sequestration in practice - brustein & manasevit, pllc
TRANSCRIPT
The 112th Congress was the least productive Congress since analysts started keeping track
112th: 220
Public laws
passed
Clinton impeachment
…and a significant portion of the laws they did manage to pass just renamed post offices.
112th Congress The 110th Congress renamed
the most post offices relative
to total bills passed
The 112th Congress There were a large number of opportunities for conflict
over fiscal issues during the 112th Congress
BUT historic gridlock and division between parties meant that consensus was extremely difficult to find
In general:
Republicans in Congress want to deeply cut federal spending, preserve lower tax rates, and preserve defense spending
Democrats in Congress want to balance the budget by raising revenues (taxes) AND cutting some spending
Result: lack of compromise; temporary “band-aids” on important fiscal issues
Example: sequestration
Where does sequestration
come from?
Budget Control Act of 2011
Set deficit reduction targets
Created Congressional debt “supercommittee”
If supercommittee failed to come up with a deficit
reduction plan meeting targets, sequestration triggered
Sequestration as failsafe/threat not really meant to go into
practice
Because supercommittee did not come up with a plan,
sequestration is triggered (unless Congress acts to
delay/repeal)
What is sequestration? Automatic, across the board budget cuts
Procedure comes from 1985 law
Applied equally to all federal programs, projects, and
activities (with some exceptions) in FY 2013
Applied as a reduction to Congressional appropriations
caps in FY 2014 and beyond
Modified by fiscal cliff deal (American Taxpayer Relief
Act)
Originally set to start on January 2, 2013; delayed start to
March 1, 2013
Also changed amount of cuts for FY 2013
How Cuts are Calculated (before the fiscal cliff deal)
Adjust total cut for interest to reflect lesser debt principal
$1.2 trillion $984 billion*
Divide by year from FY 2013 through FY 2021 $109 billion*
Split function between defense and non-defense spending (about $54.5
billion* each per year)
Take exempt programs out of the equation (see 2 U.S.C. 905 for list of
exemptions)
Including SNAP, child nutrition, Social Security, Medicaid
Spread cuts equally among remaining programs in FY 2013
Applied to FY 2013 final appropriations (including temporary funding)
In FY 2014 and beyond, cuts applied by reducing appropriations caps
OMB originally estimated cut at 8.2%. FY 2013 cut changes with fiscal
cliff deal; new estimate for FY 2014 is 7.3% on average.
* These numbers will change for FY 2013 per fiscal cliff deal
The Impact of Sequestration (before the fiscal cliff deal)
-4,113
-1,285
-218
-1,025
-154 -156 -192
-705
-$4,500
-$4,000
-$3,500
-$3,000
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0
For FY 2013, in millions of dollars, assuming current spending levels and an 8.2% cut
The Impact of Sequestration (before the fiscal cliff deal)
May 2012 report from GAO: no workarounds for federal
agencies
Antideficiency Act: agencies can’t overspend in
anticipation of cuts
Impoundment Control Act: agencies can’t hold back on
Congressionally appropriated funds in anticipation of cuts
September 2012 memo from OMB to federal agencies:
operate under business as usual (“continue normal
spending and operations”) until there is some
resolution to sequestration
…but then
The Fiscal Cliff Deal Congress passed comprehensive spending/tax
package on New Year’s Day
Extended most of the Bush-era “middle-class” tax cuts (though not payroll tax cuts)
Raised marginal income tax rates on those with incomes above $400,000 for individuals ($450,000 for couples)
Made changes to sequester
New implementation date March 1, 2013
Reduced sequestration cut to compensate
Changes to Sequestration Delayed start by two months (now March 1, 2013)
Reduced overall amount to be cut by $24 billion
Pays for reduction with:
$12 billion in new taxes to IRAs that are converted from traditional to Roth plans
$12 billion in cuts to annual spending caps
Split evenly between Defense and non-defense
$4 billion applied against FY 2013 appropriations
$8 billion applied against FY 2014 appropriations
Now approximately 5% of annual non-defense discretionary funding (actually 5.01%)
Sequestration still applies for remainder of FY 2013 and for FY 2014 through FY 2021(though procedures differ in different budget years)
Adjust total cut for interest to reflect lesser debt principal
$1.2 trillion $984 billion
Divide by year from FY 2013 through FY 2021 $109 billion
Reduce FY 2013 cuts by $24 billion, to $85 billion
Split function between defense and non-defense spending (about
$54.5 billion each per year $42.5 billion in FY 2013)
Take exempt programs out of the equation
Spread cuts equally among remaining programs in FY 2013
OMB says final cut to federal program, project, and activity level will
be 5%.
