[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



                         [H.A.S.C. No. 112-148]












                      SEQUESTRATION IMPLEMENTATION

                        OPTIONS AND THE EFFECTS

                          ON NATIONAL DEFENSE:

                      ADMINISTRATION PERSPECTIVES

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                             AUGUST 1, 2012



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                   HOUSE COMMITTEE ON ARMED SERVICES
                      One Hundred Twelfth Congress

            HOWARD P. ``BUCK'' McKEON, California, Chairman
ROSCOE G. BARTLETT, Maryland         ADAM SMITH, Washington
MAC THORNBERRY, Texas                SILVESTRE REYES, Texas
WALTER B. JONES, North Carolina      LORETTA SANCHEZ, California
W. TODD AKIN, Missouri               MIKE McINTYRE, North Carolina
J. RANDY FORBES, Virginia            ROBERT A. BRADY, Pennsylvania
JEFF MILLER, Florida                 ROBERT ANDREWS, New Jersey
JOE WILSON, South Carolina           SUSAN A. DAVIS, California
FRANK A. LoBIONDO, New Jersey        JAMES R. LANGEVIN, Rhode Island
MICHAEL TURNER, Ohio                 RICK LARSEN, Washington
JOHN KLINE, Minnesota                JIM COOPER, Tennessee
MIKE ROGERS, Alabama                 MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona                JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania           DAVE LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas            NIKI TSONGAS, Massachusetts
DOUG LAMBORN, Colorado               CHELLIE PINGREE, Maine
ROB WITTMAN, Virginia                LARRY KISSELL, North Carolina
DUNCAN HUNTER, California            MARTIN HEINRICH, New Mexico
JOHN C. FLEMING, M.D., Louisiana     BILL OWENS, New York
MIKE COFFMAN, Colorado               JOHN R. GARAMENDI, California
TOM ROONEY, Florida                  MARK S. CRITZ, Pennsylvania
TODD RUSSELL PLATTS, Pennsylvania    TIM RYAN, Ohio
SCOTT RIGELL, Virginia               C.A. DUTCH RUPPERSBERGER, Maryland
CHRIS GIBSON, New York               HANK JOHNSON, Georgia
VICKY HARTZLER, Missouri             BETTY SUTTON, Ohio
JOE HECK, Nevada                     COLLEEN HANABUSA, Hawaii
BOBBY SCHILLING, Illinois            KATHLEEN C. HOCHUL, New York
JON RUNYAN, New Jersey               JACKIE SPEIER, California
AUSTIN SCOTT, Georgia                RON BARBER, Arizona
TIM GRIFFIN, Arkansas
STEVEN PALAZZO, Mississippi
ALLEN B. WEST, Florida
MARTHA ROBY, Alabama
MO BROOKS, Alabama
TODD YOUNG, Indiana
                  Robert L. Simmons II, Staff Director
                Jack Schuler, Professional Staff Member
          William (Spencer) Johnson, Professional Staff Member
                    Lauren Hauhn, Research Assistant


















                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2012

                                                                   Page

Hearing:

Wednesday, August 1, 2012, Sequestration Implementation Options 
  and the Effects on National Defense: Administration 
  Perspectives...................................................     1

Appendix:

Wednesday, August 1, 2012........................................    53
                              ----------                              

                       WEDNESDAY, AUGUST 1, 2012
   SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL 
                  DEFENSE: ADMINISTRATION PERSPECTIVES
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McKeon, Hon. Howard P. ``Buck,'' a Representative from 
  California, Chairman, Committee on Armed Services..............     1
Smith, Hon. Adam, a Representative from Washington, Ranking 
  Member, Committee on Armed Services............................     2

                               WITNESSES

Carter, Hon. Ashton B., Deputy Secretary of Defense, U.S. 
  Department of Defense..........................................     6
Zients, Hon. Jeffrey, Acting Director, Office of Management and 
  Budget.........................................................     4

                                APPENDIX

Prepared Statements:

    Carter, Hon. Ashton B........................................    68
    McKeon, Hon. Howard P. ``Buck''..............................    57
    Smith, Hon. Adam.............................................    60
    Zients, Hon. Jeffrey.........................................    62

Documents Submitted for the Record:

    ``Long-Run Macroeconomic Impact of Increasing Tax Rates on 
      High-Income Taxpayers in 2013,'' by Dr. Robert Carroll and 
      Dr. Gerald Prante, Ernst & Young LLP.......................    79

Witness Responses to Questions Asked During the Hearing:

    Mr. Bartlett.................................................   105
    Mr. McKeon...................................................   105

Questions Submitted by Members Post Hearing:

    Mr. Courtney.................................................   114
    Mr. Langevin.................................................   114
    Mr. McKeon...................................................   109
    Mr. Schilling................................................   115
    Mr. West.....................................................   116
 
   SEQUESTRATION IMPLEMENTATION OPTIONS AND THE EFFECTS ON NATIONAL 
                  DEFENSE: ADMINISTRATION PERSPECTIVES

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                         Washington, DC, Wednesday, August 1, 2012.
    The committee met, pursuant to call, at 10:05 a.m. in room 
2118, Rayburn House Office Building, Hon. Howard P. ``Buck'' 
McKeon (chairman of the committee) presiding.

    OPENING STATEMENT OF HON. HOWARD P. ``BUCK'' MCKEON, A 
 REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED 
                            SERVICES

    The Chairman. The committee will come to order. Good 
morning, ladies and gentlemen.
    The House Armed Services Committee meets today to receive 
testimony on the Administration's implementation options for 
sequestration. Joining us today is the Honorable Jeffrey 
Zients, the Acting Director of the Office of Management and 
Budget, and the Honorable Ashton Carter, the Deputy Secretary 
of Defense.
    Although this is the first day of August, when you look at 
the calendar there are only a handful of legislative days left 
to resolve the devastating across-the-board cuts to our 
military known as ``sequestration.'' The House has already 
passed a measure that would achieve the necessary deficit 
reduction to resolve sequestration for a year. However, the 
Senate has yet to consider any solution other than the 
President's proposal, which was defeated unanimously. And since 
he offered that failed proposal 6 months ago, the President has 
been virtually silent on the issue.
    This impasse and lack of a clear way forward has created a 
chaotic and uncertain budget environment for industry and 
defense planners. In part because of this rising tide of 
uncertainty and in part to help build the political will to 
resolve sequestration, this Congress has repeatedly requested 
information from the President and the Office of Management and 
Budget on exactly how sequestration will be implemented. We 
understand that planning for sequestration won't lessen the 
damage, but failing to plan for it will make a terrible 
situation worse.
    In fact, this hearing appears to have prompted a flurry of 
activity within the Administration. On Monday, the Department 
of Labor issued guidance on the applicability of the WARN 
[Worker Adjustment and Retraining Notification] Act, urging 
employers not to notify employees regarding potential job 
losses before the elections. Just yesterday, the President made 
the long-awaited determination that military personnel accounts 
will be exempted from sequestration. And, Director Zients, 
yesterday you issued a memo to Federal agencies that is a small 
step in the right direction. So there is even more to discuss.
    I also know we will hear a lot today about balanced deficit 
reduction, so I want to address the issue briefly. Despite 
claims that the President's budget request reduces the deficit 
by $4 trillion by proposing $2.50 in spending cuts for every $1 
in new revenue, these claims are off the mark by nearly 90 
percent. The savings are propped up by a series of budget 
gimmicks, claiming spending reductions that are actually tax 
increases and counting spending reductions that are already in 
law. It claims $848 billion in savings from ending the wars in 
Iraq and Afghanistan by counting funds that all would admit 
would not be requested in the first place.
    But even if that is the foundation for the President's 
solution, let the Senate bring some version of it to a vote. 
Then we will have a conference and sort out our differences. 
Until that happens, it is my sincere hope that we can each end 
much of this uncertainty here today.
    As one senior military official recently told me, America's 
inability to govern ourselves past sequestration plays directly 
into the hands of those who spread the narrative of American 
decline and will ultimately thrust us into a more dangerous 
world. If this is not enough to compel action and 
straightforward talk on the part of the Administration, I do 
not know what is.
    Thank you for being here, and I look forward to your 
testimony this morning.
    I also request that my full remarks be submitted for the 
record.
    Mr. Smith.
    [The prepared statement of Mr. McKeon can be found in the 
Appendix on page 57.]

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON, 
          RANKING MEMBER, COMMITTEE ON ARMED SERVICES

    Mr. Smith. Thank you, Mr. Chairman.
    I, too, thank our witnesses for being here today.
    And I completely agree with the chairman that sequestration 
is a problem right now. I think this committee has done an 
excellent job of bringing attention to that reality. Folks who 
think that because sequestration doesn't actually kick in until 
January that we have until then are completely wrong. The 
impacts of the uncertainty of whether or not sequestration is 
going to happen are having a definite impact on our economy and 
not just defense. Remember, sequestration hits the entire 
discretionary budget, not just the defense budget. It actually 
hits a little bit of the mandatory spending, as well, and has a 
profound impact on private employers' decisions going forward 
about what to invest in.
    It is impacting the economy right now. The best thing 
Congress could do would be to find a solution right now to 
that. Also, the uncertainty of what is going to happen with the 
tax cuts that are set to expire at the end of this year is also 
a major problem for the economy. Delaying on all this is a 
huge, huge challenge. And that uncertainty is having as big an 
impact as anything right now on our inability to get our 
economy moving again. So I agree with the chairman completely 
that we need to focus attention, that this is a problem right 
now that needs to be addressed as soon as possible.
    It is also worth noting that sequestration was a bad idea 
in the first place. It was based off of the Gramm-Rudman-
Hollings bill back in the 1980s. Both of those plans, the 
architects of which have said we never meant for it to be 
implemented. It is a terrible idea; it is horrible policy. It 
was only meant as a forcing mechanism. It was going to be so 
awful, so hideous, that everyone would have to get together and 
agree to prevent it.
    But we now have seen what was, I think, obvious even before 
we passed the Budget Control Act and the reason that I didn't 
vote for it, the problems of determining how to deal with our 
deficit--you know, how to address it, what to cut, what revenue 
to raise--are so serious, and there is so much difference that 
we can, in fact, go through even something as bad as 
sequestration rather than find the solution.
    So, you know, putting a gun to the head of the economy as a 
so-called forcing mechanism to deal with the deficit was a bad 
idea from the very beginning and one that I hope we never try 
again. But, again, the chairman is right--a problem right now 
that we have to address.
    I really want to thank our witnesses for being here, Mr. 
Zients in particular, and also for offering a solution. The 
White House has put out a variety of different solutions. The 
Democrats in the House have. Every time the Republicans in the 
House have put up a bill to deal with sequestration, there has 
been an alternative offered by the Democrats.
    Now, the Senate is, regrettably, a different story, because 
right now the difference is, Democrats and Republicans have a 
different approach to this. And in the Senate, nobody actually 
controls the Senate because it takes 60 votes to do anything. 
So you would have to, in the Senate, have the Democrats and the 
Republicans agree to get anything out of the Senate.
    So I think the solution here isn't, you know, hoping that 
at some point the Senate acts. The solution is to get all 
Democrats and all Republicans to come together and try to 
figure out what a reasonable approach to this is. Really, the 
problem is there is just a fundamental disagreement on that. 
And we have had that debate; we will have it again today.
    Personally, I think revenue has to be part of the equation. 
As I have said before, if you look at the Republican proposal 
that says we shouldn't cut defense, we should cut taxes by even 
more, and we should balance the budget, the math simply doesn't 
add up unless you cut everything else in our budget--Medicare, 
transportation, education, health care, everything else--by 50 
percent. Nobody supports that. The Republicans don't even 
support that. They haven't proposed it.
    So let's be realistic about the choices we face and 
realistic about the fact that revenue has to be a piece of the 
equation. Again, as I have said before, if you are absolutely 
committed, as this committee is--and I do not doubt that--to 
providing for the common defense, to make sure that our service 
men and women have the support that they need to defend this 
country, then you ought to be willing to raise the money 
necessary to pay for it. I think that has to be on the table.
    But I do agree with the chairman that it is time for all 
parties concerned to come together and try to find a solution 
to this very damaging problem. And I think this hearing is 
helpful in that. Again, I thank Mr. Zients, Mr. Carter for 
being here to have that discussion.
    And I hope we can begin to make some progress toward a 
solution. It is great that this committee is shining a light on 
how big the problem is. I think we all get that now. We now 
have to move past that to finding some way to solve the problem 
so the sequestration does not happen.
    And, with that, I yield back, and I look forward to the 
testimony and the questions and answers.
    [The prepared statement of Mr. Smith can be found in the 
Appendix on page 60.]
    The Chairman. Thank you.
    Mr. Zients.

 STATEMENT OF HON. JEFFREY ZIENTS, ACTING DIRECTOR, OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Zients. Mr. Chairman, Ranking Member Smith, and members 
of the committee, good morning, and thank you for having me 
here. I am here to discuss the Joint Committee sequestration. 
These are the automatic spending reductions for fiscal year 
2013 required by the Budget Control Act.
    I want to start by reiterating a point made when the 
President signed the Budget Control Act last August. 
Sequestration, by design, is bad policy, and Congress should 
pass balanced deficit reduction to avoid it.
    The intent of the sequester was to use the threat of 
mutually disagreeable cuts to both defense and nondefense 
programs to force Congress to enact a compromise deficit-
reduction plan. If allowed to occur, sequestration would be 
destructive to domestic investments, national security, and 
core Government operations.
    A CBO [Congressional Budget Office] report estimated that 
on an annual basis defense spending would be cut by 
approximately 10 percent, while nondefense funding would be cut 
by almost 8 percent. The actual percent cuts would be even 
greater, given that one-fourth of the fiscal year will already 
have elapsed by January 2nd. These cuts would be across the 
board and indiscriminate.
    There has been a lot of focus on the defense cuts, which 
Deputy Secretary Carter will address in a moment. But we would 
face equally harmful domestic cuts, with sequestration causing 
severe harm to many of the investments most critical to our 
country's long-term economic growth.
    More than 16,000 teachers and aides would lose their jobs. 
Close to 700,000 young children and mothers would lose 
nutrition assistance. A hundred thousand kids would lose their 
places in Head Start. The FAA [Federal Aviation Administration] 
would face significant cuts in operations. Food safety and 
workplace safety inspections would be cut back. The number of 
FBI [Federal Bureau of Investigation] agents, Border Patrol 
agents, and transportation safety staff would decline. And the 
NIH [National Institutes of Health] would have to halt or 
curtail vital scientific research, such as research into cancer 
and childhood diseases.
    The President's detailed submission to the Joint Committee 
last September and his February budget both included a plan to 
responsibly avoid these cuts, making tough choices to reduce 
the deficit with a balanced package of spending cuts and 
revenue increases. The President's plan included $2.50 in 
spending cuts for every dollar in revenue and, overall, over $4 
trillion in deficit reduction, far exceeding the amount that 
was required by the Joint Committee to avoid sequestration.
    Recently, attention in Congress has focused on seeking 
information from the Administration on planning and preparing 
for sequestration. I want to stress that in the very 
unfortunate event that Congress fails to pass a balanced 
deficit-reduction package and avoid sequestration, the 
Administration will indeed be prepared to issue the 
sequestration order on January 2nd and to manage its 
implementation. But let me be very clear: No amount of 
planning--no amount of planning--will mitigate the damaging 
effects of sequestration.
    Moreover, our planning must be deliberate so that we avoid 
inadvertently triggering some of the negative effects of 
sequestration. We do not want to waste scarce resources or 
disrupt critical Government operations. To make this vivid, the 
right course is not to spend time moving around rocks at the 
bottom of the cliff to make for a less painful landing. The 
right course is to avoid driving off the cliff altogether.
    Implementation of sequestration would be governed by the 
procedures set forth in the law. And I want to emphasize that 
the law provides OMB [Office of Management and Budget] and 
agencies with very little flexibility or discretion in 
implementing sequestration. It would be a uniform percentage 
reduction at the account level, which would apply evenly, 
equally, across programs, projects, and activities.
    Because Congress has not yet made progress toward enacting 
balanced deficit reduction, the Administration is taking a 
number of actions to prepare for a possible sequestration. 
Earlier this week, OMB issued guidance to agencies and will 
engage with agencies on matters necessary for issuing the 
sequestration order. I have also notified Congress of the 
President's intent to exercise his authority to exempt all 
military personnel accounts from sequestration if it were to 
occur.
    And regarding Federal contractors, earlier this week the 
Department of Labor issued guidance on the WARN Act, clarifying 
that contractors are not required to issue WARN Act notices to 
their workers in advance of January 2nd and that doing so would 
actually be inappropriate in light of the underlying purposes 
of the act.
    So we are taking the necessary steps, but, as I stated, no 
amount of planning will mitigate the damaging effects of 
sequestration. Sequestration is a blunt, indiscriminate 
instrument designed to force action--force Congress to act.
    It is August 1st. Five months remain for Congress to work 
together to pass balanced deficit reduction and avoid the 
sequester. The Administration stands ready to work with 
Congress to get the job done.
    Thank you, and I look forward to taking any questions.
    [The prepared statement of Mr. Zients can be found in the 
Appendix on page 62.]
    The Chairman. Thank you.
    Dr. Carter.

