; to provide and maintain a Navy; 

to make rules for the government and regulation of the land and 

naval forces; to provide for the calling forth of the militia; to execute the laws of the Union, suppress insurrections, and repel invasions; to provide for organizing, arming, and disciplining the militia. 

So I think that the thing that we have to understand is that the 

men and women in uniform are not the ones out there building the 

ships. They are not the ones out there building the planes. I often 

tell people the great story of the USS Yorktown during World War 

II and how it was severely damaged during the Battle of the Coral 

Sea, to the point where the battle damage assessment was six 

months. When it got back into port at Pearl Harbor, Admiral Nimitz said we do not have six months. The USS Yorktown steamed 

out of Pearl Harbor in less than two weeks. Those were not sailors 

that did the repairs on the USS Yorktown. That was a defense industrial base that made that happen. 

Now, what is the point of the story? The USS Yorktown joined 

up with the rest of the Pacific Fleet at a place called Midway. And 

if you understand your history, you understand exactly what happened in turning the tide in the Pacific at Midway. So I am not 

an advocate for looking at defense as a job creation program but 

I know this. Having spent 22 years in the military, all of a sudden 

we are about to tell our men and women out there that they may 

not get the support that they need because we are about to gut out 

an industrial base that supports them and I think that is the 

stance that we should take and I think that is the stance that everyone can agree upon. 

My last question. In DoD’s written testimony they said that 

when the pool of available contracting dollars is diminished as it 

would be under sequestration, their ability to partner with small 

businesses is likewise diminished. I know that NDIA and NSBA 

both sent the Committee letters of support for our contracting reforms earlier this year, but I think this statement makes the need 

to raise the small business goal more important than ever. As we 

talk about sequestration for the panel, do you think we should still 

be focused on these contracting reforms? 

Ms. MACKEY. I think it is really important that we enable the 

DoD to behave in a way that maintains our small business base. 

So I would say those contracting reforms are important well beyond 

the goal setting, but the very practical approach to how to manage 


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contracting and how to make sure there is more transparency to 

keep the playing field level. 

Ms. MONCRIEFF. I also agree that we need to uphold the contracting goals and hold the DoD to the same federal contracting 

goals of other agencies. And just as an example, I had a recent discussion with a very large multinational global that went through— 

an industrial base that went through an incredibly bad time five 

years ago. And their kneejerk reaction was to cut out a lot of small 

business and depend on larger companies. They have now gone 

back and analyzed the impact of that and they are now wanting 

to reverse that trend and reach back now five years later to do 

more contracting with small business because what they figured 

out in doing less small business contracting is that in the end it 

is costing them much, much more money. So, yes, I think it is very 

important. 

Mr. GROSS. I further that sentiment. I believe that DoD should 

be held to the same standard everybody else is as far as the subcontracting goals for small business or contracting goals for small 

business. I think that we are all prepared for budget cuts, all of 

us. It has to happen. We understand that. I do believe taking a 

more surgical look at redundancies, non-mission critical agency, 

non-mission critical programs, that sort of thing is the way to do 

that. I am not a big proponent of cutting SBA. It is the only advocacy agency we have out there and so I would think that any cuts 

at SBA are really going to hurt small business. 

Mr. WEST. Thank you, and I yield to Ranking Member 

Vela ́zquez. 

Ms. VELA ́ ZQUEZ. Thank you. And following what you just said, 

that you believe that cuts, $75 million to an agency that has suffered so much in the past in terms of budget cuts will be detrimental to the same small business contractors that are sitting 

here. So if we do not want for DoD—if we do not support DoD’s 

defense cuts because of sequestration, and we do not want to cut 

SBA because it is the watchdog that will make sure that DoD will 

achieve those contracting goals, it means that we cannot have it 

both ways. So there are some of us who are proposing a balanced 

approach and that will call for domestic spending cuts but also the 

revenue side. Otherwise, we are going to defeat the purpose. We 

will not touch DoD. But on the other hand we are going to impact, 

negatively impact the very same small business contractors that we 

are trying to protect. 

Thank you, Mr. Chairman. I yield back. 

Mr. WEST. Thank you, Ranking Member. I think we also need to 

realize that we already put $487 billion of cuts on the DoD over 

the next 10 years, and this $500 billion is in addition to that. So 

you are looking at 19.6 percept of our budget getting about 55 percent of budget cuts. 

Thank you all for participating today. While I support strong 

cuts to curb America’s severe spending habit, sequestration is not 

the proper remedy. Today’s testimony highlighting the need for the 

administration to work with Congress to ensure that small businesses, our nation’s innovators and job creators, are not unduly 

burdened under sequestration. 


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I ask unanimous consent that members have 10 business days to 

submit statements and supporting materials for the record. Without objection, so ordered. This hearing is now adjourned. 

[Whereupon, at 3:10 p.m., the Committee was adjourned.] 


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Statement 

of 

The Honorable Michael J. McCord 

Principal Deputy Under Secretary of Defense (Comptroller) 

and 

Mr. Richard Ginman 

Director, Defense Procurement and Acquisition Policy 

Before the 

Committee on Small Business 

U.S. House of Representatives 

September 20, 2012 

Embargoed Until Released 

by the 

House Committee on Small Business 
32 


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Chairman Graves ... Ranking Member Velazquez ... Members of the Committee. My 

name is Mike McCord. I am Principal Deputy Under Secretary of Defense (Comptroller). 

Appearing with me today is my colleague Dick Ginman, Director of Defense 

Procurement and Acquisition Policy in the Office of the Under Secretary of Defense for 

Acquisition, Technology, and Logistics (AT&L). He is a career Civil Servant, with more than 40 

years' experience in government and commercial business in the fields of contracting, 

acquisition, and financial management. The Comptroller organization has the overall lead in 

dealing with sequestration matters, and AT&L is responsible for contracting and small business 

policy. 

We are here this afternoon to speak about the Joint Committee sequestration and its 

potential impact on the Department of Defense and the industrial base, including the many 

small contractors that DoD relies on. 

We would like to begin by thanking you for your support of the dedicated men and 

women who wear America's uniform. Your concern for their well-being is much appreciated, as 

is your commitment to the nation's security. 

The leadership of DoD shares your concerns about the Joint Committee sequestration. 

Consequently, as you know, Secretary Panetta has been emphasizing for many months that 

sequestration would have devastating effects on the Department, on the Services, and virtually 

every other Federal agency. He urged Congress to avoid sequestration by approving a 

comprehensive and balanced deficit reduction package that the President can sign. He also 

reminded Congress that, back in February, the President's Budget for FY 2013 contained a 

proposal for just such a balanced reduction. 

This message was delivered yet again this morning when Under Secretary Hale and the 

Vice Chiefs of the Armed Services testified before the House Armed Services Committee. 

Their statement reiterated the fact that sequestration was designed to be an inflexible 

policy that would never be implemented. It was enacted as a way of encouraging Congress to 

pass a comprehensive package to reduce the federal deficit. 

If Congress fails to act on a balanced deficit reduction plan to avoid sequestration, it 

could harm the management of many defense investment programs, introduce inefficiency into 

the defense industry that supports us -- including small business - and cause long-term 

disruptions, even if the reductions only extend for one year. The Joint Committee 

sequestration would seriously disrupt our forces and programs and our workforce. 
33 


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Impacts of Sequestration 

Last week, as required by the Sequestration Transparency Act of 2012, the 

Administration transmitted a report to the Congress showing the impact of sequestration on 

accounts across the Federal government, including in the Department of Defense. 

2 

Sequestration requires that the national defense function be reduced by almost $55 

billion in FY 2013. Based on the assumptions in the Sequestration Transparency Act report, this 

would lead to an estimated 9.4 percent reduction in non-exempt discretionary defense 

programs. If allowed to go into effect, the reductions in FY 2013 and the lowering of the 

discretionary caps in the out years (FY 2014 through FY 2021) could force us to modify and scale 

back the new defense strategy that the Administration introduced just a few months ago. 

Moreover, sequester would apply to the bulk of the DoD budget, including additional 

amounts provided for Overseas Contingency Operations (OCO). The only major exception is for 

military personnel funding, which the President indicated would be exempt from any 

sequestration in FY 2013. This is the only optional exemption authorized under the 1985 

Balanced Budget and Emergency Deficit Control Act (BBEDCA), as amended; all other exempt 

and non-exempt determinations are based on requirements in the law. However, the reduction 

in other defense budget accounts will have to be increased to make up the difference because 

the amount of sequester applied to the national defense function does not change with the 

exemption of military personnel funding. 

In addition to the damage that making cuts of this magnitude necessarily implies, the 

law requires that the cuts be applied in an across-the-board manner to all non-exempt funding. 

To the extent we would have any flexibility, we would attempt to protect some high-priority 

projects from reductions. But our ability to moderate impacts under sequestration would be 

limited. 

We have reviewed the law and identified some of the key impacts sequestration would 

have on the Department. 

As noted earlier, OCO funding - which pays for the added costs of wartime activities - is 

subject to sequester. Supporting our warfighters in combat is DoD's highest priority. We would 

therefore endeavor to protect wartime operating budgets as much as possible, within the key 

operation and maintenance (O&M) accounts. 

The O&M accounts contain OCO and base-budget funding, and these two categories of 

O&M funding merge together during execution of DoD budgets. We could reduce the basebudget portions of O&M disproportionately to reduce the impact on war activities funding 

through OCO. To some extent, we could take similar steps as needed in some other accounts 

that include OCO funding. 
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3 

Protecting OCO funding would lead to larger cuts in base budget O&M, especially for the 

Army and the Marine Corps. As a result, while we would seek to minimize effects on training 

and readiness, we could probably not do so fully. 

Training in the other military services would also be affected. Air Force flying hours for 

pilots could be reduced by several hours a month, and Navy steaming days could decline by 

several days a quarter. The result will be reduced training and lower readiness for some units. 

Sequestration would also force us to reduce civilian personnel funding, possibly 

including a partial hiring freeze or unpaid furloughs, which would curtail important capabilities. 

And military families and retirees would be affected, as we would face cuts to base 

support services, facility maintenance, and maintenance of government owned family housing. 

Commissary hours could be reduced. Funds for the Defense Health Program would be 

sequestered, resulting in delays in payments to service providers and, potentially, some denial 

of service for retirees and military dependents. 

Inevitably, sequestration would also lead to disruption of DoD's investment programs. 

As estimated in OMB's report, there would be a 9.4 percent reduction in each of the nonexempt discretionary budget accounts that fund defense operations; procurement; research, 

development, test, and evaluation; and military construction projects. Those who manage 

these programs would be forced to join many other acquisition managers in non-defense 

agencies as they seek to accommodate the reduced funding for FY 2013, three months into the 

fiscal year. 

We were asked to address the consequences of sequestration on the small business 

community specifically. DoD is committed to ensuring that these essential business partners 

have their fair share of contracting dollars. But when the pool of available contracting dollars is 

diminished, as it would be under sequestration, our ability to partner with small businesses is 

likewise diminished. It is important to recognize that prior-year funding already obligated on 

contracts would not be subject to sequestration. Nevertheless, sequestration would mandate 

cuts in discretionary funding that would disrupt small business funding for defense and nondefense programs alike. 

The Secretary, Deputy Secretary, and the Under Secretary for Acquisition, Logistics, and 

Technology have voiced their commitment to small businesses. DoD has steadfastly worked to 

sustain, and where appropriate increase, the percentage of contracting dollars it provides to 

small businesses. We will maintain that commitment, with or without a sequestration, and will 

give small businesses a fair share of the contracting opportunities. But a sequestration, with its 

associated spending cuts, would reduce our overall budget, necessarily forcing cuts in buys 

from all businesses, large and small. 
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4 

Next Steps on Seguester 

While we can foresee the many harmful impacts of sequester, we cannot devise a plan 

that would eliminate or even substantially mitigate them. Again, sequester defies rational 

planning, as was intended. Congress has time to enact a balanced deficit reduction plan that 

would avoid sequestration. In the unfortunate event that sequestration is actually triggered, 

we will work with OMB and -like all the federal agencies affected by this law - we will be ready 

to implement it. 

At this point we have another undesirable possibility before us, which is that 

sequestration may not happen but we could end up triggering some of its bad effects anyway. 

For example, we do not want to unnecessarily alarm our employees by announcing adverse 

personnel actions or by suggesting that such actions are likely. We do not want to hold back on 

the obligation of funds - for weapon projects or operating programs. That would introduce 

inefficiency and waste. Nor do we want to cut back on training, which would harm military 

readiness in a period when we face a complex array of national security challenges. But in the 

charged budgetary environment today, this concern is very real. 

Finally, we understand that the many private companies -large and small -- that serve 

the Department of Defense and constitute important members of our national security team 

will be making decisions on issues related to sequester. They face many of the same dilemmas 

we do, and a number of them have expressed alarm at the wasteful and disruptive way 

sequester would affect the management of taxpayer money and the talents of their employees. 

Conclusion 

In short, sequester would be devastating to DoD and to every other Federal agency. The 

best outcome for the Department of Defense and for private companies -- large and small-- is 

for Congress to enact a balanced deficit reduction plan that halts implementation of this 

inflexible law. The men and women of DoD and their families need to know with certainty that 

we will meet our commitments to them. Our partners in the defense industry and their 

employees are likewise entitled to know that we are going to have the resources to procure the 

world class capabilities they can provide. Perhaps more importantly, allies and potential foes 

alike need to know that America has the political will to implement the defense strategy we 

have put forward. 

