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



 
SEQUESTRATION: THE THREAT TO SMALL BUSINESSES, JOBS, AND THE INDUSTRIAL 
                                  BASE 

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 20, 2012

                               __________


                  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               

            Small Business Committee Document Number 112-087
              Available via the GPO Website: www.fdsys.gov

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                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
 Hon. Nydia Velazquez............................................     2

                               WITNESSES

Hon. Mike McCord, Principal Deputy Undersecretary of Defense 
  (Comptroller), Washington, DC..................................     4
Stephen S. Fuller, Ph.D., Dwight Schar Faculty Chair and 
  University Professor Director, Center for Regional Analysis, 
  School of Public Policy, George Mason University, Arlington, VA    16
ML Mackey, Chief Executive Officer of Beacon Interactive Systems, 
  Cambridge, MA..................................................    17
Laurie Moncrieff, President, Adaptive Manufacturing Solutions, 
  Burton, MI.....................................................    20
Mark Gross, Founder and CEO, Oak Grove Technologies, Raleigh, NC.    22

                                APPENDIX

Prepared Statements:
    Hon. Mike McCord, Principal Deputy Undersecretary of Defense 
      (Comptroller), Washington, DC..............................    31
    Stephen S. Fuller, Ph.D., Dwight Schar Faculty Chair and 
      University Professor Director, Center for Regional Analysis 
      School of Public Policy, George Mason University, 
      Arlington, VA..............................................    36
    ML Mackey, Chief Executive Officer of Beacon Interactive 
      Systems, Cambridge, MA.....................................    46
    Laurie Moncrieff, President, Adaptive Manufacturing 
      Solutions, Burton, MI......................................    52
    Mark Gross, Founder and CEO, Oak Grove Technologies, Raleigh, 
      NC.........................................................    58
Questions for the Record:
    Committee on Small Business Questions for Mr. McCord and Mr. 
      Ginman.....................................................    60
Answers for the Record:
    Answers from Mr. McCord and Mr. Ginman.......................    64
Additional Materials for the Record:
    Small Environment Business Action Coalition Letter for the 
      Record.....................................................    73
    Center for Security Policy Testimony for the Record..........    76
                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MIKE MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                     ROBERT T. SCHILLING, Illinois
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

                      LORI SALLEY, Staff Director
                    PAUL SASS, Deputy Staff Director
                      BARRY PINELES, Chief Counsel
                  MICHAEL DAY, Minority Staff Director


SEQUESTRATION: THE THREAT TO SMALL BUSINESSES, JOBS, AND THE INDUSTRIAL 
                                  BASE

                              ----------                              


                     THURSDAY, SEPTEMBER 20, 2012.

                          House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1 p.m., in room 
2360, Rayburn House Office Building. Hon. Sam Graves (chairman 
of the Committee) presiding.
    Present: Representatives Graves, Mulvaney, Herrera Beutler, 
West, Ellmers, Hanna, Velazquez, Schrader, Clarke, Chu, and 
Hahn.
    Chairman Graves. I will call the hearing to order. And I 
want to say good afternoon to everybody, and thank you all for 
being here today.
    We are all acutely aware that the current level of federal 
spending cannot be sustained. Our national debt already exceeds 
$16 trillion and it is continuing to grow. Federal debt held by 
the public will reach 73 percent of GDP by the end of the 
fiscal year, which is the highest level since 1950 and about 
twice the share that it measured at the end of 2007, before the 
financial crisis and the recent recession.
    This type of spending absolutely cannot continue. We all 
hoped that the ``Super Committee'' would agree on a thoughtful 
plan to curb government spending to ensure America's fiscal 
security. Unfortunately, this did not occur and today we are 
facing the possibility of an indiscriminate, across-the-board 
cut on January 2, 2013, which is also known as sequestration.
    I am committed to cutting spending and getting the nation 
back on a fiscally sound course, and I am willing to make tough 
decisions. But I question the wisdom of using sequestration's 
crude cuts rather than deliberate, targeted cuts. I think we 
all agree that the patient is sick, but I would rather prefer 
that the surgeon use a scalpel rather than a meat cleaver. The 
sweeping, unfocused cuts of sequestration are certain to have 
unintended negative consequences, including for America's small 
businesses.
    Earlier this week, I heard from Perry Castro, the president 
and CEO of Allied Associates International, Inc. This year, SBA 
named Mr. Castro the Virginia Veteran Small Business Champion 
of the Year. He told me that if sequestration becomes a 
reality, it would, in one fell swoop, destroy his company. I 
would like to enter his full statement for the record if that 
is okay. And without objection, so ordered.
    Unfortunately, Mr. Castro's story is not unusual. We are 
here today, small firms that will be uniquely harmed by 
sequestration. It is estimated that over half of the private 
sector jobs lost to sequestration, which is about 960,000 jobs, 
are going to be small business jobs. And surely, I do not think 
that is what Congress intended.
    To better understand the effects of sequestration, today we 
are going to focus on government contracting and the Department 
of Defense (DoD) for three reasons. First, DoD spends more on 
government contracts than any other agency. Second, the Small 
Business Act places special emphasis on the role of small 
businesses and defense contracting since a strong small 
business segment is vital to the health of our industrial base 
and our national defense. And third, DoD has taken the greatest 
cut of all the agencies, as an additional $55 billion will be 
cut from DoD's budget in January, and that is on top of the 
$487 billion previously cut this Congress.
    Today's witnesses will discuss how sequestration may 
irrevocably harm the industrial base, especially in areas such 
as research and development, manufacturing, and aerospace. And 
we will talk about the lack of certainty that small businesses 
are already facing due to sequestration, at the prime and 
subcontract levels. And they will also talk about the loss to 
the government. Without strong small business participation in 
procurement, we will have less competition and innovation in 
contracting, which will result in higher prices to the 
government.
    However, while we are all talking about the DoD, all 
agencies are facing very similar challenges--unfocused cuts 
rather than smart cuts. For example, this Committee identified 
about $100 million in potential savings to the SBA, and we 
previously shared that with the Super Committee. However, the 
$75 million SBA will lose due to sequestration lacks focus and 
may put some very key lending programs at risk. The General 
Services Administration, which is an agency not exactly known 
as of late for its sound fiscal decisions, is only going to 
lose $21 million, with a quarter of that coming from the very 
inspector general who uncovered the GSA spending scandals.
    As we seek to return our fiscal house to order, I believe 
today's hearing is going to help form the debate. And again, I 
want to thank all of our witnesses for being here. Today, we 
are going to do this in two panels, and I very much look 
forward to hearing your testimony. And with that I will turn to 
Ranking Member Velazquez for her opening statement.
    Ms. Velazquez. Thank you, Mr. Chairman.
    When the Budget Control Act of 2011 was enacted last year, 
sequestration was included as an incentive for action. 
Unfortunately, the Super Committee was not so super and was 
unable to agree on a deficit savings plan.
    We are now facing the very sequestration that we had hoped 
to avoid. Beginning in January, it will become all too real as 
more than $100 billion in indiscriminate cuts take effect. This 
outcome should not be a surprise to anyone as it is simply the 
result of a process that has been held hostage by a few 
unwilling to have an open mind on fiscal issues. By not 
agreeing on a balanced deficit reduction approach, we have 
chosen to limit our options.
    The consequences of this path are seen in the businesses we 
will hear from today. They are rightfully concerned about 
losing defense contracts and the impact it will have on their 
companies and employees. They have worked hard to build their 
businesses, and the current situation is simply unfair to them. 
Make no mistake, small firms will be among those hit hardest 
when these cuts take effect. Indeed, it has been estimated that 
for every dollar spent in the defense supply chain, 70 cents 
flows to small companies. These firms developed their business 
model around what they thought was a reliable customer, the 
federal government. They now face the very real prospects of 
revenue shortfalls and layoffs due to mistakes made in 
Washington.
    Of course, the impact is not just limited to businesses 
that contract with the federal government. Small retailers, 
like gas stations and grocers, will be hard hit by the ripple 
effect as unemployed workers scale back on consumer 
expenditures. Indeed, bipartisan estimates suggest that as many 
as one million jobs could be lost and we could see gross 
domestic product reduced by one-half percent. Beyond losing 
customers, entrepreneurs will be deprived of tools and 
resources they have relied on to grow, whether it is 
manufacturing initiatives at the Department of Commerce, loan 
programs at the Department of Agriculture, or counseling 
services at the SBA.
    So yes, it is clear that no one likes sequestration, but it 
is the path we are on. And you cannot cut spending without 
cutting the very benefits that many of our constituents enjoy 
every day, whether they are defense contractors, franchise 
owners, or the mom and pop restaurants on our street corners.
    For these small businesses, this makes little sense, and I 
do not blame them for their frustration. They would like a 
government that is able to problem-solve without making matters 
worse and doing so in a manner that is not so closed-minded. We 
cannot help small businesses if we do not put all the options 
on the table. And that means everything, even if you sign a 
pledge to Grover Norquist. My first priority is to small 
businesses, and that means being part of a give and take for 
the better of this nation.
    I yield back, Mr. Chairman. Thank you.
    Chairman Graves. Thank you. All right. We will start with 
our first witness, who I would like to welcome to the 
Committee, the Honorable Mike McCord, who is the principal 
deputy undersecretary of defense and has been in that role 
since January 2009. In this capacity he provides advice and 
assistance to the secretary, the deputy secretary, the 
undersecretary on budgetary, fiscal, and financial management 
matters. While Deputy Undersecretary McCord will be providing 
the DoD's testimony, he is also joined by Mr. Richard T. 
Ginman, who is the director for defense procurement and 
acquisition policy, and he reports directly to the 
undersecretary of defense for acquisition technology and 
logistics. Mr. Ginman will be able to assist us on some of the 
more contract-detailed type questions.
    So with that, Undersecretary, I look forward to your 
testimony.

