4 things for contractors to watch on Capitol Hill now and into 2023

With a month left before funding for the federal agencies expires under a continuing resolution, David Berteau feels somewhat good about the chances of a fiscal 2023 budget deal.

But there's still a lot riding on the budget outcome even beyond its Dec. 16 deadline, the Professional Services Council president and CEO said Thursday at the Baird Government & Defense Conference. 

"I think we've got 3-1 odds, maybe more than that, that Congress will pass a FY2023 appropriations package in December for the rest of the fiscal year," said Berteau. "There's general agreement already on the defense number. There's almost nobody who's thinking about it from a national security point of view that disputes the need for more money there."

However, Berteau conceded that there are still unknowns that could roil the budget outlook and have a domino effect for federal contracting heading into what will be a divided and changing Congress.

Those unknowns, coupled with lags in defense outlays and civilian spending, could make for turbulent acquisition waters next year, possibly even forecasting a government shutdown next fall. 

Looking at the final weeks of the 117th Congress, Berteau said contractors need to keep watch on a series of tea leave to see where federal spending may go in 2023.

Civilian agency spending and the R&D tax credit

While defense budget spending is largely in agreement, the PSC president said the budget numbers for civilian agencies remain unknown, making them the key negotiation point in budget talks ahead of the December deadline.

The other thing to track in any potential budget deal is the research & development tax credit. Due to provisions in the 2017 Tax Cuts and Jobs Act, companies looking for tax deductions on R&D investments will have to amortize them over five years starting in 2022, instead of claiming them in the first year.   

There's been movement in Congress to extend the annual tax deduction, which Berteau said would be important for national security and defense.

"There's a lot of our member companies and a lot of you in this room who actually take advantage of the R&D tax credit as part of your essentially systems and process improvements that you invest in in cost-plus contracts, and you bid them based in part on that R&D tax credit," he said. "So it will even have a negative impact on IT modernization."

It's an open question whether that tax deduction is included in budget negotiations or is paired with another request, such as an extension of the child care tax credit, and whether it will be a sticking point.

Nominees and defense outlays lag

According to the Partnership for Public Service, the Biden administration has 124 nominees still being considered by the Senate. 

Berteau said that due in part to a lack of confirmed nominees in the Department of Defense, there's a shortfall on defense outlays when it comes to contract spending. 

"The same is true in the civilian agencies," he said. "The absence of Senate-confirmed political appointees has a slowing-down effect on programs across the board, across the agencies."

He added that the decline in defense contract obligations in the first two quarters of fiscal 2022 was "dramatic," reaching its lowest level since fiscal 2018, due in part to a continuing resolution that lasted into March and a lack of confirmed nominees.

Because those obligations lagged, defense outlays also were delayed. Berteau said those factors — mixed with reaction to the ongoing war in Ukraine, lengthy procurement lead times and not enough acquisition talent — have led to a slowdown in contract spending despite a robust third quarter. 

"We clearly have too few contracting officers, too little experience among them and too little risk-taking as well," he said. "That's probably the biggest cause for the delay in outlays is the delay in awards for all of those reasons: CRs, paused money and experience."

And with a short calendar in which to confirm nominees, the Senate is unlikely to clear the backlog before the 118th Congress takes office in January, meaning the nomination process will restart.

Civilian spending lows and the debt ceiling  

Likewise, Berteau said that civilian agencies have been holding back their contract spending recently, with only 4% increase in obligations between fiscal 2021 and 2022 despite budget increases of 15% over that same time.

"They didn't send the money they got," he said. "Ladies and gentlemen, there are tens of billions of dollars a year expiring unobligated in the federal civilian agencies today. That is a huge market potential for everybody in this room that does business with a non-defense agency. You just have to persuade them to get the money out the door."

And there may be no time like the present, because alongside the fiscal 2023 budget is a debt ceiling that's set to expire sometime around the end of next summer. With a divided Congress the chances of a potential government shutdown tied to debt ceiling have markedly increased.

Those elements make a December omnibus bill a desirable outcome for many, because Berteau added that if Congress doesn't reach a deal next month, a spate of continuing resolutions could follow, pushing contract obligations back further and the president's fiscal 2024 budget request from an anticipated date in February to possibly April.