Thank you very much. We welcome your questions. 

#### 
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Congress of the United States 

U.S. House of Representatives 

Committee on Small Business 

Hearing on Impacts of Sequestration on Small Business 

Testimony By 

Stephen S. Fuller, Ph.D. 

Dwight Schar Faculty Chair and University Professor 

Director of the Center for Regional Analysis 

School of Public Policy 

George Mason University 

Arlington, Virginia 

September 20,2012 

The Economic Impacts of Sequestration on Small business 

Total GOP and lob Impacts of Sequestration 

The economic impacts of sequestration, as imposed by the Budget Control Act of 

2011 (BCA), have been analyzed and found to be large and significant. I prepared a 

report entitled "The Economic Impact of the Budget Control Act of 2011 on DOD and 

Non-DOD Agencies" (July 17, 2012) that measured these impacts building on 

previously analyses prepared by the Congressional Research Service and the 

Congressional Budget Office. These analyses establish the magnitudes of these 

economic impacts across both the public and private sectors inclusive of large and 

small businesses. These total impacts can be summarized as follows: 

With spending reductions totaling $115.7 billion in FY 2013 from FY 2012 

authorized levels for DOD and Non-DOD agencies-$56.7 billion and $59.0 billion 

respectively-U.S. gross domestic product growth projected for 2013 would be 

reduced by $215.0 billion erasing approximately two-thirds of the currently 

projected gains in GOP for next year. While the U.s. economy is struggling to sustain 

its recovery and any sudden loss of economic activity of this magnitude could derail 

its fragile performance, the loss of jobs associated with these spending reductions 

would have far reaching implications. My analyses of the BCA of 2011 spending 

reductions found that these federal spending cutbacks would generate 2.1 million 

job losses nationwide. 

The direct job losses resulting of sequestration would total 746,222 and consist of: 

(1) federal workers whose jobs would be lost due to reductions in agency payroll 
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and (2) employees of federal contractors whose employment depends directly on 

the federal contracts that would be terminated. 

These federal contractors support a large number of subcontractors, suppliers and 

vendors. As a result, the spending reductions directly impacting the prime 

contractors would result in the loss of 432,978 additional jobs in both the supply 

chain and in businesses that otherwise depended on indirect transactions supported 

by federal contract awards. 

The loss of these jobs and their payrolls would reduce consumer spending, the loss 

of which would impact every sector of the economy and their respective businesses 

across the country. These are the businesses and workers that depend on the 

spending of payroll of the jobs lot to sequestration and are principally found in retail, 

restaurant, health care, education, personal services, construction, housing, and 

local government sectors. These sectors would lose 958,508 jobs as a result of 

sequestration. 

Table 1 below identifies these job losses by source and type. 

Table 1 

Employment Impacts of the Budget Control Act of 2011 in 2013 

Type of Job Loss Sl2ending Reductions 

DOD Non-DOD Agencies Total 

Direct Job Losses 325,693 420,529 746,222 

Federal Jobs 48,147 229,116 277,263 

Contractor Jobs 277,546 191,413 468,959 

Indirect Job Losses* 282,426 150,552 432,978 

Induced Job Losses** 482,240 476,268 958,508 

Total Job Losses 1,090,359 1,047,349 2,137,708 

Source: "The Economic Impact of the Budget Control Act of 2011 on 

DOD and Non-DOD Agencies," by Stephen S. Fuller, Ph.D. (July 17,2012). 

*suppliers and vendors and sub-contractors dependent on federal 

contractor spending; **jobs supported across all sectors supported by 

payroll spending by federal workers and employees of federal contactors 

losses due to federal spending reductions in FY 2013. 

The significance of these job losses is seen in their impact on the unemployment 

rate. The addition of these laid off workers to the unemployment rolls would add an 

estimated 1.5 percentage points to the current unemployment rate, increasing it to 

9.5% if the current rate holds to into 2013. 

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Collateral Impacts of Sequestration 

Sequestration would generate other impacts than those directly linked to reductions 

in federal payroll and procurement outlays. These impacts would result from the 

reaction of businesses and individual consumers to the increased uncertainty 

generated by the national economy's declining performance in response to 

sequestration. Some of these economic impacts would be driven by behavioral 

factors-the loss of consumer confidence may suppress spending especially 

spending requiring credit such as for autos and housing. personal saving may 

increase taking further disposable income out of the economy, business investment 

and private sector hiring may be dampened as a result of increased uncertainty all 

contributing to further weakening of the economy's performance. These and other 

collateral impacts will enlarge the negative consequences of the initial federal 

spending reductions and contribute to further deepening a potential economic 

contraction in 2013 thereby extending its duration and increasing its magnitude. 

Additionally, the impacts of sequestration would substantially disrupt the economy 

as a consequence of reductions in government services from the layoffs of federal 

workers and curtailment of federal programs. At a minimum these disruptions 

would slow commerce and undermine efficiency. As some federal services would 

face elimination or suspension for an extended period, these disruptions could 

result in significant reductions of business activity and increased costs impacting 

exports, business travel, tourism, health and food safety, and security, and would 

likely extend to the public safety and education services provided by local 

governments. 

Other costs will occur over a longer timeframe resulting from deferred or foregone 

innovation by both federal agencies and private entrepreneurs. These disruptions to 

the U.S. economy will have cumulative impacts with far-reaching and potentially 

more significant consequences than the initial first-year impacts. While these costs 

may be difficult to quantity in the short term, they need to be recognized and 

acknowledged before the full economic consequences of sequestration can be 

properly assessed. 

The economic impacts of sequestration will not be distributed evenly across all 

states but they will impact all states. Similarly, these economic impacts will not be 

equally distributed across all sectors of the economy or types and sizes of 

businesses. Like all economic impacts, the respective hardships will be a function of 

the businesses' or workers' abilities to absorb the costs and shift into more 

promising ventures and occupations. Small businesses and their workers will be 

especially vulnerable to both the initial economic impacts of sequestration and the 

consequences of these initial impacts as they affect their abilities to reposition 

themselves in a national economy struggling to regain traction in a weak global 

economy. 

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The Economic Impact of Sequestration on Small Businesses: 

By the Numbers 

The impact of the BCA of 2011 on both the public and private sectors, with the 

projected loss of 2.1 million jobs in FY 2013, will have a significant effect on small 

businesses and their employees. Workers in small businesses would suffer more 

than fifty percent (51.6%) of the projected job losses due to the spending reductions 

mandated by the BCA of 2011. 

DOD spending reductions would result in the loss of 520,398 jobs in small 

businesses accounting for 50.2 percent of all private sector job losses 

generated by mandated cutbacks under sequestration; and, 

Non-DOD agency spending reductions would result in the loss of 435,782 

jobs in small businesses accounting for 53.4 percent of all private sector job 

losses generated by mandated cutbacks under sequestration. 

Table 2 

Summary of the Employment Impacts of the 

Budget Control Act of 2011 on Small Businesses, FY 2013 

Sources of Federal Spending Reductions 

Impact DOD Non-DOD Agencies Totals 

Direct Federal 

Contractor Job Losses* 81,552 76,047 157,598 

Percent of All Federal 

Contractor Job Losses 29.9 40.1 34.1 

Total Small Business 

Job Losses** 520,398 435,782 956,181 

Percent of all private 

sector job losses 50.2 53.4 51.6 

Sources: GMU Center for Regional Analysis and Chmura Economics & 

Analytics. *See Table 3 for state-by-state distribution of direct jobs losses 

by small businesses; **see Table 4 for state-by-state distribution of total 

job losses by small 

businesses. 

Small businesses will be impacted by the immediate reductions in federal 

procurement spending resulting from sequestration (direct impact), as 

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subcontractors, suppliers and vendors (indirect impacts), and as businesses 

supporting the retail and consumer service needs of the workforce (induced 

impacts) that would experience layoffs and the loss of labor income due to 

sequestration. This latter class of small businesses would span the economy 

although would be concentrated in retail and consumer service sectors and be 

located throughout shopping districts and small communities across the country. 

The direct impacts on small businesses from sequestration-small businesses that 

are federal contractors-would result in the immediate loss of 157,599 jobs 

representing 34.1 percent of all federal contractor jobs (462,211 jobs) lost under 

sequestration. That this percentage is less than the 51.6 percent of the total job 

losses that small businesses would experience from sequestration (direct, indirect 

and induced) underscores the vulnerability of small businesses to these spending 

reductions. Many small businesses are subcontractors, suppliers and vendors to 

larger-scale businesses that are the prime federal contractors. As such, these 

subcontractors, suppliers and vendors are at the mercy of their primes and the 

acquisition-policy adjustments these large businesses may implement in response 

to changes in their backlog, profitability, or business outlook. These subcontractors, 

suppliers and vendors have little recourse when their contracts with their primes 

are scaled back or terminated; in fact the suppliers and vendors may not even know 

that their business is linked to a federal contract that could be canceled due to 

something called "sequestration." 

Approximately 1.4 million indirect and induced private sector jobs-jobs of 

businesses that are subcontractors, suppliers and vendors, or jobs dependent on the 

spending of federal and contractor payroll-would be lost due to federal spending 

reductions with almost fifty-eight percent (57.7%) of these jobs losses coming from 

small businesses. Small businesses and their workers are particularly vulnerable to 

these indirect and induced impacts that would undermine these firms' viability and 

threaten their survival even though many are not even doing business with the 

federal government. 

The Economic Impact of Sequestration on Small Businesses: 

The Collateral Impacts 

That small businesses are more vulnerable to changes in the economy than large 

businesses is well established in the literature. Among the factors explaining this 

greater vulnerable is their more limited access to financial resources, their greater 

dependency on fewer product and service lines of business, their smaller business 

backlogs, the more limited adaptability of their workforce, and the smaller margins 

of their economies of scale. 

The measurements of job impacts associated with sequestration calculate only the 

job-equivalent of the direct spending reductions and their subsequent impacts on 

the economy due to the loss of federal spending or its payroll effects on consumer 

purchasing power. What is not included is any consideration for the induced 

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failures of small businesses from the partial losses of federal contracts or 

subcontracts. 

While large firms may suffer financial losses as a result of a federal contract 

cancelation, these firms have sufficient scale of operations to survive through 

adjustments to their variable costs and most are able to absorb losses over the 

period required to adjust their business base, downsize, right size or re-position to 

regain profitability. A typical strategy of prime contractors when experiencing a 

reduction of contracting or business slowdown is to bring work that had been 

subcontracted to outside firms back into the base firm. Large businesses have the 

ability to re-absorb business from their subcontractors and other suppliers and 

vendors where this capability is less likely among small businesses. The fact that 

small businesses are more likely to be subcontractors and constitute a greater 

percentage of businesses impacted by the indirect and induced impacts of 

sequestration makes them more vulnerable to the predictor business strategies of 

larger prime contractors. 

Small businesses are less able to sustain themselves when they experience a loss of 

a contract, either as a prime or subcontractor. Due to the narrower economies-ofscale that characterize the operations of most small businesses, the loss of even a 

small portion of their projected backlog or the cancelation of a contract could result 

in these firm's becoming unsustainable. Small businesses typically do not have the 

financial resources to sustain unprofitable operations for a sufficiently long period 

to permit restructuring and alternative product or market development. 

The same dilemma facing small businesses with their limited resource base that 

makes adjusting to an abrupt change in business volume applies to their workers. 

Employees in small businesses may be more specialized or less networked than 

employees in large businesses thereby making their re-employment more 

challenging than for employees working in large businesses experiencing cutbacks 

or cancelations of federal contracts. These workers in larger businesses may have 

the opportunity for reassignment to another division in the same company when the 

contract they have been working on is canceled. Additionally, transfers within these 

companies to other locations may also re-employ some of these workers. And, larger 

firms tend to be located in larger economies that may offer more opportunities for 

re-employment. Small businesses and their workers are more vulnerable to 

cutbacks and the consequences can cascade beyond the immediate impacts 

accounted for by the econometric models. 

Conclusions 

The size and specialized nature of small businesses make them more vulnerable to 

sequestration than large businesses. As a result, small businesses will bear a 

disproportional impact of the federal spending reductions under sequestration. 

While these impacts can be measured in the loss of jobs by small businesses that are 

prime federal contractors (34.1% of all prime federal contractor job losses), small 

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businesses that are subcontractors, suppliers and vendors and whose existence 

depend on consumer spending that would be negatively impacted by the losses of 

labor income resulting from sequestration, would account for 57 percent of the 

associated job losses across the country. Not only will small businesses shoulder a 

disproportional share of the jobs losses attributable to sequestration but their 

ability to survive these losses and remain viable further challenges the efficacy of 

sequestration. 