    STATEMENT OF HON. ASHTON B. CARTER, DEPUTY SECRETARY OF 
              DEFENSE, U.S. DEPARTMENT OF DEFENSE

    Secretary Carter. Thank you, Mr. Chairman, Ranking Member 
Smith, members of the committee. Thanks for the opportunity to 
be here with you today. I am pleased to join my colleague, Mr. 
Zients. And I will focus, of course, on the impacts of 
sequestration on the operations of the Department of Defense.
    Let me begin, though, if I may, by thanking you all for 
your continuing support to our Department and our service 
members and military families, not only in Afghanistan but 
everywhere around the world. It is much appreciated.
    I just returned on Friday from a 10-day trip around the 
Pacific theater, where I had the opportunity to meet with our 
troops stationed in Hawaii and Guam, the Republic of Korea, 
Japan. For over 70 years, the presence of our service men and 
women has been a critical guarantor of peace and prosperity in 
the Asia-Pacific region. In the climate of peace and stability 
created by the U.S. military presence, first Japan rose and 
prospered, then South Korea, then Southeast Asia, and now China 
and India. We intend to remain a Pacific power for decades to 
come because we believe this region is one where an important 
part of our future lies. Our new defense strategy calls for 
exactly that. And that is one of many reasons why the subject 
of this hearing is so important to all of us.
    Mr. Chairman, if it is acceptable to the committee, I would 
like to ask that my full statement be submitted for the record, 
and I will just continue with some----
    The Chairman. With no objection, so ordered.
    Secretary Carter. Secretary Panetta and I have been 
emphasizing for many months that sequestration, if it is 
allowed to happen, would have a devastating effect on defense. 
While I will focus on the impact on the Department of Defense, 
Acting Director Zients' testimony makes it clear that the 
effects on the operations of nondefense agencies would be 
equally devastating.
    He has already described the mechanics by which 
sequestration would work, and I would refer you to my prepared 
statement for a more detailed treatment of the mechanics of 
sequestration as they would apply particularly to the 
Department of Defense.
    I will briefly highlight some of the impacts of 
sequestration that are specific to DOD [Department of Defense], 
but much of what I say could be echoed by nondefense Government 
managers and also by industry managers who furnish critical 
goods and services to the Federal Government. While I can 
describe many of sequestration's impacts on DOD, it is not 
possible to devise a plan to implement it that somehow 
eliminates these consequences or even mitigates them 
substantially.
    The intent of sequester was to use the threat of mutually 
agreeable cuts to both defense and nondefense programs, 
implemented inflexibly and mindlessly, to force Congress to 
enact a compromise deficit reduction plan. It was never 
designed to be implemented. Sequestration, therefore, if it 
were allowed to happen, would introduce senseless chaos into 
the management of every single one of more than 2,500 defense 
investment programs, waste into defense spending at the very 
time we need to be especially careful with the taxpayers' 
dollar, inefficiency into the defense industry that supports 
us, and would cause lasting disruptions even if it only 
extended for 1 year.
    Sequestration in fiscal year 2013 would seriously disrupt 
our forces and our programs. Over the longer term, the lower 
spending caps in fiscal 2014 through fiscal 2021 would require 
that we substantially modify and scale back the new defense 
strategy that the DOD leadership, working under the guidance of 
the President, so carefully developed just a few months ago.
    If sequestration is triggered, its impacts would be, as I 
said, devastating for defense. Given the recent announcement 
that the President will exempt military personnel funding from 
sequestration, the cuts in the rest of DOD funding will be 
about 10 percent. Under sequestration rules, moreover, this 
same percentage cut must apply individually to literally 
thousands of defense programs, one by one.
    Overseas contingency operations, or OCO, funding would be 
subject to sequestration. That is, of course, wartime war 
support funding. Supporting our warfighters in combat is 
obviously our highest priority; we would therefore endeavor to 
protect wartime operating budgets as much as possible, 
including the key operation and maintenance accounts. This is 
possible to do in part because the O&M [Operation and 
Maintenance] accounts contain OCO as well as base budget 
funding, and these two categories of O&M funding merge together 
during execution of the DOD budget. We could therefore reduce 
the base budget portions of O&M disproportionately and spare 
the OCO portions. We could take similar steps, as needed, in 
other accounts that include OCO funding.
    However, especially in the Army and the Marine Corps, this 
action would lead to a correspondingly much larger impact on 
base budget O&M and, hence, on readiness of those Services. We 
would seek to minimize effects on readiness of units deploying 
in the near term, but we could probably not do so fully. As a 
result, some later-deploying units, including some deploying to 
Afghanistan, could receive less training, again, especially in 
the Army and the Marine Corps. Under certain circumstances, 
reduced training could also impact the readiness of other units 
to respond to new contingencies should they occur. Obviously, 
sequestration would also affect training in the other Services, 
the Navy and the Air Force, as well.
    Next, sequestration would force DOD and, for that matter, 
other Government agencies to reduce funding for civilian 
personnel. We would probably have to release temporary 
employees and impose at least a partial hiring freeze. We might 
also have to impose unpaid furloughs on our civilian personnel. 
You can imagine the effect on the output, not to mention the 
morale, of these defense employees who conduct so many of the 
Department's essential support functions, from repairing 
weapons to conducting needed oversight and audits.
    Military families and retirees would be adversely affected 
by sequestration. For example, we could be forced to cut back 
on base support services, facility maintenance, and maintenance 
of Government-owned family housing. Commissary hours might have 
to be reduced. Funds for the Defense Health Program, which 
provides health care for retirees and military dependents, 
would be sequestered, resulting in delays in payments to 
service providers and potentially some denial of medical 
services.
    These various sequestration actions, taken together, would 
represent a major step toward the creation of an unready, 
hollow military force. Military readiness would therefore be 
added to the list of programs and other departments harmed by 
sequestration, as has been described by Mr. Zients.
    Sequestration would also inevitably lead to universal 
disruption of DOD's investment programs. As I noted, under 
current rules that govern the sequestration process, every one 
of our more than 2,500 procurement programs, research and 
development projects, and military construction projects would 
each be indiscriminately reduced, each by exactly the same 
percentage.
    Some managers would be forced to buy fewer articles, fewer 
weapons. Reductions in buy sizes will cause unit costs of 
weapons to rise, which will in turn result in further cuts in 
buy sizes. In cases where we cannot feasibly reduce the 
quantity of items bought, we would have to delay projects, 
which is also economically inefficient. Many military 
construction projects could be rendered unexecutable by 
sequestration. We would be forced to delay fixing schools, 
defer construction of new medical facilities, delay 
environmental cleanup, and so forth.
    While we can foresee the harmful effects of sequestration, 
as I explained earlier, the nature of the sequestration 
mechanism makes it impossible to devise a plan that eliminates 
or substantially mitigates them. We are working with OMB to 
understand this complex legislation, and we are, as I have 
described, assessing impacts. But we are still 5 months from 
January. I am hoping, to quote Secretary Panetta, that 
Congress, both Republicans and Democrats, will exercise the 
necessary leadership to make sure that sequestration is 
detriggered. 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.
    While we will not fail to prepare for sequestration, we are 
equally worried about a different type of error. This would 
occur if sequestration does not happen but we end up triggering 
some of its bad effects anyway. For example, we do not want to 
unnecessarily alarm employees by announcing adverse personnel 
actions by suggesting that such actions are likely. For 
efficiency reasons, we do not want to hold back on the 
obligation of funds, either for weapons projects or operating 
programs, that would have been obligated in the absence of a 
possible sequestration. 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.
    Finally, we understand that private companies that serve 
the Department of Defense and constitute important members of 
our national security team will be making decisions on issues 
related to sequestration. They face many of the same dilemmas 
we do, and a number of them have expressed to me their alarm at 
such a wasteful and disruptive way of managing the taxpayers' 
money and the talents of their employees. We will continue to 
consult closely with them, along with OMB and other Government 
departments. The best thing that can happen for our industry 
partners, as well as the Department, is for the Congress to 
enact a balanced deficit-reduction plan that halts 
implementation of this inflexible law.
    I believe that what I have just outlined makes clear that 
sequestration would be devastating to DOD, just as it would be 
to every other affected Federal agency. Secretary Panetta and I 
strongly believe that we need to deal with the debt and deficit 
problems in a balanced way and avoid sequestration and that 
this will require legislation that both Houses of Congress can 
approve and the President can sign.
    The men and women of our Department 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 
need to know that we are going to have the resources to procure 
the world-class capabilities they can provide and that we can 
do so efficiently. The American people, our allies, partners, 
friends, and potential foes the world over need to know that we 
have the political will to implement the defense strategy that 
we have put forward. And that is why Secretary Panetta and I 
urge action now.
    Thank you again for all you do to support our men and women 
in uniform here at home and around the world. Thank you, and I 
would be happy to take your questions.
    [The prepared statement of Secretary Carter can be found in 
the Appendix on page 68.]
    The Chairman. Thank you very much.
    The Department of Labor's guidance notwithstanding, each 
company must decide for themselves if and when they are 
obligated to provide advance notices to their employees of 
impending layoffs. The criteria established by the WARN Act is 
that such layoffs be reasonably foreseeable.
    Two weeks ago, I asked the CEO of Lockheed Martin; the CEO 
of EADS North America, who is the chairman of the National 
Defense Industrial Association and the former Deputy Director 
of OMB; the president of Pratt & Whitney, who is the chair of 
Aerospace Industries Association; and a small-business owner 
who is on the board of the National Association of 
Manufacturers, I asked these four people the following 
question: Can you each confirm at this time that layoffs are 
reasonably foreseeable? Their unanimous answers were ``yes.''
    I also asked each of them if they believed they were 
obligated by the spirit of the letter of the WARN Act to give 
conditional notices to employees that may be laid off as a 
result of sequestration in advance of making a final 
determination regarding which specific employees will be let 
go. None of them disagreed.
    Finally, I asked them if any of the exemptions to the 60-
day notice WARN Act requirements are applicable in this 
situation. For example, could the companies they represent 
claim that layoffs from sequestration were sudden, dramatic, 
and unexpected? Here is what they said:
    ``We don't believe so.''
    ``No, they are well forecasted and anticipated.''
    ``We knew months in advance and could see it coming.''
    ``I would agree with my colleagues. The law on the books 
today says that sequestration will occur on January 2nd, not 
conditional or contingent on anything. That is the law of the 
land, and we are obligated to plan on it. We have a fiduciary 
responsibility to our boards, to our shareholders, and our 
employees to plan based on the laws that are on the books 
today.''
    Director Zients and Secretary Carter, if the largest 
defense contractor and senior elected representatives of the 
National Defense Industrial Association, the Aerospace 
Industries Association, and the National Association of 
Manufacturers all believe that layoffs are, and I quote, 
``reasonably foreseeable,'' and the WARN Act applies, why do 
you disagree with them?
    Mr. Zients. Well, I think the important thing here is that 
it is the Department of Labor that issued guidance. They 
oversee the WARN Act. That happened earlier this week, so 
subsequent to the hearing that you are describing. And they did 
that in response to questions that had been raised by 
contractors in the defense industry and contractors who do 
business with other Government agencies.
    And DOL [Department of Labor], as that agency that is 
responsible for implementing the WARN Act, provided the 
guidance. And the guidance makes clear that contractors are not 
required to issue WARN Act notices 60 days in advance of 
January 2nd. And they go on to say: And to do so would be 
inconsistent with the purpose of the WARN Act. These potential 
plant closings or layoffs are speculative and unforeseeable, so 
to give blanket notices both wastes taxpayer resources and 
creates unnecessary uncertainty.
    So, clearly, the companies that you just talked about need 
to absorb this guidance from the Department of Labor, which is 
very clear, and they need to make their own decisions, but I 
think the Department of Labor has responded to questions from 
contractors with the guidance that they gave earlier this week.
    Secretary Carter. Mr. Chairman, I can't add anything on the 
legal side. That is the interpretation of the Department of 
Labor.
    I will say, I mean, I sympathize with my colleagues in the 
defense industry, in the sense that they, like we, are on the 
horns of this dilemma. On the one hand, this should not happen, 
and nobody wants it to happen. And we don't want to begin 
taking actions now to tear ourselves to pieces in the 
expectation of something that is really stupid if it happens 5 
months from now. On the other hand, we don't want to be in a 
position where we are completely flatfooted 5 months from now 
either.
    So that is where we are. And I sympathize very much with 
them. And this gives them, as they discuss with their boards 
and their counsels, as they make their own decisions, this is 
legal guidance that they can take as input.
    But the underlying issue here is that we have a lot of 
people who depend on us to behave in a more or less predictable 
and responsible way. And this puts them in a lousy position, 
this prospect of sequestration, which is why, as I said, the 
Secretary and I--and Mr. Zients has said the same thing--
Secretary Panetta and I have been saying for months, we've got 
to head this off. It is very damaging. Just having the shadow 
over us is damaging, as this discussion illustrates.
    The Chairman. I think we already, as Mr. Smith pointed out 
and I have said repeatedly, we are already in sequestration. 
They are already making decisions, they are already doing 
things, because it is the law of the land.
    Let me ask, did either the OMB or DOD provide input into 
the Department of Labor's opinion?
    Mr. Zients. OMB plays a role, as you probably know, in 
clearing guidance from all agencies. So OMB played its normal 
role of clearing interagency guidance.
    Secretary Carter. Mr. Chair, we did not, no. The Department 
of Defense didn't, though the--as I said, there is a sensible 
result here of not having people tear themselves apart about 
something that I hope doesn't happen. But we don't have a role 
in making the legal determination, no.
    The Chairman. Hope really probably isn't good enough to 
build a strategy on. They are going by based on what the law of 
the land is.
    Have you or anyone else in your organization given any 
guidance to industry, either verbal or written, not to issue 
conditional WARN Act notices to employees before the election?
    Secretary Carter. Speaking of Defense?
    The Chairman. Both of you.
    Secretary Carter. No, we have not given separate guidance 
from the Department of Labor. We have made available to our 
contractors, as I assume everyone does to all Government 
contractors, the Department of Labor's guidance on the WARN 
Act.
    Mr. Zients. The Department of Labor's guidance issued 
earlier this week is the only guidance that has been given out.
    The Chairman. Let me ask that question again. Have you or 
anyone else in your organization given any guidance to 
industry, either verbal or written, not to issue conditional 
WARN Act notices to employees before the election? Yes or no?
    Secretary Carter. No. No. No.
    Mr. Zients. No.
    The Chairman. Thank you.
    Director Zients, in your testimony you stated that you 
cannot estimate the percentage reduction and the amount of the 
reduction by program, project, and activity until Congress 
enacts all fiscal year 2013 appropriations.
    Can you explain, please, why the OMB couldn't make certain 
reasonable assumptions, like the DOD appears to have done, to 
begin its analysis?
    For example, why couldn't you use the President's budget 
request as a baseline, or the House-passed appropriations, or a 
continuing resolution funding level? After all, in the case of 
the Department of Defense, the difference between the House-
passed appropriation and the President's request is 1 percent. 
I think most analysts would like those odds, 99 percent 
certainty of what the funding will ultimately be.
    Mr. Zients. I would say that the CBO estimates have a 
decent methodology, but the problem with CBO's estimates or 
anyone's estimates at this point is you have to make a series 
of assumptions. You have to understand what the appropriation 
level is going to be. One has to understand unobligated 
balances on the defense side and what they are going to be. One 
has to understand mandatory spending for those programs that 
are going to be subject on the mandatory side to sequestration. 
Furthermore, you then have to understand how that spending is 
going to interact with PPAs [Program, Project, or Activity].
    So it is a very complex exercise. I think the estimates 
that Dr. Carter provided of 10 percent on an annual basis in 
DOD and 8 percent for the domestic programs are likely in the 
range.
    I would suggest that our energy, our time is much better 
spent avoiding sequestration through balanced deficit reduction 
rather than trying to massage numbers that we all agree will 
have a devastating impact on both defense and domestic 
programs.
    The Chairman. However, you cannot spend your time doing 
that and Dr. Carter can't spend his time doing that. We, the 
Members of Congress, have to spend our time doing that.
    Mr. Zients. Absolutely.
    The Chairman. So what you are saying is you basically will 
implement the law as written, and it will be a straight, 
across-the-board cut of roughly 10 percent to every single 
program, every single line item.
    Mr. Zients. Well, the guidance that we gave yesterday----
    The Chairman. I mean, this is what----
    Mr. Zients [continuing]. Has us working with agencies to 
understand which programs are exempt and which programs are not 
exempt. So, clearly, if a program is exempt from sequestration, 
it will not be subject to such a cut.
    The Chairman. Right.
    Mr. Zients. And that is the kind of work----
    The Chairman. And that is the personnel.
    Mr. Zients. It is not only personnel. There are other 
accounts that we would have to go through by looking at the 
Budget Act of 1985, looking at the BCA [Budget Control Act], 
how programs have changed, what new statutes have come in 
place. It is a complex exercise to understand which accounts 
are exempt and which ones are not.
    The Chairman. But you have given----
    Mr. Zients. That is obviously an important part of the 
across-the-board cut, because if an account is exempt, it is no 
longer in the denominator, if you will, and therefore----
    The Chairman. Right. So you have listed what accounts will 
be exempt. And then everything else will be cut line item by 
line item, across the board, evenly?
    Mr. Zients. That is what the law says.
    The Chairman. Thank you very much.
    Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Just to be clear--and I think you were very clear in your 
opening statement, but to follow up--you are looking at the 
options for if, you know, God forbid, this comes to pass, we 
have to implement it. You are not completely ignoring it and 
just waiting.
    Mr. Zients. Well, I mean, fortunately or unfortunately, OMB 
has experience working with agencies to plan for 
contingencies--Government shutdown, possible debt ceiling. We 
know how do this.
    Mr. Smith. Right. You went through it, like, four times 
just----
    Mr. Zients. And so we know how do this. And as Dr. Carter 
said, we will be ready. We will be ready at DOD; we will be 
ready across the Government if, unfortunately, Congress doesn't 
do its job and pass balanced deficit reduction.
    At the same time, we want to do it in an efficient way. 
There are 5 months between today and January 2nd. That is 
plenty of time for Congress to pass balanced deficit reduction. 
And at the same time, it is more than enough time for us to be 
ready for the unfortunate possibility of January 2nd coming to 
be and we have to implement the sequester.
    We will be ready. But, really, that is not where the energy 
should be spent. The energy should be spent on passing balanced 
deficit reduction to avoid what everybody agrees is bad policy.
    Mr. Smith. Right. And there is no question, I think your 
testimony has been clear, that you both think sequestration is 
completely awful and should be avoided in any way possible at 
this point.
    Mr. Zients. Absolutely.
    Mr. Smith. And then on the WARN Act, that is a legal 
question, and we will skip the legal. But neither one of you is 
suggesting that defense contractors or, you know, people in the 
transportation industry or any of those, you know, shouldn't be 
concerned. I mean, there is clearly an impact on jobs. We don't 
know what specific jobs, and that is what makes the WARN Act 
difficult, because you don't know specifically who is going to 
be laid off at this point. But, clearly, there is a lot to be 
concerned about if you are a defense contractor or a defense 
worker, and neither of you would dispute that, I assume.
    Secretary Carter. No.
    Mr. Zients. Absolutely. I mean, if we have an across-the-
board $109 billion cut indiscriminately done, there will be bad 
consequences, no doubt. And the sequester was designed to be a 
forcing function, not to be a policy that was going to be 
implemented.
    Mr. Smith. Absolutely. And the WARN Act is a very narrow 
question of whether or not you know specifically who is going 
to be laid off. And, you know, part of the legal obligation 
that the Budget Control Act puts you all under is to issue 
guidance on how should we implement this. But, clearly, there 
is a lot to be concerned about if you are a worker under any 
Government contract.
    Mr. Zients. Yes.
    Mr. Smith. I mean, that is an interesting thing about these 
hearings, as has been pointed out by some of my colleagues, 
that, you know, we have had hearings about the devastating 
impacts of cutting Federal Government spending on defense 
workers at the same time we have complained that somehow 
cutting Federal Government spending on other workers doesn't 
have any impact on the economy. It does, whether it is just 
defense or not.
    And as you both have said, it is a matter of finding the 
balanced approach to solve this problem. And there is a clear 
gulf between the two parties on what the best solution to that 
is. But I don't think there is any gulf between us on how 
devastating sequestration would be and on how important it is 
that we work to prevent it.
    Thank you. I yield back.
    The Chairman. Thank you.
    Mr. Bartlett.
    Mr. Bartlett. Thank you.
    I have four quick questions for Director Zients. With 
succinct answers, hopefully we can get through all of them.
    Sequestration, depending on how it is administered, it 
could be truly catastrophic. As our witnesses acknowledged in 
their opening statements, the Budget Control Act specifies that 
sequestration be implemented in accordance with section 256(k) 
of the Balanced Budget and Emergency Deficit Control Act, which 
states that, ``except as otherwise provided, the same 
percentage sequestration shall apply to all programs, projects, 
and activities, or PPAs, within a budget account. Defense 
programs, projects, and activities have been defined in the 
past as the most specific level of budget items identified for 
defense appropriations, the related classified annexes and 
explanatory statements, and the budget justification documents 
as subsequently modified by congressional action.''
    This level of application may render some programs 
unexecutable based on resulting order quantities that are not 
economical or efficient to manufacture or produce. 
Additionally, some investments for low-quantity orders may not 
be able to be fully funded even with reduced quantities.
    Director Zients, how do you define PPAs for the purpose of 
sequestration of defense accounts?
    Mr. Zients. Well, I think Dr. Carter said there are about 
2,500 PPAs across the Defense Department. Across the 
Government, there are tens of thousands of PPAs. And as you 
said, each one of those will receive an across-the-board cut.
    Mr. Bartlett. Will sequestration be implemented at the 
individual program, project, and activity, or at a higher 
aggregate level to afford agencies some amount of discretion 
and flexibility?
    Mr. Zients. The law is clear: It needs to be implemented at 
the PPA level.
    Mr. Bartlett. What accounts will comprise the basis of 
available funds subject to sequestration on January 2, 2013?
    Mr. Zients. It will be those accounts that are determined 
to not be exempt. And it will also include unobligated balances 
on the defense side and the mandatory programs that are subject 
to sequestration.
    Mr. Bartlett. Which exact spending accounts will or will 
not be subject to sequestration?
    Mr. Zients. Those that are not exempt will be subject to 
sequestration, as I just described. Also, unobligated balances 
on the defense side are subject to sequestration, as are the 
mandatory spending programs that are not exempt from 
sequestration.
    Mr. Bartlett. Can you provide us with a list of the exempt 
accounts?
    Mr. Zients. That is the exercise that we launched 
yesterday. And we will be developing that list.
    Mr. Bartlett. Will the authorities provided in section 
258(b) of the Balanced Budget and Emergency Deficit Control Act 
