Standards & Legislation

Will Sequestration Cuts Impact the HVACR Industry?

March 25, 2013
Sequestration Spending Cuts Obama Fiscal Cliff Legislation
Though the exact effects sequestration will have on the HVACR industry are not yet fully understood, industry leaders agree that Americans are rapidly losing faith in Congress’s ability to work together in order to solve its budget problems.

The ax fell on federal agencies in the form of $85 billion in across-the-board automatic spending cuts following Congress’s failure to reach a budget agreement before a March 1 deadline.

Designed to force a highly partisan Congress to agree to fiscal matters or face steep cuts, the ripple effects of the sequester may be felt by some in the HVACR industry, though many acknowledge that the degree to which the cuts are felt is yet to be determined. 

The Sequester

Sequestration has been used since the 1980s as a way to force cooperation by creating an undesirable alternative, such as indiscriminate spending cuts. It has been largely avoided in the past, most recently with the signing of the American Taxpayer Relief Act of 2012 (ATRA), which temporarily avoided the so-called fiscal cliff in January. Now, $85 billion is being cut for defense and nondefense federal agencies.

“The Joint Committee sequestration is a blunt and indiscriminate instrument, wrote Jeffrey Zients, deputy director for management of the office of management and budget, in an 83-page report sent to Congress on March 1. “It was never intended to be implemented and does not represent a responsible way for our nation to achieve deficit reduction.

“Sequestration will also undermine nondefense investments vital to economic growth, threaten the safety and security of the American people, and cause severe harm to programs that benefit the middle class, seniors, and children.”

Under sequestration, some federal employees are expected to lose their jobs while others may experience pay cuts and furloughs. Nonfederal employees could be impacted, too, as the Bipartisan Policy Center recently estimated that the sequester could reduce 2013 gross domestic product (GDP) growth by a half percentage point, costing the economy approximately one million jobs over the next two years.

But Jon Melchi, director of government affairs for Heating, Air-conditioning, and Refrigeration Distributors International (HARDI), said the spending cuts, despite all the doom-and-gloom hype, are relatively superficial and not nearly as damaging to the average American as the tax increases put in place by the “fiscal cliff” deal in January.

“We’re talking about 2 cents of every dollar the government spends being sequestered. We are talking about, for a lot of agencies, rolling back to where their budgets used to be a few years ago,” Melchi said. “They project increases every single year, so when they talk sequestration cuts, they’re referencing cutting pennies from their own budget projections.”

The real issue, Melchi stressed, is the fact that Americans are now bringing home less in their paychecks than they have in two decades, due to the taxes imposed by the ATRA. In addition to paying higher taxes, many small-business owners are already paying more in healthcare costs for their employees, and those costs could continue to rise.

“We’re feeling the results of the ‘fiscal cliff’ deal more clearly than we are sequestration,” Melchi said. “That does have an impact on the industry, and it makes that repair versus replace decision much more difficult for the customer.”

Potential Impact

Those in the HVACR industry most likely to be directly impacted by sequestration are those who work closely with government agencies, like the Department of Energy (DOE).

Outgoing Energy Secretary Dr. Steven Chu detailed the impact sequestration will have on the DOE’s operations in a Feb. 1 letter to Sen. Barbara Mikulski, D-Md., chairwoman of the Senate Committee on Appropriations — including the effect it will have on weatherization and home-efficiency upgrade programs nationwide.

“Funding reductions under sequestration will reduce by more than a thousand the number of homes that would be weatherized in fiscal year 2013 and could result in the unemployment of 1,200 skilled weatherization professionals,” wrote Chu, in a four-page letter. “Reductions of the magnitude associated with sequestration likely would also threaten the ongoing viability of some state programs delivering these home-efficiency upgrades, closing the associated training centers, with a concurrent loss of professional retrofit certification capability.”

But Larry Zarker, CEO of the Building Performance Institute (BPI), said the cutbacks will not significantly affect the HVAC industry. “I think it’s fair to say that low-income weatherization will be affected, but that’s not the majority of the work done by contractors,” he said.