Table 3 

State Employment Impacts on Small Businesses 

of the Budget Control Act of 2011in Fiscal Years 2012 and 2013 

Small Business Small Business 

Job Losses, Job Losses, Total Small 

Alabama 12,812 4,965 17,777 

Alaska 2,813 1,880 4,692 

Arizona 16,823 5,801 22,623 

Arkansas 1,719 2,308 4,027 

California 64,532 37,553 102,085 

Colorado 8,802 10,036 18,838 

Connecticut 17,292 2,377 19,668 

Delaware 31 889 920 

District of Columbia 7,240 46,700 53,940 

Florida 20,000 15,626 35,626 

Georgia 13,177 11,194 24,371 

Hawaii 3,750 1,178 4,928 

Idaho 469 3,923 4,392 

Illinois 11,094 12,653 23,748 

Indiana 7,135 3,741 10,877 

Iowa 2,500 2,446 4,946 

Kansas 2,969 3,193 6,162 

Kentucky 8,125 4,835 12,960 

Louisiana 9,010 3,975 12,985 

Maine 2,031 1,253 3,285 

Maryland 18,802 31,373 50,175 

Massachusetts 19,792 7,917 27,709 

Michigan 6,458 7,356 13,814 

Minnesota 2,344 4,628 6,972 

Mississippi 2,500 2,677 5,177 

Missouri 16,042 7,273 23,315 

Montana 468 1,691 2,159 

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Nebraska 1,249 1,668 2,918 

Nevada 2,031 2,561 4,592 

New Hampshire 1,719 1,126 2,844 

New Jersey 12,136 7,388 19,523 

New Mexico 2,344 9,787 12,131 

New York 13,750 17,143 30,893 

North Carolina 5,677 7,254 12,931 

North Dakota 469 1,032 1,501 

Ohio 10,156 7,957 18,113 

Oklahoma 3,802 3,267 7,070 

Oregon 1,406 3,755 5,161 

Pennsylvania 19,063 16,025 35,087 

Rhode Island 1,250 778 2,028 

South Carolina 7,031 6,500 13,532 

South Dakota 938 1,139 2,077 

Tennessee 4,843 12,055 16,898 

Texas 47,240 25,170 72,410 

Utah 3,958 3,220 7,179 

Vermont 1,094 736 1,830 

Virginia 65,000 29,700 94,700 

Washington 8,125 10,261 18,386 

West Virginia 469 3,772 4,240 

Wisconsin 13,177 3,722 16,899 

Wyoming 312 884 1,196 

Guam 1,041 204 1,245 

Puerto Rico 1,041 1,272 2,312 

Undistributed 12,348 17,965 30,313 

8 
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Table 4 

Direct Impact on Small Business Contractors «500) Employment 

Small Business 

Small Business Direct Job Total Small 

Direct Jobs Losses Losses, Non-DOD Business Direct 

DOD Cuts Cuts Jobs Losses 

Alabama 2,008 866 2,874 

Alaska 441 328 769 

Arizona 2,636 1,012 3,649 

Arkansas 269 403 672 

California 10,113 6,553 16,666 

Colorado 1,379 1,751 3,131 

Connecticut 2,710 415 3,125 

Delaware 5 155 160 

District of Columbia 1,135 8,149 9,284 

Florida 3,134 2,727 5,861 

Georgia 2,065 1,953 4,018 

Hawaii 588 206 793 

Idaho 73 685 758 

Illinois 1,739 2,208 3,947 

Indiana 1,118 653 1,771 

Iowa 392 427 819 

Kansas 465 557 1,022 

Kentucky 1,273 844 2,117 

Louisiana 1,412 694 2,106 

Maine 318 219 537 

Maryland 2,946 5,475 8,421 

Massachusetts 3,102 1,382 4,483 

Michigan 1,012 1,284 2,296 

Minnesota 367 808 1,175 

Mississippi 392 467 859 

Missouri 2,514 1,269 3,783 

Montana 73 295 368 

Nebraska 196 291 487 

Nevada 318 447 765 

New Hampshire 269 196 466 

New Jersey 1,902 1,289 3,191 

New Mexico 367 1,708 2,075 

New York 2,155 2,992 5,146 

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North Carolina 890 1,266 2,156 

North Dakota 73 180 254 

Ohio 1,592 1,388 2,980 

Oklahoma 596 570 1,166 

Oregon 220 655 876 

Pennsylvania 2,987 2,796 5,784 

Rhode Island 196 136 332 

South Carolina 1,102 1,134 2,236 

South Dakota 147 199 346 

Tennessee 759 2,104 2,863 

Texas 7,403 4,392 11,795 

Utah 620 562 1,182 

Vermont 171 129 300 

Virginia 10,186 5,183 15,369 

Washington 1,273 1,791 3,064 

West Virginia 73 658 732 

Wisconsin 2,065 650 2,715 

Wyoming 49 154 203 

Guam 163 36 199 

Puerto Rico 163 222 385 

Undistributed 1.935 3,135 5,070 

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NSB 

National Small Business Association ® 

TESTIMONY OF ML MACKEY 

CEO OF BEACON INTERACTIVE SYSTEMS 

ON BEHALF OF THE 

NATIONAL SMALL BUSINESS ASSOCIATION 

AT A HEARING BEFORE THE 

U.S. HOUSE COMMITTEE ON SMALL BUSINESS 

"SEQUESTRA TION: THE THREAT TO SMALL BUSINESSES, JOBS, 

AND THE INDUSTRIAL BASE" 

SEPTEMBER 20,2012 
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Good afternoon. Chainnan Graves, Ranking Member Velazquez, and the Members of 

the Committee, thank you for the opportunity to testify here today and for your tireless 

efforts to promote economic development and job creation in America's small-business 

community. Your continued leadership on critical issues such as the one before us today 

and your collective ability to understand and shed light on the challenges facing small 

business in the federal marketplace is invaluable and greatly appreciated. 

My name is ML Mackey, and I am the CEO of Beacon Interactive Systems, a small 

business located in Cambridge, Massachusetts. I am also on the Board of Trustees of the 

National Small Business Association (NSBA). 

18 years ago my husband and I co-founded our company out of our rent-controlled 

apartment on Beacon Street. We built the company as a provider of commercial systems 

initially providing software products to companies like Olympus, MetLife and IBM. For 

the past nine years, we have worked as a federal contractor delivering efficiency 

improving and cost-savings applications to the Department of Defense (DoD). The Navy 

is currently using products we developed through the highly successful Small Business 

Innovation Research (SBIR) program to improve performance of the equipment 

maintainers deployed across U.S. Fleet Forces Command, the sailors who keep our ships 

mission ready. At full deployment of our software, initial estimates on cost-savings and 

cost-avoidance are in excess of $40 million; all on an initial SBIR investment of $5.5 

million. This is the kind of cost savings and efficiency improvements that small 

businesses provide for the DoD, exactly the approach needed in these austere times. 

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The federal budget deficit has exceeded $1 trillion in each of the last three fiscal years 

and is expected to exceed that level in Fiscal Year 2012. Concerns over these large 

deficits, as well as the long-term trajectory of the federal budget, have resulted in 

considerable uncertainty among small businesses like mine. According to NSBA's 

recently released Mid-Year Economic Reportl

, 68 percent of small businesses said that 

economic uncertainty is the most significant challenge to the future growth and survival 

of their business. Today, 34 percent of small-business owners anticipate a recessionary 

economy in the coming year the highest it's been since December 20092 

Therefore, while I recognize that the current fiscal environment will require lawmakers to 

make some tough choices that will have a significant impact on the size of the budget 

deficit and the pace of our economic recovery, I, along with many of my counterparts 

across the country, am very concerned with the proposed arbitrary approach to 

sequestration. Simply cutting the top line of non-exempt agency budgets is not based on a 

rational assessment of the relative effectiveness or usefulness of various programs. It has 

the potential to devastate key programs and, specifically, to have a disproportionate 

impact on small business. While major program cuts will be necessary inside federal 

agencies, these cuts should be made with a purposeful and thoughtful approach in order 

to not only ensure an equal impact across the defense industrial base but also to ensure a 

rational approach that does not gut the advances made in government procurement to this 

point. 

I NSBA 2012 Mid-Y car Economic Report (htlp:l/www.nsba.biz/docs/2012Mid-Ycar-Economic3 
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Today, I am speaking to you as someone who has already felt the effects of this 

uncertainty. We, like many other small businesses in this sector, have had to tighten our 

belts in anticipation of the rough times ahead. In spite of successful pursuit of new 

opportunities, we have purposefully trimmed our workforce. This is counter to how we 

have strategically built our business over the last ]8 years. Previously, once we closed a 

big opportunity the first thing we did was evaluate our team and act on ways to improve 

our capabilities like defining new roles and hiring new employees. This approach has not 

only kept us viable, but has helped us expand our business and create jobs. 

Unfortunately, given the uncertainty surrounding sequestration, this is not the approach 

we are taking now. And, generally speaking, we're not alone. The number of smallbusiness owners who project increases in employee size in the coming 12 months 

dropped from 30 percent in December 201] to 25 percent today3 

I am by no means the first business owner, nor will I be the last, to tell a Congressional 

panel that sequestration will have major, negative impacts in areas ranging from business 

survival to national security. Nor will I be the last to argue that something must be done 

to stabilize our economy. Surely Congress can craft a more deliberate and careful 

approach than the current strategy, which will lead to considerable job loss and greater 

economic uncertainty at a time when job creation and economic growth remain a top 

priority for our country. 

The federal contracting and acquisition systems are over taxed and have struggled with 

efficiency and transparency issues for years. This problem will only get worse with 

3 1d. 

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sequestration in place. The contracting staff of Federal agencies will likely face major 

personnel reductions under sequestration. As a result, we're likely to see an increase in 

contract bundling and a less efficient, less predictable contracting system. This will have 

a major impact on small business contractors who are likely to be the first to go on many 

projects. According to NSBA's most recent Politics of Small Business Survel, 99 

percent of small-business owners are registered to vote, 97 percent said that they 

regularly vote in national elections, and the 25 percent of small businesses who have 

contacted their elected officials on a small business issue have done so on the matter of 

contracting. 

Small businesses create efficiencies. We are agile and flexible, which saves the 

government money. We believe that program managers and contracting officers should 

be incentivized to create efficiencies and cost savings through increased work with small 

business, not the other way around. Small businesses around the country are waiting on 

funds from previously awarded contracts, large businesses are contemplating mass 

layoffs and the end users, our men and women in unifonn and the people who are served 

by our federal government, are waiting for products and services they expected months 

ago. 

Washington needs to set their differences aside and not use the excuse of an election year 

or partisan gridlock to short change America's small businesses and the broader public. 

We cannot afford to wait and fix our economy or shore up our industrial base after it has 

., NSBA's The Politics of Small Business 

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been decimated. If sequestration happens, DoD contracts being competed now or in the 

near term may be cancelled with little recourse for contractors. Business owners don't 

know which opportunities are real and which are illusory, causing a massive waste of our 

limited resources. Businesses are frozen, in need of personnel but unable or unwilling to 

hire because of this uncertainty. 

Congress, to its credit, has increasingly recognized the benefits of small business 

engagement. The small business contracting reforms incorporated into Title XVI of the 

FY2013 National Defense Authorization Act (NDAA) are a positive step forward and 

incent behavior that incorporates the efficiency and cost savings approach that our small 

businesses are known to provide. These are the kind of proposals that will push the 

federal government toward greater efficiency. 

I know that pointing out problems is far easier than finding solutions. The path ahead 

will definitely be challenging. Having said that, as a small business owner, I can state 

unequivocally that we are a critical component of the solution to our government's fiscal 

concerns. 

1 applaud this committee for your vigilance in promoting small-business friendly policies 

and your work to reinforce the idea in your colleagues that small business is a value 

added proposition for the government, and an enabler of innovation and growth. 

I appreciate the opportunity to be here today and I welcome your questions. 

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211 j WILSON BOULEVARD, SUITE 400 

ARLINGTON, VA 22201·3061 

(703) 522·1820' (70s) 522·1885 FAX 

WWW.NOIA.QRG 

United States Honse of Representatives 

Committee on Small Business 

Sequestration: The Threat to Small Businesses, Jobs, and the Industrial Base 

Testimony for the Record 

Presented by Laurie Moncrieff 

President, Adaptive Manufacturing Solutions, Inc., Burton, MI 

On behalf of the 

National Defense Industrial Association 

Mr. Chairman, Madam Ranking Member, and Ladies and Gentlemen: 

On behalf of the 1.756 corporate members and over 96,000 individual members of the National 

Defense Industrial Association (NDIA), I would like to thank Chairman Sam Graves, Ranking 

Member Nydia Velazquez and all the members of the Committee for holding this important hearing 

on Sequestration: The Threat to Small Businesses, Jobs, and the Industrial Base, 

We are all painfully aware that in the past 10 years the U,S, has experienced an economic downturn 

second only to the "Great Depression," The most severe impact has been felt by small businesses, 

particularly in several critical industrial sectors, 

Even in a good economy, small businesses have to navigate barriers and challenges, However, 

thtough this downturn they have experienced a significant decrease in customer orders; sttuggled 

with layoffs and the associated effects on the workforce; loss of access to capital (including the 

redlining of geographic regions); watching opportunities for business development slip away; feeling 

the pain of plant closures; and, all too often, suffering financial ruin-all at an unprecedented 

magnitude, 

During any economic decline, small businesses can only reduce their staff so far and still be a 

government contractor. As business declines government contractors still need core staff to search 

for contracts, manage ptograms, inspect, and perform the necessary administration which requires a 

tremendous amount of overhead. Also, understand that as demand declines, costs increase due to 

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the inability to spread overhead costs over the needed volume of work, leading to a vicious cycle 

downward. 