of 1985, providing flexibility among defense programs, 
projects, and activities, be used?
    Mr. Zients. We are analyzing how the 1985 act interacts 
with the BCA. And that is central to determining what accounts 
will be exempt and which ones will not be exempt.
    Mr. Bartlett. Will the Department of Defense be granted any 
flexibility to apply sequestration in order to adjust programs 
and ensure continuation of critical investments?
    Mr. Zients. The Department of Defense will do what the law 
says. It will apply across-the-board cuts at the PPA level and 
then make decisions within PPAs, the most rational decisions 
possible.
    Mr. Bartlett. On what basis and at what level will that 
authority be given?
    Mr. Zients. According to the law.
    Mr. Bartlett. In my prepared question here, it states that 
``except as otherwise provided.'' How do you interpret that?
    Mr. Zients. I need more context in order to understand what 
your question is.
    Mr. Bartlett. If you could take a look, please, at 256(k) 
and for the record tell us what you think ``except as otherwise 
provided'' means.
    Mr. Zients. We will do so.
    [The information referred to can be found in the Appendix 
on page 105.]
    Mr. Bartlett. Thank you.
    The President's budget request for fiscal year 2013 for 
national defense exceeded the revised discretionary spending 
limits by approximately $5 billion. Should such a funding level 
be appropriated for fiscal year 2013, would the additional $5 
billion be subject to sequester and included in the calculation 
of the available funds?
    Mr. Zients. Well, that depends on whether Congress does 
what we all agree needs to be done, which is, if balanced 
deficit reduction is enacted and the sequester is avoided, 
then, no, we return to the security/nonsecurity caps.
    If under the very unfortunate situation where sequester 
kicks in on January 2nd and the caps are defense and 
nondefense, that $5 billion would be subject to a different 
sequester, not the Joint Committee sequester but the cap 
violation sequester.
    Mr. Bartlett. Thank you very much for your succinct 
answers. We got through five questions, not just four. Thank 
you very much.
    Mr. Zients. Thank you.
    The Chairman. Thank you.
    And just to follow up, the section that he was referring 
to, number four, that you will be giving him the information on 
says, ``Except as otherwise provided, obligations in 
sequestered accounts shall be reduced only in the fiscal year 
in which a sequester occurs.''
    Yesterday, the Secretary of the Department of Education 
said if sequestration kicks in and education will be affected, 
as you pointed out--and I am glad to hear somebody talking 
about--I have only been talking about the defense side. We 
understand that that is half of the equation. But he said any 
cuts to education would be put off until the next year, the 
next education year. By what authority will he be doing that?
    Mr. Zients. That is not the case. The way----
    The Chairman. Okay. That is what he----
    Mr. Zients. As we all know, the school year starts in 
September----
    The Chairman. Right.
    Mr. Zients [continuing]. So the 2012-2013 school year----
    The Chairman. Well, actually, I was on a school board, and 
the board I was on, the school year started in June. Their 
fiscal year ran June to June.
    Mr. Zients. Well, in terms of how we fund.
    The Chairman. Right.
    Mr. Zients. So September through early summer. So the, what 
the Secretary clarified was that the 2012-2013 school year 
would not be impacted by sequester. However, there would be 
very devastating consequences to the 2013 through 2014----
    The Chairman. They will have 2 years?
    Mr. Zients. No. That money would have to be taken out 
within the fiscal year, which as you all know ends September 
30th. So there would be devastating cuts to the next school 
year. So Education, like all departments, would have to live 
under the law and do their fair share of these devastating 
across-the-board cuts.
    The Chairman. Thank you very much.
    Mr. Reyes.
    Mr. Reyes. Thank you, Mr. Chairman.
    Gentlemen, welcome.
    GAO [Government Accountability Office] has stated that, 
regardless of the possible effects of any sequestration, 
agencies must continue to comply with the requirements of the 
Impoundment Control Act, with ``impoundment'' defined as any 
action or inaction by an officer or employee of the Federal 
Government that precludes obligation or expenditure of budget 
authority.
    Our committee has received testimony that indicates that 
there is an observable slowdown and reduction in contracts and 
orders. Questions this morning for you are: What is OMB's 
position on contracts funded with fiscal year 2012 
appropriations but executed in fiscal year 2013? Will agencies 
be allowed to delay contracts to preserve flexibility or 
accelerate contracts prior to January 2nd to protect programs? 
What is your guidance?
    Mr. Zients. We have been very clear in yesterday's guidance 
that we expect agencies to continue normal business operations 
and to not slow down in any way.
    Mr. Reyes. And have you noticed the same thing that we have 
noticed? Is there any indication from your perspective that 
these things are occurring?
    Mr. Zients. Well, I will defer to Dr. Carter, because two-
thirds of contracting is at DOD, and I know he has been 
tracking the obligation level there.
    Dr. Carter.
    Secretary Carter. I have been concerned about exactly the 
phenomenon you are raising that Mr. Zients addressed, which is 
that we begin to experience the deleterious effects of 
sequestration even if sequestration, which we all hope, doesn't 
take place.
    I don't see that in the obligation rate statistics yet. I 
have some anecdotal evidence to that effect from our 
contracting officers and procurement officials. We are not 
seeing it show up in the numbers yet.
    And, of course, as I said, the guidance that we were given 
yesterday, which I think is very sensible, which is, let's not 
self-sequester before we have to, if we end up having to, which 
of course we don't want, and our program managers to keep 
operating in the most efficient manner that they had planned 
to, so they are giving good defense value for the taxpayer 
dollar. We want them to keep on keeping on, if they are 
managing well, doing it the sensible way, not starting to do it 
in a nonsensical way.
    Mr. Reyes. And I was interested in your response about not 
providing guidance to industry leaders. But what about 
providing guidance within the Government? As it pertains to 
violations of the Antideficiency Act, if a director or program 
leader would--you know, they have to plan long-term--and 
sequestration kicks in, what guidance are you providing 
managers about not being in violation of the Antideficiency 
Act?
    Mr. Zients. Well, I think agencies are well aware of the 
Antideficiency Act. Sequester has not taken place at this 
point. Hopefully it never will. Agencies are instructed, as I 
said, to continue their normal business operation, which means 
to continue to spend at the appropriate level. Obviously, not 
to in any way violate the Antideficiency Act, at the same time 
not to slow down spending.
    Mr. Reyes. Well, it seems to me like that puts them in a 
catch-22 situation. They need to plan ahead. For instance, you 
mentioned the cutbacks that would affect Customs and Border 
Protection. They have to make those kinds of--as a chief, you 
have to make those kinds of plans.
    Mr. Zients. Those cuts do not occur until the sequestration 
order is issued on January 2nd. And again, I think the job of 
everybody here is to ensure that we never get to that point, 
that Congress passes a balanced deficit reduction that avoids 
the sequester, and agency operations continue.
    Mr. Reyes. Well, I agree with you, but our track record 
isn't that good here in Congress.
    Mr. Zients. We will be ready, if Congress fails----
    Mr. Reyes. So there are managers out there that could 
conceivably, you know, from my experience, could conceivably be 
in violation. And I am just wondering, is somebody taking that 
into account, and giving that kind of guidance----
    Mr. Zients. They cannot be in violation.
    Mr. Reyes [continuing]. And that kind of cover?
    Mr. Zients. They have their appropriations level, and they 
are spending that appropriation level prudently. If on January 
2nd, the level of spending is reduced by $55 billion on the 
defense side and $55 billion on the domestic side, agency 
managers will be ready to implement that. So we will be ready. 
Again, I think that we have prepared for these types of 
contingencies before. OMB knows how to do it. DOD knows how to 
do it. Agencies know how to do it. The thing that we have to 
focus on right now is avoiding this situation altogether.
    Mr. Reyes. Thank you, Mr. Chairman.
    Secretary Carter. May I just add to that if I may, for 
clarification that you all may not need, but to make sure all 
of our program managers understand. The key point is that funds 
they obligate between now and when sequester hits, if it hits, 
will not be subject to sequester. So they are not going to have 
to retroactively adjust activities they put on contract during 
this period, those activities, per se. I mean, we are going to 
make sure all of our program managers, I think most of them do 
understand that, but that is where the guidance is helpful 
because it makes clear to everybody: Go ahead and obligate the 
funds that you have appropriated to you in the way that is 
appropriate. Do your defense mission or whatever your other 
mission is in an efficient way, and sequester isn't going to 
retroactively apply to what you do now.
    The Chairman. Thank you.
    Mr. Thornberry.
    Mr. Thornberry. Thank you, Mr. Chairman.
    Mr. Zients, part of what you have got to do at OMB is to 
provide economic forecasts, employment forecasts, whether there 
will be more or fewer people unemployed in the future. As you 
know, there has been several studies about the economic 
consequences of sequestration. Do you have any doubts that if 
sequestration were to take effect that there would be 
substantial numbers of people lose their jobs, and that it 
would be detrimental to the economy?
    Mr. Zients. I think that is absolutely is case. As I said 
earlier, if you take $55 billion out of the defense budget and 
an equal amount out of the domestic side, teachers will lose 
their jobs, people that work at the FAA will be furloughed or 
potentially laid off, same situation with Border Patrol. So it 
has a significant impact across the board.
    Mr. Thornberry. As you know, some studies have estimated 1 
to 2 million people in the defense industry could lose their 
job. Do you think that is about right?
    Mr. Zients. I don't have any basis for evaluating that 
estimate, but clearly the impact both in the defense industry 
and in other industries would be significant.
    Mr. Thornberry. Okay, I want to go back to the Department 
of Labor guidance for just a second. Would the Department of 
Labor guidance that says it would be inappropriate to send out 
WARN Act notices be any sort of immunity for a contractor who 
would get sued later by employees who were laid off?
    Mr. Zients. You know, I am not a lawyer, and I am certainly 
not a labor lawyer. I think the DOL guidance is very direct. 
Clearly, companies need to work with their legal counsel to 
interpret that guidance.
    Mr. Thornberry. Well, and I would assume you would say they 
ought to learn from their experience, too. If they have been 
sued in the past over these issues and it takes years to 
resolve those lawsuits, then that would factor in at least 
because they send out the notices.
    Mr. Zients. Yeah, I would assume that each situation, 
having spent time in the private sector 20 odd years, each 
situation is different and has to be evaluated. I think we have 
pretty clear guidance from the Department of Labor as to the 
current situation with sequestration, and clearly company 
leadership needs to work with their legal counsel to interpret 
it.
    Mr. Thornberry. Sure. Can I get back to the Department of 
Education issue for just a second? I don't fully understand 
that. Is it the fact that all of the Education money is sent 
out to the school districts before January 2nd?
    Mr. Zients. No.
    Mr. Thornberry. Then how can it be that some of the money 
that would be--well, here is what is going on in my mind. You 
said sequestration will apply to unobligated balances of the 
Department of Defense. If a school district has not spent all 
of their school funds why is that not an unobligated balance?
    Mr. Zients. Well, first of all, the way the law works, 
unobligated balances outside the Department of Defense are not 
subject to sequestration. So let me clarify that. It is only 
unobligated balances at the Defense Department that are subject 
to sequestration. But at the end of the day, the Department of 
Education has the same across-the-board cut. It is X billions 
of dollars. It has to reduce its spending in fiscal year 2013 
by that amount. So by funding the school year that is about to 
begin, it will have a big impact on the school year, the 
following school year, because the Department of Education has 
to hit that number of taking that money out. It would have a 
devastating impact on kids and education across the country.
    Mr. Thornberry. Yeah. Now, you made that clear and I 
understand that part. What I don't understand completely is 
whether OMB has discretion to determine when those across-the-
board cuts will occur. Can they occur on February 2nd, or 
September 2nd, depending on OMB's discretion? Why is it----
    Mr. Zients. Well, you know there is----
    Mr. Thornberry [continuing]. In the case of schools it will 
be several months after----
    Mr. Zients. There are so many different types of programs, 
and PPAs across the Federal Government. As you know, some 
programs are seasonal, so more spending might be up front, in 
which case you need to save up front. Some might be back-end 
loaded, in which case the money is going to come out of the 
later months of the fiscal year.
    By the end of fiscal year 2013, each agency has to achieve 
that across-the-board cut in each one of those PPAs. There is a 
lot of complexity. There is a lot of nuance. I think it is hard 
to generalize about how that will be achieved.
    Mr. Thornberry. Well, do you have discretion at the OMB to 
determine when those across-the-board cuts will occur within 
the time period from January 2nd to September 30th?
    Mr. Zients. Well, the sequestration order is issued January 
2nd. That means that $55 billion has to come out on each side. 
That means that agencies need to think through how they are 
going to end their fiscal year with the savings achieved. And 
in every situation it is different, and in every situation it 
is going to be very difficult. And remember, if these 8 to 10 
percent numbers had been cited up front based on the CBO 
estimates, 8 percent on the domestic side, 10 percent on the 
defense side, they are actually skipping higher than that, 
because on January 2nd we are actually a quarter into the 
fiscal year. So those are more like 10, 11, 13, 14 percent 
cuts.
    The Chairman. Thank you very much.
    Ms. Sanchez.
    Ms. Sanchez. Thank you, Mr. Chairman. Thank you, gentlemen, 
for being before us. My first question is for Director Zients. 
Did you have a vote on the Sequestration Act?
    Mr. Zients. On the Budget Control Act?
    Ms. Sanchez. Yes.
    Mr. Zients. No, I am not a Member of Congress.
    Ms. Sanchez. Thank you. And Secretary Carter, I would ask 
you the same question. Did you get a vote on that?
    Secretary Carter. I did not.
    Ms. Sanchez. Thank you. So, Mr. Chairman, the Budget 
Control Act was neither authored nor passed by the 
Administration. The enactment of the Budget Control Act is 
really the responsibility of this body, the United States 
Congress. And as our witnesses stated in their testimony, the 
only body that can turn the course of this policy is us, not 
them. So everybody here wants to discuss the negative impacts 
of sequestration. I think, you know, there is probably other 
committees that have been doing this.
    Mr. Turner. Excuse me, will the gentlewoman yield? Will the 
gentlelady yield for just a moment?
    Mr. Turner. I mean, the President did sign it. It's not a 
vote----
    Ms. Sanchez. But the gentlemen in front of us----
    Mr. Turner. It wouldn't have become law if the President 
hadn't signed it. I voted no, by the way.
    Ms. Sanchez. Taking back my time. We know the impacts of 
the sequestration law, loss of jobs, cancelation of programs 
across the board, less teachers, less programs to support our 
children, less programs for our senior citizens. However, I 
don't think that the solution is to exempt the Department of 
Defense. I think that we need to sit down and in a logical 
manner go through and figure out what we need to cut. And this 
is the law as it is right now. It will go, I think it is a--it 
is wrong to go percentage by percentage across the line, but I 
think that we need to, as leaders in this country, sit down. I 
know that I talked to a number of my leaders from both major 
and small businesses, and in, you know, in my conversations 
with--I had a CEO express to me that the impact of 
sequestration, the uncertainty is weighing down the company. He 
said to me, I can't even make decisions for my company, 
Loretta, because really it is making me crazy not to be able to 
lead my company.
    I know that with this sequestration California is due to 
lose something like 150,000 jobs. I mean, we are really on the 
line for this. And I don't want to see sequestration triggered, 
but I do think that we all need to sit down in a very calm 
manner and look through and figure out where we are going to 
make cuts, both in the Department of Defense and in all of the 
other places of our budget.
    So I would just urge my colleagues to sit down in a 
constructive way and work through this and stop this whole 
uncertainty that is going on.
    And I yield back, Mr. Chairman.
    The Chairman. Thank you. Mr. Jones.
    Mr. Jones. Mr. Chairman, thank you very much. And I was 
listening very carefully to Ms. Sanchez, and for me personally, 
I have Camp Lejeune Marine Base down in the district and the 
depot down in the district, and the anxiety of the 
sequestration is mounting each and every day. And one of my 
biggest concerns is, quite frankly, and Mr. Director, probably 
you or Dr. Carter could answer this for me. But if we do go 
into sequestration, the mental health programs within the 
Department of Defense, which I think now are very much stressed 
with the PTSD [Post Traumatic Stress Disorder] and the TBI 
[Traumatic Brain Injury], at what point do we go to within the 
5 months that you get to a point that everyone that is going to 
be on any type of list to be advised that you will not continue 
in this position; if we cannot come to a resolution in the 
House, which I think both parties want to try to do that, at 
what point are you in that 5-month period of time that you have 
to start notifying? I know that is based on the labor laws or 
whatever, but give me an idea of that element. And also, if you 
would, how do you anticipate the best you can the threat to the 
mental health programs within the Department of Defense?
    Secretary Carter. Well, thanks for asking that question, 
because I absolutely share your concern. We have of necessity, 
and sadly, learned a lot about the mental health consequences 
of combat over the last decade and have really tried to advance 
the art with which we service our wounded warriors. And there 
is no question about it, this is caught up like everything else 
we do in sequester. Obviously, we try, as we are going to try 
everywhere we can, within the pretty brutal constraints of the 
law as it is written, to protect the most essential parts of 
our caregiving for PTSD, traumatic brain injury, and so forth.
    And obviously, we are not in a position to say we are going 
to be perfectly successful in doing that because we do have 
these big cuts indiscriminately applied. But we will certainly 
try.
    And just in closing, I just appreciate the community 
support of Lejeune. I was just down in Lejeune a few weeks ago 
and you are great to our people down there and we are grateful 
for it.
    Mr. Jones. Doctor, thank you very much, and Mr. Director, 
if we get into December and there has been no resolution by 
Congress, then the process starts. So does it start before 
December if there is no resolution by Congress to stop 
sequestration?
    Mr. Zients. Well, we are going to be very mindful of being 
ready, and at the same time not doing things that are wasteful 
and disruptive. But if we are in that very unfortunate 
situation where the sequestration order needs to be issued on 
January 2nd, we will be ready to do so.
    Mr. Jones. Okay. Mr. Chairman, I yield back my time.
    The Chairman. Thank you.
    Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. I would like to thank 
the witnesses. I think we can stipulate that just about 
everybody on this committee thinks sequestration is a bad idea. 
I do. And we don't want to see it happen. I don't. I think we 
can also stipulate that it is bad for the economy for civilian 
workers in the Defense Department, and people who work for 
contractors and DOD contracts get laid off. I think it is 
equally bad for the economy, by the way, for teachers and 
firefighters, and people who work for highway contractors to 
get laid off, too.
    And I want to apologize to the witnesses. I think you have 
done a very good job explaining an indefensible problem that 
they have been saddled with. Normally I like to ask the 
witnesses questions, but I think that that is probably not the 
right thing to do this morning because the answer to the 
sequestration problem lies on our side of the table, not yours.
    And I would just say with great respect and affection for 
all of my colleagues, I think it is time for us to start to say 
what we are for and not what we are against to fix this 
problem. Understand that repealing sequestration increases the 
national debt by a trillion dollars. That is what it does. So 
if we repeal this, we have to take responsibility for what we 
would do instead. I, by the way, think that replacing that 
trillion dollars is not nearly enough. I think we need a $4 
trillion deficit reduction plan. I would stick with the 
trillion dollars that most of us voted for last August 2nd, and 
I would do the following on top of it: In Medicare, I would say 
that people have to wait a little longer before they can get 
their Medicare benefits. I personally support a plan that would 
say for each year that you are under 55 years of age you have 
to wait a month to get your Medicare benefits to vest beyond 
65. So I would say to a person 45 years old, you get Medicare 
when you are 65 years and 10 months old. I would do the same 
thing with Social Security. The roof did not cave in on my head 
when I said those things. I know that there are sacred things 
you can't say in American politics. We need to start to say 
them.
    I would favor some reductions in domestic areas of the 
budget. I am from New Jersey. I would favor reductions in beach 
erosion funds from the Federal Government if we also had 
reductions in crop subsidies and other funds that benefit other 
areas of the country. I think it is time we have to do those 
kind of things. I don't think that every housing authority 
should have a job training program, and the Department of Labor 
has many job training programs. I think we can do that.
    I think that the wealthiest 2 or 3 percent of Americans 
should pay slightly higher income tax in order to reduce the 
deficit, and I think every dollar they pay should go to our 
deficit reduction.
    And I also think that we can reduce defense spending, 
personally, below the level that is in the sequester. I 
wouldn't go to the $495 billion, but I think we could do a bit 
beyond the 495 that is already in the bill. But the way we 
ought to do it, is have statutory caps on defense 
appropriations where each year this committee and our younger 
cousin, the Defense Appropriation Subcommittee, would make 
decisions about rational and intelligent ways to allocate those 
reductions. I think, for example, that our footprint in Asia 
and Europe is a bit too large and could be reduced. I think 
that a nuclear arsenal that can blow up the world 24 times is 
quite sufficient and it could modernized and reduced in cost.
    I frankly think that changes in the military healthcare 
system, which would be painful and politically unpopular, we 
have an obligation to discuss them and consider them in a fair 
and balanced way.
    Now, I do not expect any of my colleagues to agree with all 
or any of what I have said. If you agree with it, fine. If you 
disagree with it, fine. But I do think it is fair to expect 
each of our colleagues on and off this committee, if they want 
to say they are against sequester to say what they would do 
instead. If you are not prepared to say how you would replace 
that trillion dollars of addition to the national deficit, then 
I think that that is kind of unfair to the witnesses here.
    Look, I hope and pray that on January 2nd that sequester 
order is never issued. It is very bad for the country and for 
this economy. But the power to stop that is with us, ladies and 
gentlemen, not with the gentlemen here testifying this morning. 
And the way to stop it, and I think the chairman of the 
committee deserves great credit for a long time, really for 10 
or 11 months, at educating the Congress and the country on the 
consequences of sequester. I commend him for that. But we as a 
group have to move to the next step. Okay, we can stipulate to 
the fact that we all don't like this. Now, what are we going to 
do about it? And I have put forward some ideas. I know they are 
quite controversial. I think others should put their ideas 
forth and then let's go about our business, do our job, pass a 
law, put it on the President's desk, and repeal sequester that 
way.
    I yield back the balance of my time.
    The Chairman. I thank the gentleman, and I mentioned 
earlier that we had passed legislation not to get rid of the 
trillion dollars, not to eliminate that, merely to pay for the 
first year of it, to move it out of--you have presented some 
items which I applaud your doing that, however, many who are 
facing election in November who are in tighter races are not 
going to step up and do that.
    Mr. Andrews. Well, if the chair will yield, my race may 
have just gotten a lot tighter. But, and I say it with great 
respect for the chairman because he has not practiced this sin 
in my opinion. We have been pushing things out to the future 
around here for 40 years. We keep having commissions and 
delays, and that is what got us into this problem. I think the 
time is for us to make some decisions.
    The Chairman. I am in agreement with you on that. The 
gentleman talked about we have 5 months left. We have 2 
legislative weeks left before we leave for the election to go 
home and tell people what a great job we are doing. And then we 
come back after the election and you know what the environment 
here will be like. People that have lost their elections that 
are given a desk down in the basement, saying don't miss any 
votes, to try to solve something that is very, very important 
that we haven't been able to solve for a year-and-a-half. And 
so I am frustrated with that, and I think that it is very 
important that we do that. In the meantime, though, they do 
have a responsibility to let the people know what they can 
