Reporting by David M. Katz, David McCann and Alissa Ponchione
Despite an eleventh-hour deal in the U.S. Senate that would temporarily reopen shuttered government offices and let the country avert a debt default, finance chiefs say their businesses have already been hurt by Washington’s wrangling over the country’s finances.
The Congressional compromise proposed Wednesday would reopen the federal government until January 15, 2014, and raise the debt ceiling until February 7, but CFOs weren’t pleased. “It’s a short-term solution,” says Paul A. Farr, CFO of PPL, the $12 billion gas and electric utility. “We’re moving from crisis to crisis, kicking the can down the road.”
Says Bob Fetterman, vice president of finance at Oneida Indian Nation Enterprises: “It would be great if Congress could understand the impact they’re having on the real economy, real jobs and real money in people’s pockets. This isn’t just a game.”
Clearly, the chance of another disruption to federal government operations exists. The current shutdown has already put businesses on edge. For example, Dayton T. Brown (DTB), a defense contractor based in Bohemia, N.Y., narrowly missed a cash-flow disruption, says CFO Stephen Marini.
DTB gets a majority of its revenue performing subcontract work — engineering and component-testing services. It experienced payment delays during the summer because of sequestration-prompted furloughs at Defense Finance and Accounting Services, which provides payment services to the U.S. Department of Defense. That cleared up in September, but then the shutdown shelved 85 percent of the workers at the Defense Contract Management Agency (DCMA), which audits contractors’ performance. Contractors — including Sikorsky Aircraft, a United Technologies company that makes the Black Hawk helicopters and is DTB’s biggest customer — in turn made plans for their own furloughs.
That would have caused more late payments and a work slowdown for DTB, but fortunately the government decided to bring back many of the furloughed DCMA workers, and the company has mostly escaped ill effects at this point.
Meanwhile, the impact on consumer businesses may be greater. Fetterman says Oneida Nation Enterprises has seen an unusual falloff in consumer spending at its various businesses, which include a casino, convenience stores, marinas and a car repair shop. Consumers are less willing to spend discretionary money, Fetterman says, because they are worried about their jobs or their Social Security checks. That affects his company’s staffing levels.
“We’d have to cut back [employee] hours if this continues,” he says. “If it happens regularly, we’ll have to get more nimble about paring back our staffing [when] demand drops.”
Company investment could also be impacted, Fetterman says. The continuing uncertainty makes near- and long-term planning for Oneida Nation Enterprises difficult. “We have an expansion planned in the next 12 months that I’m nervous about. If [the shutdown] pushes the economy into a recession, a slowdown has an impact on all of us. Certainly we would have to look [again] at what we’re doing before we fully commit.”
Late Wednesday Standard & Poor’s estimated that to date the federal government shutdown has “shaved at least 0.6% off annualized fourth-quarter 2013 gross domestic product growth, or taken $24 billion out of the economy.” S&P lowered its fourth-quarter growth forecast for the U.S. economy to “closer to 2 percent” from 3 percent.
S&P said that the temporary agreement over the budget would give politicians only a short turnaround “to negotiate a lasting deal.” That will weigh on consumer confidence, said S&P. “If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks. That points to another Humbug holiday season.”
The capital markets have been jarred by the debt-ceiling fight. PPL’s Farr, like Fetterman, is trying to finance investment but debt market volatility created by the potential default on U.S. Treasuries and another showdown over the debt ceiling could raise the cost of the capital. “Construction programs inside the utilities are for good high-paying jobs, mainly domestically manufactured equipment,” Farr told CFO. “We’re [expanding] the local property-tax base through that construction activity, and we’re improving customer service and reliability. It just gets tougher to do when this type of volatility hits the market.”
The subsidiaries of PPL are all investment-grade enterprises, “but any noise is bad,” says Farr. “The interest coupons that we’ll have to pay will get reflected in customer rates.”
But access to capital for small and midsize businesses is the real economic problem, says Farr. “When we look at consumption patterns for electricity, that’s where we see the problems in the economy: it’s in the commercial enterprises, the strip malls and the smaller office buildings where economic activity has not rebounded,” he says. “We can see it in the usage data in Kentucky, Pennsylvania, South Wales and Central England — we see it all over, that’s the challenge: to really get capital flowing across all the enterprise sizes.”
Although Congress does need to work on the federal budget and get things like entitlement spending “risk adjusted at a lower level,” CFO Farr says he would like to see Congress move past the budget battles and address corporate and individual tax reform, to “get to the things that really will drive incentives to make investment.”