Outlook for Sequestration

January 31, 2013

With the sequester date set for March 1st, there is still some uncertainty as to what further actions – if any – Congress will take regarding the process of sequestration. At this time, most DC insiders are assuming that Congress will allow the automatic budget cuts to take effect March 1. A number of recent media reports indicate that Congressional leaders think the sequester is likely to occur as scheduled under current law and could remain in effect at least until a funding agreement is reached for the current fiscal year (the federal fiscal year runs until September 30th 2013). Funding for federal operations is currently being authorized through a continuing resolution (CR), which is scheduled to expire on March 27, 2013. In the weeks ahead, Congress therefore has two key budget issues to address: 1) Whether to postpone or replace the planned March 1 sequester; 2) How to fund the government for the remainder of fiscal 2013.

While Congress will decide whether to allow sequestration to go into effect on March 1, it should also be noted that the federal Office of Management and Budget (OMB) has some discretion, albeit limited, in how to apportion the spending cuts if they are triggered. However, OMB has not provided specific guidance to date on how it might use this discretion in implementing the sequester.

NASBO will hold a members-only conference call on February 20th at 3:00 pm Eastern to provide an update on the outlook for sequestration at that time and a forum for discussion between states about how they are planning internally for the possible sequester.

Here are some key points regarding the sequester and its impact on states:

  • The American Taxpayer Relief Act (ATRA), also known as “The Fiscal Cliff Bill,” passed by Congress on January 2, postponed the automatic spending cuts until March 1, 2013. The cuts were originally scheduled to take effect on January 2.
  • Congress offset the cost of the sequester delay by achieving $24 billion in savings – half from lowering overall defense and non-defense discretionary spending caps for fiscal 2013 and fiscal 2014 (without specifying where agency spending will be cut) and half from revenue raised by voluntary transfer of traditional IRAs to Roth IRAs.
  • By delaying the sequester by two months and paying for this delay, the federal government effectively reduced the amount of across-the-board cuts scheduled to take place in federal fiscal 2013. Under ATRA, the total amount of sequester cuts for fiscal 2013 was reduced from $109 billion to $85 billion. Also, the cuts would now be implemented by OMB over a shorter period of time – the seven months remaining in fiscal 2013 (March 1, 2013 – September 30, 2013). The Center on Budget and Policy Priorities (CBPP) recently released updated estimates of the percentage cuts in federal funding for programs subject to the sequester on March 1, compared to the estimates for the January 2 sequestration scheduled under prior law.
  • OMB is the federal agency responsible for executing the sequester and interpreting the exemptions and special rules. OMB released a report in September 2012 that explains which accounts are exempt and which are not. More recently, on January 14, OMB issued a memo to federal executive branch agencies regarding planning for sequestration. While this guidance from OMB directs agencies to intensify their planning efforts for potential sequestration, the memo also advises agencies to generally continue normal spending and operations for the time being. As noted above, OMB may have some discretion in implementing the sequester, though it has not provided specific guidance to date on how this discretion might be used.
  • Federal Funds Information for States (FFIS) estimates states could see a $4.4 billion reduction in federal funds for fiscal 2013 if the March 1 sequester goes into effect. FFIS also notes that roughly 82 percent of the funding states receive via federal grants would be exempt from sequester, particularly since Medicaid is exempt. Full report is available to FFIS subscribers with state-by-state estimates of spending reductions.
  • Many of the largest federal grant programs to states would not feel the pain of sequestration. For example, Medicaid, the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF) are all exempt from the sequester. However, funds would be cut for numerous grant programs to states in areas like education – for example, Title I Grants to Local Education Agencies, special education grants, Head Start, and Community Development Block Grants are all subject to the sequester.
  • In addition to direct federal funding cuts, states that rely especially on defense spending could possibly see an impact on their economies if sequestration is not averted. Defense Secretary Leon Panetta reported that if Congress extends the CR through the fiscal year, rather than passing a full appropriations bill for fiscal 2013, and allows the sequester to take place, this could result in a 19-20 percent reduction in the Department of Defense (DoD) base operating budget. On January 10, DoD directed agency officials to begin cutting administrative, overhead and other costs in response to uncertainty over the looming sequester scheduled to be triggered on March 1.
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