expect. We have a responsibility to fix this. I am just not 
very optimistic at how we are going to go about that.
    Mr. Forbes.
    Mr. Forbes. Thank you, Mr. Chairman. Mr. Zients, you opened 
the door to my questions when you were willing to speak for the 
entire Administration and say that the Administration stands 
ready to work for Congress and also, you were very freely 
willing to opine as to which actions of the Administration, or 
which actions of Congress you thought were responsible or not 
responsible, and also, which ones you thought were realistic or 
not realistic.
    So my first question to you, you have heard Mr. Carter's 
testimony today about how devastating and horrible the 
atrocities that are going to come from sequestration. You also 
heard the ranking member say that he voted against that. I 
voted against that. Do you believe that it was reasonable to 
use a draconian method such as sequestration to force Congress 
to do anything?
    Mr. Zients. Let's go back and review the history here.
    Mr. Forbes. No, sir, I am just asking. I only have 5 
minutes. I just want you to tell me whether you think it is 
responsible or not responsible.
    Mr. Zients. The majority----
    Mr. Forbes [continuing]. Not responsible. Pardon me?
    Mr. Zients. The vast majority of members of this committee, 
both Democrats and Republicans, voted for the Budget Control 
Act. The decision was made----
    Mr. Forbes. Mr. Zients, you stated in your testimony that 
you thought certain actions by Members of Congress were 
irresponsible. I am asking you, do you think it was responsible 
to use an action as draconian as sequestration to force 
Congress to----
    Mr. Zients. The Budget Control Act said the sequestration 
was law and order to force balanced deficit reductions.
    Mr. Forbes. Mr. Zients, are you willing to just say what is 
responsible when it is to your favor? Are you willing to tell 
us? If you don't have an opinion whether it is responsible----
    Mr. Zients. Did I think that it would be responsible to 
implement the sequester? Absolutely not. But a balanced deficit 
reduction----
    Mr. Forbes. Do you think it was responsible to use that as 
a forcing mechanism?
    Mr. Zients. It was--you all wrote the law.
    Mr. Forbes. Mr. Zients, I am just asking you if you thought 
it was responsible.
    Mr. Zients. I think it was responsible to implement 
balanced deficit reduction.
    Mr. Forbes. Did you think it was responsible to use a 
draconian method such as sequestration----
    Mr. Zients. I think whatever it takes to get balanced 
deficit reduction.
    Mr. Forbes. Do you think it was responsible for the 
President to sign that measure into law?
    Mr. Zients. I think given the situation with the debt 
ceiling, I think the President was presented that bill. It 
passed both Houses of Congress, and the President signed the 
bill.
    Mr. Forbes. And you testified before the Senate on February 
14th, and this was a quote, you told the Senate, ``The 
President is not proposing that the sequester go away. The 
sequester is a very important force and function for us to do 
deficit reduction.''
    So is it your thought that sequestration with all its 
atrocities, even though it may be, in effect, holding national 
defense blackmail, is a proper tool if it forces deficit 
reduction?
    Mr. Zients. There are 5 months remaining for Congress to 
act. What is holding us up right now is the Republican refusal 
to have the top 2 percent pay their fair share.
    Mr. Forbes. Okay, Mr. Zients, and let's go to----
    Mr. Zients. The balanced deficit reduction to replace 
sequester----
    Mr. Forbes. Mr. Zients, let's go to your partisan statement 
that you just made about Republicans and Democrats and say 
this: You mentioned the fact that the President has put forward 
a realistic alternative to this. You also come in here and 
state it is Congress' job to fix this. Do you acknowledge that 
the President has at least some responsibility to come in and 
stop sequestration from happening?
    Mr. Zients. The President has put forward on two 
occasions----
    Mr. Forbes. I am just asking you----
    Mr. Zients. In September of 2011 a balanced deficit 
reduction plan to avoid sequester.
    Mr. Forbes. Mr. Zients, do you feel that he has some 
responsibility to put forward a realistic proposal?
    Mr. Zients. He has done so on two occasions.
    Mr. Forbes. All right, now, the one occasion that you 
mentioned in here was his budget. This is a copy of his budget. 
Do you know how many votes this budget got in the Senate of the 
United States Congress?
    Mr. Zients. That budget was not voted on in the Senate.
    Mr. Forbes. It was voted down 99----
    Mr. Zients. It was a Republican gimmick called the Mulvaney 
Amendment which did not have the President's policies included 
in it.
    Mr. Forbes. It was voted down, 99 to nothing. Mr. Zients, 
do you know how many votes that budget got in the House of 
Representatives?
    Mr. Zients. That budget was not voted on.
    Mr. Forbes. It was voted down by every single Member of 
Congress. Mr. Zients, don't you think a realistic proposal 
should have a single vote from at least 1 out of 535 Members of 
Congress in some committee or some forum and can you tell me a 
single proposal that the President of the United States has put 
forward to stop sequestration that has gotten a single vote out 
of the Senate or the House of Representatives?
    Mr. Zients. What you are referring to was not the 
President's budget. It was a gimmick.
    Mr. Forbes. Mr. Zients, I am just asking----
    Mr. Zients. Again, the root cause of the problem----
    Mr. Forbes [continuing]. For you tell me if there is any 
proposal that you can put forward today, any proposal that the 
President has put forward to stop sequestration that has gotten 
a single vote in a Senate committee, on the Senate floor, a 
House committee, or the House floor.
    Mr. Zients. The root cause of the problem here is the 
Republicans refusal to ask the top 2 percent to pay their fair 
share.
    Mr. Forbes. Mr. Zients, I understand your partisanship. I 
am just asking you if you can tell me that that proposal--can 
you point to such a proposal? Then your answer is no.
    And then my second question is this: If you can't point to 
any such proposal that has gotten a single vote, can you 
honestly sit there and say that the President has a realistic 
proposal if it can't garner a single vote in the Senate or the 
House, and with that, Mr. Chairman, I yield back.
    The Chairman. Thank you, Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman. And I appreciate the 
opportunity for the hearing today. And I just want to share 
with my colleague that he was asking about the Administration, 
but in actuality before the Rules Committee recently the 
Democrats did put forth a proposal to offset sequestration, and 
that didn't go very far. And so there are opportunities to do 
that. And unfortunately, as it was just mentioned, if we don't 
address the top 2 percent paying their fair share, then we are 
not going to get where we need to go.
    One of the things that you brought forth today is really 
the impact on our military families. And I know that everybody 
on this committee has consistently been very, very strong when 
it comes to our military families. But in addition to the 
problems that we would see as a result of sequestration, we 
also have tax cuts that will go away for our military families 
that would mean significant, significant problems to them, 
whether it is the child tax credit, a number of other 
opportunities that they have had over the last number of years, 
and I wonder if you could comment on that? Because we would 
have a real impact on our families if we are not able to move 
forward.
    One of the things that struck me the other day when we had 
the defense industry here is they were suggesting in order so 
solve this problem, and we know this is true, everything has to 
be on the table.
    Mr. Zients. That is right.
    Mrs. Davis. We have to be willing to look at a debt deficit 
reduction package----
    Mr. Zients. I think you bring up a good point.
    Mrs. Davis [continuing]. That is going to make a 
difference. Please.
    Mr. Zients. My understanding is both the House and the 
Senate Republicans and Democrats agree that middle-class 
families should not experience a tax increase at the end of 
this year. My understanding is there is a consensus around 
that. The Senate has passed a bill which will ensure that 
middle-class families, families earning under $250,000--and in 
fact all Americans under their first $250,000 of income would 
have no tax increase. And I would encourage the House to pass 
that bill so we can take away that uncertainty for all middle-
class Americans that their taxes will indeed not go up on 
January 1st.
    So why not where there is an area of agreement go ahead and 
provide certainty to those families and those individuals and 
to our economy that taxes will not go up on middle-class 
families.
    Mrs. Davis. Thank you, I appreciate that. And I would 
challenge my colleagues on that as well because that is the one 
way that we can begin to give some certainty, I think, to the 
economy as a whole.
    Mr. Zients. Absolutely.
    Mrs. Davis. Could you comment, further, though, on 
additional cuts that would occur under sequestration for our 
military families? How would those be felt? And I guess going 
to Secretary Carter as well, you have a lot of contact with the 
industries that support our defense, and what have you heard 
from them in terms of what they really feel Congress should be 
focusing on right now?
    Secretary Carter. I think you captured it just a moment 
ago. My colleagues in the defense industry are beholding this 
situation unfold with the same kind of alarm that we are 
expressing in the departments and agencies that have to manage 
things. It is no way to do business and you know the best of 
them have very carefully tried to give us good value and manage 
their facilities and their programs and their technology and 
their people in an optimal way for us, and this just throws 
everything they are trying to do in a cocked hat, so I think 
they are hoping for the same thing that everybody here has been 
talking about, which is that we can find a way not to do this 
to ourselves. And so I just associate myself with them in every 
way. They are trying to manage on our behalf a situation that 
is really untenable.
    Mrs. Davis. Thank you. Thank you, Mr. Chairman, I yield 
back.
    The Chairman. Thank you.
    Mr. Miller.
    Mr. Miller. I think my colleagues will find consolation in 
the fact that we will be given the opportunity to vote on the 
floor tomorrow to extend all of the Bush era tax cuts, 
including those for the middle class as well.
    Mr. Zients, as the Director of OMB, Acting Director, I 
guess, of OMB, what is the law today regarding the Bush tax 
cuts, what is called tax cuts? How do you interpret the law 
today?
    Mr. Zients. They are set to expire.
    Mr. Miller. When?
    Mr. Zients. At the end of the year.
    Mr. Miller. And do you make any plans in regards to that in 
your forecasting of your budgeting that there will be more 
revenue brought into the Government because they expire?
    Mr. Zients. Well, the President's plan assumes that there 
will be no tax increases on families earning less than 
$250,000.
    Mr. Miller. No, that is not my question. My question is, as 
the Bush tax cuts are today, what is the law? The law is they 
will expire at the end of the year. So at the end of the year 
what type of forecasting do you do to prepare for that?
    Mr. Zients. Well, the President's plan has the tax cuts not 
expire for families under $250,000. I don't think all of that--
--
    Mr. Miller. But that is not the law.
    Mr. Zients. Let me finish.
    Mr. Miller. No, sir. What is the law? They expire, correct? 
What do you have to do? If it is the law, you have to prepare 
for those tax cuts expiring, correct?
    Mr. Zients. I don't really understand the intent. What type 
of preparations are you talking about? I think we all agree 
that it is----
    Mr. Miller. Do you forecast having additional revenue 
coming into the Government?
    Mr. Zients. I am sorry?
    Mr. Miller. Do you forecast additional revenue coming into 
the Government?
    Mr. Zients. The policy is protect those families----
    Mr. Miller. From any of the tax cuts. No, sir.
    Mr. Zients. Yes, we do. We have money coming into the 
Government under the assumption that the top 2 percent will not 
have----
    Mr. Miller. And how much money will that be?
    Mr. Zients. Over a decade it is about a trillion dollars, 
$850 billion in the expiration of the tax cuts and the estate 
tax.
    Mr. Miller. So he plans on part of the law not expiring, 
but sequestration you are not planning on any of it because 
somebody has made the statement, and Mr. Carter, I would like 
for you to tell me who made the statement that sequestration 
was never intended to happen, but----
    Mr. Zients. I don't think anyone would debate whether 
sequestration was intended to happen.
    Mr. Miller. But it is the law.
    Mr. Zients. Sequestration was the forcing function to 
balance the deficit reduction.
    Mr. Miller. But it is the law.
    Mr. Zients. The root cause problem here----
    Mr. Miller. Is the law.
    Mr. Zients [continuing]. Is the refusal of Republicans to 
acknowledge the top 2 percent have to pay their fair share. And 
we do have that trillion dollars.
    Mr. Miller. Mr. Zients, was the President's budget ever 
voted on in the Senate?
    Mr. Zients. The President's budget itself was not voted on 
in the Senate.
    Mr. Miller. The President's budget, was it ever voted on in 
the Senate?
    Mr. Zients. No.
    Mr. Miller. Does it concern you that in a Democratic-
controlled Senate by Harry Reid, that Harry Reid would not even 
bring up the President's budget for a vote?
    Mr. Zients. What concerns me is that we have 5 months to do 
balanced deficit reduction----
    Mr. Miller. No, that is not--my question is regarding the 
President's----
    Mr. Zients. And that the refusal to acknowledge that the 
top 2 percent have to pay their fair share----
    Mr. Miller. Sir. Sir, it is my time. Sir, it is my time. 
Does it concern you and the President that the Democrat-
controlled Senate would not, in your words, vote on the 
proposal that the President of the United States gave to this 
Congress?
    Mr. Zients. What concerns me is we have 5 months to enact 
balanced deficit reduction to avoid sequester.
    Mr. Miller. Sir, I have a minute-and-a-half left and I am 
going to ask you again, and I will ask you until the time runs 
out. Does it concern the President that Harry Reid and the 
Democrat Senate would not bring up the President's proposed 
budget?
    Mr. Zients. What concerns me is that the vast majority of 
Democrats and Republicans in this committee voted in favor of 
BCA, which has as a forcing function sequestration and there 
has been no progress by Republicans to acknowledge that we need 
a balanced package that includes further spending cuts and 
requires the top 2 percent to pay their fair share.
    Mr. Miller. I would expect you to be political in your 
comments today, but you have not answered my question. Does it 
concern you or the President that the President's budget was 
not voted on in the Democrat-controlled United States Senate?
    Mr. Zients. My energy and my concern is how we use the next 
5 months to balance deficit reduction and try to avoid the 
sequester.
    Mr. Miller. Can you explain to me then, sir, why you waited 
until yesterday to put out any type of discussion in regards to 
what was going to be exempt from what agency? I mean, now you 
are saying--we have actually had 6 months prior to that.
    Mr. Zients. Well, let's assume that all of us agree that 
the energy should be put against avoiding the sequester. No one 
thinks it is good policy. As I said on multiple occasions, OMB 
and agencies will be ready in the very unfortunate situation if 
January 2nd comes and the sequester order needs to be issued.
    The Chairman. Thank you. Mr. Courtney.
    Mr. Courtney. Thank you, Mr. Chairman, and I thank you for 
conducting this hearing. I would just like to again walk 
through a few points with the witnesses. It was almost exactly 
a year ago that the Budget Control Act was passed. In fact, the 
Administration had initially asked for just a clean bill in 
terms of avoiding default on the full faith and credit of this 
country. They were not the ones who were insisting on a 
sequestration-backed mechanism for deficit reductions, isn't 
that correct?
    Mr. Zients. That is right. I mean, the history here is that 
Republicans refused to do balanced deficit reduction last 
summer, and the threat of default led to the Budget Control 
Act.
    Mr. Courtney. Thank you, and Mr. Carter, in your testimony, 
you mentioned the fact that the design of the Budget Control 
Act actually incorporated the Gramm-Rudman Sequestration 1985 
Act, which is sort of the basic structure of how sequestration 
would take place.
    Again, you have been through a few rodeos in terms of past 
budgets. I mean, the fact is that Gramm-Rudman was on the books 
for a number of years. I mean, it was a bumpy ride before 
finally Congress reached a point where we balanced the budget 
actually in the early 1990s. You know, I would just note that 
when it passed, Congressman Gramm was on the record saying it 
was never the objective of Gramm-Rudman to trigger sequester. 
The objective of Gramm-Rudman was to have the threat of the 
sequester force compromise and action. And that is precisely 
the thinking with the Budget Control Act, that again was 
enacted just about almost exactly a year ago, isn't that 
correct?
    Secretary Carter. That is my understanding as well, yes, 
both of the past and the recent past.
    Mr. Courtney. And at the time the Speaker was actually 
boasting in public that he got 98 percent of what he wanted in 
terms of negotiations with the White House. Again, this was 
certainly something that had more than bipartisan 
participation. In fact, the Speaker claimed he got 98 percent 
with the deal that was finally voted on and sent to the 
President a year ago.
    I would like to just also go to one point which my good 
friend Mr. Forbes was trying to claim that there was not a 
single proposal that the White House has offered that has been 
voted on and approved by either the Senate or the House in 
terms of deficit reduction. And I would actually point out that 
in the 2011 Republican budget plan, where they claimed $5.7 
trillion in savings, $1 trillion of those savings was war 
savings in the OCO account. And I realize, you know, today the 
chairman, who is also someone I have a great deal of respect 
for, now claims that that is a gimmick. But the fact of the 
matter is we are going to spend $98 billion in Afghanistan this 
year, isn't that correct?
    Mr. Zients. That is right. And CBO scores those savings, 
the OCO savings, and importantly, by capping OCO, we are 
closing the backdoor on discretionary spending.
    Mr. Courtney. Right.
    Mr. Zients. So those are real savings as determined by CBO, 
and importantly, closes the backdoor so that we cannot in any 
way increase the cap.
    Mr. Courtney. And I want to be clear. I am not doing this 
as a gotcha point. I mean, the fact of the matter is there 
actually is some overlap between budget documents that have 
been voted on by the vast majority of the Republicans in the 
House and what the President actually put forward. And I think 
we should go back to Mr. Gramm's admonition when the Gramm-
Rudman sequestration was first passed that really it is really 
a mechanism to force compromise and action. And there really 
are some working parts that we can begin to get to that point 
and avoid the cataclysmic results.
    Mr. Zients. And we are where we are, but 5 months remain, 
and there is plenty of time to do balanced deficit reduction 
and avoid the sequester.
    Mr. Courtney. I would just note that, back in eastern 
Connecticut where I come from, people get it, we have fought 
two wars on a credit card, and that post-2014 it is not going 
to be down to zero, but we are going to be bringing down that 
process of pouring money into Afghanistan. And those are real 
savings. That is real money that this Government is not going 
to be expending. And to me, you know, for the Administration to 
offer that as a way of reducing the budget and hitting the 
Budget Control Act targets, which again the Republican budget 
in 2011 used precisely the same measure, is at least one piece 
of how we can solve this problem. And again, I don't know if 
you want to comment on that.
    Mr. Zients. It is driven by the policies of ending the war 
in Iraq and drawing down in Afghanistan.
    Mr. Courtney. Thank you. I yield back, Mr. Chairman.
    The Chairman. You know, I would think that the gentleman 
would know, serving on this committee, that whether a 
Republican or a Democrat proposes using OCO funding that we are 
carrying out into the future for 10 years a trillion dollars 
knows that it is not going to be spent because we know that we 
have pulled the troops out of Iraq and we will pull all of the 
troops out of Afghanistan by 2014. And so we don't need to 
carry that into the future.
    And I have said it is a gimmick whether a Republican or a 
Democrat proposed it.
    Mr. Courtney. Well, I respect that. I would just note, 
though, that certainly your caucus is on record supporting that 
type of approach. And I would yield back.
    The Chairman. Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman.
    Mr. Zients, it has been a pleasure having you here in front 
of the Armed Services Committee. We are not usually of the 
habit of hearing such partisan statements in what is really a 
bipartisan committee. We don't usually hear people throw around 
Republican and Democrat, but you have very, very well. I want 
to commend you on your broken record of your partisanship with 
respect to the fiction of the fact that this Administration has 
a budget or a plan.
    We have already established, although you have tried to 
denie it over and over again, that there has been not one 
single vote in the Senate, not one single vote of support in 
the House or one Member of the House or one Member of the 
Senate who supports the President's so-called budget.
    The lack of that support means you have no plan. We are in 
August, August. There is not one thing on the table that we 
could pick up that has the support of the House or the Senate 
that would solve this problem that comes from the President. I 
can't imagine what it would be like to have the title of 
Director of Office of Management and Budget and to have had no 
support in Congress for a budget. I would probably, if I was 
you, would want to stand in front of Congress and blame 
Congress instead of blaming the fact that you have no plan. You 
keep saying Congress should act. Congress should act. You are 
absolutely right, but you know, Congress by the Constitution, 
we can't do it alone. We have to have the President. Just as 
the President signed the act that causes sequestration, again, 
a bill I pointed out that I voted against, the President has 
full responsibility for sequestration, having voted for it, 
having endorsed it coming out of the House and the Senate, and 
then signed it himself, and also his responsibility for having 
essentially pulled out of the ``super committee'' [Joint Select 
Committee on Deficit Reduction], having provided no plan for 
the supercommittee to have an action that would have then, in 
effect, avoided sequestration.
    What we are dealing with now, though, is two things. One, 
your statements on the WARN Act, and I want to ask you a couple 
of questions about that. We have people who are faced with the 
effects that sequestration might be coming. We have contractors 
that are concerned that they are going to have civil penalties 
and additional actions against them as a result of failure to 
notify employees that they might be laid off as a result of the 
threat of sequestration. You said the Department of Labor has 
issued a guidance so that no one need provide those notices.
    So let me ask you first. You have said you weren't a 
lawyer, but you might not be a lawyer, but you might, I know, 
have an understanding of the authority of the position you sit 
in, so let's start with your position. Do you have any legal 
authority or ability to waive the penalties in the WARN Act for 
noncompliance under the threat of sequestration?
    Mr. Zients. No, I do not believe so.
    Mr. Turner. Okay, let me go then to the Department of 
Labor's own guidances. Here we have the U.S. Department of 
Labor's fact sheet with respect to the WARN Act, and they 
expressly state, an employer who violates the WARN Act 
provisions by ordering a plant closing or mass layoff without 
providing appropriate notice is liable for, boom, boom, boom. 
And it lists all of these things that they are liable for. And 
then it says, the Department of Labor--this is their document--
since it has no administrative or enforcement responsibility 
under WARN, cannot provide specific advice or guidance with 
respect to individual situations. This is their document. I am 
assuming you don't disagree with it?
    Mr. Zients. I think the Department of Labor is the expert 
here.
    Mr. Turner. Did you disagree with their document?
    Mr. Zients. They are the experts.
    Mr. Turner. Right. Their document goes on to say: 
Enforcement of WARN requirements is through the United States 
District Court. Then you go to the actual regs that are with 
respect to the WARN Act, and it says: The Department of Labor--
these are the actual Federal regulations--the Department of 
Labor has no legal standing in any enforcement action and 
therefore will not be in a position to issue advisory opinions 
of specific cases.
    So, although you won't acknowledge it, their documents 
acknowledge it, the statement by the Department of Labor that 
people need not provide WARN Act, warning notices under the 
threat of sequestration has no effect. It is not worth the 
paper it is printed on. It may be the desire of the 
Administration that no one do that, but it certainly isn't 
reality. It is a fiction. And now then to reality. The reason 
why people----
    Mr. Zients. May I respond?
    Mr. Turner. The reason why people have to do that is in 
addition to no plan from this Administration, we also have no 
detailed understanding from the Administration what the effects 
of sequestration would be. You can't provide us one document 
that shows what is going to happen if sequestration hits, 
correct? Do you have one for us today?
    Mr. Zients. In our testimony, both Dr. Carter and I 
illustrated----
    Mr. Turner. Specifically. Do you have documents that 
specifically show who gets cut, who loses jobs, what programs 
stopped?
    Mr. Zients. One can't do that at this point.
    Mr. Turner. The answer is no, right.
    Mr. Zients. The answer is----
    Mr. Turner. You just haven't done it. You are before us 
with no ability to provide us any of that.
    Mr. Zients. The answer is----
    Mr. Smith. I am sorry, if you want to give a speech, give a 
speech. The witness has to get more than 2 sentences out of his 
mouth if you are asking him a question. It has to be said, if 
you just want to badger the witnesses, you know, you can do 
that and not put it in the form of the question.
    Mr. Turner. I have the answer. The answer is no.
    The Chairman. The gentleman's time has expired. Mr. 
Johnson.
    Mr. Johnson. Thank you, Mr. Chairman. Just a few questions, 
or just a couple of statements, I am sorry, that I would like 