BUT individual grantees may see bigger or smaller cuts based on
changes to census data, “hold harmless” provisions, and small state
minimums
How Cuts are Calculated (after the fiscal cliff deal)
*Note: Changes from the fiscal cliff deal only affect FY 2013 sequestration procedures
-2,271
-726
-124
-579
-87 -86 -149
-408
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0 For FY 2013, in millions of dollars, assuming current spending levels and a 5% cut
The Impact of Sequestration (after the fiscal cliff deal)
Vanishing Sequestration Cuts
• Cliff deal created $24 billion in spending cuts and new
revenue to compensate for cancelling January and
February 2013 sequester cuts
• Of that $24 billion:
• half will be raised through revenues ($12 billion)
• half will be raised through spending cuts ($12 billion)
• $6 billion of spending cuts applied to non-defense
discretionary (“NDD”) funding (includes education), $6
billion to defense
• Spending cuts will be applied through reductions in
Congressional spending caps
• One-third to be applied in FY 2013 (the rest in 2014)
▫ $2 billion in NDD cuts for FY 2013
Vanishing Sequestration Cuts As a result of the fiscal cliff deal, instead of $12 billion in
NDD sequestration cuts spread over the first two months of the year, only $2 billion in cuts to congressional spending caps* for NDD programs are now spread over a full year
Cuts to caps =/= cuts to funding
These cuts are in addition to any across-the-board cuts from sequestration, but those across-the-board cuts are now much lower
Takes estimated 8.2% cuts down to 5% for FY 2013
*more on this coming up
-4,113
-1,285
-218
-1,025
-154 -156 -192
-705
-$4,500
-$4,000
-$3,500
-$3,000
-$2,500
-$2,000
-$1,500
-$1,000
-$500
$0
Vanishing Sequestration Cuts The effect of shrinking cuts from 8.2% to 5% of FY 2013 spending
Two major outside factors in determining cuts for any given program under sequestration:
1. Congressional
spending caps
2. Regular-year
appropriations
Congressional Spending Caps
Spending caps (also known as 302(b) caps) represent Congress’ own limits on how much “budget authority” the 12 appropriations Committees and Subcommittees have to spend in each account (e.g. the account for Labor, Health and Human Services, Education, and Related Agencies) when they write appropriations bills
Cuts to spending caps (as opposed to automatic budget cuts) mean appropriators have more discretion in choosing where to spend or trim
Fiscal cliff deal reductions to FY 2013 spending AND ALL sequestration cuts in spending years FY 2014 through FY 2021 are accomplished through reductions in Congressional appropriations/spending caps below current targets
$0
$100
$200
$300
$400
$500
$600
$700
FY 12
FY 13
FY 14
FY 15
FY 16
FY 17
FY 18
FY 19
FY 20
FY 21
FY 22
CBO Baseline BCA Caps Sequestration
Budget Authority in billions of dollars
Non-defense Discretionary Appropriations Caps (after fiscal cliff deal)
Source: Center for Education Funding (CEF) calculations based on An Update to the Economic and Budget Outlook: Fiscal Years
2012 to 2022, Congressional Budget Office (CBO), August 2012; Office of Management and Budget (OMB) Report Pursuant To The
Sequestration Transparency Act Of 2012, September 2012; the American Taxpayer Relief Act of 2012, January 2013
Regular-Year Appropriations Still important! All sequestration cuts represent cuts below the
“budget baseline” (current federal spending levels) for FY 2013
Can differ (up or down) from 302(b) cap amounts
FY 2013 appropriations set by two temporary budget resolutions
known as a Continuing Resolution (“CR”) provided funding for FY