 STATEMENT OF MIKE McCORD, PRINCIPAL DEPUTY UNDERSECRETARY OF 
                            DEFENSE

    Mr. McCord. Chairman Graves, Ranking Member Velazquez, 
members of the Committee. Thank you for this opportunity to 
discuss the impact of sequestration on the DoD.
    As you said, I am here today representing the Office of the 
Comptroller, which has the overall lead in dealing with 
sequester matters at the DoD, and joining me is Dick Ginman, 
director of Defense Procurement and Acquisition Policy. His 
organization is responsible for contracting and for 
implementing our small business policy through our contracts. 
Mr. Ginman and I have submitted a joint statement for the 
record that in interest of time I will summarize briefly, and I 
ask that our written statement be made part of the record.
    As you know, Secretary Panetta has said for months that 
sequestration would have devastating effects on the department 
and on national security. He urged Congress to avoid 
sequestration by approving a comprehensive and balanced deficit 
reduction package that the president can sign.
    As required by the Sequestration and Transparency Act of 
2012, the Office of Management and Budget transmitted a report 
to Congress last week showing the impact of sequester programs 
across the department--across the federal government that is, 
including defense. That report shows that national defense 
programs will be reduced by almost 55 billion in FY 2013 by 
sequester, which will translate to a 9.4 percent cut.
    If allowed to go into effect, the lowering of discretionary 
caps in the out years would result in reductions of a similar 
amount each year from FY 2014 through FY 2021. These reductions 
would force us to change the new defense strategy that the 
administration introduced just a few months ago. The potential 
sequester would apply to both the base defense budget and to 
overseas contingency operations funding. The only exception is 
military personnel, which the president has exempted from the 
FY 2013 sequester. However, other DoD budget accounts will have 
to make up the slack for that exemption. Moreover, the 
department has little flexibility in determining where to take 
these cuts, the remaining cuts, which leaves us with limited 
ability to prioritize.
    We are particularly concerned that funds to support our 
troops in Afghanistan are subject to sequester under the law. 
We would endeavor to protect these wartime operating budgets as 
much as possible; however, protecting these wartime funds from 
sequester would force us to make deeper reductions in other 
areas, such as civilian personnel funding, possibly including a 
partial hiring freeze or unpaid furloughs, which would reduce 
our capability to perform other important missions. Military 
families and retirees would also be affected through cuts to 
base support services and to maintenance of our facilities. 
Commissary hours could be reduced. Funds for the Defense Health 
Program would be sequestered resulting in delays in payments to 
service providers and potentially some denial of service to 
retirees and dependents.
    We are also concerned that cumulative impact to these cuts, 
especially if continued beyond 2013 into the out years, would 
contribute to the creation of an unready or hollow military 
force. Sequestration would also lead to disruption of DoD's 
investment programs. As outlined in OMB's report there would be 
the 9.4 percent reduction in each of the accounts that fund our 
investment in new technology and in facilities through 
procurement, research and development, and military 
construction.
    We were asked today to address the consequences of 
sequestration on the small business community specifically. In 
response, we would say that DoD is committed to ensuring that 
these essential business partners have their fair share of the 
contracting dollars. When the pool of available resources is 
diminished, as it would be under sequester, our ability to 
partner with small business is going to be likewise diminished, 
however.
    This does not alter our commitment to small business or 
change any of our small business contracting goals, but 
sequestration would reduce our overall budget, forcing us to 
reduce purchases from businesses both large and small. So 9.4 
percent less money means we would in general buy 9.4 percent 
less of everything. We cannot devise a plan that would 
eliminate or even substantially mitigate these sequester 
impacts. It was designed to be an inflexible policy that was 
never intended to be implemented. It was a prod to Congress to 
devise a balanced comprehensive package to reduce the deficit. 
If implemented, sequester would be devastating to DoD and to 
every other federal agency. The best outcome for the DoD and 
for private companies large and small is for both houses of 
Congress to enact fiscal changes the president will sign, which 
will put a halt to the implementation of this inflexible law.
    Mr. Chairman, this concludes our opening statement, and we 
would welcome your questions.
    Chairman Graves. Thank you, Undersecretary.
    I am going to turn to Mr. West and let him open up for 
questions.
    Mr. West. Thank you, Mr. Chairman, and also Ranking Member. 
And thanks to the panel for being here and this is an issue 
that is very near and dear to my heart having spent 22 years in 
the United States Military and also being on the HASC and also 
being on this Small Business Committee.
    First of all, let me say that I did vote for the Budget 
Control Act of 2011. I did not believe that the Super Committee 
nor this thing about sequester was a good idea, but you know, 
people always talk about compromise and reaching across the 
aisle. So that is what I did. And so now I am here to talk 
about how do we resolve this?
    You know, when I continue to hear about taxes increased, I 
mean, we have to understand that if we increase taxes just on 
those top two tax brackets, you are only talking about $85 
billion of new revenue per year. And when you look at our net 
interest on the debt that means that you will only fund that 
for 10 days.
    The federal government has a spending problem. We spend $4 
billion a year--I mean, a day. Four billion dollars a day. So 
when I look at this sequestration, while we are here talking 
about it, I want to give you the numbers from the congressional 
district that I represent in Florida's 22. Total small 
businesses jobs lost due to sequestration. The estimation is 
35,626. Total small business contract amount loss due to 
sequestration, $60,983,639. Total contract amount loss, 
somewhere about 80 million. This is a big deal for us. We have, 
you know, places like Pratt Whitney.
    The first question I would like to ask is when we look at 
what is happening as far as the loss of these contractors? Are 
we taking into account that there may be some type of legal 
ramifications to these contracts being terminated that the DoD 
will have to then pay for? I mean, you are going to have an 
additional cost because of this. Correct?
    Mr. McCord. We would, I think we would endeavor to minimize 
that because it would not be our intention to, if it was 
avoidable, to terminate contracts; rather, we would try and--if 
we have within the scope of the contract the ability to buy say 
10 percent less, we would probably do so. And we would have to 
scrutinize new contracts. The contracts we are already in, if 
the money is obligated and on the contract before January, it 
would not be affected. So I cannot say it is not possible, and 
I would ask Mr. Ginman to amplify it, but it would not be our 
intent to go reopen contracts if it is avoidable.
    Mr. Ginman. The vast majority of our contracts are fully 
funded, fully obligated, dollars obligated on them at award. 
There are a few, particularly in the R&D world, that are 
incrementally funded but for product, fully funded. So this 
sequesterization reduces our budget authority. And so from an 
existing--and what that says is I have less money to spend 
going forward. There is no need for me to terminate an existing 
contract unless the product that was going to be delivered was 
now not needed into the future. But if the product continues to 
be needed, there is really no need for me to terminate it. What 
I need to do is to adjust my spending on a go-forward basis.
    Mr. West. So if on the 2nd of January this thing is not 
staved off, anything that goes into calendar year next year, if 
it is already, the contract has been awarded, there will be no 
affects on that contract?
    Mr. Ginman. If I may, I will do it in two parts.
    For contracts that were awarded with FY 2012 current money 
or prior, I really do not think there will be an impact. If I 
have a contract that was awarded in FY 2013, since 
sequesterization affects all of--what goes into the denominator 
is all of the FY 2013 budget, if I put a service contract in 
place with equal spend and I spend through the first three 
months at that level, I would need to find a way through the 
last nine months of the fiscal year to, in fact, spend less on 
that contract.
    Mr. West. Now, with that being the case then, you know, the 
unpredictability for the workforce that is out there, you know, 
one of the things that concerned me when you look at the Warren 
Act, the Worker Adjustment and Retraining Notification Act, a 
lot of these notifications will probably need to start going 
out some time November, at the latest December, for a 2nd 
January kick-in. Of course, the Department of Labor sent out a 
recommendation that a lot of these businesses and the defense 
industrial base do not have to adhere to the law. Do you think 
that that will set them up for potential lawsuits down the road 
if they did not adhere to the Warren Act?
    Mr. McCord. The first thing I want to say is the 
department, I think, has been--the secretary and the deputy 
have met with industry leaders and I think they have been 
clear. I am going to try and restate what they said, that we 
cannot be in the position of providing legal device as the DoD 
to corporations about their own relationships with their own 
unions and workforce.
    Mr. West. I understand, but the Department of Labor, which 
I also, I mean, is there no coordination between the DoD and 
the DoL for what they just sent out? I mean, I think that they 
can be setting up, you know, a lot of people that service the 
DoD for a really big pitfall if they are not careful.
    Mr. McCord. Well, the Department of Labor does have the 
responsibility and was speaking for the Executive Branch. And 
so we are deferring to them on that guidance. And I understand 
that not all corporations are satisfied with the Department of 
Labor's position, but they are the person, they are the entity 
in the lead for us on that.
    Mr. West. If I could ask one more question, Mr. Chairman, 
if I could.
    Chairman Graves. Quick, yes.
    Mr. West. Yes. The key thing that I want to ask, do you 
think that if sequestration kicks in with our industrial base, 
especially manufacturing, the aerospace, the shipbuilding, and 
things of that nature, even weapons and permanent, will we be 
able to restart these industries down the road or will we maybe 
lose a technological and innovative advantage at some point?
    Mr. Ginman. The manufacturing and industrial based policy 
office within AT&L has been and continues to pay a great deal 
of attention to the industrial base. They call it a sector-by-
sector and tier-by-tier analysis, looking expressly at very low 
levels. What are the exact technologies and capabilities that 
we need? When we find that one is threatened, then we take 
action to attempt to protect it. We will continue, you know, 
that office will continue to do the analysis to ensure from an 
industrial-base perspective for the key technologies that we 
need, that we are looking to find ways to, in fact, protect 
them.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Chairman Graves. Ranking Member Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. McCord, as of September 6, Undersecretary Kendall was 
stating that he expects the DoD accounts to take an 11 percent 
cut. However, the report released by OMB last week projected at 
most 10 percent decrease in funding. To what do you attribute 
the difference in the projected cut?
    Mr. McCord. Well, I guess I cannot be sure where Mr. 
Kendall got his, you know, all of us prior to the report coming 
out were using approximate numbers. It was common to say 10 
percent, 11 percent. Two things. First of all, we in the 
department tend to think almost exclusive in terms of 
relationship to the budget that we submitted and calculate 