to make. I want to thank you all for joining us, and I am sorry 
that we have dragged you from your actual governing 
responsibilities to attend this spectacle, this attempt by 
House Republicans to wash their hands of their own mess and lay 
the blame on the President. It is an election year, after all. 
The responsibility to govern is something I know both of you 
take seriously, which is more than I can say about this Tea 
Party Republican House of Representatives, which brings me to 
an important point.
    Why exactly are we here? I will answer that question. We 
are here because last summer the House Republicans, bowing down 
to their Tea Party base, refused to honor the financial 
commitments of the United States Government and threatened to 
undermine the full faith and credit of their own country. 
Scrambling to deal with that manufactured crisis, Congress 
broke through the gridlock and enacted legislation that would 
impose sequestration unless we agreed on a balanced approach to 
meeting our budget targets. And now instead of working on that 
balanced approach, the approach every serious economist says is 
necessary, what do the House Republicans do? They passed the 
Ryan budget. They cut unemployment. Excuse me, they cut 
employment and training programs. They cut food stamps, low-
income home energy assistance. They cut healthcare for 
children, the sick, and the poor. They cut foreclosure 
prevention. They cut taxes for the rich. And they loaded up the 
defense authorization with pork, an East Coast missile shield, 
nuclear facilities no one wants, and billions of dollars of 
waste far in excess of the caps under the Budget Control Act.
    They want to have their pie sisters' cherry pie and eat it 
too. This hearing is not about the Obama administration and 
sequestration. It is about the Republican Party's abdication of 
its responsibility to govern and the terrible results.
    Now, the Tea Party Republicans during the debt ceiling 
negotiations insisted on sequestration as a part of the deal to 
keep America from defaulting on its debt for the very first 
time in our history.
    Mr. Zients, what would have happened if we had not broken 
that gridlock and which branch of Government was responsible 
for this sequestration policy? And last but not least, Mr. 
Zients, I would like to ask you whether or not the 
Administration is willing to meet our budget targets by 
adopting a balanced approach that involves a measure of 
spending reductions and a measure of revenue increases.
    Mr. Zients. In terms of the debt ceiling negotiation, I 
think it had a bad impact on the economy during that period of 
time. I cannot imagine and don't even want to think about the 
impact that it would have had on the economy if we had not--if 
we had actually defaulted.
    Mr. Johnson. And in fact, just the threat of it----
    Mr. Zients. It is unimaginable. The threat of it alone had 
a bad impact on the economy at a period of time when we could 
hardly afford further bad news.
    You know, I think balanced deficit reduction is the key 
here. Further spending cuts, and revenue with the top 2 percent 
paying its fair share. You are right, independent economists, 
Bowles-Simpson, Rivlin, all of them have at the center of their 
plan balance, spending cuts, and revenue. It is the lack of 
balance, it is the insistence that we can do spending cuts only 
that is the root cause problem here that has us in a situation 
where we are 5 months out and we have not yet replaced the 
sequester. Balanced plan is the key to moving forward and 
making sure that we do not have to implement what we all would 
agree is a bad policy of sequester.
    Mr. Johnson. So what you are suggesting is that it is this 
very Congress who has compelled your attendance today that is 
the very problem that they have called you here from----
    Mr. Zients. Congress needs to pass a balanced deficit 
reduction that the President can sign into law and avoid the 
sequester.
    Mr. Johnson. I thank you, Mr. Zients, and I yield back.
    The Chairman. Thank you.
    Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman, and thank the 
witnesses for being here today. I would like to remind 
everybody that the House Republicans have acted. We passed a 
budget. The Senate has not acted. If you would go back to the 
White House and I would ask you to encourage the President to 
do like he did on the cyber bill and show some leadership. He 
wrote an op ed, and all of a sudden the Senate starts to take 
up a cyber bill. He needs to maybe write another op ed and 
insist that the Senate draw up a budget, whatever their budget 
is, pass something. Let's get into conference. Let's talk about 
it. But to sit here and say we have done nothing is just not 
accurate. We have passed a budget. In fact, we have passed one 
for the past 2 years. So that is something that needs to be 
corrected in the record here today.
    My question, though, goes to Dr. Carter, concerning 
multiyear procurement authority, the multiyear contracts. What 
percentage of what we procure today are in those types of 
multiyear contracts?
    Secretary Carter. I can't give you an exact percentage. I 
can actually find it out for you, but it is fairly small. But 
they are very important, because multiyear contracts can be 
much more efficient. Because you lengthen the horizon of the 
manufacturing----
    Mr. Shuster. Savings?
    Secretary Carter [continuing]. Base. So it is much more 
efficient, and sequester, if it occurs, would affect the 
payment on those contracts in the future. So it is a partial 
exception to the thing I was describing earlier about obligated 
funds not being----
    Mr. Shuster. And it will expose us to Federal Government to 
termination liability considerations, is that correct?
    Secretary Carter. In general for changes, adjustments of 
the kind that would be called for in sequestration, when you 
negotiate a multiyear contract, you negotiate variable numbers 
because we actually never know what our appropriation is going 
to be year by year.
    Mr. Shuster. But my question is, there is liability there 
for us if we break this contract?
    Secretary Carter. There is. It is less efficient if the 
quantities go down.
    Mr. Shuster. So has the Department of Defense or OMB taken 
into consideration what kind of dollars we are talking about, 
because if we cut those contracts and we cut them down, there 
is still going to be a cost somewhere there. So has there been 
an analysis done on any of those multiyear contracts?
    Mr. Zients. Contract by contract, and you are right there 
will be tremendous inefficiencies both in terms of quantities 
having to be decreased which loses economies of scale, delaying 
things.
    Mr. Shuster. I understand, but have you done any analysis 
on that?
    Mr. Zients. No specific analysis on that at this point.
    Mr. Shuster. Is that something you can shield so that, for 
instance, I guess the F-35 [Lightning II fifth-generation 
stealth fighter jet] would be one of those multiyear contracts. 
Can we shield those? Is that something that----
    Secretary Carter. The F-35 is not yet at this point in its 
lifetime subject to multiyear contracts. But we can, and all of 
our program managers know how to make those adjustments. They 
are just, as Mr. Zients said, grossly inefficient.
    Mr. Shuster. But under the BCA will you be able to exempt 
those? Have you done an analysis into that?
    Mr. Zients. As we have talked about, it is across the board 
at the PPA level. You have got to go PPA by PPA. Some PPAs 
might have one contract in them in which case that has to be 
cut. Others might have multiple contracts in which----
    Mr. Shuster. So there is some ability to do that.
    Mr. Zients. Sorry?
    Mr. Shuster. There is some ability to shield some of those 
multiyear contracts?
    Mr. Zients. Yeah. It really has to go PPA by PPA. It is 
going to be different at the Defense Department than it is 
going to be at Education, than it is going to be at 
Agriculture. It is a very----
    Mr. Shuster. So that begs the question. Are you considering 
that?
    Secretary Carter. Yeah, but we would certainly take 
advantage--we are going to take advantage of any flexibility 
that we can find.
    Mr. Shuster. That is something you should be doing, right? 
Because you will be standing----
    Secretary Carter. Absolutely. But unfortunately, there is 
just so little flexibility in sequester. It is not much help, 
but we will take advantage of every bit of flexibility we can, 
if this happens to us, to continue to try to deliver best value 
we can for the taxpayers' defense dollars. And I am sure all of 
the other managers around the Government will try to do the 
same.
    Mr. Shuster. I appreciate that, but again it brings me back 
to what I started. The House Republicans have acted and again, 
I would urge you to go talk to the President to have him show 
some leadership on this to get the Democratic-controlled 
Senate--as I last knew, the Democrats control the Senate so to 
sit here and say that we haven't acted is just not true.
    Mr. Zients. In 20 odd years in the private sector 
inevitably you do a lot of negotiations. In order to come to 
the table, you have to have two reasonable parties in order to 
get something done.
    Mr. Shuster. Propose something. Propose something. Get it 
passed in the Senate.
    Mr. Zients. Spending-only approach, 2 percent aren't paying 
their fair share. It is not a starting base for a balanced 
budget.
    Mr. Shuster. Again, what 2 percent is that, to make sure 
that I am clear on that. Is that people, single folks that earn 
over $200,000 and a couple over $250,000? Is that the correct 
number?
    Mr. Zients. It is the package that is coming before you 
which ensures there is no tax cuts for 98 percent of Americans 
families who are----
    Mr. Shuster. So that means as a former small business owner 
and you have been in the private sector, if I am a Subchapter S 
Corporation, sometimes my tax return would show over $250, 
$300,000, but I don't take that money home.
    Mr. Zients. The President's plan protects 97 percent of 
small businesses.
    Mr. Shuster. I take that money and invest it back in my 
business.
    The Chairman. The gentleman's time has expired.
    Mr. Shuster. It is going to hurt the job creators.
    The Chairman. The gentleman's time has expired. Mr. Barber.
    Mr. Barber. Thank you, Mr. Chairman. And thanks to our 
witnesses for testifying here today. As the newest Member of 
Congress, I was not here to vote on sequestration. Thank 
goodness. Had I been here, I would not have voted for this 
irresponsible plan. This is an irrational way to deal with the 
budget deficit and our national debt. Sequestration represents 
a failure of leadership in Congress and is absolutely the wrong 
approach to getting our fiscal house in order. It would have a 
devastating impact on the two military installations, the 
service members, the civilian personnel, and defense 
contractors that are the major economic drivers in my district. 
And it would bring serious harm to funding for border security, 
a priority for me and for my district, to education, to public 
safety, disability services, and essential services for the 
most vulnerable members of my district.
    If a family took an approach like sequestration to manage 
its budget, it would cut mortgage payments, utility bills, 
food, clothing purchases, child care, and all of the rest by 
the same amount across the board. Obviously, no family would or 
could do this. And while I was not here to vote against 
sequestration last fall, I am here to help stop it. I came here 
with the full intention of working across the aisle to solve 
problems, and I have been told countless times that this is a 
pretty naive proposition. But I remain hopeful that common 
sense and bipartisanship will yet prevail.
    My question is for you, Dr. Carter. I am very concerned 
about all of these potential cuts across the board to both 
military and to domestic spending. But I would like to focus, 
with your help, on the Department of Defense, since that is 
such a critical area in my district and, of course, in many 
others.
    Could you please help us by identifying three critical 
national security priorities that absolutely must be protected 
whether we have deep cuts under sequestration or some other 
formulation?
    You know, Congressman Jones spoke to one that is of grave 
concern to me, how we treat our military members for Post 
Traumatic Stress Disorder and for TBI. And there are others, I 
am sure. But could we have your view on what are the three most 
critical national security priorities that must be protected?
    Secretary Carter. Well, the first one that obviously comes 
to mind is our wartime spending and support to the forces that 
are engaged in the fight in Afghanistan. As I indicated in the 
opening, that is largely but not exclusively OCO funding. And 
the bad news is that OCO is subject to sequestration.
    The only slight silver lining on that cloud is that the 
operations and maintenance part of OCO and the base part of OCO 
become one account in the year of execution, which, said 
differently, without all the gobbledygook, is that we can take 
money from ordinary O&M, training, readiness here at home in 
order to keep the troops in the field funded in a way that we 
really owe them. But that makes the hit on the readiness here 
back at home even harder. So you are shifting the pain away 
from the theater, which is the responsible thing to do, but you 
make it even heavier.
    Second thing I would say is, that is not entirely possible 
for the other parts of OCO that are not operations and 
maintenance. And we are going to have to find other ways there 
to provide the materiel and so forth that the troops need in 
the field.
    Otherwise, I could go on and on, but let me just take a 
few. I think military medical care was cited already. 
Obviously, that is an area where we will work very hard, within 
the limits of this very rigid law, to do everything we can to 
make sure that there is no impact on the care we give wounded 
warriors, families, and so forth.
    And, of course, the exemption of military personnel is one 
way of signifying our faith in the importance of ordinary 
soldiers, sailors, airmen, and marines.
    So those are four or five responses to your question. There 
are many.
    Mr. Barber. Thank you, Dr. Carter.
    The Chairman. Thank you.
    Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman.
    Gentlemen, thank you for being here.
    Mr. Carter, Secretary Carter, if sequestration happens--and 
none of us want it to, and we are going to work real hard, and 
yada, yada, to not allow that to happen, but it is the law of 
the land. And it looks to me like there are an awful lot of 
contracts that will either be terminated or rescoped at a point 
in time as a part of the sequestration. Have you got any sense 
yet as to what the associated costs will be with terminating 
and rescoping these contracts?
    Secretary Carter. The contract termination per se is not 
required, in the sense that if you have already obligated 
money--that is, it is on contract--that obligated fund is not 
subject to sequestration. So this would be--the extant 
contracts would not be affected.
    Mr. Conaway. So you are not anticipating terminating any 
contracts that haven't yet been funded?
    Secretary Carter. They do not have to be terminated on 
account of sequestration.
    Mr. Conaway. Yeah.
    Director Zients, Government-wide, this problem is going to 
be thousands and thousands of contracts and obligations. Would 
you anticipate that you have the authority to do some sort of a 
class waiver, class deviation? Or would you have to go at it 
contract by contract, task order by task order?
    Mr. Zients. As you point out, there are hundreds of 
thousands of contracts Government-wide. About two-thirds of the 
$535 billion of contracting we do is at DOD. On the other 
third, I think you have to go contract by contract, understand 
where we are not going to exercise options, where are we going 
to make modifications, where do you need to consider 
terminations. It is a very inefficient, as we talked about, 
very labor-intensive exercise.
    Mr. Conaway. Right. Well, as a predicate to all that, have 
you given guidance to all of the executive branch agencies and 
everyone that--I mean, this falls under your umbrella of 
responsibility. Have you started to give them that guidance? Is 
there going to be a training and everything else go on? Are you 
giving any guidance whatsoever on this?
    Mr. Zients. The guidance we gave yesterday, as you know, 
was focused on exempt and nonexempt accounts and, importantly, 
instructed agencies to continue business as usual, their normal 
operations. If we get to a point where January 2nd and the 
sequestration order is kicking in, we will have prepared 
agencies on contracting and other issues.
    Mr. Conaway. So they will have enough workforce in place, 
trained and ready to go, to do it----
    Mr. Zients. As you know, the acquisition workforce is 
stretched----
    Mr. Conaway [continuing]. With the same efficiencies that 
the----
    Mr. Zients. As you know, the acquisition workforce is 
stretched to ensure that we are moving from----
    Mr. Conaway. All right.
    Mr. Zients [continuing]. No-bid contracts to competition, 
from cost-plus contracts to----
    Mr. Conaway. Right.
    Mr. Zients [continuing]. Fixed-price contracts. So this 
is----
    Mr. Conaway. Well, reclaiming my time, the effect on the 
Department of Defense is about, we think, $55 billion the first 
year. That is net. Either one of you have an estimate as to--
once you start doing these adjustments, terminations, whatever 
it is, it triggers penalty payments and other kinds of things, 
as well as the costs of defending and all this kind of stuff. 
Do we know what the gross is going to be in order to net back 
down to 55?
    Mr. Zients. Well, the $55 billion is the money that would 
be, unfortunately, taken away. You are right that spending 
underneath that $55 billion would be inefficient.
    Mr. Conaway. Okay. But doesn't that add to the problem? And 
then you have to----
    Mr. Zients. It means the money that you have left will be 
less efficiently spent, yes.
    Mr. Conaway. So can you give us a guess yet as to what the 
gross expenditure is going to be at to be cut in order to make 
up for that inefficiency?
    Mr. Zients. Again, you are cutting $55 billion. The 
remaining money will not be as well-spent because of the 
inefficiencies we have described.
    Mr. Conaway. All right.
    Let me ask you this question. Dr. Carter, you said earlier 
that if, during the first quarter, all these agencies get their 
money obligated and pushed out, then it is not subject to 
sequestration at that point in time.
    Mechanically, how does that work? Are we going to have some 
sort of a mass rush across Government to get everything spent 
and done during that first quarter and pushed out to the 
recipients so that--how do you cut, at that point in time, if 
everything has been spent?
    Secretary Carter. Well, it is what it is. If they have 
obligated funds----
    Mr. Conaway. So how do they comply with the law, though, 
Dr. Carter if----
    Secretary Carter. They have to meet their sequestration 
target with the amount of funds that are not obligated at that 
date. So this is a subject that we will go through with all of 
our program managers one by one.
    Mr. Conaway. So this is just the Department of Defense. The 
rest of Government----
    Secretary Carter. No, the same principle would apply to any 
agency that is doing contracting.
    Mr. Conaway. All right.
    Secretary Carter. Just the way the law works.
    Mr. Conaway. All right.
    We collectively and, in particular, the Administration 
seems to be taking the attitude with respect to sequestration 
of the fellow who fell off the 10-story building. As he is 
passing the fifth floor, he is saying, ``So far, so good. So 
far, so good.'' We have five floors left, we have 5 months 
left. And I am not sensing a lot of leadership.
    And I understand the macho, that you have to pound away, 
Mr. Zients, about the balanced--and all those kinds of things. 
But there are those of us who have similar opinions, held just 
as strongly, that we have a spending problem, not a revenue 
problem. In 2005, 2006, and 2007, the rates currently in place, 
these horrible rates that this President extended, raised money 
the old-fashioned way, it increased Federal revenues the old-
fashioned way: more people working and growing the economy. And 
that would be a balanced approach.
    And I yield back.
    The Chairman. Mr. Critz.
    Mr. Critz. Thank you, Mr. Chairman.
    Thank you, Mr. Zients, Dr. Carter, for being here.
    Mr. Zients, my questions are more about clarification. You 
had mentioned the tax, or not extending the tax cuts for the 
top 2 percent. Now, are you talking about on income that is 
earned over $200,000 or anyone who earns over $200,000?
    Mr. Zients. Yes, the first $250,000 for a family or 
$200,000 for the individual----
    Mr. Critz. Would still receive the tax cut.
    Mr. Zients. Yeah. So it is income above that.
    Mr. Critz. Okay. So----
    Mr. Zients. And it is that group that we need to have pay 
their fair share so we have a balanced approach here.
    Mr. Critz. Now, what is the estimate of how much money that 
would raise over the next--I think the estimate is over 9 
years, right, not over 10? Or is it over 10?
    Mr. Zients. I think it is 10. It is about $850 billion.
    Mr. Critz. Eight hundred and fifty billion. And 
sequestration is $1.2 trillion, but I guess with interest 
savings it is really like $984 billion or something like that?
    Mr. Zients. That is correct. That is correct.
    Mr. Critz. So that leaves a gap of, by my estimate, $134 
billion that would then still have to come through cuts if we 
used all of the income or revenue from the elimination of those 
tax cuts to go definitely toward--or strictly toward 
sequestration.
    Mr. Zients. The President's plan actually has about $1.2 
trillion of revenue, so revenue that goes beyond just the 
expiration of the 2001-2003. But you are right, there also are 
further spending cuts. So the balance here is not simply the 2 
percent paying their fair share; it also is further spending 
cuts in health care and other nonmandatory programs--I am 
sorry, other mandatory non-healthcare programs.
    Mr. Critz. So if we have $134 billion over 9 years to cut, 
then that works out to be, what, $10 billion, $15 billion per 
year, $7.5 billion defense, $7.5 billion domestic programs. Is 
that close estimates?
    Mr. Zients. Well, there is also--your $10 billion to $15 
billion sounds correct. But discretionary, let's remember that 
as part of BCA we have already saved a trillion dollars.
    Mr. Critz. Yeah.
    Mr. Zients. So there are mandatory programs, as I just 
mentioned, both on the healthcare side and non-healthcare side, 
that the President's budget and his submission to the Joint 
Committee last September articulate savings in those areas.
    Mr. Critz. And just to clarify, as well, the bill that I 
believe we are going to vote on tomorrow that has come over 
from the Senate, will that have that $850 billion in revenue?
    Mr. Zients. The Senate bill ensures that no family with 
less than $250,000 has any tax increase. And as you point out, 
for families with more than $250,000, that first $250,000 is 
also protected. It extends that middle-class tax cut for 1 
year, while not extending the tax cuts for the wealthiest 2 
percent, consistent with the wealthiest 2 percent need to pay 
their fair share.
    Mr. Critz. And that will raise the $850 billion?
    Mr. Zients. In essence, yes.
    Mr. Critz. In essence. Okay.
    And just to clarify, too, because you both have said it, 
that sequestration takes effect January 2nd----
    Mr. Zients. Yes.
    Mr. Critz [continuing]. And becomes law--or is law, but it 
becomes effective January 2nd, but it is really until the end 
of the fiscal year that each agency has to show the savings. 
Because, like, at Education, their money is already spent for 
that school year, so they have to take it out of the next. And 
the same with Defense. If they have already obligated money 
through the end of this year, then whatever is left in their 
pot is where they have to----
    Mr. Zients. On January 2nd, we will be a quarter of the way 
through the fiscal year, so the 8 and 10 percent cuts that we 
cited on the domestic and defense side actually are higher 
percentages, because they have to be applied to that 9-month 
period of time.
    Mr. Critz. Right. Right.
    Okay. I just wanted some clarification. I appreciate your 
indulgence. Thanks for being here.
    I yield back.
    The Chairman. Thank you.
    Mr. Wilson.
    Mr. Wilson. Thank you both for being here today.
    And I want to thank Chairman McKeon for his leadership. I 
think it has been very revealing, Mr. Chairman, the information 
that the American people are receiving today. Very important 
for the American people. It has direct impact on the citizens I 
represent.
    I am very grateful I represent Fort Jackson, the initial 
Army training facility. I represent Parris Island. We are very 
proud of the Marines that are trained there. Marine Corps Air 
Station, Beaufort Naval Hospital. I represent North Airfield. 
And in the new district I represent of Aiken County, I now will 
be in the neighborhood of Fort Gordon and the Eisenhower 
Medical Center. So I've got wonderful people, military 
families.
    And as chairman of the Military Personnel Subcommittee, I 
am very, very concerned about what I have heard today.
    And, in particular, Dr. Carter, yesterday, in advance of 
this hearing, the President announced that he would exempt 
military personnel accounts from sequestration. Can you please 
describe in more detail whether these accounts will be exempted 
in whole or in part, or to what extent?
    Secretary Carter. The law gave the President until early 
August to make that determination. He did decide to exempt 
military personnel in toto. So it is, that part of our budget 
will be exempt from sequestration. That means that the rest of 
the budget, of course, has to bear a larger share of the cuts, 
but we certainly think that is a fair and a practical thing to 
do.
    It is fair because it is the right thing to do by our 
troops in a time of war. It is a practical thing to do because, 
the way the military personnel regulations and laws work, it 
would be very difficult to take that much money out of the 
military personnel account if it weren't exempted. For example, 
we cannot furlough military personnel. We can furlough civilian 
personnel and, sadly, might have to do that if sequester 
happens. We can't do that with military personnel. The only way 
we could accommodate a cut of that size would be to do things 
like stop accessions, which is very unhealthy for the force; 
stop bringing in new people; stop permanent change-of-station 
moves, which means everybody freezes in place and we can't move 
anybody around.
    So as you thought about applying sequester to the military 
personnel account, it is particularly unpleasant. As I have 
said, sequester is very unpleasant in general to everything we 
do. It would be particularly unpleasant to that. So it is in a 
bad situation; this is making the best of a bad situation, to 
exempt military personnel.
    Mr. Wilson. And, actually, you said it was stupid. And that 
is just unfortunate for our country.
    And as you mention about furloughs and accession, related 
to that is something else, and that is, does the exemption of 
military personnel accounts from sequester mean that even more 
military personnel will have to be separated to offset the loss 