Zarker agreed, however, that those who work in areas with high concentrations of government employees could be affected noticeably by sequestration cutbacks. “If you’re in the Washington, D.C., area, where they’re furloughing tens of thousands of workers and slashing incomes by up to 20 percent, you would expect homeowners in that category to be more reluctant to spend money on the HVAC systems in their homes,” he said.

In his letter, Chu asserted that sequestration would hinder the country’s ability to compete in the solar-energy market. “A reduction in funding would slow down the significant advances made in making solar energy cost-competitive with conventional forms of electricity generation, as well as cut funding for solar-industry job training that is targeted at military veterans and provided to 261 community colleges,” Chu wrote.

However, sequestration will not impact tax credits currently utilized in the HVACR industry, like the $150 million 48C tax credit for clean-energy manufacturers and the $500 25C residential energy-efficiency tax credit will also remain in place. “Those credits are not subject to the whims of sequestration,” Melchi confirmed.

While Melchi agreed a small percentage of contractors could be affected by sequestration, he said the spending cuts aren’t the end of the world — not by a long shot. “There will be anecdotal evidence of people impacted by this, but it’s just not likely that these initial cuts, especially those occurring in the first year of the sequester, are going to alter America and life as we know it,” he said.

Ann Kahn, owner of Dallas-based Kahn Mechanical Contractors, said she is not overly concerned about how sequestration will affect her business, though she acknowledges it may have a small impact.

“My business could be affected if any cuts trickle down to public sector construction, holding up funds to works in progress, but we’ll not see much of a problem for our employees as we have enough work to keep them busy,” Kahn said, though she added, “I cannot speak for the effect it could have on employees’ families if they work in areas that will experience cuts.”

Outside of sequestration, Kahn acknowledged that she and her employees are already feeling the effect of higher taxes. “It seems those on the lower end of the totem pole bear the most burden in times like these,” she said.

“Washington already inflicted the pain at the first of the year, when they raised taxes and every single worker in America had less take-home pay,” Melchi said. “That’s what the people here don’t realize, and that’s what has impacted the economy — not the 2 cents on the dollar.”

Fed Up

In the end, only time will tell exactly how sequestration will influence the HVACR industry and the U.S. as a whole. In the meantime, Congress’s inability to effectively work together is proving to be frustrating for many Americans.

“If Congress would stop using a sports mentality of win, win, win, maybe they could see past the goal posts and recognize what their attitude is doing to the country,” wrote Patrick Murphy, director of training for testing at RSES, on The NEWS’ LinkedIn group page. “Some programs being developed, and others previously developed, were ill conceived and that is where the cuts should come from.”

Murphy suggested shifting some of the responsibility for researching and developing new products and programs to the private sector, which he said would “increase the economy, increase the tax base, and cut federal spending.”

Richard Harshaw, president of Lodestar Consulting Systems, Cave Creek, Ariz., agreed with Murphy that Congress, with a few exceptions, “doesn’t care what it does to the country because they are governed by their own laws, pension plans, health care, etc. If a business tried to survive this way, it would not.”

“I think everyone agrees that getting the federal budget under control has to be a top priority for Congress and the White House, even if it involves political pain,” said Guido Zucconi, director of congressional affairs for the Air-Conditioning, Heating & Refrigeration Institute (AHRI). “The immediate problem is that political gamesmanship has paralyzed Congress’s regular work. We are all in a holding pattern awaiting the Department of Energy budget, trying to start serious talks on tax reform. Even if the sequester is here to stay, which seems likely, we are all waiting for the next fiscal crises; avoiding a government shutdown and then raising the debt ceiling. I think we are reaching crisis fatigue.”

Melchi said the majority of Americans really are sick of the whole thing.

“Businesses want to know what they’re dealing with, and this uncertainty — even if sequestration doesn’t really impact distributors and the industry, there’s still a general consensus that the government doesn’t know what’s going on,” Melchi said. “That’s a scary thing.”

Publication date: 3/25/2013 

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