Looming federal cuts big risk to small companies

By Joyce M. Rosenberg

Associated Press

Published: Wednesday, Oct. 17 2012 8:20 a.m. MDT

In this Monday, Oct. 15, 2012, photo, Amber Peebles, left, and Melissa Schneider, co-owners of Athena Construction Group, pose for a portrait at their office in Dumfries, Va. Athena Construction Group, has been a contractor and subcontractor on federal construction projects since 2009. The company gets 85 percent of their revenue from the government doing everything from carpentry work to helping build hospitals for the Veterans Administration.

Jacquelyn Martin, File, Associated Press

NEW YORK — Laura Schoppe's small business gets about half of its revenue from contracts with the federal government. It's at risk of losing a chunk of that money when 2013 arrives.

Schoppe and thousands of other small companies with federal contracts are watching to see if Congress will stop a mandatory $109 billion in federal budget cuts scheduled to take effect Jan. 2 in what's being called sequestration. The cuts were triggered by the failure of Washington lawmakers to strike a budget deal that would begin chipping away at the U.S. deficit.

Unless Congress acts to stop the sequester, it's estimated that 9.4 percent of non-essential defense spending and 8.2 percent in non-essential spending in other parts of the federal budget will be reduced. No one knows yet where exactly the cuts might be made, but many expect they would have a devastating effect on small companies and slow an already lumbering economy. According to one study, the reductions could mean the loss of nearly 1 million small business jobs. In the meantime, small company owners are trying to find ways to soften any loss of revenue by prospecting for new business, cutting back on hiring and slashing spending.

Schoppe's company, Fuentek, helps federal laboratories license their technology innovations so they can be sold to companies for use in their own research and development. Most of the Raleigh, N.C., company's government contracts are with NASA and the Pentagon. It also works with universities.

"Our funding has a very real possibility of big cuts," Schoppe says.

She has talked with officials at NASA and met with her senator and congressional staffers to try to get a sense of how deep the cuts will be.

"The answer we're getting is, 'we're working hard not to make it happen,'" she says. "I'm sure they have plans, but they're holding it very close to the vest."

Schoppe says she believes Congress will find a way to avoid the cuts. But she's taking no chances and is looking for other business that will make her company less dependent on the government. One snag is that U.S. universities also face the possibility of big cuts in the money they get from the government. That could make them less able to develop and sell their own technologies. In the coming years, Schoppe's revenue could drop more. So she's soliciting business from overseas schools.

If she isn't able to bring in enough revenue to replace money lost to budget cuts, Schoppe says some of her staff of 30 would have to be furloughed until more business comes in.

Congress is in recess and isn't expected to debate or vote on sequestration until after the election. It's a thorny issue for small business owners because the planned cuts would coincide with tax increases scheduled to go into effect in January. The combination of steep budget cuts and higher taxes is being called the "fiscal cliff" because of warnings from some economists that it will send the country into recession. A bipartisan group of senators has been working on a plan to avert the cuts by creating a plan to reduce the federal deficit over the next 10 years — but the success of any proposal is uncertain given the sharp divisions in Congress.

The risk to small businesses and the economy could be severe. Small businesses would have to eliminate more than 956,000 jobs if all the cuts were implemented, according to researchers at George Mason University and the economic forecasting firm Chmura Economics and Analytics.

Their findings are based on what they believed would be the most vulnerable agencies. But it goes beyond the job losses likely to be suffered by companies with government contracts. It also includes businesses that benefit indirectly. For example, a company that provides cleaning or catering services to a government contractor might be one of the casualties when a contractor has to cut costs. Or a retailer that depends on a contractor's staffers for its business may have to lay off workers when sales fall.

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