of savings from pay and benefits?
    Secretary Carter. No, because the entire military personnel 
account is protected in this way. What will suffer 
disproportionately as a consequence is readiness of the force 
that exists, modernization, research and development, test and 
evaluation. All of the other major accounts will suffer as a 
consequence.
    Mr. Wilson. Additionally, in your testimony you indicated 
this will affect our service members who are serving overseas, 
actually in the line of fire. In June, the Commandant of the 
Marine Corps expressed concerns about, quote, ``a hollow 
force,'' the same statement of Secretary Panetta, if the 
President exempts military personnel accounts.
    Do you agree with the Commandant? If the O&M accounts are 
sequestered, how will the Department ensure that service 
members are properly trained and equipped?
    Secretary Carter. Well, this is the kind of tradeoff one 
doesn't want to have to make but is made under sequester.
    Past 2013, when these very mechanical cuts are imposed, I 
think that the entire leadership of the Department has made 
clear and the President made clear in the budget that we 
submitted for fiscal 2013, which of course didn't presume 
sequestration but did contain his intent on this matter, we do 
understand that military personnel are going to have to be part 
of meeting our budget target in the future.
    Remember, we already have in our 2013 budget $489 billion 
of cuts. We have already taken that in Defense. We did include 
military personnel in that, because to do otherwise would, as 
you suggest, be unbalanced and would mean that we would have a 
hollow force of the same size.
    Mr. Wilson. Thank you very much.
    The Chairman. Thank you.
    Mr. Wittman.
    Mr. Wittman. Thank you, Mr. Chairman.
    Secretary Carter, Honorable Administrator Zients, thank you 
so much for joining us today. We appreciate you taking the 
time.
    Secretary Carter, let me ask you, you had previously 
testified before us that sequestration would affect CVN-78 
[Gerald R. Ford class supercarriers], our LCS [Littoral Combat 
Ship] programs, our DDG-51 [Arleigh Burke class guided missile 
destroyer] programs. Can you elaborate a little bit more on 
that in looking at how it will affect the different 
shipbuilding accounts? Specifically, how is it going to affect 
the Ohio class replacement submarine? We know one of the models 
for procurement and construction has been the Virginia class 
submarine, and it is critical to our force projection there in 
the Asia Pacific. We know how important that is.
    And can you also comment, too, on how sequestration would 
affect our shipbuilding industrial base and, specifically, the 
suppliers and vendors that support that industrial base?
    Secretary Carter. Excellent question. And I share all the 
concerns that are implied there.
    Sequester does apply to each and every program line item. 
And some programs have both an R&D [research and development] 
line and also a procurement line, and sequester applies 
separately to the R&D line and the--so this is a detailed pain 
for each and every management of each and every one of our 
programs, which leads to inefficiency.
    And to get to your shipyards, you know, our shipyards plan 
out their work years in advance so that they operate in the 
most efficient way. And this will cause us to make very 
inefficient adjustments in each and every one of them. So it is 
a sad waste of the taxpayers' procurement dollar to run things 
this way.
    Mr. Wittman. Sure.
    How would it affect the Ohio class replacement? Would it 
delay that? How would it affect that program, in your 
estimation?
    Secretary Carter. I will get back to you with a more 
detailed answer.
    Mr. Wittman. Okay.
    Secretary Carter. But at this point in the Ohio class 
replacement program, that is going to be largely R&D money.
    Mr. Wittman. Sure.
    Secretary Carter. So it will affect the rate at which we 
accumulate the design content of the Ohio class replacement. 
And, obviously, we will work as hard as we can to make sure we 
don't slow the overall project down as a consequence, but there 
will definitely be a risk of that.
    Mr. Wittman. Let me ask you, in your understanding of the 
shipbuilding supplier industrial base, do you think that with 
this uncertainty that is building with sequestration, do you 
think there is a possibility that any of those small businesses 
would go out of business in the interim?
    Secretary Carter. Yeah, I do. The bottom of the supply 
chain is particularly vulnerable in times of economic 
inefficiency, which this would engender.
    We work very hard to protect particularly the small 
businesses that supply Defense. And the reason for that is that 
small businesses are particularly vibrant, they are good 
sources of technology, they breathe new life and new talent 
into the defense sector, which we need. So we are always 
concerned about the small businesses, and we will work hard to 
keep them in the game.
    Mr. Wittman. Sure.
    How difficult and costly would it be to reconstitute that 
small-business supplier industrial base for our shipbuilding if 
it were unfortunately to be affected by sequestration?
    Secretary Carter. Well, we worry all the time about exactly 
that, not, by the way, just in the context of sequestration, 
but budget cuts in general and just management day to day. It 
is very hard once you lose a specialized supply chain 
contributor to regain that specialized expertise. So once you 
lose it, it is very expensive to regain. So, better to keep it 
in the business in the long run, which is why our whole 
industrial base policy is such an important part of what we do 
in defense.
    Mr. Wittman. Let me ask you, I want to point to some 
comments that have been made about BRAC [Base Closure and 
Realignment]. You know, there has been a lot of back and forth 
about BRAC. And when Secretary Panetta came and testified 
before us February 15th, 2012, he said very specifically that, 
in looking at the total context of defense spending, is that 
the Administration's policy was to pursue a BRAC in 2013 and 
2015. And, as you know, I put an amendment in both the 
appropriations side and the authorization side to set aside 
BRAC in 2013.
    I was surprised when President Obama, though, visited 
Richmond, Virginia, and he did a sit-down interview, and his 
quote on BRAC was this. He says, ``You know, I don't think now 
is the time for BRAC.'' He said that on July 15th. He went on 
further to say, ``We just went through some base closings, and 
the strategy that we have does not call for that.''
    And I am just wondering, was the President misspeaking 
there? Because it was very clear to me that Secretary Panetta 
said that it was this Administration's policy to pursue BRAC in 
2013, and then his comment on July 15th just seemed to be 
counter to that. So I just wanted to get some clarification 
from you.
    Secretary Carter. No, the President is right; we did not 
build into our 2013 budget submission any savings or any 
presumption about BRAC for the very simple reason that that is 
not an authority we have. That is an authority only Congress 
has. And so there was never any prospect and is no prospect of 
any BRAC in 2013.
    Down the road, if we continue to have reductions in overall 
defense spending, it will be a necessary corollary of that, 
that we will have to revisit BRAC. But that is obviously not 
going to happen in 2013.
    Mr. Zients. I want to be clear that it is not only no 
savings in 2013, there were no savings in the 5-year window----
    Secretary Carter. Yes. I am sorry.
    Mr. Zients [continuing]. Of the defense budget. And I think 
the President has been very clear, this is not the economic 
time, given the fragility of the economy, for doing BRAC.
    Secretary Carter. So we didn't build that into our budget 
submission.
    Mr. Wittman. Okay. Very good.
    The Chairman. The gentleman's time has expired.
    Mr. Wittman. Thank you, Mr. Chairman.
    The Chairman. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    And, gentlemen, thank you for being here.
    And I did not vote for sequestration. I know that 
commitments were made at the highest level in both parties that 
this would never happen and we wouldn't be sitting here today, 
but we are. And, unfortunately, for me, as a man with a wife 
and a soon-to-be 13-year-old boy, I am quite honestly tired of 
the blame game. I am going to live under whatever we do for a 
long time in this country, and I and the rest of the freshman 
class want to get this resolved.
    But I would like to, if I could, Mr. Zients, talk with you 
about a couple of things. If you listen to the President, he 
has essentially said, well, if you all would just pass my 
budget, everything would be okay. Well, he didn't get a single 
vote for his budget from Democrats or Republicans. So that is 
not my fault, that it didn't pass. I mean, it wasn't supported 
by his own party. Same with his jobs bill.
    And as I have listened to the President come out and talk, 
he has talked more about the Buffett rule than he has anything 
else. And I understand you have said, and I take you at your 
word, that he is going to be--that his tax bill is coming to 
the House. I assume we will have his total language. And you 
said it would generate somewhere in the range of $850 billion 
over 10 years. Is that----
    Mr. Zients. That is right.
    Mr. Scott. Okay. We spend approximately $10 billion a day 
in this country. Is that fair enough, give or take a--okay.
    The Buffett rule generated $47 billion over the course of 
10 years. So, over the last 18 months that I have been here, as 
an American I have listened to my President present a proposal 
for corporate-jet tax increases that would fund the Government 
for 45 minutes and a Buffett rule that funds the Government for 
10 or 11 hours.
    The bottom line is this: This Tax Code that we are living 
under today, the one that we are living under today, generated 
$2.567 trillion in 2007. It generates less than that today. 
Part of it is the global recession, but part of it, with due 
respect to the President, part of it is the class warfare that 
he is perpetuating. And with due respect, there is a difference 
in taxing schedule S income and taxing W-2 income.
    Why would--now, you are obviously a smart guy. But if you 
are a schedule S business owner and you are going to pay 
schedule S taxes at approximately 40 percent under the 
President's proposal or you could convert to a schedule C and 
pay them at what he says should be a lower rate than we even 
have today, why wouldn't you convert your schedule S to a 
schedule C and pay at the lower tax rate?
    Mr. Zients. Well, a couple things here. First of all, the 
President presented a very detailed plan to the Joint Committee 
that had $4 trillion----
    Mr. Scott. But would you answer the schedule S versus 
schedule C?
    Mr. Zients. I operated in the economy----
    Mr. Scott. Sure. I did, too.
    Mr. Zients [continuing]. During the Clinton administration, 
which is the level of taxation that we are talking about 
returning to. I can say personally that there was plenty of 
incentive to grow my businesses. My businesses when I started 
were about----
    Mr. Scott. The budget was balanced.
    Mr. Zients [continuing]. One hundred people; today they 
employ about 4,000 people.
    Mr. Scott. The budget was balanced.
    Mr. Zients. Plenty of incentive to grow businesses in the 
type of tax economy that we are going to--or tax regime that 
the President recommends that--or proposes that we return to so 
that the top 2 percent are paying their fair share.
    The President is also in favor of tax reform----
    Mr. Scott. Are those that are paying nothing paying their 
fair share, according to the President?
    Mr. Zients [continuing]. The top 2 percent are paying their 
fair share. No one with incomes under--no family with income 
under $250,000 is paying any more.
    Mr. Scott. Let's go back to----
    Mr. Zients. But the President also is, to your point, the 
President is very much in favor of tax reform so we have a 
simpler system, lower rates.
    Mr. Scott. Has he presented a proposal?
    Mr. Zients. He has set forward principles and looks forward 
to working with Congress.
    Mr. Scott. He has not presented a proposal, with all due 
respect.
    Mr. Zients. Tax reform is a very complex terrain, but the 
principles are----
    Mr. Scott. Absolutely.
    Mr. Zients [continuing]. There, and the President looks 
forward to engaging----
    Mr. Scott. And he has been President for 4 years, and it is 
time for him and the Administration to stop blaming George 
Bush.
    The bottom line is--the bottom line is we are spending $10 
billion a day in this country. Your revenue estimate--and I 
asked this of another member of the Administration, the only 
member of the Administration that the President has allowed to 
meet with the freshman class, which represents about 20 percent 
of Congress now--the revenue estimate that you have, how is 
that derived?
    Mr. Zients. The revenue estimate in the President's 
proposal of $1.6 trillion?
    Mr. Scott. The budget for fiscal year 2013----
    Mr. Zients. Right.
    Mr. Scott [continuing]. How--the total receipts----
    Mr. Zients. It is derived by having the top 2 percent pay 
its fair share, by us returning to the Clinton-era tax rates, 
and by ensuring that deductions are limited to 28 percent for 
the wealthiest 2 percent. That creates about $1.6 trillion. As 
you said, there are some other specific proposals, like the 
corporate tax piece. That is how we get there.
    And, again, the President would love to do tax reform in 
order to simplify and lower rates.
    Mr. Scott. You are the director of the budget office. And 
with due respect, the President's assumptions, what you all 
have given us in your assumptions assumes that the revenue from 
corporate taxes doubles over the 24 months between 2011 and 
2013.
    Mr. Zients. I don't believe that to be the case. The 
President's tax reform proposal on corporate is tax-neutral. 
Now, you have the economy growing and picking up pace. We are 
not where we need to be----
    Mr. Scott. I think that is part of the problem, is that the 
President's definition of growth and his Administration's 
definition of growth is 1.5 to 2 percent. And, quite honestly, 
it just doesn't get us there.
    Mr. Zients. Well, if Congress would enact the American Jobs 
Act, we would have better growth.
    Mr. Scott. And the President was asked----
    Mr. Zients. And if we got rid of----
    Mr. Scott [continuing]. On four separate occasions by my 
office specifically to give us an----
    The Chairman. The gentleman's time has expired.
    Mr. Scott [continuing]. Outline of where the money would 
go, and he refused.
    The Chairman. Just to clarify something that Mr. Wittman 
brought up, I remember in a meeting with Secretary Panetta in 
my office--I don't know if you were there, Dr. Carter--but the 
request of us was that we have two BRACs going forward in the 
strategy. Is that correct?
    Secretary Carter. Yes. He has asked for authority to begin 
BRAC in 2013. That would not have led to any BRAC activity, 
obviously. In the process, there is a commission and so forth.
    The Chairman. But it was the Administration request of us. 
We didn't put it in our bill, but it was his request at that 
time.
    Secretary Carter. That was.
    The Chairman. Thank you.
    Mr. Palazzo.
    Mr. Palazzo. Thank you, Mr. Chairman.
    Also, I would like unanimous consent to introduce a report 
by Ernst & Young titled ``Long-Run Macroeconomic Impact of 
Increasing Tax Rates on High-Income Taxpayers in 2013.'' Can I 
enter that for the record?
    The Chairman. No objection, so ordered.
    [The information referred to can be found in the Appendix 
on page 79.]
    Mr. Palazzo. Okay. I am going to quote from it in a second. 
But, first of all, you know, we ask ourselves why we are here. 
And if we are honest with ourselves, we can just look back over 
decades of fiscal mismanagement of this country by both 
parties, both Republican and Democrat, and maybe one or two 
independents if they were out there at the time. But, you know, 
we have just made some poor fiscal choices year after year 
after year.
    And, you know, we--pointing fingers at this time is not 
going to resolve sequestration. You have mentioned over and 
over, both of you on this panel, that we have 5 months to avert 
sequestration. And we need to be working together. We don't 
need to be engaging in, you know, partisanship or playing the 
blame game. Whether you voted for the bill or whether you 
didn't vote for the bill, it is facing us. It is coming at us 
very quick, like a fast-moving train.
    And if sequestration is allowed to take effect, we know it 
is irresponsible, and we know the damage that it is going to do 
is irreversible. But you did mention some things on the 
President's plan to raise the revenue through taxing the 2 
percent that you say don't pay their fair share. I think 5 
percent of the top earners pay almost 40 percent of our total 
revenues.
    But that report I just mentioned actually kind of analyzes, 
I think, what the President's plan is. And those businesses 
that you are talking about employ 54 percent of the private-
sector workforce and pay 44 percent of Federal business income 
taxes. The number of workers employed by large flow-through 
businesses is also significant. More than 20 million workers 
are employed by flow-through businesses with more than 100 
employees.
    The report--and this is from the executive summary, and the 
report goes on to pretty much say that these higher marginal 
tax rates result in a smaller economy, fewer jobs, less 
investment, and lower wages. Specifically, this report finds 
that the higher tax rates will have significant adverse 
economic effects in the long run, lowering output, employment, 
investment, the capital stock, and real after-tax wages when 
the resulting revenue is used to finance additional Government 
spending.
    You know, that is food for thought. But I would like to ask 
some questions. We are here to talk about--this is the House 
Armed Services Committee, and I want to get some more questions 
from Mr. Carter, or Secretary Carter, on how sequestration is 
going to affect our military personnel.
    You testified that if the President elects to exempt 
military personnel funding in fiscal year 2013, the out-year 
cuts would force the Department to make substantial reductions 
in military personnel in units in the years beyond fiscal year 
2013.
    With the President having just recently announced that 
military personnel accounts are exempted, could you please 
clarify when additional reductions in military personnel would 
commence? Would it not occur until after fiscal year 2014 or 
later, or would the Department have to start taking steps in 
fiscal year 2013 to responsibly draw down the force beginning 
at a later date?
    Secretary Carter. What the President did was exempt from 
sequestration in fiscal year 2013 military personnel. As I 
said, that was both a decision made on principle and one that 
was practical, given the limitations on how we could have--the 
draconian way in which such cuts would have had to be taken.
    In the longer run, over the course of the next 10 years, 
particularly as we absorb the $489 billion worth of cuts we 
have already absorbed, military personnel, that part of our 
budget will be taken into consideration in those cuts, as it 
was in the 2013 budget that we submitted. Because to do 
otherwise would be to unbalance.
    But what the President was doing was avoiding something 
associated with sequester in 2013, which is a particularly 
absurd--given that all of sequester is absurd--a particularly 
absurd impact on that account in 2013. And that was absolutely 
the right thing to do, because, otherwise, we would have had to 
have done some very drastic things to----
    Mr. Palazzo. Thank you----
    Secretary Carter [continuing]. Accommodate the sequester.
    Mr. Palazzo [continuing]. Secretary Carter.
    Would any of these reductions rely heavily on involuntary 
separations?
    Secretary Carter. We are trying, in the plan that we 
submitted for 2013 and the out-years, which, again, is the 
first $489 billion, and we would endeavor to do that in 
whatever circumstances that we found ourselves, to avoid or at 
least minimize involuntary separations. In fact, we have built 
our whole drawdown, particularly in the Army and the Marine 
Corps, on the principle of minimizing--we can't eliminate 
entirely--minimizing involuntary separations.
    Mr. Palazzo. Thank you.
    The Chairman. Thank you.
    Director Zients, I know you were planning on leaving at 
12:30, but we do have one more Member. I understand you have 
agreed to stay for that.
    Mr. Zients. Absolutely.
    The Chairman. And I thank you for that.
    Mr. Lamborn.
    Mr. Lamborn. Thank you, Mr. Chairman.
    Thank you both for being here and staying a few minutes 
longer. I appreciate that.
    Mr. Zients. Please.
    Mr. Lamborn. Director Zients, what is the OMB position on 
contracts funded with fiscal year 2012 appropriations but 
executed in fiscal year 2013? In other words, will agencies be 
allowed to delay contracts to preserve flexibility or 
accelerate contracts prior to January 2nd in order to protect 
programs?
    Mr. Zients. We assume, or we are instructing agencies to 
continue their normal business operations. That was central to 
yesterday's guidance. Agencies that have--or, sorry, contracts 
that are fully obligated will not be impacted. Unobligated 
balances, as we have talked about, are subject to sequester. So 
contracts that are not obligated would be subject to sequester, 
or to the ramifications of sequester.
    Mr. Lamborn. Okay. Thank you.
    And for either one of you, in the event that fiscal year 
2013 begins under a continuing resolution, which is looking 
more and more likely, how will sequestration calculations be 
applied?
    I will restate that. If fiscal year 2013 begins under a 
continuing resolution, will OMB consider apportioning based on 
post-sequestration estimates or based on fiscal year 2012 
levels?
    Mr. Zients. We will assume business as usual. And, 
obviously, if unfortunately we are in an event where, January 
2nd, the sequestration order is implemented, we will be ready 
to implement.
    Mr. Lamborn. Okay.
    Mr. Carter, do you have anything to add to that?
    Secretary Carter. I don't, no. That is accurate.
    Mr. Lamborn. And as a follow-up, in that event will changes 
be retroactive to the beginning of the fiscal year once the 
appropriations bills are passed?
    Mr. Zients. No.
    Mr. Lamborn. Okay.
    Mr. Carter.
    Secretary Carter. Same answer.
    Mr. Lamborn. Okay. I appreciate your both being here. Thank 
you.
    Mr. Chairman, I yield back.
    The Chairman. Thank you.
    Mr. Smith.
    Mr. Smith. Thank you.
    Just quickly, I want to thank both of our witnesses for 
being here and the discussion. About half the discussion I 
think was a useful discussion about how do we get out of this 
problem, and the other half of this discussion was simply, you 
know, the majority's attempt to try to blame the Administration 
for the entire problem.
    Mr. Turner observed that, you know, you were being 
partisan. I think, just for your explanation, normally on the 
Armed Services Committee the members of the committee are very 
partisan, but our witnesses are from the DOD and they don't 
really fight back. And today we finally had someone who was 
willing to punch back. So that was about the only thing that 
was different.
    I think that, you know, was not the most useful exchange 
that we have had. And I would ask that if we are going to have 
witnesses up from the White House, you know, don't cut them off 
every 2 seconds. I mean, if you are not getting the answer you 
want after a sentence, that is fine. But, otherwise, it is just 
embarrassing to the committee to not give the witnesses a 
chance to at least get two words out of their mouth in between 
questions.
    But, again, I think the chairman's intentions were very 
good in this hearing: to finally, you know, start having the 
discussion about how we get out of this. Not all Members lived 
up to your intentions, but the discussion at least is moving 
forward. And I think it was very useful to have, you know, 
people from the White House and the committee have the 
discussion about how we can get out of what we all agree is, 
you know, a problem that we must avoid. And the sooner, the 
better. Not a January 2nd problem. The sooner we can come up 
with a solution, the more certainty we can have in the economy 
and the better we can help turn things around.
    So I thank the chairman for attempting that and succeeding 
in part, at least.
    I yield back.
    The Chairman. Thank you.
    I think that this is a bipartisan committee. And I think 
this is probably, in my time, the first time that we have had a 
witness come that has actually told us what Republicans should 
do and what Democrats should do. And I think that got us off on 
a track that I was uncomfortable with, and I wish it hadn't 
happened.
    But for you to state your position, that the worst thing 
that could happen is Republicans are not willing to raise 
revenue, as I said in our earlier meeting and at my opening 
statement, we have taken action. And this isn't private 
industry; we talked a little bit about how that works. This is 
the Congress of the United States, and we are directed by the 
Constitution. And the Constitution lays out a framework where 
we resolve problems, and that is, one body passes legislation, 
the other body passes legislation, and then you have a 
conference and try to resolve the differences. And we find 
ourselves hung up because the Senate hasn't taken action.
    Director Zients, one final follow-up question. Is it the 
case that the President's negotiators first raised the 
sequester mechanism during the debt-ceiling negotiations with 
the House?
    Mr. Zients. I don't know the history of that negotiation.
    The Chairman. Okay. That has been my understanding, that 
that is where it came from. And is there a way that you could 
find out and get back to us for the record?
    Mr. Zients. I was not part of those negotiations. We can--
--
    The Chairman. Do you know anybody that was in there that 
you could ask?
    Mr. Zients. Let me see what kind of follow-up we can do.
    [The information referred to can be found in the Appendix 
on page 105.]
    Mr. Zients. At the end of the day, the vast majority of 
members of this very committee, Democrats and Republicans, 
voted in favor of the BCA.
    Mr. Smith. Mr. Chairman, could I just throw something in 
there that I meant to say earlier?
    You know, I didn't vote for the BCA. I completely 
understand the Members who did. Because the other piece of it 
is, nobody likes sequestration, but no one wanted the debt 
ceiling to be breached either. That was, you know, the 
complete, terrible choice that we faced. So the Members who 
voted for it, the President who signed it, it wasn't, ``Yay, 
sequestration.'' It was, ``We have to stop the debt ceiling 
from being breached.'' And that was the only option on the 
table, D or R. I totally understand the Members who said, I 
don't like sequestration, but----
    Mr. Zients. Furthermore, we are where we are, as you have 
pointed out. It is the law. We have 5 months. We all agree we 
need to avoid it. Let's focus our energy forward to do balanced 
deficit reduction to avoid the sequestration.
    The Chairman. Thank you very much.
    This hearing is adjourned.
    [Whereupon, at 12:41 p.m., the committee was adjourned.]