Erosion of critical industrial sectors has escalated the need to study and identifY trades that are 

critical to reviving the U. S. economy and, more specifically, our homeland security and defense 

industrial base. The output of these eroded industries is still widely needed to produce product 

worldwide. These industries are critical to national security, needed for the health and revitalization 

of our national economy, and are recognized as an integral part of our National Innovation System. 

employees. Please take a look at the chart' in your printOl1t: 13 of 16 are considered "eroded". 

As a representative of small business manufacturing, I ask each of you to consider: how can we ever 

revitalize these critical industries (that have already sustained considerable economic injury); 

encourage innovation and invention; increase production aud demand for new state-of-the-art 

products; and support and improve national security when small businesses are hit with yet another 

blow from the astounding budget cuts already taken by the Department of Defense, and then yet 

another blow from sequestration? 

The challenges of the last ten years have made it difficult to identifY individual businesses in these 

segments, to assess what capabilities and capacities exist, and consequently, to match the current 

needs with the proper resources. It can be easily demonstrated that these small businesses hold 

irreplaceable intellectual knowledge, which may not reside in the prime contractor community. Yet 

with the structure of the supply chain today, small business innovation and value-added work is 

often unrecognized, unrewarded, and under-represented in government awards. Ultimately, it means 

I Alliance for American lv1anufactttring, }vIanufocturingA Better Future For America, 7: 274, 2009. 
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there is an increasing risk that we will continue to lose more and more of these "behind the scenes", 

innovative- small business suppliers. 

The sequestration mandated defense budget cuts will disptoportionately impact small business unless 

we act in a ptoactive manner. The United States Government and its military strategic thinkers 

have always subscribed to the basic ancient military principle: "without industry a country cannot 

maintain an army." I advocate that a certain outcome of blind implementation of sequestration will 

be further loss in our country's small businesses and challenges in maintaining our military. 

Examples of companies and communities that are facing the potential or have already been impacted 

include: 

• Cuts to primes on contracts such as the MRAP, which totals over $6 billion in contracting, 

will impact over $1.5 billion of sub-contracts performed by small businesses. 

• Many small businesses in the Michigan are reporting that they are holding back on hiring 

and investing in equipment, even though there is demand today, as they are worried that the 

cuts will lead to large losses in business down the road. Therefore, they are waiting to invest 

and grow until they know the outcome of potential defense cuts, which will negatively 

impact our economy. 

• The Procurement Technical Assistance Center (PTAC) in Genesee County, Michigan, that 

works predominantly with small businesses, (as they have no large prime contractors located 

in their community), has already seen a 30% decrease since its peak in 2010 due to 

anticipation of defense budget cuts. They are concerned about the number of small 

businesses that may need to close their doors and the negative economic impacts for an 

already hard hit community. 

• Miller-Holzwarth, a 2007 recipient of the SBA subcontractor of the year award, announced 

recently that they would be closing their doors. The business located in Salem, Ohio, 

employed 48 at the time of closing, and manufactured periscopes, vision blocks, ballistic 

windows, transparent armor and specialty components for the defense industry for more 

than 35 years. Among the issues affecting their decision to close, was the potential impact of 

significant business loss due to budget cuts and their concern over evolving trends in defense 

procurement practices. 

• TACOM LCMC awards on the FHTV, M-ATV, FMTV, Stryker, and HMMWV include 

$539.6 million directly to small businesses and an additional $563.5 million in subcontract 

awards through March in FY12. This totals over $1.1 billion in the first half of the year, 

demonstrating the importance of small business in this supply chain. 

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• Manufacturer of one of a kind High Tech "Hot Press" furnaces used in the manufacture of 

ceramic body armor plates - If the demand for sustainment of such hlrnaces is decreased or 

eliminated the manufacturer which is a small business comprised of 6 employees will simply 

shut his doors. There is no other application for these furnaces and this business is 

completely dependent on the DoD supply chain to remain in business. The ability for DoD 

to reconstitute this capability, if at all, in a minimum of 18 -24 months based on long lead 

items and unique equipment that is used in the design of the furnace supplied by 2d and 3d 

tier small businesses. 

• Manufacturers of "high strength" carbon used in the manufacture of body armor. Small 

business suppliers of this item have already demonstrated what happens when the supply 

chain fails to keep them energized. In 2010 the DoD allowed this key component supplied 

by small business to be diverted to other worldwide demand for high strength carbon. When 

DoD again wanted to institute the manufacture of body armor that required this component 

to be available in the supply chain it simply was not available and the DoD suffered a 12 

month lag in delivety times for body armor that was needed in theater. Suppliers of this 

component will again either divert to other industries our close their doors if the demand for 

this item evaporates due to DoD's inability to sustain requirements for body armor. To 

support a DoD surge requirement for this component would again take 12 months or more 

to support expanded manufacturing requirements. 

• Manufacture of carbon tooling, special foils and other ptoduction products unique to the 

manufacture of body armor components. All of these things are manufactured, supported 

and maintained by small businesses that will be heavily impacted by any reduction in current 

sustainment requirements. Many of these companies are 2-3 person operations and exist to 

only support the requirements of Ceradyne body armor manufacturing. If lost, it could take 

up to 24 months to replace such lost capabilities if needed to support surge requirements 

within DoD. 

Many of these examples highlight negative impacts in anticipation of what is to come but there are 

perhaps others unknown. Further degradation of the small business base conld result in the loss of 

sectors that are costly to rebuild, if not impossible; reduce competition, lead to the loss of 

innovation, increase unemployment, further erode skill sets, and a myriad of other unknown 

repercussions. 

UtiliZing goods and services produced by our allies is an important part of defense contracting, 

however this strateb'Y must be more carefully considered. The Department of Defense has already felt 

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the impact of an ever-increasing number of counterfeit and defective parts in rhe defense market-a 

risk that is mitigated by using parts sourced from domestic small businesses. The number of 

counterfeit parts reported represents only those found; rhousands more defective, damaged and 

substandard parts are likely installed throughout DoD weapons systems and within massive 

inventories of spare parts. We must consider the safety of our soldiers even as we consider pathways 

to cost savings. 

It is a documented fact that small businesses are critical ro the economy: according ro the Small 

Business Adminstration, 99.7% of all employer firms are small businesses. They have created 60-

80% of net new jobs since 1990, and account for half of the nation's private secror workforce and 

GDP. Small business produces 13 times more parents per employee than large firms. The SBA's 

first Advocacy report produced in 1979 by a task force stated: 

"Innovation is an essential ingredient for creatingjobs, controlling inflation, and for economic and social 

growth. Small businesses make a disproportionately large contribution to innovations. There is something 

jimdamenta! about this unusual ability of sma!! firms to innovate that mUJt be presertJed for the sake of 

healthy economic growth". 

That statement is still as true roday as was in the 70s. 

So what are the considerations that could create new opportunities ro revitalize small business, grow 

the U. S. economy, and strengrhen national and global security? 

There are several ways we could strengthen the small businesses and increase the value ro the 

Goverument: 

• More direct sourcing to small busiuess. The Executive Office of the President, Office of 

Management and Budget published a Memorandum dated February 11, 2011 regarding the 

need to increase small business participation in federal contracting and provided examples of 

tremendous savings due ro small business awards in NNSA, EPA, NASA, DHS, and DoD 

totaling in excess of $383 million dollars. 

• Develop a program to reverse engineer "low hanging fruit" parts that are already in the DoD 

inventoty (examples: vehicle cylinder head assemblies, axles, etc.). Again, to increase the 

opportunity for small businesses to provide part price reduction. 

• Review the process of DCMA. If a quality assurance rep recommends "NO AWARD" on 

the Pre-Award Survey, rhe small business has one last chance with rhe SBA CertifIcate of 

Competency (CoC) program. The SBA is responsible for determining if the small business 

is capable and competent after the contracting officer has determined rhe company "nonresponsible", but in most instances relies on the DCMA Pre-Award Survey and supports the 

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non-award. I have personal experience with the reams of paperwork and negative results. 

This process is not only costly ro the small business bur also ro the Government. 

• There are many great products and processes that have and continue to originate in small 

businesses. However, they struggle to connect and bring their product ro marker. We 

must work towards the support of more robust avenues for these products to reach the 

federal and Commercial market so that the $180 billion invested in early stage innovation 

can actually be realized and multiply. 

• Streamline and reduce the amount of paperwork and effort required to find, understand, and 

submit bids. It is a cumbersome and time consuming process that far too many small 

businesses are not willing to participate in as they cannot afford to hire the staff and the 

overhead needed to be successfirl. 

We need to celebrate and support the strength that small business brings to the market, and better 

leverage these valuable resources. There are many ideas of how to reduce the cosrs for the 

Department of Defense bur with every decision there are many unintended consequences. I am here 

today to advocate and ask each and everyone of you to carefully consider how your decisions will 

impact small business. We must consider how decisions could support, uphold, and foster their 

innovation and growth. It is important to think about how we can make decisions to help revitalize 

critical industrial sectors, ultimately, creating jobs and improving our economy and national securiry. 

It is time to support the industrial sector and small businesses. 

Mr. Chairman, thank you again for the opportuniry to express my views and those of tbe National 

Defense Industrial Association. I welcome your questions and comments. 

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Testimony of Mark Gross, Founder and CEO 

Oak Grove Technologies 

Congress of the United States 

US House of Representatives 

Committee on Small Business 

Sequestration: The Threat to Small Businesses, Jobs, and The Industrial Base 

Thursday, September 20,2012 1 :00 P.M. 

Washington, D.C. 

Good afternoon Chairman Graves, Ranking Member Velazquez, and members of this Subcommittec. 

Thank you for the invitation to come before you and share my concerns relating to the topic of 

Sequestration and the impact it is having on small business today, and the potential impact it wiII have on 

companies in early 2013. 

I am a veteran of the United States Army, and founder of Oak Grove Technologies, a Scrvice Disabled 

Veteran owned small business, focused on Training, Strategic Communications, Information 

Technologies, and Intelligence and Analytical Services. We employ over 390 employees, over 70% of 

those are veterans, and over 20% are service disabled veterans. Geographically wc are dispersed in 21 

states, Africa, Afghanistan and Iraq. 

The threat of Sequestration creates uncertainty, which paralyzes small businesses. Most small businesses 

do not have a robust or diversified contract portfolio supporting their operations. Small businesses ollc-Il 

wait until they have a contract before they acquire the resources ncccssary to perform the contract. 

Without reasonable assurances of future business, small businesses cannot plan for the future and are not 

likely to invest in the company's growth by acquiring additional equipment, facilities, or personnel. 

However, small businesses that fail to invest or grow will tind themselves less competitive for the 

opportunities that do remain. 

Many of the business owners that I speak with are taking a similar approach as we are considering the 

uncertainty of Sequestration; we are putting expansion, infrastructure expenditures, and indirect hiring on 

hold. We arc forced to prepare for the worse case in order to regroup and/or recover. Oak Grove has 

over 200 acres of land in Hoftinan, NC adjacent to Camp MacKall Anny Air Field where we support 

training for Special Forces, Military Information Support Operations, and Civil Affairs Soldiers. We are 

putting much of our planned construction on hold, minimizing our marketing campaigns and trade show 

participation, and in general tightening our belts because of the uncertainty surrounding Sequestration. 

Sequestration in the short term will have the most impact on an agency's budget for operations. 

and services contracts arc a large part of that budget. Most small business federal contractors 

provide the Government with services rather than products because there are fewer barriers to 

entry in the services markct than the market for manufactured items Of supplies. For supplies, a 

company needs personnel, equipment, facilities, distribution channels, etc. For services, a 

company just needs peoplc. It is easier for an agency to eliminate two data processers from 11 

contract, than eliminate a section of a fighter jet. By cutting services in a greater proportion than 

products, sequestration will atIcct many more small contractors than large contractors. 

A small busincss with ten federal contracts will feel the effects of a loss of one of those ten 

contracts more than a company with 100 contracts that loses 10 of those contracts. Although 

both scenarios reflect a 10% cut in each company's contracts, larger companies have a greater 

ability to reallocate personnel and idle resources to the other contracts because or the large 

number of C(lntracts remaining. Larger contractors, moreover, are more likely to have 
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commercial andlor international contracts that can offset the effects of a stymied federal market. 

Small businesses rarely have the ability to diversify in this manner. 

We understand completely the necessity of budget culs, especially while we have two military 

conflicts ending. However, an across the board cut will hurt everyone, although the same 

economic engine that powers America, small business, will be the one that sutTers most. Thank 

you for your time. 

Respectfully, 
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Committee on Small Business 

Hearing: "Sequestration: The Threat to Small Bnsinesses, Jobs, and 

the Industrial Base" 

September 20, 2012 

Questions - Deputy Under Secretary Mike McCord and Mr. Richard Ginman 

I. In your written testimony, you said that when the pool of available contracting dollars is 

diminished, as it would be under sequestration, your ability to partner with small 

businesses is likewise diminished. If implemented will sequestration be a proportional 

cut? Specifically, will small businesses receive 9.4 percent fewer prime contracts from 

the Department of Defense (DoD) next year, or will small businesses face a greater loss? 

2. In your written testimony, you said that DoD does not anticipate terminating any 

contracts. However, under prior sequestration orders, DoD has had to terminate 

contracts. Why is this scenario different? 