differences from what our plan to do was in 2013 and the 
sequester report that OMB did was not done that way. It was 
compared to the CR.
    Second, as Mr. Ginman was describing, with respect to 2013, 
the amount of reduction across the entire 12 months is 9.4 
percent, but if you kind of look at the last nine months you 
would come with a figure close to what Mr. Kendall was using if 
you look at how you have to get that money out of less than a 
full year.
    Ms. Velazquez. Thank you. Small businesses do not have the 
resources that larger companies do, such as Lockheed Martin or 
Boeing. And they will not have the money to have the lobbyists 
to fight to keep their contracts. Given this inequality, how 
can you assure us and small businesses that their contracts 
will not be the first one on the chopping block?
    Mr. Ginman. So I think the best answer I can give, what we 
buy is what we need for our war fighters. If there is something 
that we do not need, that will be what we stop spending on 
first. It is not going to be I need to protect large business 
or I need to protect small business. It will be I need to meet 
the requirements of the war fighter.
    So we will make our prioritization decisions based on what 
war fighters need.
    Ms. Velazquez. Well, one of the requirements are for DoD to 
comply with the 23 percent contracting goal for small 
businesses. And, you know, traditionally you have had issues 
and problems not achieving those goals. I just want to make 
sure that if sequestration takes place that there is a level 
playing field that would allow for small businesses to have a 
shot at the door.
    Mr. McCord. If I could just comment, amplify one point 
though. There is, if anything, perhaps too much of a level 
playing field because we are not going to have a great deal of 
discretion. We are going to endeavor to do exactly what Mr. 
Ginman said, to do the things that our war fighters need the 
most. And that was in my opening statement I referred to 
protecting the funding for the troops in Afghanistan as a top 
priority. But the law is going to limit our flexibility, 
especially in the procurement account, so we may not be able to 
go even as far as we want to to buy what we need. And so some 
levelness of playing field is enforced upon us by the rigidity 
of sequester, for good or for ill.
    Ms. Velazquez. What will it mean in terms of readiness and 
readiness if small businesses are no longer there to provide 
the products and services that are necessary for our military 
Because sequestration could very well threaten some of these 
small businesses?
    Mr. McCord. From a sequesterization perspective and our 
policies with small business, virtually no policy in the 
department that we have with the requirements to award to small 
business will change. There is nothing in the sequesterization 
law that would cause us to do that. We will continue to have 
the same emphasis to award to small business. We will continue 
to have the requirement to do the market research. If there are 
two small businesses capable of doing the work, we will 
continue to set aside the work for small business.
    Ms. Velazquez. Okay. As you know, on this Committee we have 
discussed so much throughout so many hearings. The impact of 
contract bundling. And it continues to be a prevalent program 
government-wise, preventing many small businesses from 
competing in the federal marketplace. With a position workforce 
likely impacted by discards, what measures will DoD take to 
ensure that this impediment to small business participation 
does not grow?
    Mr. McCord. The first thing I would say is that the 
acquisition workforce, again, kind of getting back to the 
rigidity of sequester, we recognize the importance of it and we 
would not want it to have it take a disproportionate hit but 
there is probably no part of the workforce that can be totally 
exempt, so it is going to have to be part of the balancing that 
everyone participates in if sequester happens.
    That said think it was respect to our workforce and our 
civilian workforce in particular that we would probably be 
strongly inclined toward looking at furloughs as opposed to 
RIFs. So the people were not going to try. If it is possible, I 
think it is not in our interest. It is not helpful to us to 
divest workers, but we may need to go with furloughs. So I 
think that we are not going to lose the expertise, although we 
are probably going to lose some work gears out of this.
    Ms. Velazquez. Let me just ask you, as we continue to work 
towards a solution, there are a lot of people that say that 
there should not be any cuts to defense spending. With our 
country facing historic deficits, should not all agencies, 
including DoD, makes sacrifices and not let all the cuts, the 
burden, fall on social programming?
    Mr. McCord. I think that is the principle embodied both in 
the Budget Control Act and really, the backup sequestration, 
you know, took that approach.
    Ms. Velazquez. Thank you.
    Chairman Graves. Ms. Ellmers.
    Ms. Ellmers. Thank you, Mr. Chairman. And thank you to our 
panel, Undersecretary McCord and Director Ginman.
    I represent the 2nd District of North Carolina. In North 
Carolina, 30,000 jobs are at risk through sequestration. In 
Fayetteville, I represent Fayetteville and the Fort Bragg area, 
which accounts for 50 percent of the local economy there.
    Sequestration may cause the government to make unilateral 
changes to tens of thousands, if not hundreds of thousands of 
government contracts and task orders. And I know you are aware 
of this.
    I do want to share a personal business situation in Cary, 
North Carolina. I recently spoke to Doug Bennett, president of 
Bennett Aerospace located in Cary, North Carolina. Bennett 
Aerospace, as mall defense contractor, said their business 
would come to a grinding halt should sequestration go into 
effect. And obviously, as you have pointed out, research and 
development will greatly be affected. Mr. Bennett has already 
lost three major projects as a result of what he is facing.
    Now, I have a couple questions. One, are you aware that in 
the House of Representatives, we have passed a couple of cases 
of legislation that will avoid the devastating military cuts by 
making other budget cuts to keep to the number. Are either one 
of you aware of that?
    Mr. McCord. Yes, we are.
    Ms. Ellmers. Okay. Because I know you had mentioned in your 
opening statement that, you know, certainly we can all work 
together, with the president as well, in order to avoid this. 
And I would say that on behalf of the House of Representatives, 
I think we have definitely. I think we have definitely made an 
effort at that.
    My other question to you is, and again, I am going back to, 
I believe it was when you were answering Mr. West's questions. 
The FY 2012, that any contracts that are FY 2012 that are not 
FY 2012 would have no impact. Is that correct? Did I understand 
correctly?
    Mr. Ginman. For existing contracts.
    Mr. McCord. And prior.
    Mr. Ginman. It is FY 2012 and prior. But if the existing 
contract was funded with FY 2012 and prior funds, it is fully 
obligated. There really should be no reasons, sequesterization 
does not go after funds that were already obligated; it goes 
after unobligated funds.
    Ms. Ellmers. Okay. So for Mr.----
    Mr. Ginman. It will reduce budget authority in 2012 and 
prior to the extent that they are unobligated dollars. But it 
will not cause us to go back to an existing contract already 
placed, already with funds obligated on it and make a change to 
that contract.
    Ms. Ellmers. So how would we explain to Mr. Bennett then 
that he has had three major contracts canceled?
    Mr. Ginman. I do not know the reason why the contracts were 
canceled. I am comfortable that it was not because of 
sequestration.
    Ms. Ellmers. Okay.
    Mr. Ginman. But I would be happy to either meet with Mr. 
Bennett or to entertain a question from him, you know, to help 
him understand where that is, but it sounds like it was in a 
competition that he did not win.
    Ms. Ellmers. Okay. I think he would be most appreciative of 
that.
    And I guess from that perspective with the time remaining, 
what is the advice you are giving to these businesses? What 
guidance are you giving. I know I heard you mention adjusting 
spending as a possibility. What other suggestions would you 
have for any businesses that are faced with this?
    Mr. McCord. I think one of the things that Mr. Ginman and I 
have discussed is that probably the more unique a skill that a 
company has as a subcontractor or a supplier, probably the 
better shape they are going to be in. Of course, if they have 
or can diversify a little bit away from federal business, 
obviously that would probably help them in the coming months as 
well.
    I do not know if, Dick, if you want to talk about what we 
have seen historically.
    Mr. Ginman. You know, as we spend less, there are going to 
be less opportunities. I mean, we have put the budget out for 
2013 and we have allocated where our priorities are and what 
they are and that is what companies use to plan and look. If 
sequestration hits, it is a 9.4 percent hit at every line item 
level we have that is visible and capable of being seen.
    Ms. Ellmers. Okay. All right. Well, thank you, gentlemen. I 
appreciate your input. Thank you very much. And I yield back 
the remainder of my time.
    Chairman Graves. Ms. Hahn.
    Ms. Hahn. Thank you, Chairman Graves, Ranking Member 
Velazquez. Thank you, Mr. Undersecretary McCord and Mr. Ginman 
for taking the time today.
    I am really glad we are holding this hearing on this 
specific issue because I know that we, specifically on this 
Committee and I am sure the rest of our colleagues in Congress, 
understand the importance of small businesses as it relates to 
the recovery of this economy and the job creation that we know 
comes directly from our small businesses. So the threat of 
sequestration at this time, when they are beginning to recover, 
it could be devastating.
    I have only been here in Congress a little over a year, and 
I came to Congress last July just to see one of the most bitter 
partisan fights I think this country has ever seen. I voted 
against the Budget Control Act because I thought it was a bad 
idea then and it has proven to be a very bad idea. I did not 
think it was my job or any of us who came to Congress to set 
automatic across-the-board budget cuts. And I voted against it 
because I did not think it was also my job to turn over my 
authority to a Super Committee to make the decisions for this 
country. And I think it is bearing out today that these 
automatic cuts will damage our economy, specifically to our 
small businesses.
    One of the things I think we stand to lose because of 
sequestration is the innovation, specifically by our small 
businesses, who stand to suffer the most damage from the loss 
of federal governments. Can either one of you maybe give the 
Committee a specific example of the type of technology or 
innovation you fear that we could lose if sequestration goes 
through?
    Mr. Ginman. I do not have one off the top of my head.
    Mr. McCord. Yeah, I guess we do not have a good example in 
that the cuts going forward are kind of going to be spread 
everywhere. And our SNT area is not going to be exempt, so 
there will be impacts there, but I guess I am not familiar 
enough to know what specific projects might be the ones that 
fall by the wayside as we deal with 9 percent less, the thing 
that we would have done with our 13th SNT funding that will now 
have 91 percent. I agree with your premise; there will be an 
impact down the road. It is hard for me to assess in advance 
what projects will not be selected perhaps because we cannot 
afford to fund them all.
    Ms. Hahn. Let me get a little more specific. I know in my 
district in California, we have benefitted from new, innovative 
technology that has saved government agencies time and money 
and even saved lives. And some of these businesses were able to 
do this through the SBIR grant program. And we know that 
seemingly unrelated research can often lead to inventions that 
prove useful for defense and other purposes. And given that 
nondefense, discretionary spending includes virtually all 
research and development at agencies like the National Science 
Foundation, the National Institutes of Health, and NASA. Are 
you worried that sequestration to these non-defense programs 
could negatively impact our national security and 
competitiveness. Is it probable that research for NASA or NIH 
could benefit our national defense. And maybe you could give us 