=======================================================================




                           A P P E N D I X

                             August 1, 2012

=======================================================================


              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                             August 1, 2012

=======================================================================

      
              Statement of Hon. Howard P. ``Buck'' McKeon

              Chairman, House Committee on Armed Services

                               Hearing on

              Sequestration Implementation Options and the

        Effects on National Defense: Administration Perspectives

                             August 1, 2012

    Good morning ladies and gentlemen. The House Armed Services 
Committee meets today to receive testimony on the 
Administration's implementation options for sequestration. 
Joining us today is the Honorable Jeffrey Zients, the Acting 
Director of the Office of Management and Budget, and the 
Honorable Ashton Carter, the Deputy Secretary of Defense. 
Gentlemen, thank you for joining us.
    Although this is the first day of August, when you look at 
the calendar there are only a handful of legislative days left 
to resolve the devastating across-the-board cuts to our 
military known as sequestration. The House has already passed a 
measure that would achieve the necessary deficit reduction to 
resolve sequestration for a year--however, the Senate has yet 
to consider any solution, other than the President's proposal, 
which was defeated unanimously. And since he offered that 
failed proposal 6 months ago, the President has been virtually 
silent on the issue. This impasse, and lack of a clear way 
forward, has created a chaotic and uncertain budget environment 
for industry and defense planners. We heard from some of those 
leaders 2 weeks ago that even though cuts are scheduled for 
implementation January 2nd, companies are required to assess 
and start planning now, in accordance with the law--and, 
sequestration is the law right now. Just because there is 
bipartisan consensus that sequestration is bad and should be 
replaced, it doesn't mean that we can wish away the law. The 
President wanted sequestration in the Budget Control Act and he 
got it. Let us also not forget that it was the President who 
put defense ``squarely on the table'' last spring. Until the 
President and the Senate come to the table with a proposal to 
resolve the cuts, we have no choice but to proceed as if 
sequestration will happen.
    In part because of this rising tide of uncertainty and in 
part to help build the political will to resolve sequestration, 
this Congress has repeatedly requested information from the 
President and Office of Management and Budget on exactly how 
sequestration will be implemented. With two million Active 
Duty, civilian, and private sector jobs at stake it is 
unconscionable this information has been denied to Congress, 
the Department of Defense and our industry partners. Make no 
mistake, we understand--planning for sequestration won't lessen 
the damage. But failing to plan for it will make a terrible 
situation worse.
    One bright light of bipartisanship in this impasse was the 
overwhelming House and unanimous Senate passage of the 
Sequestration Transparency Act--legislation requiring the 
President to submit a report to Congress detailing how the 
Administration plans to implement the budget sequestration 
cuts. So this hearing is very timely, and seeing as the 
President already has that legislation on his desk, gentlemen, 
I think it's time to cut to the chase and start talking.
    In fact, this hearing appears to have prompted a flurry of 
activity within the Administration. On Monday, the Department 
of Labor issued guidance on the applicability of the WARN Act, 
which requires notification to employees in advance of massive 
layoffs. Just yesterday, the President made the long-awaited 
determination that military personnel accounts will be exempted 
from sequestration. And Director Zients, yesterday you issued a 
memo to Federal agencies that was a small step in the right 
direction. So there is even more to discuss.
    The panel of defense industry leaders testified before this 
Committee that barring any additional guidance, they must 
proceed as if sequestration will become a reality, and under 
the requirements of the WARN Act notify their employees that 
they may well be laid off in the coming months. As one CEO put 
it, the Administration's failure to issue any guidance on 
sequestration has completed obscured the industry's near-term 
horizon with a ``fog of uncertainty.'' We asked them for the 
specific guidance they needed. They've responded and I have to 
say, input from the Department of Labor wasn't on their list.
    That's because the Department of Labor's own fact sheet on 
the WARN Act says it is inappropriate for the Department to 
issue guidance on the applicability of WARN Act. Nevertheless, 
on Monday night the Department of Labor urged employers not to 
follow the requirements of the WARN Act before the election. So 
instead of bringing his party in the Senate to the negotiating 
table to resolve sequestration, the President has focused on 
preventing advance notice to American workers that their jobs 
are at risk.
    Despite the fact that we can all agree that sequestration 
will cause job losses and that is the law of the land, the 
President's Labor Secretary found a lot of excuses to explain 
why layoffs aren't foreseeable. I guess the conclusion is that 
the Administration doesn't believe Americans deserve the common 
courtesy of being given a couple of months notice before they 
lose their jobs. In the end, it doesn't matter. Each company 
will have to make its own conclusion as to whether or not the 
layoffs are ``foreseeable.'' But I don't want to dwell on that 
ill-conceived guidance. Business leaders will do what they 
think is in the best interests of their employees and 
shareholders, and we are here today to talk about OMB's 
planning.
    Director Zients, you have argued that no amount of planning 
or reports will turn the sequester into anything other than the 
devastating cut in defense and non-defense programs that it was 
meant to be. I fear this means many of our questions will go 
unanswered and our hearing will be used solely as an 
opportunity to push for the wholesale adoption of President 
Obama's budget plan.
    I know we'll hear a lot today about ``balanced deficit 
reduction,'' so I want to address the issue briefly. While the 
President's so-called ``balanced'' plan may sound fair, it 
quickly collapses under scrutiny. In a recent op-ed, Director 
Zients, you argue this ``balanced'' approach finds $1.2 
trillion in savings, and reduces the deficit by $4 trillion by 
proposing $2.50 in spending cuts for every $1 in new revenue. 
But the numbers simply do not add up.
    The $2.50-to-$1 ratio was arrived at by a series of budget 
gimmicks, claiming spending reductions that are actually tax 
increases and counting spending reductions that are already in 
law. It claims $848 billion in ``savings'' from ending the wars 
in Iraq and Afghanistan by counting funds that we all would 
admit will not be requested in the first place. And most 
troubling, it raises taxes on hard-working Americans and 
threatens an already weak economy. But even if that's the 
foundation for the President's solution, let the Senate bring 
some version of it to a vote. Then we'll have a conference and 
sort out our differences.
    Until that happens, it is my sincere hope that we can end 
much of this uncertainty here today. Our allies are getting 
anxious and our adversaries emboldened. As one senior military 
official recently told me, America's inability to govern 
ourselves past sequestration plays directly into the hands of 
those who spread a narrative of American decline and will 
ultimately thrust us into a more dangerous world.
    If this is not enough to compel action and straightforward 
talk on the part of the Administration, I do not know what it 
is. I look forward to your testimony this morning.

                      Statement of Hon. Adam Smith

           Ranking Member, House Committee on Armed Services

                               Hearing on

              Sequestration Implementation Options and the

        Effects on National Defense: Administration Perspectives

                             August 1, 2012

    Thank you, Mr. Chairman. I, too, thank our witnesses for 
being here today. And I completely agree with the chairman that 
sequestration is a problem right now. I think this committee 
has done an excellent job of bringing attention to that 
reality. Folks who think that because sequestration doesn't 
actually kick in until January that we have until then are 
completely wrong. The impacts of the uncertainty of whether or 
not sequestration is going to happen are having a definite 
impact on our economy and not just defense. Remember, 
sequestration hits the entire discretionary budget, not just 
the defense budget. It actually hits a little bit of the 
mandatory spending, as well, and has a profound impact on 
private employers' decisions going forward about what to invest 
in.
    It is impacting the economy right now. The best thing 
Congress could do would be to find a solution right now to 
that. Also, the uncertainty of what is going to happen with the 
tax cuts that are set to expire at the end of this year is also 
a major problem for the economy. Delaying on all this is a 
huge, huge challenge. And that uncertainty is having as big an 
impact as anything right now on our inability to get our 
economy moving again. So I agree with the chairman completely 
that we need to focus attention, that this is a problem right 
now that needs to be addressed as soon as possible.
    It is also worth noting that sequestration was a bad idea 
in the first place. It was based off of the Gramm-Rudman-
Hollings bill back in the 1980s. Both of those plans, the 
architects of which have said we never meant for it to be 
implemented. It is a terrible idea; it is horrible policy. It 
was only meant as a forcing mechanism. It was going to be so 
awful, so hideous, that everyone would have to get together and 
agree to prevent it.
    But we now have seen what was, I think, obvious even before 
we passed the Budget Control Act and the reason that I didn't 
vote for it, the problems of determining how to deal with our 
deficit--how to address it, what to cut, what revenue to 
raise--are so serious, and there is so much difference that we 
can, in fact, go through even something as bad as sequestration 
rather than find the solution.
    So, putting a gun to the head of the economy as a so-called 
forcing mechanism to deal with the deficit was a bad idea from 
the very beginning and one that I hope we never try again. But, 
again, the chairman is right--a problem right now that we have 
to address.
    I really want to thank our witnesses for being here, Mr. 
Zients in particular, and also for offering a solution. The 
White House has put out a variety of different solutions. The 
Democrats in the House have. Every time the Republicans in the 
House have put up a bill to deal with sequestration, there has 
been an alternative offered by the Democrats.
    Now, the Senate is, regrettably, a different story, because 
right now the difference is, Democrats and Republicans have a 
different approach to this. And in the Senate, nobody actually 
controls the Senate because it takes 60 votes to do anything. 
So you would have to, in the Senate, have the Democrats and the 
Republicans agree to get anything out of the Senate.
    So I think the solution here isn't hoping that at some 
point the Senate acts. The solution is to get all Democrats and 
all Republicans to come together and try to figure out what a 
reasonable approach to this is. Really, the problem is there is 
just a fundamental disagreement on that. And we have had that 
debate; we will have it again today.
    Personally, I think revenue has to be part of the equation. 
As I have said before, if you look at the Republican proposal 
that says we shouldn't cut defense, we should cut taxes by even 
more, and we should balance the budget, the math simply doesn't 
add up unless you cut everything else in our budget--Medicare, 
transportation, education, health care, everything else--by 50 
percent. Nobody supports that. The Republicans don't even 
support that. They haven't proposed it.
    So let's be realistic about the choices we face and 
realistic about the fact that revenue has to be a piece of the 
equation. Again, as I have said before, if you are absolutely 
committed, as this committee is--and I do not doubt that--to 
providing for the common defense, to make sure that our service 
men and women have the support that they need to defend this 
country, then you ought to be willing to raise the money 
necessary to pay for it. I think that has to be on the table.
    But I do agree with the chairman that it is time for all 
parties concerned to come together and try to find a solution 
to this very damaging problem. And I think this hearing is 
helpful in that. Again, I thank Mr. Zients, Mr. Carter for 
being here to have that discussion.
    And I hope we can begin to make some progress toward a 
solution. It is great that this committee is shining a light on 
how big the problem is. I think we all get that now. We now 
have to move past that to finding some way to solve the problem 
so the sequestration does not happen. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             August 1, 2012

=======================================================================


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


=======================================================================


              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                             August 1, 2012

=======================================================================

      
              RESPONSE TO QUESTION SUBMITTED BY MR. MCKEON

    Mr. Zients. As I stated at the hearing, I was not part of the debt 
ceiling negotiations in 2011 and I do not know who first raised the 
sequester mechanism in those negotiations. However, it is clear that 
the sequester mechanism had bipartisan support, as evidenced by the 
fact that the Budget Control Act of 2011 was passed by both houses of 
Congress with bipartisan majorities. Rather than focusing on past 
negotiations, Congress should work together to enact bipartisan, 
balanced deficit reduction to avoid the sequestration. [See page 51.]
                                 ______
                                 
             RESPONSE TO QUESTION SUBMITTED BY MR. BARTLETT
    Mr. Zients. Section 256(k)(2) of the Balanced Budget and Emergency 
Deficit Control Act of 1985, as amended (BBEDCA), states that, 
``[e]xcept as otherwise provided, the same percentage sequestration 
shall apply to all programs, projects, and activities within a budget 
account.'' Pursuant to this provision, the same percentage reduction 
will be applied equally at the program, project, and activity level 
within each sequestrable account, unless another provision of law 
expressly directs that sequestration be implemented differently. [See 
page 15.]
?

      
=======================================================================


              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                             August 1, 2012