2013
For the most part, these bills maintained FY 2012 funding levels with
some exceptions (e.g. Head Start received a very small funding
increase)
Second CR also triggered an automatic 0.2% across-the-board cut
FY 2013 NDD appropriations are already $3 billion below current
appropriations caps
So fiscal cliff deal cuts to caps for FY 2013 ($2 billion) will likely not
affect NDD spending in second half of FY 2013
For years after FY 2013, cuts will average 7.3% to non-Defense discretionary spending
Will vary by individual program
Congress will likely target programs like Race to the Top, implementation of health care law for more cuts
Formula programs like Title I and IDEA will likely see smaller cuts
Future cuts will be applied through reductions in 302(b) appropriations caps
More discretion to appropriators to save some programs
But harder to predict funding for individual agencies/programs
FY 2014 budget caps could face a double whammy:
Sequestration cuts AND
Cuts from fiscal cliff deal ($4 billion to NDD in FY 2014)
Sequestration in FY 2014 (and beyond?)
What Sequestration Means
for Program Funding
How ED Plans to Implement Cuts All funds allocated October 2012 and later are subject to cuts
Some programs (like Impact Aid) were affected with first allocation after implementation of sequestration
For competitive programs, ED has said that only new awards will be affected, not multi-year or continuation grants (but guidance from program offices varies)
Procedure for bifurcated funding programs*:
Advance funding received in October of 2012 will not see cuts when allocated
BUT cuts will be calculated and total FY 2013 cut applied against July 2013 allocation
After July 2013 (FY 2014 and beyond), cuts will be incorporated into annual appropriations, not individual program cuts
Other agencies will follow different procedures for implementing cuts
*Per a July 2012 memorandum, confirmed in conference calls on 2/26 and 3/6.
How ED Plans to Implement Cuts
FY 2012 Regular
Appropriations
FY 2013 Regular
Appropriations
FY 2013 Advance
Appropriations*
FY 2014 Advance
Appropriations*
Sequestration goes into effect January 2 March 1
Not subject to
sequestration Subject to sequestration
Federal FY 2013 FFY 2014 FFY 2012
SY 2012-13 SY 2013-14
Sequestration cuts start for
bifurcated funding programs
*Funding distributed in October of each year is known as “advance” appropriations
because though funds are sent out to grantees at the beginning of the fiscal year, they
are appropriated by Congress in the previous fiscal year – one year in advance.
Oct. 2012
July 2013
October 2012 (allocated without
sequestration cut)
July 2013
Sequestration Cut
In programs with bifurcated funding, grantees usually receive about 75% of program
funds in October, and the remaining 25% the following July. Though sequestration
cuts represent a reduction approximately 5% of the full year’s allocation, that entire
amount will be taken out of July 2013 funds.
Federal FY 2013 Funding Under Sequestration
Sample Sequestration Cut
Assume the (fictional) “School is Cool” (SIC) grant
program provides $100,000 per year to your State
As with most bifurcated funding programs, 75% of SIC
funds ($75,000) are distributed to States in October,
with the remaining 25% ($25,000) available in July
Under sequestration, ED* will provide the full funding
amount in October of 2012. However, it will calculate a
cut for the full fiscal year (approximately 5%, or $5,000)
and will apply that full year’s cut against July 2013
funds.
*Per a July 2012 memorandum, confirmed in conference calls on 2/26 and 3/6.