a sense, this Committee, on the role that non-defense research 
plays in our national defense.
    Mr. McCord. Well, we certainly understand and I think the 
administration touched on this, that the effects are bad on our 
agency as well as other agencies. Secretary Panetta, as the 
former Budget Committee chairman, used to looking across, you 
know, the spectrum when he was here as a member, certainly 
understands that as much as we talk about and think about the 
impact on ourselves, of course, primarily as a DoD, that is 
what we are doing and what we are talking about. He does 
recognize the impacts are damaging and that across-the-board 
cuts do not make any more sense for domestic agencies like NIH, 
than they do for us. So yes, we certainly understand that 
concern and share it.
    Ms. Hahn. Thanks. Because I did not want us to get in a 
thought process in Congress that it is defense and then it is 
nondefense cuts because I think there is a huge relationship 
between some of our traditional nondefense research that 
actually has played into technology and innovation that has 
clearly benefitted our national security.
    Thank you. I yield back my time.
    Chairman Graves. Ms. Clarke.
    Ms. Clarke. Thank you very much, Mr. Chairman. And I thank 
the ranking member. I thank Undersecretary McCord and Mr. 
Ginman, Director Ginman, for this very sobering conversation. I 
just sit here and I remember the debate distinctly about 
sequestration. And I just wonder why we are so surprised. Or 
you know, there is this major concern. The concern would have 
been we could have compromised with one another. We could have 
worked with anybody to make sure that we would be sitting here 
during a hearing trying to avert what can be catastrophic. But 
we are here nonetheless and so I have a few questions to ask.
    Mr. McCord, you indicated that you foresee a possibility 
where the sequestration could be averted at a late point, yet 
you will have triggered some of its effects. Understanding that 
would cause a disruption across the board, can you extrapolate 
at this point or quantify the level of disruption that would be 
caused and how long it might take to rectify?
    Mr. McCord. Well, the type of disruption we are talking 
about are both things that can be quantified, and I think 
things that cannot be easily quantified, such as moral impact. 
If you start telling people we are about to furlough you or we 
are about to lay you off, and one of the things I know the 
deputy secretary feels strongly about is that we not do that 
until we are absolutely certain it is necessary because it 
conveys a message to your workforce and to the contracting 
workforce, as well, that you do not want to send unless it 
becomes you are kind of at that irrevocable point.
    In terms of other impacts, again, that we do not want to 
trigger, certainly as Mr. Ginman said, we do not want to go 
into contracts. There is no reason for us to go into existing 
contracts. That is not going to be productive.
    I think the other thing that we recognize that we cannot 
really fix is that uncertainty creates its own bad dynamic. I 
think Chairman Bernanke talked about that recently in front of 
one of the other committees, and that we understand that that 
is out there today and there is not a great deal we can do. So 
what we are trying to do, and I think what the administration, 
the OMB director's memo at the end of July, told people to keep 
continuing normal operations while we see if there is a way 
out. And so that is what we are still doing but the uncertainty 
still remains in people's minds, understandably.
    Ms. Clarke. Yes. It has a very dampening effect.
    I would like to get a better idea of the baseline we are 
using there. As it stands, the surge is ending in Afghanistan 
and the troops will be coming home soon. And I understand the 
concept of readiness means the ability to respond to any 
threat, anywhere across the globe. However, with the evolving 
nature of warfare moving toward reliance to a certain degree on 
drones and other military technologies, are we making 
projections at the same or similar cost of readiness that has, 
I guess, been the contemporary meaning of readiness? And in the 
future, as it stands right now with the troops in the field or 
is there something that you are adding to this equation now 
going forward that you may put into your thinking should 
sequestration be a part of that equation?
    Mr. McCord. I hope I am going to be able to answer the 
question. I think there were sort of two parts of it.
    Sequestration, the readiness impact of either the drawdown 
or of changing the technology is probably not going to help us 
in any way that is material, especially as we look at, say, 
comparing 2012 to 2013. The situation is just not changing 
enough in a way that would produce any dramatic savings. The 
reduction in wartime spending that comes with the drawdown was 
already planned and is not really going to help us. Wartime 
spending is subject to sequester but having less of it does not 
lessen the impact. It is kind of an unusual player in the 
sequester equation. So I do not really see any windfall from 
that respect or any major changes in operational concepts or 
readiness concepts that is going to materially affect the 
discussion that we have been having or that you probably have 
had with your constituents.
    With respect to going forward, I think Mr. Hale, my boss, 
and the vice chiefs of the services testified this morning, and 
I know Mr. West was there, that there are going to be readiness 
impacts of reducing funding for training, things like that. So 
that, if sequester happens, is going to be a readiness impact 
of sequester impacting readiness, but the vector going the 
other way of readiness changes affecting sequester I do not 
think is really going to be much of a factor. I hope that is 
responsive to your question.
    Ms. Clarke. That is helpful, sir. And I thank you for your 
testimony here today. Mr. Chairman, I yield back.
    Chairman Graves. Ms. Chu.
    Ms. Chu. Mr. McCord, thank you for being here today to 
testify about this important matter.
    As you know, the defense budget for FY 2011 was 700 
billion, which is over half of discretionary spending in the 
federal budget. With defense spending making up such a 
significant portion of our budget as we work together to 
implement a balanced deficit reduction plan, we will inevitably 
have to make some cuts to defense spending.
    I agree with you that sequestration is not a good policy, 
and in fact, I voted against the Budget Control Act, which 
engineered it. Sequestration would have such a devastating 
effect on every federal agency and thousands of small 
businesses who would be directly affected by the reduced number 
of federal contracts and subcontracts and indirectly affected 
by the decrease in economic activity.
    But my question to you is as we negotiate a better deficit 
reduction plan, how do we make strategic cuts to the Defense 
Department that will not threaten our national security while 
helping us to bring down the mounting deficit?
    Mr. McCord. Well, we feel, the secretary feels strongly, 
that we did that in presenting the budget that is before the 
Congress now that I guess will not be probably dealt with fully 
until at least after the election.
    If we were to do another round as a way to, say, deal with 
sequester, we understand that defense would be on the table. It 
is hard for us to assess at this point exactly--to say give a 
number of what we could live with as a change, if any, but we 
would want to be part of the conversation if there was another 
look at a new budget deal. But we feel that what we have done 
so far was strategically based and although people have 
disagreed with particular aspects of it, such as the air guard, 
that the broad outlines we think have been pretty compelling to 
people, and the secretary is concerned that we will have to 
walk away from that in some material way if the sequestration 
happens with no further adjustment.
    Ms. Chu. Okay. I want to also talk about the contracts that 
are given to small businesses. You said that the DoD would 
still fund contracts from the prior year and these would not be 
subject to cuts. How would the DoD handle the contracts that 
small businesses won but those contracts that have not yet been 
funded? And what if the contracts that were given last year 
were multi-year contracts that extended beyond 2013? Would they 
also be subject to sequestration? And also, under 
sequestration, would small businesses lose the number of 
contracts or just get a smaller dollar amount per contract? And 
how would you ensure that the Defense Department's goal to give 
small businesses 22 percent of contracts and 32 percent of 
subcontracts, how would you ensure that that goal is met?
    Mr. Ginman. The existing contracts that are there, there is 
no need to do that. Multi-year contract and the careful 
definition of a multi-year, the department only has eight of 
those. All of them are large businesses. Multi-year--if what 
you meant by multi-year was a contract that had options in it 
that I would exercise into the future, while the effect of 
sequestration within whatever budget line item I am in, if in 
fact I need the requirement and I do not have enough money to 
spend it, I would have to renegotiate the option to bring it 
down to the dollar level I could afford.
    Many of the contracts that we write, understanding that the 
money that we ask for is not always necessarily what we get, we 
tend to write options--contracts with options in them with the 
flexibility to order varying levels. So my hope would be in 
most of those levels of those types of contracts, we would, 
without having to renegotiate, simply be able to exercise the 
option at a lower dollar value.
    Ms. Chu. What about this 22 percent of contracts?
    Mr. Ginman. So as I said earlier, no direction with regard 
to awarding business to small business will change as an effect 
of sequestration. We simply wind up with 9.4 percent less 
money. We will continue to work to do that. Undersecretary 
Kendall, the deputy secretary, and the secretary have all 
issued letters recently looking to improve. The deputy 
secretary has made it mandatory that for all senior executives 
within the department that have any responsibility for spending 
money have as an element in their personnel evaluations how did 
they do in getting work to small business. Secretary Kendall 
recently issued one in three very specific areas saying we know 
small business can operate in these areas. We want you to 
increase the percentage by 10 percentage points. I have 
recently issued one looking at those orders that are small 
dollar values, the below $150,000, remind people that it is our 
policy to set those aside and ask him to do that.
    And we have reinforced the Office of Small Business Policy 
within the department. Created a very sophisticated tool to be 
able to facilitate market research to help contracting officers 
find better opportunities for small business so that we can 
meet the goal.
    Ms. Chu. Thank you. I yield back.
    Chairman Graves. I do want to echo the words of the 
undersecretary in that and you pointed out that the goal for 
the Super Committee was not sequestration; it was a prod. The 
goal of the Budget Control Act was for the Super Committee to 
find savings to help pay down the debt. Unfortunately, they 
failed and now we have to deal with this.
    But with that, what we are going to do is we have two votes 
and we are going to recess for approximately 30 minutes. When 
we come back we will set the second panel out there. And I want 
to thank the Undersecretary, Mr. Ginman, both of you for being 
here today. We appreciate it very much. And with that we will 
recess again for approximately 30 minutes and then we will be 
back.
    [Recess.]
    Mr. West. We will continue on with the hearing for today 
and now we will have our introductions for panel number two.
    I would like to introduce Stephen Fuller. Our next witness 
is Professor Stephen Fuller, the Dwight Schar faculty chair and 
university professor, as well as director at the Center for 
Regional Analysis, School of Public Policy at George Mason 
University in Arlington, Virginia. Professor Fuller is an 
expert in the field of urban and regional economic development. 
He has authored over 500 articles, papers, and reports in this 
field, including his newest report released this morning, which 
looks at the economic impact of the Budget Control Act of 2011 
on small business. Thank you for testifying today, Mr. Fuller. 
You may begin.