=======================================================================

      
                   QUESTIONS SUBMITTED BY MR. MCKEON

    Mr. McKeon. Do you agree that sequestration is now the law and that 
barring the passage of further legislation, signed by the President, it 
will have to be implemented?
    Mr. Zients. The Balanced Budget and Emergency Deficit Control Act 
of 1985, as amended, is law and, barring enactment of bipartisan 
deficit reduction that allows us to avoid sequestration, it will have 
to be implemented. I urge the Congress to avoid sequestration by 
enacting bipartisan balanced deficit reduction that the President can 
sign. Since Congress has not made progress on enacting balanced deficit 
reduction, in July, OMB issued a memo to agencies that outlines the 
initial steps to prepare for the possibility that OMB will issue a 
Joint Committee sequestration order on Jan. 2, 2013. The memo also 
notes that additional steps would need to be taken over the longer-
term. Should Congress fail to act, OMB will be ready to issue the 
sequestration order on January 2, 2013, as required by law.
    Mr. McKeon. Whose responsibility is it within the Executive Branch 
to interpret the Budget Control Act and issue guidance on its 
application? Can this responsibility be delegated? Has it been 
delegated?
    Mr. Zients. The Budget Control Act of 2011 (BCA) assigns various 
responsibilities to the Office of Management and Budget (OMB). OMB 
interprets the relevant provisions of the BCA to carry out the 
responsibilities assigned to it by law, and it has not delegated this 
function.
    Mr. McKeon. What is OMB's estimate of the percentage reductions by 
agency and account, after exemptions have been fully considered?
    Mr. Zients. As set forth in the Sequestration Transparency Act of 
2012 (STA) Report submitted to the Congress, the estimated percentage 
reductions range from 7.6 to 10.0 percent. However, these estimates are 
preliminary and are dependent on a number of assumptions required by 
the STA. If the sequestration were to occur, the actual results would 
differ based on changes in law and ongoing legal, budgetary, and 
technical analysis.
    Mr. McKeon. Will unobligated prior-year funds be subject to 
sequestration cuts? Will there be any special considerations for 
unobligated funds that are intended for multiyear contracts?
    Mr. Zients. Section 255(e) of the Balanced Budget and Emergency 
Deficit Control Act of 1985, as amended, provides that: ``Unobligated 
balances of budget authority carried over from prior fiscal years, 
except balances in the defense category, shall be exempt from reduction 
under any order issued under this part.'' Therefore, only unobligated 
balances in the defense category are subject to sequestration. At the 
appropriate time, OMB will work with the Department of Defense (DOD) 
and other agencies to determine how to address key questions affecting 
contracting and other areas.
    Mr. McKeon. Current law provides that, 20 days after the final 
sequester order, either house of Congress may proceed to consider a 
joint resolution that can ``modify'' or ``provide an alternative'' to 
the sequester order. Does the President intend to propose a resolution 
to Congress that would reorder the Department of Defense sequester to 
shift reductions among defense accounts?
    Mr. Zients. The sequestration modification provision referenced in 
your question is section 258A of the Balanced Budget and Emergency 
Deficit Control Act of 1985, as amended (BBEDCA). On August 2, 2012, 
the Senate Parliamentarian ruled that section 258A does not apply to 
the Joint Committee sequestration. Consistent with the Senate 
Parliamentarian's ruling, OMB has independently concluded that, based 
on the statutory text of BBEDCA, the sequestration modification 
provision in section 258A is not applicable to the Joint Committee 
sequestration.
    Mr. McKeon. What guidance will be issued to Federal departments and 
agencies regarding the obligation and expenditure of funds during the 
first quarter of FY13?
    Mr. Zients. In July, OMB issued a guidance memorandum to agencies 
concerning the potential Joint Committee sequestration. That memorandum 
stated that agencies should continue normal spending and operations. In 
the event a continuing resolution for FY 2013 is enacted, OMB would 
issue guidance to agencies on the apportionment of funds available 
under the continuing resolution, as is OMB's ordinary practice whenever 
there is a continuing resolution.
    Mr. McKeon. Sequestration may cause the Government to make 
unilateral changes to tens of thousands, if not hundreds of thousands, 
of Government contracts and task orders. How will the Government manage 
this level of contract dislocation?
    Mr. Zients. Sequestration would impose a significant acquisition 
management burden on the agencies. If sequestration occurs, it will be 
a difficult and time-intensive process to determine how individual 
contracts should be modified, terminated, or otherwise impacted by the 
reduction in funding. This work would be highly disruptive and would 
need to be handled on a case-by-case basis to ensure that both the 
contractor and the taxpayer are treated fairly. Conducting these 
planning activities prematurely could have adverse effects on the 
contracting community and on taxpayers. That is why it is imperative 
that Congress acts to avoid sequestration by enacting balanced deficit 
reduction.
    Mr. McKeon. When will OMB provide the federal agencies guidance on 
how to handle this volume of work?
    Mr. Zients. In July, OMB issued a guidance memorandum to agencies 
concerning the potential Joint Committee sequestration. That memorandum 
stated that agencies should continue normal spending and operations. 
Until Congress acts, the Administration will continue to work, as 
necessary, on issues related to the sequestration and its 
implementation. OMB will issue additional guidance regarding 
sequestration in the months ahead as necessary.
    Mr. McKeon. Clarity and assurances by the Government during this 
period of uncertainty can be of significant help to industry as they 
carry out their own planning and preparation for the period ahead. Will 
OMB provide clarification and assurances that programs with fully 
funded contracts awarded prior to October 1, 2012, will not be subject 
to sequestration?
    Mr. Zients. Contracts fully-funded with prior year money will not 
be subject to sequestration in FY 2013. We will work with agencies, 
often on a case-by-case basis, in order to determine how sequestration 
would affect different contracts. It is important to note, however, 
that conducting these planning activities prematurely could have 
adverse effects on the contracting community and on taxpayers. That is 
why it is imperative that Congress promptly acts to avoid sequestration 
by enacting balanced deficit reduction.
    Mr. McKeon. Typically, OMB would have issued initial guidance to 
Federal agencies regarding the preparation of their FY14 budget 
requests by now. How does your guidance address sequestration? What 
assumptions are you making about sequestration as you currently build 
the FY14 budget?
    Mr. Zients. OMB issued guidance to agencies on preparing their 2014 
Budget submissions on May 18, 2012. That guidance makes clear that the 
Congress can and must act to avoid sequestration. The 2014 Budget will 
need to make hard choices: the discretionary caps put in place by the 
BCA continue to sharply constrain discretionary spending. Accordingly, 
the 2014 Budget will build upon the BCA and the 2013 Budget's 
framework, which called for over $4 trillion in deficit reduction that 
would far exceed the amount required to avoid sequestration. The 2014 
Budget will continue to cut lower-priority spending in order to create 
room for the most effective investments in areas critical to economic 
growth and job creation, including education, innovation, 
infrastructure, and research and development.
    Mr. McKeon. What information can you provide regarding the impact 
that sequester would have on essential public safety responsibilities 
such as homeland security, food safety, and air traffic control 
activities?
    Mr. Zients. Sequestration would have significant negative effects 
on a variety of important Government activities, including public 
safety. For example, sequestration would likely force the Federal 
Government to significantly reduce the total number of active law 
enforcement agents. The Federal Aviation Administration, which ensures 
air traffic is safe, would face significant cuts in operations. The 
Department of Agriculture's efforts to inspect food processing plants 
would be curtailed.
    Mr. McKeon. Given that the FY13 sequestration requires a specified 
amount of reductions, the longer that sequestration actions are delayed 
past January 2, 2013, the larger the cut that would need be applied 
over the remaining period of FY13. Will the Administration be ready to 
execute sequestration on January 2, 2013, and, if not, why not?
    Mr. Zients. The Administration firmly believes that the Congress 
should take action to enact a balanced deficit reduction plan in order 
to avoid sequestration. That said, given the Congress's lack of 
progress on enacting balanced deficit reduction, beginning work on what 
needs to be done in advance of issuing a Joint Committee sequestration 
order is both responsible and necessary. Until Congress acts, the 
Administration will continue to work, as necessary, on issues related 
to the sequestration and its implementation. The Administration will be 
ready, if necessary, to issue a Joint Committee sequestration order on 
January 2, 2013.
    Mr. McKeon. Will agencies be allowed to adjust programs through 
major reprogramming actions? Will the Administration seek an increase 
in the General and Special Transfer Authority caps for FY13 and, if so, 
by how much?
    Mr. Zients. Many agencies, particularly small agencies, do not have 
any existing transfer authority. Even for those that do, however, no 
amount of transfer authority is enough to mitigate a sequestration of 
this magnitude. Our focus should not be on trying to mitigate the 
impacts of sequestration. It is bad policy by design, and no amount of 
shifting funds around will change that or mitigate its impacts. That is 
why the Congress must act to pass a balanced deficit reduction package 
and avoid sequestration.
    Mr. McKeon. If military personnel accounts are exempt, how will 
sequestration cuts be applied to the Services? Will military personnel 
account totals be included or excluded in Service totals when the 
percentage distribution to PPAs is calculated?
    Mr. Zients. On July 31, OMB notified Congress of the President's 
intent to exercise his authority under section 255(f) of the Balanced 
Budget and Emergency Deficit Control Act of 1985, as amended, to exempt 
all military personnel accounts from sequestration. Exempting these 
accounts does not affect the total amount of the Joint Committee 
sequestration, but it excludes the funding in these accounts from 
calculations of the uniform percentage reduction required in non-exempt 
accounts. The same uniform percentage reduction would be applied to 
each non-exempt PPA in the defense category.
    Mr. McKeon. If military personnel accounts are exempt, what are the 
consequences for other Departmental PPAs?
    Mr. Zients. On July 31, OMB notified Congress of the President's 
intent to exercise his authority under section 255(f) of the Balanced 
Budget and Emergency Deficit Control Act of 1985, as amended (BBEDCA), 
to exempt all military personnel accounts from sequestration. Exempting 
these accounts does not affect the total amount of the Joint Committee 
sequestration, but it excludes the funding in these accounts from 
calculations of the uniform percentage reduction required in non-exempt 
accounts. Therefore, exempting military personnel accounts would 
increase the uniform percentage reduction required in non-exempt 
accounts in order to achieve the total amount of the Joint Committee 
sequestration. The same uniform percentage reduction would be applied 
to each PPA within a non-exempt account.
    Mr. McKeon. What steps, if any, will the Administration take to 
ameliorate WARN Act requirements in advance of sequestration's January 
2, 2013, effective date? Would this guidance be issued over 90 days 
prior to the execution of sequestration?
    Mr. Zients. The Department of Labor (DOL), the agency charged with 
implementing the WARN Act, released guidance on the WARN Act on July 
30, 2012. The DOL guidance explained that, in the context of the 
prospective across-the-board budget cuts that may occur on January 2, 
2013, WARN Act notice to employees of Federal contractors is not 
required 60 days before that date, and in fact would be inappropriate, 
given the lack of certainty about how the budget cuts will be 
implemented and the possibility that sequestration will be avoided 
before January.
    Mr. McKeon. The Committee received testimony from industry 
witnesses, including the former Deputy Director of OMB, that the actual 
budget impact of sequestration will go far beyond the Budget Control 
Act requirement of a $55 billion FY13 topline reduction when the costs 
of contract cancellations, claims, personnel severances and other 
related actions are factored in. Do you agree or disagree with this 
observation and why? Do you have an estimate of how much in additional 
cuts could be required to achieve the BCA net FY13 topline reductions?
    Mr. Zients. The Joint Committee sequestration will have far-
reaching consequences for a wide range of Government programs, 
including national security and critical investments necessary to 
foster economic growth. It is impossible to quantify the full impact 
that these arbitrary, across the board reductions can have. That is why 
the Administration firmly believes that the Congress should take action 
to enact a balanced deficit reduction plan in order to avoid 
sequestration.
    Mr. McKeon. The volume and magnitude of contract modifications and 
contract terminations will cause price changes for both prime and sub-
contractors. Under current Government contracting rules, contractors 
will likely submit requests for equitable adjustments. What actions 
will OMB and the DOD, particularly DCAA and DCMA, need to take to 
respond to this volume of work?
    Mr. Zients. If sequestration were to occur, some contract 
modifications would be required, and contractors would likely submit 
equitable adjustment requests as a result. Responding to these 
adjustments would be costly and time consuming for the Government's 
contracting professionals in order to ensure that both the contractor 
and the taxpayer would be treated fairly. With respect to DCAA (Defense 
Contract Audit Agency) and DCMA (Defense Contract Management Agency) in 
particular, I defer to the Department of Defense as to how this would 
be managed at the appropriate time.

    Mr. McKeon. Does the Department plan to use transfer authority 
after a possible sequester to avoid the impact on certain PPAs, 
including OCO? On what transfer authority will the Department rely?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. In advance of sequestration, does the Department plan 
to adjust its recruiting goals or place any freezes on separations, 
including retirements?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What is the requirement for providing advance 
notification to service members prior to making involuntary 
separations?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. If FY13 funding is sequestered, will the DOD have to 
implement a reduction in force (RIF) within its civilian workforce?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. If civilian reductions are planned and a RIF is 
implemented, how many civilians will be let go to achieve the savings 
necessary to comply with funding reductions? Will civilian jobs be 
eliminated on the basis of tenure or on the basis of critical skill 
sets?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What are the costs associated with a RIF, and would 
those additional costs be recovered through higher civilian reductions?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. In compliance with 10 U.S.C. 1597, the DOD has 
established guidelines for the manner in which reductions in the number 
of civilian positions within the Department are made. The DOD is 
required to notify employees 60 days prior to the effective date of any 
civilian reduction or furlough action. In addition, 10 U.S.C. 1597 also 
states that the DOD may not implement any involuntary reduction or 
furlough of civilian positions until the expiration of the 45-day 
period beginning on the date on which the Secretary submits to Congress 
a report setting forth the reasons why such reductions or furloughs are 
required. Does the DOD intend to submit this report to Congress? If so, 
when?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Has a plan for the reduction of civilian personnel been 
initiated? What is the communication plan to provide information to 
civilian employees? If no plan has been initiated, why not? Has any 
guidance been issued to prevent such planning?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Do you intend to take a balanced approach to civilian 
and military personnel reductions, or will military or civilian end 
strength be disproportionately impacted by sequester?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What is the position of the Department of Defense on 
the allowability of any WARN Act compliance costs that result from 
sequestration? Is the Department prepared to accept financial 
responsibility for any and all costs incurred from compliance by 
contractors with the requirements of the WARN Act through advance 
agreements or other established mechanisms?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Absent the passage of legislation, signed into law by 
the President, that modifies sequestration, do you agree that layoffs 
are reasonably foreseeable?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Do you agree that Federal law requires contractors to 
provide notice of mass layoffs or plant closings at least 60 days prior 
to implementing such actions?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Do you believe that any of the exceptions of the WARN 
Act apply? For example, are layoffs under sequestration ``sudden, 
dramatic, or unexpected''?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What is your position on the assessment of many in 
industry that, barring additional guidance, WARN Act notices will have 
to be sent out before January 2nd?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Sequestration may cause the Government to make 
unilateral changes to tens of thousands, if not hundreds of thousands, 
of Government contracts and task orders. How will the Department manage 
this level of contract dislocation?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What methodology will you use to determine if contracts 
will be terminated or modified? How will you determine estimated costs 
associated with contract modifications?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Do you have a preliminary estimate of the potential 
termination costs and increased contract costs due to renegotiation and 
reinstatement of contracts? If not, how do you know how much you will 
have to cut in order to generate $55 billion in net savings?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Would any resultant terminations be characterized as 
terminations for convenience? Why or why not?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Is it possible that major defense acquisition programs 
could be terminated due to sequestration?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Have you issued Department-wide guidance regarding the 
awarding of new FY12 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?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Modifications to contracts pursuant to sequestration 
may cause major defense acquisition programs to reach either a 
significant or critical cost breach under Nunn-McCurdy. How will the 
DOD handle such occurrences? To limit disruption to major defense 
acquisition programs, will the Administration seek Congressional relief 
for Nunn-McCurdy breaches solely caused by sequestration?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Have any major defense acquisition programs started to 
plan for sequestration? For example, have any programs delayed contract 
awards planned for fiscal year 2012 or slowed spending plans so that 
they can carry over additional funds to fiscal year 2013?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. The Department of Defense is typically reluctant to use 
``re-opener'' clauses in its contracts. In light of the numerous 
unknowns attached to sequestration, will the DOD include ``re-opener'' 
clauses in contracts awarded after October 1, 2012?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Sequestration would potentially take effect while you 
were in the final stages of constructing the FY14 request. What impact 
would this have on your budget building process?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What steps has the Department taken to assess the risks 
and identify potential implications to missions and critical skills and 
competencies?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Given that OCO funds are subject to sequestration, how 
will the Department continue to support ongoing operations in 
Afghanistan?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Can you please provide an assessment of the impact on 
ongoing operations and the safety of United States military and 
civilian personnel?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Can you please provide an assessment of the impact on 
the readiness of the Armed Forces, including impacts to steaming hours, 
flying hours, and full spectrum training miles, and an estimate of the 
increase or decrease in readiness (as defined in the C status C-1 
through C-5)?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. If OCO accounts are sequestered and money is pulled 
from the base budget to cover the costs of war, as General Dempsey has 
suggested, what will be the impact to the Army and Marine Corps 
procurement and O&M accounts?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Have you started to revise the current strategic 
guidance? The Department has previously stated that the current 
strategy will have to be revisited in the event of sequestration. The 
last guidance took nearly a year to develop. What will you do in the 
absence of a defense strategy when sequestration takes effect?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Given that the FY13 sequestration requires a specified 
amount of reductions, the longer that sequestration actions are delayed 
past January 2, 2013, the larger the cut that would need be applied 
over the remaining period of FY13. Will the Administration be ready to 
execute sequestration on January 2, 2013, and, if not, why not?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. Will agencies be allowed to adjust programs through 
major reprogramming actions? Will the Administration seek an increase 
in the General and Special Transfer Authority caps for FY13 and, if so, 
by how much?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. If military personnel accounts are exempt, how will 
sequestration cuts be applied to the Services? Will military personnel 
account totals be included or excluded in Service totals when the 
percentage distribution to PPAs is calculated?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. If military personnel accounts are exempt, what are the 
consequences for other Departmental PPAs?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. What steps, if any, will the Administration take to 
ameliorate WARN Act requirements in advance of sequestration's January 
2, 2013, effective date? Would this guidance be issued over 90 days 
prior to the execution of sequestration?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. The Committee received testimony from industry 
witnesses, including the former Deputy Director of OMB, that the actual 
budget impact of sequestration will go far beyond the Budget Control 
Act requirement of a $55 billion FY13 topline reduction when the costs 
of contract cancellations, claims, personnel severances and other 
related actions are factored in. Do you agree or disagree with this 
observation and why? Do you have an estimate of how much in additional 
cuts could be required to achieve the BCA net FY13 topline reductions?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. McKeon. The volume and magnitude of contract modifications and 
contract terminations will cause price changes for both prime and sub-
contractors. Under current Government contracting rules, contractors 
will likely submit requests for equitable adjustments. What actions 
will OMB and the DOD, particularly DCAA and DCMA, need to take to 
respond to this volume of work?
    Secretary Carter. [The information was not available at the time of 
printing.]
                                 ______
                                 
                  QUESTIONS SUBMITTED BY MR. LANGEVIN
    Mr. Langevin. In the event that FY13 begins under a continuing 
resolution, how will sequestration calculations be applied?
    Mr. Zients. Pursuant to sections 251A(7) and 253(f)(2) of BBEDCA, 
the sequestration would be applied against the annualized amount 
available under the Continuing Resolution.

    Mr. Langevin. You note in your testimony that the Department cannot 
even substantially mitigate the effects of sequester and that there are 
significant risks of triggering adverse consequences even if sequester 
does not happen. When must Congress act in order to forestall this 
possibility?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. Langevin. Sequestration would potentially take effect while you 
were in the final stages of constructing the FY14 request. What impact 
would this have on your budget building process?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. Langevin. Given that, per the Budget Control Act, Congress 
determined that OCO funds are subject to sequestration, how will the 
Department continue to support ongoing operations in Afghanistan?
    Secretary Carter. [The information was not available at the time of 
printing.]
                                 ______
                                 
                  QUESTIONS SUBMITTED BY MR. COURTNEY
    Mr. Courtney. Please describe any impact of sequestration on 
existing multiyear procurement contracts. For example, FY13 is the last 
year of a five-year block buy of Virginia class submarines--how would 
sequester impact the last year of that contract and, specifically, 
impact the two submarines set to begin construction in FY13?
    Mr. Zients. Sequestration would impose a significant acquisition 
management burden on the agencies, and it would adversely affect nearly 
every multiyear procurement contract. However, any effects on specific 
contracts depend on decisions by agencies that have not yet been made.

    Mr. Courtney. Please describe any impact of sequestration on 
existing multiyear procurement contracts. For example, FY13 is the last 
year of a five-year block buy of Virginia class submarines--how would 
sequester impact the last year of that contract and, specifically, 
impact the two submarines set to begin construction in FY13?
    Secretary Carter. [The information was not available at the time of 
printing.]
                                 ______
                                 
                  QUESTIONS SUBMITTED BY MR. SCHILLING
    Mr. Schilling. Do you believe that the President took into account 
single points of failure in our national security and industrial base 
when making these ``difficult choices'' in his budget?
    Mr. Zients. Although many difficult choices had to be made in its 
development, the President's FY 2013 Budget fully supports the defense 
strategy announced in January 2012, which was the product of several 
months of deliberation among DOD's most senior leaders as well as 
extensive engagement by the National Security Staff and the President. 
The Administration is committed to maintaining a healthy industrial 
base and always considers effects on the industrial base in its 
planning.
    Mr. Schilling. Because the Senate has not yet passed a budget or 
any appropriations bills, Congress is very likely headed towards a 
Continuing Resolution (CR). How will a CR change the calculations you 
will do for sequestration?
    Mr. Zients. Pursuant to sections 251A(7) and 253(f)(2) of BBEDCA, 
the sequestration would be applied against the annualized amount 
available under the Continuing Resolution.
    Mr. Schilling. If you already know how you must implement 
sequestration by law and the high likelihood of a CR being the base 
from which you take your numbers off of, why do you not already have 
fair estimates of the cuts to departments, agencies and programs?
    Mr. Zients. The Sequestration Transparency Act of 2012 Report 
submitted to Congress last week contains preliminary estimates of the 
required cuts based on FY 2012 funding levels. However, appropriations 
legislation that is actually enacted for the fiscal year beginning on 
October 1, 2012 will change the estimates provided in the report. Other 
legislation, including any enacted changes to direct spending levels 
between now and January 2, 2013, as well as changes in the level of 
unobligated balances in the defense function, could also affect these 
estimates. Depending on the timing of the discretionary Final 
Sequestration Report for FY 2013, the discretionary spending limits 
could be adjusted as provided by section 251(b)(2) of BBEDCA, which 
would change the allocation of the Joint Committee reductions between 
the defense and nondefense functions. In addition, OMB continues to 
review the application of various provisions of BBEDCA to specific 
programs and accounts. For all of these reasons, it is impossible to 
calculate the exact amount of reductions that will be required in any 
given account at this time.
    Mr. Schilling. How long will it take you to make the necessary 
calculations for sequestration and how much time will agencies and 
programs have to prepare for those cuts--ie, your implementation time?
    Mr. Zients. OMB has experience in executing budget enforcement 
provisions and will be ready, if necessary, to issue the Joint 
Committee sequestration order on January 2, 2013.

    Mr. Schilling. Director Zients stated that obligated balances would 
be factored into the cuts. How will this affect the industrial base--
both organic and private?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. Schilling. What precisely does the personnel funding exception 
from Sequestration entail?
    Secretary Carter. [The information was not available at the time of 
printing.]
    Mr. Schilling. You pointed out that our Intelligence Community gets 
much of its funding from the DOD budget. Can you expand on the exact 
impacts to our ability to react and respond to threats this would 
cause? Can you also talk about the trickle-down effect to how this will 
affect our homeland security forces?
    Secretary Carter. [The information was not available at the time of 
printing.]
                                 ______
                                 
                     QUESTION SUBMITTED BY MR. WEST
    Mr. West. Should the sequester take effect, how do you feel the 
monetary and military aid given to Israel, with respect to the Arrow 
Weapons System and David's Sling Weapons System, be affected.
    Secretary Carter. [The information was not available at the time of 
printing.]

                                  
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