Sample Sequestration Cut – FY 2013
October 2012
(allocated without
sequestration cut)
July 2013
Sequestration
Cut
Your State received its regular SIC appropriation ($75,000) on October 1, 2012.
The full-year sequestration cut of $5,000 (5%) will be taken out of July 2013 funding
So the SIC allocation sent out on July 1, 2013 will be $20,000 ($25,000 - $5,000)
Since most States and districts use July 2013 funds for the 2013-14 school year, ED anticipates that SIC programs will not feel the impact of cuts until then.
*Per a July 2012 memorandum, confirmed in conference calls on 2/26 and 3/6.
Sample Sequestration Cut – FY 2014
October 2013
July 2014
For FY 2014 and beyond,
sequestration cuts (and cuts from
the fiscal cliff deal) are taken out of
302(b) appropriations caps
Sequestration will not be applied as a
percentage cut
Appropriators have discretion in
distributing spending/cuts
So 75% of SIC funds will be sent
out in October, and 25% in July
The only variable here is total
program funding – the size of the
pie.
The FY 2014 Double Whammy?
States and school districts generally structure their budget
cycles differently from the federal government
For federal government, FY 2013 funding = October 2012 +
July 2013 allocations
For States/districts, SY 2013-14 = July 2013 + October 2013
Assuming FY 2014 appropriations see additional cuts, SY
2013-14 funds will see a double reduction:
July 2013 funding will be cut proportionate to full FY 2013
October 2014 funding will be cut again, according to
Congressional appropriations (non-Defense discretionary
cuts to average 7.3% under sequestration, according to an
April 2013 OMB report)
NOTE: actual allocations may shift by more or less than 5%
Because of variations in census data, poverty data, and
per pupil expenditures, FY 2013 allocations under Title I
and other formula programs differ from FY 2012
In addition, a number of statutes prevent ED from
reducing funding small or shrinking districts below hold-
harmless amount even if sequestration cut would put
them below that number
Result: actual cut from 2012 to 2013 at district-level can
range from 0% to approximately 10%
The second and final FY 2013 funding bill contains a
provision that triggers automatic cuts if amounts
appropriated exceed 302(b) spending caps
• OMB says this has occurred
• Will mean 0.2% across-the-board cut in
addition to sequestration in FY 2013
• Unclear at this point how this cut will be
implemented, but likely through same
process as sequester
NOTE: Second CR Means
Additional Across-the-board Cut
Lingering Questions Will an alternative to sequestration be passed? Some proposals, but little comprehensive action
Both President’s FY 2014 budget proposal and Senate Budget Committee resolution assume repeal of sequester
Will additional programs be exempted from cuts? Federal Aviation Administration received authority in April to change
implementation of cuts (NOT an exemption)
Exempting some programs means deeper cuts to others
How will fiscal cliff deal cuts, FY 2014 cuts be applied? Cuts to appropriations caps give lawmakers more discretion (not
across-the-board percentage cuts)
How much discretion will agencies use in applying cuts to individual programs/grantees? Definition of “program, project, or activity” level varies by agency
Some agencies will furlough staff (ED said in May 2013 memo it will not)
Additional Resources: State-by-State Reports – Overall Impact (White House)
State-by-State Title I Impact (ED)
Title I Impact Largest 100 Districts (ED)
State-by-State IDEA Impact (ED)
Sequestration order: M-13-06, Issuance of the Sequestration Order Pursuant To Section 251A of the Balanced Budget and Emergency Deficit Control Act of 1985, as Amended (OMB)
OMB Report to the Congress on the Joint Committee Sequestration for Fiscal Year 2013 (March 1, 2013)
Explains how cuts are calculated
OMB Bulletin No. 12-02, Supplement 1, Apportionment of the Continuing Resolution(s) for Fiscal Year 2013 (March 1, 2013).
Details cuts to various agencies and accounts based on current appropriations