The Federal Budget and How it Impacts Contractors

It seems every time you turn on the television or go online, someone is discussing federal budgets – how to fund the rest of fiscal year 2011 and how to provide funding for fiscal year 2012. Will there be another continuing resolution? Will the government shut down?

It can be difficult to understand what the real issues are, and how they’ll impact business – especially federal contractors. Here’s a synopsis of the situation with both the 2011 and 2012 budgets and the primary issues related to each.

FY 2011 Budget:

The budget for FY 2011 has never been finalized, so agencies are operating under a continuing resolution.  This first continuing resolution was passed last year with the intention of giving lawmakers more time to determine the final spending bill for 2011. Since passage of the continuing resolution, the government has been funded at FY 2010 spending levels.

Congress recently passed another continuing resolution, which will keep the government operating until March 18, 2011. By that deadline, Congress and the White House must adopt another continuing resolution, now pass a new spending resolution to keep the federal government operating through the end of the fiscal year – September 30, 2011 – or confront the prospect of a government shutdown.

FY 2012 Budget:

President Obama’s budget includes “a five-year freeze on all discretionary spending outside of defense and national security, slowing the growth in the Pentagon budget and eliminating or downsizing 200 programs to achieve $1.1 trillion of deficit savings over the next decade”.

Historically discussion over discretionary spending has focused on “defense” vs. “non-defense”. Now the category has been broadened so the term “security” encompasses not only defense but also homeland security and veterans programs.

While the proposed cap would limit spending, funding for various programs could be increased if cuts are made elsewhere. “Security” programs would not be subject to the cap. These programs are projected to increase over the next several years, but the rate of growth is much lower than in previous years, which means agencies will have less to spend. Overall , the “non-security” cap is projected to save the government an estimated $400 billion over the next ten years, even though the cuts apply to only about 12% of the total budget.

Ramifications:

Federal agencies are delaying programs as lawmakers decide how to proceed with FY 2011. If major cuts are made to the remainder of the 2011 budget, it would most certainly reduce the number of programs awarded over the next 6 months.

If lawmakers cannot agree, within the next two weeks, on a spending bill for the remainder of 2011, or enact another extension, the government will have to shut down. That could have serious implications for federal contractors.

In 2011 and beyond, contractors will continue to face issues concerning cuts or reductions in discretionary spending. In the proposed 2012 budget discretionary funds only represent 35% of the total budget. About 40% of those discretionary funds go towards contracts. Government agencies, especially those conducting “non-security” projects, will have to work with less money than in previous years. Just how much less has yet to be determined. But with the goal of reducing the deficit high on lawmakers’ agendas , discretionary spending will certainly be impacted.