The sequester – a series of automatic, across-the-board federal spending cuts – is expected to legally go into effect this Friday, March 1. According to current law, President Obama must issue an order to begin sequestration by 11:59 PM on March 1. Also by that time, the Office of Management and Budget (OMB) is required to detail the percentage reductions for each budgetary account to implement the sequester.

The Senate has been planning to hold side-by-side votes on competing proposals to alter the sequester from the Democrats and Republicans tomorrow, February 28, though neither proposal is expected to pass the chamber. Reports indicate that Senate Republicans have had difficulty reaching consensus on the plan they would bring to the floor for a vote, but may still rally around a proposal that would give the Obama Administration more flexibility to implement the sequester. The Senate Democrats’ plan would replace the sequester through the end of the 2013 calendar year with $110 billion in alternative savings, achieved with a combination of spending cuts and tax increases. While neither plan is expected to clear Congress, these measures may set the stage for budget negotiations next month to address the sequester and appropriate funding for federal government operations for the rest of fiscal year 2013.  It is possible that such a deal could also include provisions to alter or replace the sequester, but the outlook for this possibility is still uncertain. Reports today also indicate that President Obama has invited House Speaker John Boehner (R-OH), House Minority Leader Nancy Pelosi (D-CA), Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) to the White House this Friday for a face-to-face meeting about replacing the sequester with a long-term deficit reduction plan.

Implementing the Sequester
The sequester will cut $85 billion from the federal budget in fiscal 2013 – half from defense spending and half from non-defense spending. (The American Taxpayer Relief Act, or ATRA, delayed sequestration by two months and reduced the total cuts for the current fiscal year by $24 billion.) These cuts will need to be implemented during the remaining months of federal fiscal 2013, which ends on September 30, 2013. OMB is the federal agency responsible for executing the sequester and interpreting the exemptions and special rules. In September 2012, OMB released a report explaining which accounts are exempt and non-exempt.

According to estimates earlier this month from the Congressional Budget Office (CBO), to implement the March 1 sequester, discretionary funding will be reduced by $71 billion and mandatory funding by $14 billion for fiscal 2013. CBO estimates that non-exempt nondefense discretionary spending will need to be reduced by 5.3 percent to cut spending by $28.7 billion. Additionally, CBO estimates non-exempt defense discretionary spending will need to be reduced by 7.9 percent to achieve $42.7 billion in savings, Medicare spending subject to a 2 percent sequester will be reduced by 2.0 percent to achieve 9.9 billion in savings, and other non-exempt mandatory spending will need to be reduced by 5.8 percent to save $4.0 billion.

As mentioned above, OMB will determine the official percentage reductions required, but the agency has not yet released those figures. Also, OMB has some discretion, albeit limited, in how to apportion the spending cuts over the remaining months of fiscal 2013, but the agency has also not provided specific guidance to date on how it might use this discretion in implementing the sequester.

Impact on States
Federal Funds Information for States (FFIS) recently updated its grants database, available to FFIS subscribers, to reflect the impact of the March 1 sequester on more than 200 federal grant-in-aid programs, based on CBO’s latest estimates of the percentage reductions. Many of the largest federal grant programs to states would not be directly affected by the sequester cuts. 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 other areas – 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 could see the sequester’s indirect effects on their economies, especially those that have a large defense presence.

The Next Deadline: March 27
Lawmakers are now looking to March 27 as the next key budget deadline, when the current continuing resolution (CR) will expire. In order to prevent a government shutdown, Congress will need to reach a deal to continue funding the federal government for the remainder of fiscal 2013. As mentioned above, such a deal may also be used as a vehicle to alter or replace the sequester.

Links: OMB Sequester Report; CBO Report; FFIS Grants Database