3. In terms of contracts, if DoD chooses not to terminate contracts in the belief that savings 

can be negotiated that will offset the sequestered amounts, does that put DoD at the risk 

of either incurring Anti-Deficiency Act violations or simply dropping contracts if the 

expected savings do not materialize? For example, last year the last 2 I percent of prime 

contract dollars were obligated in the first quarter (QI). These will be subject to 

sequestration, but current DoD guidance does not suggest that they need to be cut by 9.4 

percent. Thus, 11.9 percent will need to be saved off all of contracts awarded or options 

exercised in the second, third and fourth quarters (Q2-Q4). However, since negotiations 

for contracts awarded/options exercised in Q2 begin in Ql, additional savings will likely 

be needed in Q3 and Q4 contracting. Any savings not achieved on the Q2 or Q3 

contracts will be passed forward to Q4, leaving the greatest percentage of savings to be 

achieved then. At the same time, Q4 accounted for 42 percent of spending last year, so 

approximately half of all savings would need to be met in three months. Is DoD 

confidant that it can meet such a rigorous saving goal during the busiest time of year 

without terminating contracts? 

4. Large prime contractors are allegedly replacing small subcontractors with their own 

employees as a way to protect themselves against possible sequestration. Given this, 

what is DoD doing to make sure that small subcontractors are protected? Please detail 

any specific plans or proposals on this topic. 

5. On September 28, 2012, the Office of Management and Budget (OMB) issued guidance 

on allowable contracting costs associated with the Worker Adjustment and Retraining 

Notification (WARN) Act. In light of this newest memorandum and the prior training 

and employment guidance letter issued by the Department of Labor (DOL) on July 30, 

2012, will DoD accept WARN Act penalties; which can be up to 60 days of back pay 

plus $500 per day per employee, as acceptable costs on its contracts? Further, will the 

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DoD accept the costs associated with the 15 states that have mini-WARN Acts? How 

will these penalties be paid for on firm, fixed price contracts that do not have a method of 

reimbursement for allowable costs? If DoD does reimburse contractors for these costs, 

does that mean that additional sources for savings must be identified? 

6. In response to questioning from Congressman West, Mr. McCord stated that "the 

secretary and the deputy have met with industry leaders" regarding sequestration, 

specifically the WARN Act implementation. With whom did the Secretary and Deputy 

Secretary meet? What representatives of small businesses were present, and how has 

DoD conducted outreach with the small business segments of the industrial base? 

7. When asked about the difference between the 9.4 percent cuts projected for defense 

programs by OMB, and the 11 percent cuts projected by Under Secretary Kendall on 

September 5,2012, the Committee was told that different methodologies were used. 

Please explain the basis for the 11 percent projection, and how the methodologies 

differed. Does either the 9.4 percent or 11 percent figure account for the cost of 

achieving the savings, such as the costs incurred with changes, terminations, WARN Act 

costs, or workforce actions? 

8. If enacted, sequestration may cause the government to make unilateral changes to 

numerous government contracts and task orders. How will the Department manage this 

level of contract dislocation? 

9. Under current regulations (see FAR 49. 101 (e)), when seeking to terminate contracts the 

Government must give priority to keeping small business contracts. What has the DoD 

done to ensure compliance with this in the past? Moving forward, how will the DoD 

adhere to this requirement with sequestration? 

10. Has the Department issued any guidance on awarding new FYI2 fourth-quarter or FY13 

first-quarter contracts, as well as whether to exercise options on existing contracts? If 

not, when will you issue guidance? What criteria will you offer contracting officers who 

must make these decisions? 

II. Under sequestration, please detail the methodology that will be used to determine if 

contracts will be terminated or modified. Further, please explain how the DoD will 

determine estimated costs associated with contract modifications. 

12. Given that uncertainty is one of the biggest challenges facing small businesses, please 

describe the guidance being provided to DoD contractors in light of sequestration. If the 

DoD is merely following with OMB and DOL memorandums please explain why DoD 

, believes that is the best course of action. 

13. The Sequestration Transparency Act required OMB to report by program, project or 

activity where cuts would occur. Instead, OMB reported by agency, bureau and account. 

For DoD please provide additional information as to what specific program, project or 

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activity will be cut. If DoD is unable to provide this infonnation, please explain why and 

when DoD anticipates this infonnation will be available. 

14. As sequestration would implement across the board cuts, how does DoD plan to maintain 

the small business segment of the industrial base? 

15. A recent study indicated that as the federal budget declines there is an increase in bid 

protests. With sequestration enforcing substantial cuts across the board, how equipped is 

the DoD to handle these increases in bid protests? 

16. Under sequestration the DoD will most likely have to substantially reduce its civilian 

workforce. As many of these individuals oversee government contracting, what plans 

does DoD have in place to ensure that small businesses are not further ostracized from 

contracting opportunities? 

17. If contracts are modified or descoped, does DoD anticipate that this will make it difficult 

for small businesses to remain compliant with the limitation on subcontracting clause? 

Please explain. 

18. Will small businesses that have seats on multiple-award contracts face any special 

challenges if sequestration occurs? Please explain. 

19. Since the Department's FY13 small business prime and subcontracting goals are already 

set, as are the subcontracting goals for all contracts previously awarded, does DoD 

believe it will still be able to meet those goals? Please explain. 

20. At DoD, prior year unobligated balances remain subject to sequestration, but not for other 

agencies. What special challenges does this pose and how does DoD plan to manage 

this? 

21. Under to current law, the Sequestration Order would be issued and effective on January 

2, 2012, and agencies will be required to implement the Sequestration Order. What steps 

is DoD taking to prepare to implement the Sequestration Order? Please provide a 

timeline of additional steps DoD plans to take over the next months in anticipation of a 

sequester. 

22. DoD previously stated that it will need 105 days to implement a reduction in force (RlF) 

of the civilian workforce. Dr. Fuller estimated that 48,147 DoD civilian jobs will need 

to be R!F'd next year. Since 105 days before January 2,2012 has already elapsed, has 

DoD taken any such actions? If not, how does DoD intend to recapture these saving if 

sequestration is not averted? 

23. If DoD were given additional spending reduction targets, would DoD voluntarily apply 

them across the board, or would they be targeted? Please explain. 

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24. Despite repeated concerns that the DoD is losing key segments of its industrial base; 

which would be exacerbated the sequester; the 2012 Annual Industrial Capabilities 

Report to Congress did not specifically address sequestration. Why is this? Please 

explain what risks sequestration poses to our industrial base. 

25. Under sequestration, a study by the National Association of Manufacturers (NAM) 

suggests that the biggest losses will be in aerospace manufacturing, ship and boat 

manufacturing, and search and navigation manufacturing. How does DoD intend to 

protect these segments of our industrial base? 

26. The 2012 Annual Industrial Capabilities Report to Congress states, "that the Department 

cannot afford to protect the entire industrial base, especially in a time of budget austerity, 

and the Department recognizes that an effort to protect too much would also stand in the 

way of innovation, which over time replaces the industrial base that supplies old 

technologies with dynamic, new industrial capabilities." Please explain how the DoD's 

inability to protect the entire industrial base will affect small businesses. 

27. Based on the 2012 Annual Industrial Capabilities Report to Congress notes that and the 

Sector-by-Sector, Tier-by-Tier (S2TS) research, please list and explain all industrial base 

sectors primarily occupied by small businesses and the ramifications the loss of these 

companies would have on the overall health the industrial base. 

28. DoD issued a memo on August 22, 2012 directing procurement officers to stop awarding 

contracts for services in the military simulator industry through the 8(a) program. 

However, the DynaLantic decision applied only to military simulators. So, why did 

DoD's memo go beyond the scope of the court's ruling? 

29. How did DoD determine that extensions of existing contracts as well as the exercise of 

options on existing contracts were within the scope of the DynaLantic decision? 

30. Why hasn't DoD sought permission from SBA to release these procurements from the 

8(a) program as required by law? 

31. Will DoD halt the enforcement of its August 22nd memo ifDOJ decides to pursue an 

appeal of the DynaLantic decision? 

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CHARRTS No.: HSBC-OI-00l 

Hearing Date: September 20,2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #1 

Question: In your written testimony, you said that when the pool of available contracting dollars 

is diminished, as it would be under sequestration, your ability to partner with small businesses is 

likewise diminished. If implemented will sequestration be a proportional cut? Specifically, will 

small businesses receive 9.4 percent fewer prime contracts from the Department of Defense 

(DoD) next year, or will small businesses face a greater loss? 

Answer: The law requires that the cuts be applied in an across-the-board manner to all nonexempt funding. To the extent we would have any flexibility, we would attempt to protect some 

high-priority projects from reductions. But our ability to moderate impacts under sequestration 

would be limited. 

The 9.4 percent reduction contained in the sequester transparency report is our estimate of the 

total reduction required if sequestration goes into effect. Sequestration, with its associated 

spending cuts, would reduce our overall budget, necessarily forcing cuts in buys from all 

businesses, large and small. 
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CHARRTS No.: HSBC-01-013 

Hearing Date: September 20,2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: # 13 

Question: The Sequestration Transparency Act required OMB to report by program, project or 

activity where cuts would occur. Instead, OMB reported by agency, bureau and account For 

DoD please provide additional information as to what specific program, project or activity will 

be cut. If DoD is unable to provide this information, please explain why and when DoD 

anticipates this information will be available. 

Answer: In the Sequestration Transparency Act Report submitted on September 14, 2012, the 

Office of Management and Budget (OMB) provided Congress the information it determined was 

responsive to the statutory requirement. Requests for further refmement of the information 

should be directed to OMB. 
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CHARRTS No.: HSBC-OI-021 

Hearing Date: September 20, 2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #21 

Question: Under to current law, the Sequestration Order would be issued and effective on 

January 2, 2012, and agencies will be required to implement the Sequestration Order. What 

steps is DoD taking to prepare to implement the Sequestration Order? Please provide a timeline 

of additional steps DoD plans to take over the next months in anticipation of a sequester. 

Answer: We have been working with OMB to understand the sequestration law and to assess its 

impact on DoD. We are continuing those efforts and, as testimony today shows, we have 

completed enough work to demonstrate the nature of sequestration and its adverse impacts. 

Our assessment phase has not been completed and as such, our planning phase has not 

commenced. But we believe it is premature to plan in detail for sequestration. No plan will 

mitigate the devastating consequences. We should focus on halting sequester for defense and 

non-defense agencies. 

We will, however, continue our assessment efforts and we will be ready if Congress allows 

sequestration to take effect. 
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CHARRTS No.: HSBC-OI-006 

Hearing Date: September 20, 2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #6 

Question: In response to questioning from Congressman West, Mr. McCord stated that "the 

secretary and the deputy have met with industry leaders" regarding sequestration, specifically the 

WARN Act implementation. With whom did the Secretary and Deputy Secretary meet? What 

representatives of small businesses were present, and how has DoD conducted outreach with the 

small business segments of the industrial base? 

Answer: The SD, DSD, and USD AT &L have met with industry. The meetings occurred on 

January 20, and July 23, 2012 at the combined invitation of the Aerospace Industries 

Association, the National Defense Industrial Association, and the Professional Services Council. 

All three organizations have small business members as well as traditional large defense firm 

members. The meetings attended by DoD were organized by the associations. The following 

industry officials were present: Robert Stevens, Lockheed Martin Corporation; John Jumper, 

SAIC; Jim Albaugh, The Boeing Company; Dan Allen, CACI International; Wes Bush, 

Northrop Grumman Corporation; Jay Johnson, General Dynamics Corporation; Scott Donnelly, 

Textron; Marion Blakey, Aerospace Industries Association; Bonnie Carroll, Information 

International Associates; Ed Casey, SERCO; Angela Drummond-Rogers, SiloSmashers; Brad 

Feldmann, Cubic Defense Applications; Ellen Glover, ICF International; David Hess, United 

Technologies Corporation; Dawn Hickton, RTI International Metals; Linda Hudson, BAE 

Systems; Ray Jones, TenX Group; Stephen Kelly, Battelle National Security Global Business; 

Robin Lineberger, Deloitte Federal Govemment Services; Tom Marotta, Marotta Controls; 

David Melcher, ITT Exelis; Wood Parker, TASC; Paul Pastorek, EADS North America; George 

Pedersen, ManTech International Corporation; Arnold Punaro, Punaro Group; Bill Swanson, 

Raytheon Company; and Hal Y oh, Day & Zimmermann. Several topics were discussed at these 

meetings, including sequestration and WARN Act issue. 

DoD engages in regular outreach to small business. Mr. Kendall has personally hosted two 

major small business events this year, and there are numerous other regular small business 

outreach events hosted by the military services, Defense Logistics Agency, etc. The personnel 

small business outreach events (halfor full day) hosted by USD AT&L Carter: March 5, 2011 in 

Detroit, August 8, 2011 in Orlando; DSD and USD AT&L Kendall: May 4,2012 in Tampa, 

August 8, 2012 in San Diego (Navy-led conference), and August 29, 2012 in Dayton, OH. 

Small business outreach is a major USD AT &L priority. 
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CHARRTS No.: HSBC-OI-017 

Hearing Date: September 20, 2012 

Committee: HSBC 

Member: 

Witness: Director (DP&AP) Ginman 

Question: #17 

Question: If contracts are modified or descoped, does DoD anticipate that this will make it 

difficult for small businesses to remain compliant with the limitation on subcontracting clause? 

Please explain. 