 STATEMENTS OF STEPHEN S. FULLER, PH.D., DWIGHT SCHAR FACULTY 
 CHAIR AND UNIVERSITY PROFESSOR, DIRECTOR, CENTER FOR REGIONAL 
ANALYSIS, SCHOOL OF PUBLIC POLICY, GEORGE MASON UNIVERSITY; M. 
 L. MACKEY, CEO, BEACON INTERACTIVE SYSTEMS, ON BEHALF OF THE 
    NATIONAL SMALL BUSINESS ASSOCIATION; LAURIE MONCRIEFF, 
   PRESIDENT, ADAPTIVE MANUFACTURING SOLUTIONS; MARK GROSS, 
            FOUNDER AND CEO, OAK GROVE TECHNOLOGIES.

                 STATEMENT OF STEPHEN S. FULLER

    Mr. Fuller. Thank you, Mr. West and Committee Members. I 
want to go back to July of this year when I released another 
report called ``The Economic Impact of the Budget Control Act 
of 2011.'' The analyses in that report set the stage for my 
comments today and it identified the loss of 2.1 million jobs 
nationwide by the year 2013 or during 2013 from the Budget 
Control Act or if sequestration is implemented. My subsequent 
analyses have established the fact that these impacts will 
disproportionately affect small businesses and their workers, 
workers in small businesses which suffer more than 50 percent 
of the projected job losses due to spending reductions mandated 
under the Budget Control Act. These job losses would show up in 
small businesses that are prime contractors. Also, 
subcontractors, suppliers, and vendors, and also thirdly, the 
businesses that support the retail and consumer service needs 
of laid-off workers and the loss of their labor income. This 
latter class of small businesses span the economy, although we 
find it more concentrated in retail and consumer service 
sectors. The direct impacts, the federal contractors who are 
small businesses that would be impacted by sequestration, would 
involve the loss of about 158,000 jobs. It just represents 
about 34 percent of the prime contractors. Overall, the loss of 
jobs that is attributable to small businesses is about 51 
percent.
    The difference is important. What it says is that the 
concentration of small business impacts are among 
subcontractors, and suppliers, and vendors, and those 
businesses that provide services supported by the payroll 
spending of laid-off workers. In fact, they represent 58 
percent. Small businesses in these other categories represent 
58 percent of the job losses that would result from 
sequestration. It is 58 percent of 1.4 million jobs. It is a 
very significant impact.
    And what is more important about this, these companies have 
less control over their destiny. They are the subs. They are 
the suppliers. They are the vendors. And in many cases, they do 
not even know that they are working on a federal contract. And 
so as large companies adjust to changes in federal spending, 
clearly they are going to be impacted, too, as they adjust. One 
of the typical adjustments is they bring work back from the 
small--their subcontractors into the main company. They have 
much deeper pockets and can adjust financially and take time to 
restructure and reposition their businesses. Small businesses 
do not have that capability.
    I am going to skip forward because time is short.
    The small businesses are less able to sustain themselves 
when they experience a contract loss, whether they be a prime 
or a sub. Due to the more limited economies of scale that 
characterize the operations of most small businesses, the loss 
of even a small portion of their projected backlog or a 
cancellation of a contract could result in these firms becoming 
unsustainable. Small businesses typically do not have the 
financial resources to sustain unprofitable operations for a 
sufficiently long term to permit restructuring alternative 
market or product development.
    It should be noted that all of these calculations of job 
impacts associated with sequestration only measure the job 
equivalent of the direct spending reductions and their 
subsequent impacts. What they do not include are any 
consideration of induced failures of small businesses from 
partial losses of federal contracts or subcontracts. The 
literature shows that small businesses are much more vulnerable 
than big businesses to changes in the business climate. And one 
of the principal reasons for this is that they have a much 
smaller margin of operation. Their profit margins are smaller. 
They cannot adjust as quickly to changes in the business 
environment, and so with a small reduction in spending, may 
actually force them out of business. So these of the collateral 
effects have not really been considered.
    The workers for small businesses face some of these same 
problems. Employees in small businesses may be more specialized 
or less networked than employees in larger businesses, making 
their reemployment more challenging than for employees working 
in large businesses that may be experiencing cutbacks or 
cancellations in federal contracts. Workers in larger 
businesses have the opportunity to reassignment to another 
division. You do not find that in small businesses. Or perhaps 
a transfer to another location. Small businesses have very 
little options.
    To me the key takeaway from all of this analysis is that 
besides bearing a disproportionate impact or potential impact 
of federal spending reductions, small businesses are more 
vulnerable to actions they cannot control. The larger 
businesses can move the contracts around and the small 
businesses are sitting there waiting for something to happen. 
The fact that 58 percent of all of the job losses are in the 
secondary kinds of functions I think highlights the 
vulnerability of small businesses. Most importantly, beyond the 
loss of jobs it is the survivability of these small companies 
from partial reductions in federal spending or federal 
contracting that they might be doing. Thank you very much.
    Mr. West. Thank you.
    Our next witness is Ms. M. L. Mackey, CEO of Beacon 
Interactive Systems in Cambridge, Massachusetts. Her company 
was started 18 years ago, and for the last decade has been 
active as a federal small business contractor. Through 
government contracts, her innovative firm has developed 
effective and cost-saving software products used within the 
DoD. Ms. Mackey is testifying today on behalf of the National 
Small Business Association. Thank you for being with us, Ms. 
Mackey, and you may begin.

                   STATEMENT OF M. L. MACKEY

    Ms. Mackey. Good afternoon, Congressman West and Ranking 
Member Velazquez, and the members of the Committee. Thank you 
for the opportunity to testify here today and for your tireless 
efforts to promote economic development and job creation in 
America's small business community. Your continued leadership 
on critical issues, such as the one before us today and your 
collective ability to understand and shed light on the 
challenges facing small business in the federal marketplace is 
invaluable and greatly appreciated.
    My name is M.L. Mackey, and I am the CEO of Beacon 
Interactive Systems, a small business located in Cambridge, 
Massachusetts. I am also on the board of trustees of the 
National Small Business Association.
    Eighteen years ago, my husband and I co-founded our company 
out of our rent controlled apartment on Beacon Street. We built 
the company as a provider of commercial systems, initially 
providing software products to companies like Olympus, MetLife, 
and IBM. For the past nine years, we have worked as a federal 
contractor delivering efficiency, improving, and cost-savings 
applications to the DoD. The Navy is currently using products 
we developed through the highly successful Small Business 
Innovation Research (SBIR) program to improve performance of 
the equipment maintainers deployed across U.S. Fleet Forces 
Command, the sailors who keep our ships mission-ready. At full 
deployment of our software, initial estimates on cost savings 
and cost avoidance are in excess of $40 million; all on an 
initial SBIR investment of $5.5 million. This is the kind of 
cost savings and efficiency improvements that small business 
provide for the DoD, exactly the approach needed in these 
austere times.
    I, along with many of my counterparts across the country, 
am very concerned with the proposed arbitrary approach to 
sequestration. Simply cutting the top-line of nonexempt agency 
budgets is not based on a rational assessment of the relatively 
effectiveness or usefulness of various programs. It has the 
potential to devastate key programs and specifically to have a 
disproportionate impact on small business. While major program 
cuts will be necessary inside federal agencies, these cuts 
should be made with a purposeful and thoughtful approach. In 
order to not only insure an equal impact across the defense 
industrial base, but also to ensure a rational approach that 
does not gut the advances made in government procurement to 
this point.
    Today, I am speaking to you as someone who has already felt 
the effects of this uncertainty. We, like many other businesses 
in this sector, have had to tighten our belts in anticipation 
of the rough times ahead. In spite of successful pursuit of new 
opportunities, we have purposefully trimmed our workforce. This 
is counter to how we have strategically built our business over 
the last 18 years. Previously, once we closed a big 
opportunity, the first thing we did was evaluate our team and 
act on ways to improve our capabilities, like defining new 
roles and hiring new employees. This approach has not only kept 
us viable, but has helped us expand our business and create 
jobs. Unfortunately, give the uncertainty surrounding 
sequestration, this is not the approach we are taking now.
    I am by no means the first business owner, nor will I be 
the last, to tell a congressional panel that sequestration will 
have major, negative impacts in areas ranging from business 
survival to national security. Nor will I be the last to argue 
that something must be done to stabilize our economy. Surely 
Congress can craft a more deliberate and careful approach than 
the current strategy, which will lead to considerable job loss 
and greater economic uncertainty at a time when job creation 
and economic growth remain a top priority for our country.
    The federal contracting and acquisition systems are 
overtaxed and have struggled with efficiency and transparency 
issues for years. This problem will only get worse with 
sequestration in place. The contracting staff of Federal 
agencies will likely face major personnel reductions under 
sequestration. As a result, we are likely to see an increase in 
contract bundling and less efficient, less predictable 
contracting system. This will have a major impact on small 
business contractors who are likely to be the first to go on 
many projects. According to NSBA's most recent Politics of 
Small Business Survey, 99 percent of small business owners are 
registered to vote, 97 percent said that they regularly vote in 
national elections, and the 25 percent of small business owners 
who have contacted their elected officials on a small business 
issue have done so on the matter of contracting.
    Small businesses create efficiencies. We are agile and 
flexible, which saves the government money. We believe that 
program managers and contracting officers should be 
incentivized to create efficiencies and cost savings through 
increased work with small business, not the other way around. 
Small businesses around the country are waiting on funds from 
previously awarded contracts, large businesses are 
contemplating mass layoffs, and the end users, our men and 
women in uniform and the people who are served by our Federal 
Government, are waiting for products and services they expected 
months ago.
    Washington needs to set their differences aside and not use 
the excuse of an election year or partisan gridlock to 
shortchange America's small businesses and the broader public. 
We cannot afford to wait and fix our economy or shore up our 
industrial base after it has been decimated. If sequestration 
happens, DoD contracts being competed now or in the near term 
may be canceled with little recourse for contractors. Business 
owners do not know which opportunities are real and which are 
illusory, causing a massive waste of our limited resources. 
Businesses are frozen, in need of personnel, but unable or 
willing to hire because of this uncertainty.
    Congress, to its credit, has increasingly recognized the 
benefits of small business engagement. The small business 
contracting reforms incorporated into Title XVI of the 2013 
National Defense Authorization Act (NDAA) are a positive step 
forward and incent behavior that incorporates the efficiency 
and cost-savings approach that our small business are known to 
provide. These are the kind of proposals that will push the 
federal government toward greater efficiency.
    I know that pointing out problems is far easier than 
finding solutions. The path ahead will definitely be 
challenging. Having said that, as a small business owner, I can 
state unequivocally that we are a critical component of the 
solution to our government's fiscal concerns.
    I applaud this Committee for your vigilance in promoting 
small business-friendly policies and your work to reinforce the 
idea in your colleagues that small business is a value-added 
proposition for the government and an enabler of innovation and 
growth.
    I appreciate the opportunity to be here today. It is an 
honor and a privilege, and I welcome your questions.
    Mr. West. Thank you, Ms. Mackey.
    Our next witness is Laurie Moncrieff, president of Adaptive 
Manufacturing Solutions in Burton, Michigan. Adaptive 
Manufacturing Solutions formed by Ms. Moncrieff in 2007, is a 
group of small tooling and manufacturing companies that work 
together to bid on contracts. She is also president of Schmald 
Tool and Die, one of the companies within Adaptive 
Manufacturing Solutions, a small tooling and die company which 
has been in her family for over 60 years. She is testifying 
today on behalf of the National Defense Industrial Association. 
Thank you for testifying today, Ms. Moncrieff, and you may 
begin.

                 STATEMENT OF LAURIE MONCRIEFF

    Ms. Moncrieff. On behalf of the 1,756 corporate and over 
96,000 individual members of the National Defense Industrial 
Association (NDIA), I would like to thank Chairman Sam Graves, 
Ranking Member Nydia Velazquez, and all the members of the 
Committee for holding this important hearing.
    We are all painfully aware that in the past 10 years the 
U.S. has experienced an economic downturn second only to the 
Great Depression. The most severe impact has been experienced 
by small businesses.
    Even in a good economy, small businesses have to navigate 
barriers and challenges. But through this downturn, we have 
seen it at an unprecedented magnitude. The resulting erosion 
has decimated many critical sectors that are still widely 
needed and in demand to produce product worldwide and also 
recognized as integral to part of our national innovation 
system. The vast majority of the companies classified in these 
critical industries are small businesses with less than 50 
employees.
    As a representative of small business and manufacturing, I 
ask each of you to consider how can we ever revitalize these 
industries that have sustained considerable economic injury, 
encourage innovation and invention, increase production and 
demand, and support and approve national security if small 
businesses are hit with yet another blow from astounding budget 
cuts the DoD faces with sequestration?
    The challenges of the last 10 years have made it difficult 
to find and identify individual businesses in these segments. 
It can be easily demonstrated that these companies hold 
irreplaceable intellectual knowledge, which may not reside in 
the prime contractor community. Yet with the structure of the 
supply chain today, small business innovation and value-added 
work is often unrecognized, unrewarded, and under-represented 
in government contracting.
    Some examples of companies and communities that could in 
the future or have already been impacted include TACOM LCMC 
awards of the FHTV, M-ATV, FMTV, Stryker, and HMMWV include 
$539.6 million directly to small businesses and an additional 
$563.5 million in subcontract awards through March in FY 2012. 
The totals of over $1.1 billion in the first half of the year, 
demonstrating the importance of small business in this supply 
chain.
    A manufacturer of High Tech ``Hot Press'' furnaces used in 
the manufacture of ceramic body armor plates will simply shut 
their doors if this demand for sustainment of furnaces is 
decreased or eliminated. There is no other application for 
these furnaces outside of the military. It would take us 
between 18 and 24 months to get this business operational yet 
again.
    A small manufacturer who makes ``high strength'' carbon 
used to produce armor felt the impact of demand decrease back 
in 2010 when the DoD allowed this key component to be diverted 
to support other worldwide demand. When DoD later wanted to 
reinstitute the manufacture of body armor, it suffered a 12-
month lag in delivery times for body armor in theater. We 
cannot afford to repeat this scenario.
    The manufacturer of carbon tooling, special foils, and 
other unique production products are all supported and 
maintained by small businesses, many of whom only have two to 
three people per company in their operations. If lost, it could 
take up to 24 months to replace such lost capabilities.
    Miller-Holzwarth, a 2007 recipient of the SBA Subcontractor 
of the Year recently announced the closing of their doors. The 
business located in Ohio manufactured periscopes, vision 
blocks, ballistic window armor, and had been in the defense 
industry for over 35 years. Among the issues that impacted 
their decision to close was the potential of budget cuts with 
sequestration. There are many other businesses like that that 
we could see similar instances arising.
    It is documented that small businesses are critical to the 
economy. Thirteen times more patents per employee, 99.7 percent 
of all employer firms are small businesses.
    There are several ways we could strengthen small business 
and increase the value to the government, presenting a win-win 
situation.
    We can encourage more sourcing to small business. The 
executive office of the president in management and budget 
published a memorandum dated February 11, provided examples of 
savings in excess of $383 million due to targeted set-asides to 
small business.
    Develop a program to reverse engineer ``low hanging fruit'' 
already in the DoD inventory.
    Review processes of DCMA, as many have minimal value and 
are costly to small business as well as government.
    Many great products and processes originate in small 
businesses. However, they struggle to connect and bring their 
product to market. We must work towards the support of more 
robust avenues for these products to reach the federal and 
commercial market.
    Streamline and reduce the amount of paperwork and effort 
required to find and bid on contracts.
    We need to celebrate and support the strength that small 
businesses bring to the market and better leverage these 
valuable resources. There are many ideas of how to reduce cost, 
but with every decision there are many unintended consequences. 
We must consider how decisions could support, uphold, and 
encourage small business, innovation, and growth, and 
revitalize critical industrial sectors. These actions will move 
us forward to create jobs, improve the economy, and our 
national security. It is time to step up and support the 
industrial sector and the small businesses which are the 
backbone of our country. Thank you.
    Mr. West. Thank you, Ms. Moncrieff.
    I now yield to Ranking Member Velazquez to introduce our 
final witness.
    Ms. Velazquez. Thank you, Mr. Chairman.
    It is my pleasure to introduce Mr. Mark Gross. Mr. Gross is 
the founder and CEO of the Oak Grove Technologies, a service-
disabled, veteran-owned small business located in North 
Carolina. Prior to starting his business, he worked for DoJ's 
antitrust division and in management-level positions of several 
Fortune 500 companies. Additionally, Mr. Gross served on the 
SBA Veterans Advisory Committee and was a founding member of 
the American Legion's Small Business Task Force. Welcome to the 
Committee.