Answer: Any response to this question without specific facts in the context of a particular 

contract would be highly speculative. DoD would expect, as with any contract modification, to 

enter into discussions with the prime contractor. 
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CHARRTS No.: HSBC-OI-022 

Hearing Date: September 20,2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Gimnan 

Question: #22 

Question: DoD previously stated that it will need 105 days to implement a reduction in force 

(RIF) of the civilian workforce. Dr. Fuller estimated that 48,147 DoD civilian jobs will need to 

be RIF'd next year. Since 105 days before January 2, 2012 has already elapsed, has DoD taken 

any such actions? If not, how does DoD intend to recapture these saving if sequestration is not 

averted? 

Answer: We are assessing the impacts of sequestration, but we have not begun detailed 

planning. To accommodate sequester in FY 13, we would need to focus on hiring freezes and 

probably unpaid furloughs and would do so consistent with statute; any government-wide 

guidance from the Office of Management and Budget or the Office of Personnel Management; 

and DoD guidance including the memo issued by the Deputy Secretary of Defense on 

September 21, 2012 regarding sequestration. [copy attached] 
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CHARRTS No.: HSBC-OI-023 

Hearing Date: September 20,2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #23 

Question: If DoD were given additional spending reduction targets, would DoD voluntarily 

apply them across the board, or would they be targeted? Please explain. 

Answer: We do not believe any additional spending reductions are called for. The nature of any 

future statutory budget reduction would be decided primarily by the Congress. 
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CHARRTS No.: HSBC-Ol-020 

Hearing Date: September 20, 2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #20 

Question: At DoD, prior year unobligated balances remain subject to sequestration, but not for 

otber agencies. What special challenges does tbis pose and how does DoD plan to manage tbis? 

Answer: The overall effect of a reduction in prior year unobligated balances is tbat tbe 

Department will not be able to complete 100% oftbe programs or scope of work requested 

witbin tbe President's Budget for that year. Initial assessments are being undertaken; however, 

plans attempting to mitigate tbe damage have not been completed. We do not anticipate 

cancelling contracts to achieve such savings. Ratber, we anticipate tbat we would reduce 

projected quantities, level of efforts or scope of work for contracts or contract options that would 

be entered into after January 2, 2013. 
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CHARRTS No.: HSBC-OI-007 

Hearing Date: September 20,2012 

Committee: HSBC 

Member: 

Witness: PDUSD(C) McCord, Director (DP&AP) Ginman 

Question: #7 

Question: When asked about the difference between the 9.4 percent cuts projected for defense 

programs by OMB, and the II percent cuts projected by Under Secretary Kendall on September 

5,2012, the Committee was told that different methodologies were used. Please explain the basis 

for the 11 percent projection, and how the methodologies differed. Does either the 9.4 percent or 

11 percent figure account for the cost of achieving the savings, such as the costs incurred with 

changes, terminations, WARN Act costs, or workforce actions? 

Answer: It is not possible to know the percentage of an actual sequester order precisely until 

Congress enacts a final level ofFY13 budget authority, and until we have final estimates of 

unobligated balances. 

However, DoD has made reasonable estimates assuming enactment of the FY13 budget request 

and using our best of unobligated balances as of the time OMB provides the official sequester 

cuts. The DoD estimate is 9.4 percent total reduction in budget authority that results from 

sequestration, based on Military Personnel being exempt. 

The Department does not anticipate having to terminate or significantly modify any contracts on 

or about January 2, 2013, as a result of sequestration. Most department contracts are fully 

funded; because they are obligated from FY 2012 and prior year funding, they would not be 

affected by sequestration. 

Program managers will assess the best way to accommodate sequester cuts, if they occur. They 

will consider the overall schedule for their program an how best to accommodate lower budgets. 

Contracting officers will recommend contract changes depending upon the size and nature of the 

affected contracts. 

We will assess the desirability and cost of contract changes during budget execution, as we do 

for regular budgets. The 9.4 percent reduction contained in the sequester transparency report is 

our estimate of the total reduction required if sequestration goes into effect. That amount is 

owed regardless of any compliance costs which might result. 
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Sma" &wironmental Business Action CoaliliOll 

September 19,2012 

Chairman Sam B. Graves, Jr. 

House Committee on Small Business 

2361 Rayburn House Office Building (RHOB) 

Washington, D.C. 20515 

202.225.5821 Phone 

202.226.5276 Fax 

88817'" St. N.W., Ste. 1100 

Washington, D.C. 20006 

Ph: 202-775-8400 

Fax: 202-857-0200 

www.sebac.org 

Subject: Written Testimony of SEBAC to the House Small Business Committee on its 

Hearing Regarding ·Sequestration: The Threat to Small Businesses, Jobs, and the 

Industrial Base," September 20, 2012 

Dear Chairman Graves: 

The Small Environmental Business Action Coalition's ("SEBAC") membership is 

comprised of small environmental businesses acrosS the nation, all of which are engaged 

in work with the federal government. This letter addresses the grave and disparate impact 

that the Budget Control Act of 2011 and sequestration will have on our membership as well 

as other small businesses that work with federal agencies, an issue of paramount 

importance to SEBAC and the House Small Business Committee and the nation. 

The Small Business Administration estimates that there are approximately 28 million small 

businesses in the United States that employ over 60 million Americaus, accounting for half of the 

private sector workforce. In 2011, federal agencies awarded $91.5 billion in prime contracts to these 

small businesses, representing 21.65 percent of federal contracting dollars. The $1.2 trillion in 

budget cuts that will be imposed, should sequestration be implemented, will have a significant and 

disproportionately adverse affect on these small businesses and their employees. Although the 

specific details of how each agency might implement the required cuts remains uncertain, recent 

information provided by the White House makes it strikingly clear that agencies will have no choice 

but to reduce personnel and new contracts. Agencies will also change the way they administer 

existing contracts and rethink the procurement vehicles that they use to carry out agency objectives. 

These actions will have a devastating impact on the economic viability of small businesses, not only 

because of decreased contract opportunities, but because of an associated increase in bid protest and 

claims activity. Small businesses have already seen an increase in costs resulting from the 

uncertainty of the impact sequestration will have on business viability, uncertainty that will certainly 

continue should the budget cuts be implemented. 
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Page Three 

September 19, 2012 

Chairman Sam B. Graves, Jr. 

House Committee on Small Business 

Small businesses will undoubtedly bear a disproportionate burden as a result of sequestration. 

While, in general, government contractors will experience a decrease in contract opportunities and 

an increase in administration costs, small businesses will be particularly affected by contracts that 

are prematurely terminated or subject to a reduction in scope. Businesses will not only lose expected 

revenue, but will likely be forced to layoff a substantial number of employees and reduce hiring. In 

situations where layoffs are unavoidable, many businesses will be responsible for the costs 

associated with compliance with the federal WARN Act and state sister statutes. Moreover, small 

businesses will incur increased claims costs to recover the full value of the work performed where 

contracts are terminated prematurely or subject to a reduction in scope. Should sequestration move 

forward, SEBAC urges this Committee to implement processes that will quickly compensate small 

businesses for work completed and implement an expedited claims process to reduce administrative 

costs, an initiative beneficial to both the government and small businesses. 

Small businesses often perform as subcontractors to larger prime contractors on federal 

projects. Subcontractors will have even less control over the administration of the prime contract 

and the impact on subcontracts should sequestration affect the continuance and scope of the prime 

contract. It is essential that major contractors are not permitted to shift the burden of de-scoping 

disproportionately on small businesses by eliminating subcontracts, while keeping themselves 

relatively insulated from impact. In situations where the scope of the prime contract changes, it is 

imperative that any negative impact be flowed down proportionately to small businesses, thereby 

leveling the playing field for small businesses to compete in such an unfavorable environment. 

SEBAC urges this Committee to implement policies that ensure that any reductions in the scope of 

contracts do not disproportionally impact small businesses. 

Sequestration is also expected to incentivize agencies to modify the way they achieve desired 

objectives. Federal agencies will likely increase the use of indefmite duration indefinite quantity 

("IDIQ") and firm fixed price contracts, which they perceive to provide more flexibility to the 

agency. However, these models dramatically affect the economic viability of small businesses and 

increase uncertainty. An increase in IDIQ contracts is particularly troubling because these vehicles 

require that small businesses incur the cost of maintaining a contract-ready business and workforce 

without confidence or assurance that the agency will issue any task orders at all. Many small 

businesses will simply not be able to effectively compete in such an environment, considering their 

profit margins are small and their challenges to growing successful enterprises are already 

disproportionately large. 

Informal comments from agency officials have also suggested that agencies could implement 

sequestration by insourcing currently contracted work on the faulty assumption that doing so will 

"save money." However, evidence gathered from recent insourcing initiatives makes it clear that 

this assumption is not supported by the facts. Therefore, SEBAC urges this Committee to require 

that agencies complete comprehensive cost analysis of the potential cost savings that might be 

derived through competition and/or through bilateral modifications to the existing contract. 

Agencies must also be required to examine the impact of insourcing on small businesses that 

currently perform the work and to provide timely notification to all contractors of the agency's 

intentions. 
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Page Three 

September 19,2012 

Chairman Sam B. Graves, Jr. 

House Committee on Small Business 

It is imperative that any and all changes to the administration of contracts are informed by the 

facts and make economic sense. Failure to make reasoned decisions, not only thwarts the spirit of 

budget reduction, but needlessly damages small businesses, the heart of the nation's economy. 

Thank you in advance for your attention to this important issue and for your leadership 

during these challenging times. Please do not hesitate to contact me if you have any questions or like 

to discuss our position in greater detail. 

Sincerely, 

SEBAC 

Dennis D. Morgan, II 

President 
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http://www.centerforsecuritypolicy.orgI 

Center for Security Policy 

1901 Pennsylvania Avenue, NW, Suite 201 

Washington. DC 20006 

Phone: (202) 835-9077 

United States House of Representatives 

Committee on Small Business 

Sequestration: The Threat to Small Businesses, Jobs, and the Industrial Base 

TESTIMONY FOR THE RECORD 

Presented by the Center for Security Policy 

4 October, 2012 

Mr. Chairman, Madam Ranking Member, and Members of the House Committee on Small Business: 

As a national security educational organization, the Center for Security Policy (CSP) believes that defense 

sequestration will have severe consequences for national security at a time when the United States 

faces growing threats, both conventional and asymmetric. While the nation's debt also constitutes a 

national security threat that needs to be addressed, the Center's research shows that attempting to 

solve this economic crisis through the defense sequestration mechanism - cutting $500 billion to 

defense over the next ten years - will in fact significantly worsen that crisis, particularly with respect to 

America's small businesses. 

The Center's conclusion that defense sequestration will cause significant harm to America's small 

businesses - and by extension, to the defense Industrial base that underlies our national security - is 

based upon the findings of our Defense Breakdown series, a comprehensive set of reports examining the 

1 
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projected impacts of defense sequestration on state/local economies (available at 

www.forthecommondefense.orglreports!.)' The reports use the figures of 9% for implementation of 

the original defense cuts as contained in the Budget Control Act of 2011, and 18% to account for the 

additional 9% cuts that will be activated starting in January 2013 if sequestration is not reversed. ' The 

reports examine the impact both from the "contractor location" perspective (the contractor business 

office) and the "place of performance" perspective (the location at which the contracted work is carried 

out). The data is further broken down to analyze projected impacts on smail businesses, minorityowned businesses, women-owned businesses, and veteran-owned businesses. The data captures any 

business that had a contract with the Department of Defense in 2011, irrespective of the size of the 

business or the type of work in which the business is engaged. 