                    STATEMENT OF MARK GROSS

    Mr. Gross. Good afternoon, Ranking Member Velazquez, 
Congressman West, and members of this Committee. Thank you for 
the invitation to come before you and share my concerns 
relating to the topic of sequestration and the impact it is 
having on small businesses today and the potential impact it 
will have on small businesses in early 2013.
    I am a veteran of the United States Army, founder of Oak 
Grove Technologies, a service-disabled veteran-owned small 
business focused on training, strategic communications 
information technologies, and intelligence and analytical 
services. We employ over 390 employees, over 70 percent of 
those are veterans, and over 20 percent of those are service-
disabled veterans. Geographically, we are dispersed in 21 
states, Africa, Afghanistan, and Iraq.
    The threat of sequestration creates uncertainty, which 
paralyzes small businesses. Most small businesses do not have 
the robust or diversified contract portfolio supporting their 
operations. Small businesses often wait until they have a 
contract before they acquire the resources necessary to perform 
the contract. Without reasonable assurances of future business, 
small businesses cannot plan for the future and are not likely 
to invest in the company's growth by acquiring additional 
equipment, facilities, or personnel. However, small businesses 
that fail to invest or grow will find themselves less 
competitive for the opportunities that do remain.
    Many of the business owners that I speak with in North 
Carolina, excuse me, are taking a similar approach as we are 
considering the uncertainty of sequestration. We are putting 
expansion, infrastructure, expenditures, and indirect hiring on 
hold. We are forced to prepare for the worse case in order to 
regroup and/or recover. Oak Grove Technologies has in the past 
year purchased over 200 acres of land in Richmond County, 
Hoffman, North Carolina, which is the most economically 
disadvantaged company [sic] in the state. It is adjacent to 
Camp Mackall Army Air Field, where we support training for 
special forces, military information support operations, and 
civil affairs soldiers. We are putting much of our planned 
construction on hold, minimizing our marketing campaigns and 
trade show participation, and in general, tightening our belts 
because of the uncertainty surrounding sequestration.
    Sequestration in the short term will have the most impact 
on the agency's budget for operations and service contracts 
that are a large part of that budget. Most small business 
federal contractors provide the government with services rather 
than products because there are fewer barriers to entry in the 
service market than the market for manufactured items and 
supplies. For supplies, companies need personnel, equipment, 
facilities, distribution channels, et cetera. For services, 
companies just need people. It is easier for an agency to 
eliminate two data processors from a contract than to eliminate 
a section of a fighter jet. By cutting services in a greater 
proportion than products, sequestration will affect many more 
small business contractors than large contractors.
    A small business with 10 federal contracts will feel the 
effects of a loss of one of those 10 contracts more than a 
company with 100 contracts that loses 10 of those contracts. 
Although both scenarios reflect a 10 percent cut in each 
company's contracts, larger companies have a greater ability to 
reallocate personnel and idle resources to other contracts 
because of the large number of contracts remaining. Large 
contractors, moreover, are more likely to have commercial and/
or international contracts that can offset the effects of the 
stymied federal market. Small businesses rarely have the 
ability to diversify in this manner.
    We completely understand the necessity of budget cuts, 
especially while we have two military conflicts ending. 
However, an across-the-board cut will hurt everyone. Although 
the same economic engine that powers America, small business 
will be the one that suffers most.
    I appreciate the opportunity to address this Committee 
today. Thank you for all you do for us, and I welcome any 
questions.
    Mr. West. Thank you. And thank you for your service in the 
Army. Army Strong.
    I would like to start with a simple question. DoD just told 
us earlier, and if you were here you saw the first panel, that 
they would not be terminating contracts but yet we just found 
out that the Air Force has reported it may cancel the tanker 
contract with Boeing and Northrop is laying off about 600. One 
of my big concerns, of course, is the trickle-down effect, not 
just to the small business but also to the suppliers and the 
subcontractors that you all use. What do you see as being those 
effects in your line as far as to those suppliers and the 
subcontractors that some of you alluded to earlier from the 
effects of sequestration?
    Mr. Gross. Congressman, I think many of us small 
businesses, the predominance of our contracts are subcontracts 
from larger contractors, Oak Grove included. When the large 
contractors feel the squeeze, there is a trickle-down effect to 
the subcontractors, whether it is in rates, whether it is in 
reduction in your staff, or they will take some of the 
positions in-house. It is certainly something we are concerned 
with currently on a number of the operations that we are 
involved in in contracts, so I definitely think it is going to 
happen for certain and it is definitely a concern.
    Ms. Mackey. So I would answer that question in terms of how 
it specifically affects small business. So when you ask about 
sort of the down-line of your supply chain, I would also 
perhaps, if I could expand that question to your up-line, who 
you have relationships to that you are the subcontract to? Who 
do you team with as other small businesses? So as small 
business, sometimes people say to me, oh, you are the CEO of a 
business. I go, you know, it is a small business. Maybe it is 
not quite as glamorous as you think. I spend a lot of time 
doing a lot of things. I do not have a lot of time to build 
relationships. So the relationships, the extended team that I 
have, took a long time to get in place. And I think some of the 
trickle-down that Dr. Fuller was talking about is that it will 
be very difficult for me to recoup all that time and investment 
in relationships. I hope that is helpful.
    Mr. West. Dr. Fuller, is there a concern in your analysis 
that you see as we start to push out and decimate the small 
business contributions to the defense industrial base that 
maybe there will be more of a monopoly by some of the larger 
businesses and companies and therefore you could end up seeing 
higher costs because you reduced the amount of competition?
    Mr. Fuller. That is certainly one of those collateral 
impacts that need some attention. I think we have seen this in 
very recent days where some of the very large defense 
contractors are talking about mergers and we have seen 
increasing acquisitions. I guess my biggest concern is that 
first, the numbers are really big. We are talking about a 
million jobs among small businesses and two million overall. So 
the small businesses just are extremely exposed, and they are 
exposed in a way that I think the other witnesses have 
illustrated so well, is that they in effect are sitting ducks. 
They are at the mercy of the primes in so many cases. And I 
have seen as we have analyzed these data that approaching 60 
percent of the potential job losses coming out of companies 
that are not primes and who are small businesses, that they 
have very little recourse. And adjusting is not an option to 
them. They go out of business increasingly and I think we--I am 
more concerned that we are losing the innovative talents of 
small businesses either because they are threatened at this 
point or they actually go out of business later on as times get 
tougher.
    Mr. West. Last question. Ms. Moncrieff, you kind of alluded 
to it. The start-up time. If you go to zero, I mean, how long 
does it take to kick this back in? You know, because the 
question I asked to the first panel, are we looking at an 
industrial base at capacity and capability and therefore, our 
technological advantage and innovations may be lost? So I would 
like to get your input as far as what would it take, what type 
of timeline you would look at to try to recover yourself to get 
back to a full operating capacity or capability?
    Ms. Moncrieff. I, myself, am not going to be impacted, and 
I think, I guess I cannot say it like that. I am not as 
concerned about my impact as some of the other companies that I 
work with because I went through an economic time five years 
ago where I lost 75 percent of my business overnight. So when I 
got into government contracting, what I did is I purposefully 
contracted first direct with the military knowing that should 
there be a downturn, you are in a worse position if you are in 
a subcontract mode.
    Now, on the innovation piece, there are 16 industries that 
are key to innovation, 13 times more patents per employee, and 
a lot of these folk are behind the scenes. Without them in 
business, you cannot make anything anymore. So there are 
businesses that are upstream from them that will lose the 
ability to make product. And we have got a lot of product in 
the military that we have one supplier left in the country. We 
have one manufacturer for chaff for our jets. No other 
manufacturer in the United States. They are already struggling. 
To rebuild them, it is not just time; it is an incredible 
amount of money. I do not know that we would have the ability 
to bring that back. So there are a lot of industries that I 
think it is not just a matter of time but it is the amount of 
money to rebuild those industries down the road.
    Mr. West. Thank you. And I yield to Ranking Member 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Gross, with the wars in Iraq and Afghanistan coming to 
a close, there has been a concerted effort among federal 
agencies to promote entrepreneurship among veterans coming 
home, and one of the issues is high unemployment among veterans 
that are coming back. It seems DoD is the largest provider of 
contracts to all veterans. How do you think sequestration will 
impact the decision of these veterans to enter the federal 
marketplace?
    Mr. Gross. That is a great question. I think if you look at 
across-the-board cuts, especially in DoD, most of the veterans 
coming out are more than likely looking at opportunities within 
DoD based on their background, their skills, their training. 
With less opportunity within DoD, obviously it creates far more 
competition and it makes the barrier to entry far greater. I 
think for companies like myself, you know, veterans hire 
veterans. It is what we do. And so for us, you know, a down, a 
decrease in DoD dollars, unfortunately, that is generally who 
gets impacted.
    Ms. Velazquez. Mr. Fuller, in your study you estimate that 
45 percent of job losses will come from small businesses, and 
you also discussed the fact these losses will have on other mom 
and pop shops that are patronized by employees of defense 
contractors. Does your estimation of job losses also include 
this multiplier effect or do you expect the impact to be even 
greater?
    Mr. Fuller. The numbers that have been cited include the 
indirect effects as well. And also, the scope of our work, even 
though we are focused on DoD because it is the single largest 
source of federal contracting, includes all the non-DoD 
agencies. So this is even a bigger problem than we are talking 
about. And we are at 51.6 percent of all of the potential job 
losses coming from small businesses, and that would include 
those subcontractor suppliers and vendors as well as those 
companies across--you find them in every single county in the 
country that are supported by the spending of those jobs that 
might be terminated.
    Ms. Velazquez. Thank you. Ms. Mackey, while the cuts to 
DoD's discretionary spending will be significant, there will 
also be 75 million dollars in cuts to SBA. And SBA is the 
agency in charge of making sure that small businesses get their 
fair share of federal contract dollars. So what will the cuts 
to these agencies mean for small businesses and their ability 
in the federal marketplace to enter the federal marketplace?
    Ms. Mackey. The SBA is the agency that watches all our 
small businesses' backs. We need to make sure that they stay in 
the game and funded in a way that they can perform effectively. 
The challenges that are going to come up around contracting and 