National Level Impact 

At the national level, smail businesses - as well as several separate categories which include many smail 

businesses - are projected to suffer the following losses if defense sequestration is not reversed': 

USA Defense Contractor Businesses Projected Revenue Reductions Based On National Average 

Type of Business Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned $33,047,059,681 ($2,974,235,492) ($5,948,470,981) 

Small Businesses SA $16,425,472,092 ($1,478,292,550) ($2,956,585,096) 

Small Disadvantaged $12,374,299,824 ($1,113,687,032) ($2,227,374,058) 

Veteran-owned $8,353,266,125 ($751,793,981) ($1,503,587,964) 

Service-Disabled $9,001,937,140 ($810,174,376) ($1,620,348,747) 

Veteran 

, See Center for Security Policy, "Defense Breakdown Economic Impact Reports, 2011 Data Edition", Sept. 11, 

2012. http:Uforthecommondefense.org/reports/ (accessed Oct. 2, 2012) 

, See Center for Security Policy, "Defense Breakdown Economic Impact Reports, 2011 Data Edition; Frequently 

Asked Questions", Sept. 11, 2012. http:Uwww.forthecommondefense.org/reports/FAQ.html(accessed Oct. 2, 

2012) 

3 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition; The USA 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/usa.pdf (accessed Oct. 2, 2012) 

2 
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Women-Owned $11,818,100,313 ($1,063,629,068) ($2,127,258,143) 

Impact by State: House Small Business Committee Representation 

At the state level, the following tables illustrate projected revenue losses for small businesses - as well 

as several separate categories which include many small businesses - in each of the states represented 

by Members on the House Committee on Small Business, in alphabetical order: 

California' 

Type of Business Numbers of This Revenue for This Revenue losses for Revenue losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at least 9% at least 18% 

Reduction Reduction 

Minority Owned 1,505 $2,932,249,036 -$263,902,424 -$527,804,847 

Small Businesses 467 $1,318,154,187 -$118,633,882 -$237,267,763 

Small Disadvantaged 791 $789,087,702 -$71,017,896 -$142,035,792 

Veteran-Owned 583 $528,250,609 -$47,542,557 -$95,085,113 

Service-Disabled 332 $478,685,732 -$43,081,718 -$86,163,435 

Veteran 

Black American 195 $241,147,930 -$21,703,315 -$43,406,629 

Hispanic American 532 $788,240,521 -$70,941,650 -$141,883,299 

Asian-Pacific Owned 515 $832,547,631 -$74,929,290 -$149,858,580 

Women-Owned 1,354 $1,239,750,964 -$111,577,591 -$223,155,182 

4 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The California 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/calcontractorlocation/defensebreakdownsummarvreport CA,pdf 

(accessed Oct. 2, 2012) 

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Colorado': 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 180 $495,209,228 -$44,568,832 -$89,137,665 

Small Businesses 113 $438,830,338 -$39,494,732 -$78,989,464 

Small Disadvantaged 109 $183,232,021 -$16,490,883 -$32,981,765 

Veteran-Owned 111 $77,452,803 -$6,970,753 -$13,941,505 

Service-Disabled 114 $216,044,245 -$19,443,983 -$38,887,966 

Veteran 

Black American 37 $22,188,985 -$1,997,009 -$3,994,017 

Hispanic American 79 $220,299,991 -$19,827,000 -$39,654,000 

Asian-Pacific Owned 29 $46,896,611 -$4,220,695 -$8,441,390 

Women-OWned 251 $223,759,096 -$20,138,319 -$40,276,639 

Florida· 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 624 $1,334,532,063 -$120,107,890 -$240,215,781 

Small 8uslnesses 236 $884,108,701 -$79,569,786 -$159,139,573 

5 See Center for Security Policy "Defen,e Breakdown Economic Impact Reports, 2011 Data Edition: The Colorado 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

httD:/Iwww.forthecommondefense.org/reports/co/contractorlocation/defensebreakdownsummarvreport CO. pdf 

(accessed Oct. 2, 2012) 

• See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Florida 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reportslfllcontractorlocation/defensebreakdownsummaryreport FL.pdf 

(accessed Oct. 2, 2012) 

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Small Disadvantaged 292 $509,597,503 -$45,863,777 -$91,727,554 

Veteran-Owned 364 $726,322,915 -$65,369,065 -$130,738,130 

Service-Disabled 263 $757,408,537 -$68,166,771 -$136,333,542 

Veteran 

Black American 148 $173,050,207 -$15,574,519 -$31,149,038 

Hispanic American 293 $570,177,942 -$51,316,017 -$102,632,034 

Asian-Pacific Owned 85 $412,092,209 -$37,088,300 -$74,176,601 

Women-Owned 725 $453,572,383 -$40,821,516 -$81,643,032 

Illinois' 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 BUSiness Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 187 $637,211,253 -$57,349,015 -$114,698,030 

Small Businesses 53 $241,501,186 -$21,735,108 -$43,470,215 

Small Disadvantaged 126 $514,185,876 -$46,276,731 -$92,553,461 

Veteran-Owned 132 $43,996,714 -$3,959,704 -$7,919,409 

Service-Disabled 58 $383,841,498 -$34,545,736 -$69,091,472 

Veteran 

Black American 55 $23,629,852 -$2,126,687 -$4,253,374 

Hispanic American 33 $41,562,299 -$3,740,607 -$7,481,214 

Asian-Pacific Owned 48 $360,958,185 -$32,486,238 -$64,972,476 

Women-Owned 305 $276,261,531 -$24,863,539 -$49,727,078 

, See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Illinois 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/il/contractorlocation/defensebreakdownsummaryreport Il.pdf 

(accessed Oct. 2, 2012) 

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lowa8 

Type of Business Numbers of This Revenue for This Revenue losses for Revenue losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at least 9% at least 18% 

Reduction Reduction 

Minority Owned 26 $70,761,844 -$6,368,566 -$12,737,132 

Small Businesses 9 $13,798,543 -$1,241,869 -$2,483,738 

Small Disadvantaged 19 $9,028,279 -$812,545 -$1,625,090 

Veteran-Owned 45 $21,891,510 -$1,970,236 -$3,940,472 

Service-Disabled 10 $16,945,660 -$1,525,109 -$3,050,219 

Veteran 

Black American 6 $5,729,693 -$515,672 -$1,031,345 

Hispanic American 7 $50,292,844 -$4,526,356 -$9,052,712 

Asian-Pacific Owned 5 $1,428,212 -$128,539 -$257,078 

Women-OWned 79 $10,000,148 -$900,013 -$1,800,027 

louisiana9 

Type of Business Numbers ofThis Revenue for This Revenue losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011 -

at least 9% at least 18% 

Reduction Reduction 

Minority OWned 135 $275,078,595 -$24,757,075 -$49,514,149 

Small Businesses 77 $222,381,033 -$20,014,294 -$40,028,588 

8 See Center for Security Policy "Defense Breakdown Economic Impact Reports} 2011 Data Edition: The Iowa 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/ia/contractorlocation/defensebreakdownsummaryreport IA.pdf 

(accessed Oct. 2, 2012) 

9 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The louisiana 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www,forthecommondefense.org/reports/la/contractorlocation/defensebreakdownsummaryreport LA.pdf 

(accessed Oct. 2, 2012) 

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Small Disadvantaged 51 $59,987,517 -$5,398,877 -$10,797,753 

Veteran-Owned 67 $95,962,019 -$8,636,582 -$17,273,164 

Service-Disabled 35 $70,251,551 -$6,322,640 -$12,645,280 

Veteran 

Black American 78 $77,234,469 -$6,951,102 -$13,902,205 

Hispanic American 28 $52,424,426 -$4,718,199 -$9,436,397 

Asian-Pacific Owned 6 $10,290,639 -$926,158 -$1,852,315 

Women-Owned 138 $166,957,394 -$15,026,166 -$30,052,332 

Maryland'O 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type ZOll Business Type ZOl1 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 761 $2,058,046,646 -$185,224,206 -$370,448,411 

Small Businesses 387 $1,303,832,304 -$117,344,912 -$234,689,824 

Small Disadvantaged 317 $580,220,594 -$52,219,856 -$104,439,711 

Veteran-Owned 292 $360,011,394 -$32,401,027 -$64,802,053 

Service-Disabled 173 $272,433,218 -$24,518,991 -$49,037,981 

Veteran 

Black American 384 $728,113,448 -$65,530,213 -$131,060,426 

Hispanic American 112 $295,735,385 -$26,616,186 -$53,232,371 

Asian-Pacific Owned 120 $563,459,960 -$50,711,398 -$101,422,797 

Women-Owned 678 $994,390,199 -$89,495,121 -$178,990,243 

10 See Cenler for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Maryland 

Defense Breakdown Economic Impacl Report", Sepl. 11, 2012. 

http://www.forthecommondefense.org/reports/md/conlraclorlocation/defensebreakdownsummaryreport MD.p 

l!f (accessed Oct. 2, 2012) 

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Massachusetts" 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 111 $242,746,273 -$21,847,165 -$43,694,331 

Small Businesses 41 $143,348,736 -$12,901,387 -$25,802,774 

Small Disadvantaged 60 $160,759,782 -$14,468,381 -$28,936,762 

Veteran-Owned 105 $93,888,824 -$8,449,994 -$16,899,989 

Service-Disabled 53 $50,252,078 -$4,522,687 -$9,045,374 

Veteran 

Black American 21 $11,704,135 -$1,053,372 -$2,106,744 

Hispanic American 25 $68,355,727 -$6,152,016 -$12,304,031 

Asian-Pacific OWned 29 $14,625,123 -$1,316,261 -$2,632,522 

Women-OWned 197 $199,811,946 -$17,983,076 -$35,966,152 

Michigan" 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority OWned 141 $716,462,253 -$64,481,605 -$128,963,211 

Small Businesses 50 $154,579,624 -$13,912,167 -$27,824,333 

11 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The 

Massachusetts Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/ma/contractorlocation/defensebreakdownsummarvreport MA,p 

!!f (accessed Oct. 4, 2012) 

12 See Centerfor Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Michigan 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reoorts/mi!contractorlocation/defensebreakdownsummaryreport MI.pdf 

(accessed Oct. 2, 2012) 

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Small Disadvantaged 78 $121,152,407 -$10,903,717 -$21,807,434 

Veteran-Owned 129 $98,338,413 -$8,850,458 -$17,700,915 

Service-Disabled 56 $43,749,469 -$3,937,452 -$7,874,905 

Veteran 

Black American 51 $18,381,376 -$1,654,324 -$3,308,648 

Hispanic American 26 $29,036,813 -$2,613,313 -$5,226,627 

Asian-Pacific OWned 23 $60,520,111 -$5,446,810 -$10,893,620 

Women-Owned 172 $67,120,582 -$6,040,853 -$12,081,705 

Missouri13 

Type of Business Numbers ofThis Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011-

at Least 9% at Least 18% 

Reduction Reduction 

Minority OWned 120 $519,844,376 -$46,785,996 -$93,571,991 

Small Businesses 47 $118,628,245 -$10,676,542 -$21,353,085 

Small Disadvantaged 60 $112,984,160 -$10,168,575 -$20,337,150 

Veteran-Owned 123 $99,035,991 -$8,913,240 -$17,826,479 

Service-Disabled 49 $55,487,487 -$4,993,874 -$9,987,748 

Veteran 

Black American 52 $388,241,412 -$34,941,728 -$69,883,457 

Hispanic American 24 $68,082,944 -$6,127,465 -$12,254,930 

Asian-Pacific OWned 11 $8,239,089 -$741,518 -$1,483,036 

Women-Owned 233 $128,158,121 -$11,534,231 -$23,068,463 

13 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Missouri 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http·lIwww.forthecommondefense.org/reports/mo/contractorlocation/defensebreakdownsummarvreport MO.p 

!if (accessed Oct. 2, 2012) 

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NewYork14 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 207 \ $885,177,827 -$79,666,008 -$159,332,015 

Small Businesses 74 $776,422,052 -$69,877,987 -$139,755,975 

Small Disadvantaged 138 $206,524,160 -$18,587,175 -$37,174,350 

Veteran-Owned 195 $115,673,386 -$10,410,605 -$20,821,210 

Service-Disabled 65 $783,914,520 -$70,552,310 -$141,104,619 

Veteran 

Black American 62 $29,088,629 -$2,617,977 -$5,235,953 

Hispanic American 46 $44,529,820 -$4,007,684 -$8,015,368 

Asian-Pacific Owned 47 $725,758,766 -$65,318,292 -$130,636,583 

Women-Owned 379 $280,099,569 -$25,208,962 -$50,417,924 

North Carolina" 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at least 9% at Least 18% 

Reduction Reduction 

Minority Owned 201 $367,056,595 -$33,035,095 -$66,070,190 

Small Businesses 73 $297,707,033 -$26,793,634 -$53,587,268 

14 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The New York 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/ny/contractoriocation/defensebreakdownsummarvreport NY,pdf 

(accessed Oct. 2, 2012) 

15 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The North 

Carolina Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www,forthecommondefense,orglreports!nc!contractorlocation/defensebreakdownsummaryreport NC.pdf 

(accessed Oct. 2, 2012) 

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Small Disadvantaged 129 $144,262,936 -$12,983,665 -$25,967,330 

Veteran-Owned 180 $532,815,560 -$47,953,402 -$95,906,805 

Service-Disabled 150 $295,917,554 -$26,632,581 -$53,265,162 

Veteran 

Black American 91 $53,007,303 -$4,770,657 -$9,541,315 

Hispanic American 38 $192,926,112 -$17,363,351 -$34,726,702 

Asian-Pacific OWned 19 $43,565,299 -$3,920,877 -$7,841,754 

Women-Owned 365 $195,253,120 -$17,572,781 -$35,145,563 

Ohio" 

Type of Business Numbers ofThis Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority OWned 221 $572,694,685 -$51,542,524 -$103,085,047 

Small Businesses 70 $207,934,777 -$18,714,131 -$37,428,261 

Small Disadvantaged 129 $314,802,565 -$28,332,232 -$56,664,464 

Veteran-Owned 197 $149,731,239 -$13,475,812 -$26,951,624 

Service-Disabled 73 $749,170,122 -$67,425,314 -$134,850,627 

Veteran 

Black American 82 $262,944,120 -$23,664,972 -$47,329,943 

Hispanic American 25 $51,327,635 -$4,619,487 -$9,238,975 

Asian-Pacific OWned 39 $39,691,933 -$3,572,274 -$7,144,548 

Women-Owned 309 $432,063,939 -$38,885,756 -$77,771,512 

16 See Centerfor Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Ohio 

Defense Breakdown Economic Impact Report", Sept, 11, 2012, 

http://www.forthecommondefense.org/reports/oh/contractorlocation/defensebreakdownsummaryreport OH.pd 

f (accessed Oct, 2, 2012) 

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Oregon17 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 48 $28,388,529 -$2,554,968 -$5,109,935 