deciding with limited resources who to contract and when, we 
need to make sure that that level playing field you were 
talking about stays level by having an ombudsman, by having 
people that watch and make sure that we are not doing the 
bigger contracts because then we can get more of the money 
committed, but just leaving the small business contracts 
because we have to cut some out; we might as well cut the 
smaller ones. We need to keep the whole industrial base 
performing and engaged through the difficult times ahead.
    Ms. Velazquez. Thank you. Thank you.
    Mr. West. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Dr. Fuller, does government spending create jobs?
    Mr. Fuller. Yes.
    Mr. Mulvaney. And the lack of government spending causes us 
to lose jobs?
    Mr. Fuller. Yes.
    Mr. Mulvaney. And using your numbers, I think you said that 
this sequester, you have got it at $115 billion in FY 2013. I 
think the number we use around here is $110 billion. It leads 
to roughly $215 billion in loss of GDP and 2.1 million jobs 
lost. Am I reading this correctly?
    Mr. Fuller. That's correct.
    Mr. Mulvaney. Okay. I recognize the fact that there is not 
a perfectly inverse relationship between spending cuts and jobs 
lost and spending increases and job loss, but just running the 
basic back-of-the-envelope numbers, Dr. Fuller, using your 
numbers, the $800 billion stimulus that we had here several 
years ago should have created 15 million jobs and at the two 
times multiplier that you have, should have added $1.6 trillion 
or 10 percent to our GDP. And I just have not seen it yet. And 
I am sympathetic to folks who come in here and say that 
government spending will cost us jobs, but I am very much 
concerned about making the same argument the other way in light 
of the fact we have just been through that economics experiment 
where we spent $800 billion and did not get anywhere near 18--
excuse me, 15 million jobs. In fact, there is another report 
that you wrote that said that $1 billion in investment--excuse 
me $1 billion--in government savings would lead to 28,500 jobs, 
which means that the $110 billion represented by this cut would 
be 3.1 million jobs but conversely, the stimulus should have 
created 21 million jobs.
    And I guess my question, Mr. Fuller, it is not as much a 
question as much as it is a comment to anybody who is willing 
to listen. I believe, Mr. Chairman, that these cuts will hollow 
out the military. I do believe that. And I believe that is 
where we should be focusing our attention. I think it is 
disingenuous of us as a party to have railed against government 
spending for the last two years as not creating government jobs 
and then running to that argument the very first time we 
actually have job cuts.
    Let me ask you this, Dr. Fuller, have you done an economic 
analysis of the impact of jobs in this country of adding $110 
billion of additional debt when 77 cents of every dollar 
borrowed is printed by the Federal Reserve?
    Mr. Fuller. I have not done that analysis. No.
    Mr. Mulvaney. Is it fair to say that adding to our debt 
burden, especially in light of the fact that we are printing 
effectively 77 cents out of every dollar that we borrow, would 
have a negative impact on GDP and on job growth in this nation?
    Mr. Fuller. I think we could manage this process much more 
effectively than we have done, and the stimulus, while I 
believe that the idea of a stimulus could have been more 
productive than it was, I do not think it was executed very 
well. It is quite easy to--it is how you spend the money that 
is important, and we can run--we know what we are going to cut 
back when we begin to cut back DoD spending, and we know that 
it has a job impact. And so it is important to know that there 
are costs associated with these decisions. It does not mean 
there are not benefits. And you might be able to cite some of 
the benefits. If these monies were spent in another way, they 
might have a different kind of impact. The point is that this 
economy cannot accommodate this kind of loss this quickly. It 
would throw the economy into another recession. It would add a 
point and a half, maybe two points to unemployment. And so we 
need to know what the consequences are.
    Mr. Mulvaney. Have you seen the studies, Dr. Fuller, that 
indicate that traditionally when countries have debt that 
exceeds 90 to 100 percent of their GDP that it annually takes 
one percent off of their GDP growth?
    Mr. Fuller. I would agree that having more debt--having the 
debt levels we have is not good for our economy either. That is 
a different question than do we take it out of the backs of 
small businesses. It is how we do this that ought to be 
discussed and not whether it is done.
    Mr. Mulvaney. And Dr. Fuller, just so I understand, the 
numbers that you used, were they just the defense cuts or were 
they the entire sequester?
    Mr. Fuller. The 2.1 million job losses is the entire 
sequester as spread across the nondefense agencies as well.
    Mr. Mulvaney. Thank you, Dr. Fuller.
    Mr. Chairman, I will say again, you and I have worked 
tirelessly over the last two years trying to make the argument 
that government spending does not create jobs, and yet now I 
see us relying almost exclusively on the argument that reducing 
this spending will cost us jobs. We cannot have it both ways, 
and in fact, by doing this I feel we open ourselves up to 
claims of hypocrisy. The sequester cuts will harm the military. 
There is no question about it. It will harm our ability to 
defend our nation. And I continue to think that that is the 
focus that we should be taking and we should focus instead not 
on the job losses that come from the sequester. I think it is 
easy to make the argument; hard to prove the argument. I think 
instead it should be focusing on where else we could save the 
money instead so that we can move the money from wasteful 
programs into actually defending the nation.
    With that I thank you and I yield back the balance of my 
time.
    Mr. West. The chairman yields back. And I would like to 
dovetail off what my good colleague said because I do not 
support, you know, looking at the DoD as a job creation 
program. But when I go to the Constitution and I look at 
Article 1, Section 8, and a lot of the tasks that are listed 
for us as members of Congress, to define and punish piracies 
and felonies committed on the high seas and offenses against 
the law of nations; to declare war, grant letters of Marque, 
rules concerning captures on land and water; to raise and 
support armies but no appropriation of money, to that use shall 
be for a longer term than two years; to provide and maintain a 
Navy; to make rules for the government and regulation of the 
land and naval forces; to provide for the calling forth of the 
militia; to execute the laws of the Union, suppress 
insurrections, and repel invasions; to provide for organizing, 
arming, and disciplining the militia.
    So I think that the thing that we have to understand is 
that the men and women in uniform are not the ones out there 
building the ships. They are not the ones out there building 
the planes. I often tell people the great story of the USS 
Yorktown during World War II and how it was severely damaged 
during the Battle of the Coral Sea, to the point where the 
battle damage assessment was six months. When it got back into 
port at Pearl Harbor, Admiral Nimitz said we do not have six 
months. The USS Yorktown steamed out of Pearl Harbor in less 
than two weeks. Those were not sailors that did the repairs on 
the USS Yorktown. That was a defense industrial base that made 
that happen.
    Now, what is the point of the story? The USS Yorktown 
joined up with the rest of the Pacific Fleet at a place called 
Midway. And if you understand your history, you understand 
exactly what happened in turning the tide in the Pacific at 
Midway. So I am not an advocate for looking at defense as a job 
creation program but I know this. Having spent 22 years in the 
military, all of a sudden we are about to tell our men and 
women out there that they may not get the support that they 
need because we are about to gut out an industrial base that 
supports them and I think that is the stance that we should 
take and I think that is the stance that everyone can agree 
upon.
    My last question. In DoD's written testimony they said that 
when the pool of available contracting dollars is diminished as 
it would be under sequestration, their ability to partner with 
small businesses is likewise diminished. I know that NDIA and 
NSBA both sent the Committee letters of support for our 
contracting reforms earlier this year, but I think this 
statement makes the need to raise the small business goal more 
important than ever. As we talk about sequestration for the 
panel, do you think we should still be focused on these 
contracting reforms?
    Ms. Mackey. I think it is really important that we enable 
the DoD to behave in a way that maintains our small business 
base. So I would say those contracting reforms are important 
well beyond the goal setting, but the very practical approach 
to how to manage contracting and how to make sure there is more 
transparency to keep the playing field level.
    Ms. Moncrieff. I also agree that we need to uphold the 
contracting goals and hold the DoD to the same federal 
contracting goals of other agencies. And just as an example, I 
had a recent discussion with a very large multinational global 
that went through--an industrial base that went through an 
incredibly bad time five years ago. And their kneejerk reaction 
was to cut out a lot of small business and depend on larger 
companies. They have now gone back and analyzed the impact of 
that and they are now wanting to reverse that trend and reach 
back now five years later to do more contracting with small 
business because what they figured out in doing less small 
business contracting is that in the end it is costing them 
much, much more money. So, yes, I think it is very important.
    Mr. Gross. I further that sentiment. I believe that DoD 
should be held to the same standard everybody else is as far as 
the subcontracting goals for small business or contracting 
goals for small business. I think that we are all prepared for 
budget cuts, all of us. It has to happen. We understand that. I 
do believe taking a more surgical look at redundancies, non-
mission critical agency, non-mission critical programs, that 
sort of thing is the way to do that. I am not a big proponent 
of cutting SBA. It is the only advocacy agency we have out 
there and so I would think that any cuts at SBA are really 
going to hurt small business.
    Mr. West. Thank you, and I yield to Ranking Member 
Velazquez.
    Ms. Velazquez. Thank you. And following what you just said, 
that you believe that cuts, $75 million to an agency that has 
suffered so much in the past in terms of budget cuts will be 
detrimental to the same small business contractors that are 
sitting here. So if we do not want for DoD--if we do not 
support DoD's defense cuts because of sequestration, and we do 
not want to cut SBA because it is the watchdog that will make 
sure that DoD will achieve those contracting goals, it means 
that we cannot have it both ways. So there are some of us who 
are proposing a balanced approach and that will call for 
domestic spending cuts but also the revenue side. Otherwise, we 
are going to defeat the purpose. We will not touch DoD. But on 
the other hand we are going to impact, negatively impact the 
very same small business contractors that we are trying to 
protect.
    Thank you, Mr. Chairman. I yield back.
    Mr. West. Thank you, Ranking Member. I think we also need 
to realize that we already put $487 billion of cuts on the DoD 
over the next 10 years, and this $500 billion is in addition to 
that. So you are looking at 19.6 percept of our budget getting 
about 55 percent of budget cuts.
    Thank you all for participating today. While I support 
strong cuts to curb America's severe spending habit, 
sequestration is not the proper remedy. Today's testimony 
highlighting the need for the administration to work with 
Congress to ensure that small businesses, our nation's 
innovators and job creators, are not unduly burdened under 
sequestration.
    I ask unanimous consent that members have 10 business days 
to submit statements and supporting materials for the record. 
Without objection, so ordered. This hearing is now adjourned.
    [Whereupon, at 3:10 p.m., the Committee was adjourned.]

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