Sma" Businesses 13 $1,927,587 -$173,483 -$346,966 

Small Disadvantaged 45 $32,153,044 -$2,893,774 ·$5,787,548 

Veteran-Owned 62 $69,101,006 -$6,219,091 ·$12,438,182 

Service-Disabled 20 $1,554,991 -$139,949 -$279,898 

Veteran 

Black American 6 $504,275 -$45,385 -$90,770 

Hispanic American 8 $558,164 -$50,235 ·$100,470 

Asian-Pacific Owned 17 $26,039,361 -$2,343,543 -$4,687,085 

Women-Owned 120 $46,365,607 -$4,172,905 ·$8,345,810 

Penns~lvania18 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 175 $479,064,392 -$43,115,797 -$86,231,594 

Sma" Businesses 71 $286,771,072 -$25,809,398 -$51,618,795 

17 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Oregon 

Defense Breakdown Economic Impact Report", Sept. 11,2012. 

http://www.forthecommondefense.org/reports/or/contractorlocation/defensebreakdownsummaryreport OR,pdf 

(accessed Oct. 4, 2012) 

18 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The 

Pennsylvania Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/pa/contractorlocation/defensebreakdownsummaryreport PA.pdf 

(accessed Oct. 2, 2012) 

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Small Disadvantaged 121 $325,990,896 -$29,339,182 -$58,678,364 

Veteran-Owned 211 $96,775,906 -$8,709,832 -$17,419,664 

Service-Disabled 83 $325,554,180 -$29,299,877 -$58,599,755 

Veteran 

Black American 57 $35,106,842 -$3,159,616 -$6,319,232 

Hispanic American 29 $59,678,320 -$5,371,049 -$10,742,098 

Asian-Pacific Owned 36 $165,695,487 -$14,912,594 -$29,825,189 

Women-Owned 359 $277,211,249 -$24,949,013 -$49,898,027 

Rhode Island" 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority OWned 4 $323,452 -$29,111 -$58,221 

Small Businesses 2 $12,530 -$1,128 -$2,255 

Small Disadvantaged 8 $1,109,173 -$99,826 -$199,651 

Veteran-OWned 24 $69,056,155 -$6,215,054 -$12,430,108 

Service-Disabled 11 $4,796,417 -$431,678 -$863,355 

Veteran 

Black American 1 $128,153 -$11,534 -$23,068 

Hispanic American 1 $41,747 -$3,757 -$7,514 

Women-Owned 35 $4,193,183 -$377,386 -$754,773 

" See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Rhode 

Island Defense Breakdown Economic Impact Report", Sept. 11,2012. 

http://www,forthecommondefense.org/reports/rilcontractorlocation/defensebreakdownsummaryreport RI.pdf 

(accessed Oct. 2, 2012) 

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South Cgrolina'o 

Type of Business Numbers of This Revenue for this Revenue losses for Revenue losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at least 9% at Least 18% 

Reduction Reduction 

Minority Owned 109 $159,427,057 -$14,348,436 -$28,696,871 

Small Businesses 49 $170,160,478 -$15,314,444 -$30,628,887 

Small Disadvantaged 53 $12,076,782 -$1,086,910 -$2,173,821 

Veteran-owned 120 $101,296,627 -$9,116,697 -$18,233,394 

Service-Disabled 71 $82,758,913 -$7,448,302 -$14,896,605 

Veteran 

Black American 60 $80,576,308 -$7,251,868 -$14,503,736 

Hispanic American 16 $33,116,374 -$2,980,474 -$5,960,948 

Asian-Pacific Owned 15 $3,818,730 -$343,686 -$687,371 

Women-Owned 167 $100,943,745 -$9,084,937 -$18,169,875 

Washinglon21 

Type of Business Numbers of This Revenue for This Revenue losses for Revenue losses for 

Business Type 2011 Business Type 2011 Business Type 2011 • Business Type 2011 -

at least 9% at Least 18% 

Reduction Reduction 

Minority Owned 216 $239,313,236 -$21,538,192 -$43,076,384 

Small Businesses 78 $138,788,315 -$12,490,949 -$24,981,898 

'0 See Center for Security Polley "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The South 

Carolina Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/sc/contractorlocation/defensebreakdownsummarvreport SC.pdf 

(accessed Oct. 2, 2012) 

21 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The 

Washington Defense Breakdown Economic Impact Report" t Sept. 11, 2012. 

http://www.forthecommondefense.org/reports/wa/contractoriocation/defensebreakdownsummarvreport WA.p 

!if (accessed Oct. 2, 2012) 

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Small Disadvantaged 121 $88,760,258 -$7,988,424 -$15,976,847 

Veteran-Owned 177 $72,175,761 -$6,495,819 -$12,991,637 

Service-Disabled 91 $124,036,483 -$11,163,284 -$22,326,568 

Veteran 

Black American 37 $20,881,980 -$1,879,378 -$3,758,757 

Hispanic American 41 $39,831,379 -$3,584,824 -$7,169,649 

Asian-Pacific Owned 64 $57,190,483 -$5,147,144 -$10,294,287 

Women-Owned 294 $140,400,112 -$12,636,011 ·$25,272,021 

Impact by State: The top five highest revenue-losing states 

The five states that are projected to suffer the highest overall revenUe losses if defense sequestration is 

not reversed include, in descending order: Virginia, California, Texas, Maryland, and Florida. As 

California, Maryland, and Florida are already accounted for in the above tables, the Virginia and Texas 

projections for small business revenue losses - as well as losses for several separate categories which 

include many small businesses - follow: 

Virginia" 

Type of Business Numbers of This Revenue for This Revenue Losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011 - Business Type 2011 -

at Least 9% at Least 18% 

Reduction Reduction 

Minority Owned 1,025 $9,137,801,020 -$822,402,124 -$1,644,804,249 

Small Businesses 520 $2,635,262,578 ·$237,173,641 -$474,347,283 

Small Disadvantaged 435 $4,642,503,150 -$417,825,300 -$835,650,600 

Veteran-Owned 619 $2,592,989,692 -$233,369,082 -$466,738,163 

Service-Disabled 487 $2,074,238,425 -$186,681,466 -$373,362,931 

Veteran 

" See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Virginia 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www.forthecommondefense,org/reports/va/contractorlocation/defensebreakdownsummarvreport VA.pdf 

(accessed Oct. 2, 2012) 

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Black American 371 $2,640,887,559 -$237,679,890 -$475,359,780 

Hispanic American 183 $3,182,252,524 -$286,402,739 -$572,805,477 

Asian-Pacific Owned 226 $1,521,806,256 -$136,962,568 -$273,925,137 

Women-Owned 988 $1,905,382,667 -$171,484,447 -$342,968,894 

Texas23 

Type of Business Numbers of This Revenue for This Revenue losses for Revenue Losses for 

Business Type 2011 Business Type 2011 Business Type 2011- Business Type 2011 -

at Least 9% at least 18% 

Reduction Reduction 

Minority OWned 1,062 $1,795,335,212 -$161,580,176 -$323,160,351 

Small Businesses 437 $1,043,612,047 -$93,925,088 -$187,850,176 

Small Disadvantaged 424 $465,197,897 -$41,867,812 -$83,735,625 

Veteran-Owned 469 $623,565,921 -$56,120,935 -$112,241,870 

Sel1(ice-Disabled 276 $739,720,491 -$66,574,847 -$133,149,694 

Veteran 

Black American 207 $172,060,401 -$15,485,437 -$30,970,873 

Hispanic American 583 $932,007,938 -$83,880,718 -$167,761,436 

Asian-Pacific OWned 95 $273,098,949 -$24,578,906 -$49,157,813 

Women-Owned 962 $841,982,087 -$75,778,391 -$151,556,782 

Range of Businesses Affected by Defense Sequestration 

Through its Defense Breakdown reports, the Center has assessed not oniy the projected revenue losses 

by type of business within each state as documented above, but also by industry classification within 

each state. The industry classification section of the report illustrates the range of businesses that will 

23 See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: The Texas 

Defense Breakdown Economic Impact Report", Sept. 11, 2012. 

http://www,forthecommondefense.org/reports/tx/contractoriocation/defensebreakdownsummarvreport TX,pdf 

(accessed Oct. 2, 2012) 

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be affected by defense sequestration." The range of defense contractors is broad: There are over 1,000 

(one thousand) industry classifications that will be affected by defense sequestration. 

Additionally, Defense Breakdown includes a series of Congressional District Reports which show 2011 

defense contracts for businesses in each congressional district (and bordering zip codes), including the 

contract dollar amount, contractor business name, address and phone number, the contractor industry 

classification, and whether the business is a small or disadvantaged business, woman-owned, minorityowned or veteran-owned. 25 

Follow-up Defense Seq uestration Issues Arising from Defense Breakdown Reports 

Since the release of Defense Breakdown, the Center has had the opportunity to brief a wide variety of 

stakeholders and other entities on the report findings, including Members of Congress, Governors 

offices, defense contractors, local chambers of commerce, trade associations, veterans organizations, 

and national/local media. In the course of these briefings, concerns have been raised about significant 

developments directly relevant to defense sequestration impact on small business, but not addressed in 

the Defense Breakdown reports themselves. These include: 

Requirements under the WARN Act. Several defense contractors have previously indicated intent to 

send out notices to employees of mass layoffs due to defense sequestration per requirements of the 

Worker Adjustment and Retraining Notification (WARN) Act. The WARN Act requires that such notices 

be sent sixty calendar days in advance of such layoffs, which would result in several contractors sending 

out WARN Act notices on 2 November 2012.26 The Department of labor issued guidance in July 2012 

stating that the possibility of sequestration did not justify the sending of WARN Act notices, stating in 

part: "In the absence of any additional information, potential plant closings or layoffs resulting from 

such contract terminations or cutbacks are speculative and unforeseeable ... "" Subsequently, the Office 

of Management and Budget (OMB) issued guidance indicating that the U.S. government will cover 

contractor litigation fees arising from the lack of WARN Act notices if defense sequestration comes 

about and layoffs take place, provided that those contractors had followed the Department of Labor's 

24·See Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: Defense 

Breakdown Economic Impact Report By Contractor location Data -- Sorted by State, Broken Out by Industry 

Classification - All States", Sept. 11, 2012. 

http://www,forthecommondefense.org/reoorts/ all states/contractoriocation/By Industry Classification -

All States - 2011 - Sort by State.html (accessed Oct. 2,2012) 

2S Center for Security Policy "Defense Breakdown Economic Impact Reports, 2011 Data Edition: 2011 Defense 

Contracts by Contractor location for all Congressional Districts" Sept. 11, 2012. 

httD:llwww.forthecommondefense.org/djstrlC!s/ (accessed Oct. 2, 2012) 

26 See Zachary Fryer-Biggs, "labor Dept. Pushes Back Against WARN Act Claims", Jul. 30, 2012, Defense News, 

http:Uwww.defensenews.com/articie/20120730/DEFREG02/307300007/labor-Dept -Pushes-Back-Against-WARNAct-Claims (accessed Oct. 2, 2012) 

27 See id. 

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guidance." Some opponents of defense sequestration on Capitol Hill, including the Chairman of the 

House Armed Services Committee, are questioning the legality of this guidance. 29 

While the WARN Act does not apply to businesses having less than 100 employees, the Small Business 

Administration defines a "small business" as an independent business having fewer than 500 

employees, meaning that some small businesses are conceivably being affected by the ambiguity that 

continues to surround WARN Act requirements in the defense sequestration context. 

Additionally, the WARN Act does not appear to require prime contractors to give any notice to 

subcontractors that they are likely to terminate a contract due to defense sequestration, as prime 

contractors can typically avail themselves of a "termination for convenience" option present in many 

contracts. 

Lack of planning at Department of Defense, Press reports have indicated that Deputy Secretary of 

Defense Ashton Carter, in late September 2012, instructed military and civilian personnel not to plan for 

defense sequestration. According to the Washington Times, Deputy Secretary Carter's memo stated in 

part: 

"I am ... directing that all commanders and managers in the Department of Defense continue 

the defense mission under current laws and policies, without taking any steps that assume 

sequestration will occur .. " 

"We do not want our programs, personnel and activities to begin to suffer the harmful effects of 

sequestration while there is still a chance it can be avoided."" 

Conclusion 

Defense sequestration will not only harm national security, but will harm the defense industrial base 

that supports national defense and a strong national economy, of which small businesses are an integral 

part. It is the Center's hope that its Defense Breakdown reports will encourage informed discussion at 

all levels of business and government as to the projected economic impact of defense sequestration, 

and that such discussion will aid in the reversal of sequestration, or at a minimum, mitigation of its 

impact on national security and defense readiness. 

28 See Sara Sorcher, "White House Moves To Head Off Sequester layoffs", Sept. 29 2012, National Journal} 

http://www.nationaHournal.com/nationalsecurjtylwhjte-house~moves~to-head-off-seguester-lavoffs-20120928 

(accessed Oct. 2 2012) 

"See Jeremy Herb, "Sen. Graham: Obama move on defense layoff notices 'patently illegal''', Oct. 12012, The Hill, 

http:Uthehill.com/blogs/defcon·hili/industrvl259517·graham·says·hell·block-reimbursements·in·layoff·notice· 

f!g!J! (accessed Oct. 2, 2012) 

30 See Rowan Scarborough, "Official warns Pentagon managers not to plan for budget cuts", Sept. 272012, The 

Washington Times http://www.washingtontimes.com/news!20121sepI27 /offidal~to-pentagon-managers-notplan-budget·cuts/printl (accessed Oct. 2, 2012) 

18