Update on the Sequester and Its Potential Impact
With nine days to go, hope of averting the March 1 sequester continues to fade, with each side drawing a line in the sand, and little reason to believe that their differences can be breached any time soon. Last week the President again went on record demanding that any agreement to delay or cancel the sequester needed to be “fair”, that it contain a mix of spending reductions and increases in revenue. Republicans held to their position that they won’t consider any further increases in revenue. In addition, last week Speaker of the House John Boehner informed Senate Majority Leader Harry Reid that any plan to avert the sequester would need to first be passed in the Senate—a crafty approach given that the Constitution requires that revenue legislation originate in the House.
Jockeying between the House and Senate
In a meeting with reporters, the Speaker refrained from ruling out any specific elements of a plan, but did state that any agreement to avoid the sequester would need to include a plan to balance the budget in ten years, consistent with House Budget Committee Chairman Paul Ryan’s new budget plan unveiled last week. You may recall the debate that was generated a year ago over what became known as “the Ryan Budget,” when opponents labeled him as a “granny killer” because of his proposed changes in Social Security and Medicare. Last year’s proposal, which included major changes in entitlement programs as well as dramatic cuts in non-defense discretionary spending, would have balanced the budget in thirty years, not in ten.
Senate Democrats have assembled a deficit reduction package that promises to cut $110 billion, divided equally between spending cuts and new revenues. Much of the spending cuts would be relatively painless, as they’d come from farm subsidies that wouldn’t likely be paid anyway, and from future defense spending. Most of the revenue would come from the so-called “Buffett Rule”, a 30 percent minimum income tax on millionaires.
Senate Republicans plan to counter the Democratic bill with their own deficit reduction plan that consists of spending cuts only, but have yet to unveil anything. If the competing plans are brought to the floor at all, it won’t be until Tuesday February 26 at the earliest, just three days before the sequester kicks in. Neither plan is likely to gain the sixty votes needed for passage.
The Pay Raise
Last Friday, in its final legislative day prior to the ten day Presidents Day recess, the House of Representatives passed by a vote of 261-154 H.R. 273, a bill to eliminate the 2013 statutory pay adjustment for federal employees. The bill was debated over the course of two days, and 43 Democrats joined 218 Republicans in the final vote. H.R. 273 would deny federal employees the 0.5 percent pay raise scheduled for April through the end of the fiscal year, overturning President Obama’s executive order.
According to the Congressional Budget Office (CBO), cancelling the pay increase would generate $11 billion in savings over ten years. While the White House went on record in opposition to the bill, it stopped short of threatening to veto the bill, although it knows full well that it’s very unlikely to come to the floor of the Senate, let alone pass in the upper chamber.
Impact of the Sequester
With little hope remaining that the March 1 sequester will be avoided, attention is now turning to how it will be managed by the departments and agencies, and what comes next. Of the $85 billion in scheduled cuts, $71 billion will come out of discretionary funding, and $14 billion will come out of entitlement programs. Within discretionary funding, defense (excluding military personnel accounts) will be cut by around 8% across the board, and nondefense funding that’s subject to the automatic reductions will be cut by between 5 percent and 6 percent.
Last week, Office of Management and Budget (OMB) Comptroller Danny Werfel informed the Senate Appropriations Committee that no furloughs would take place in March, but would potentially begin in April. Agreements with federal employee unions require that in the event of a sequester, negotiations with federal unions would begin at that time over how to administer the furloughs, and that legal requirements provide that 30 days’ notice be given to employees.
Defense and non-defense spending
Much of the attention thus far has been paid to the potential impact of the sequester on national security. Last week, members of the Joint Chiefs of Staff as well as the civilian Pentagon leadership, in testimony before the Senate Armed Services Committee, detailed the dangers that sequestration would pose to our national security. On the non-defense side, OMB’s Werfel cited the need to furlough air traffic controllers, Border Patrol Agents, Transportation Security Administration inspectors, and Food Safety Inspectors, which would temporarily shut down food manufacturing plants.
What’s Next: The Continuing Resolution (CR)
The current CR set discretionary funding for 2013 at an annual rate of $1.047 trillion, the cap established by the Budget Control Act (BCA) before the American Taxpayer Relief Act reduced it by $4 billion. That funding will expire on March 27, and if no additional appropriations are provided, nonessential functions of the government will cease operations after March 27. Under normal circumstances, and CRs are the new normal, the choice would be either extending the CR, or passing the appropriations bills either separately, or as some sort of omnibus or set of minibuses.
Under normal circumstance we’d be discussing the FY14 appropriations bills. Now, however, those are overshadowed by the BCA, the sequester, and the expiration of the debt ceiling extension. Assuming the sequester does take place on March 1, attention will quickly turn to some sort of compromise that replaces both the sequester and the expiring CR at the end of March. This will likely be an extension of the CR that funds the government for the remainder of the fiscal year, and maybe even for the remainder of the calendar year, but at a lower level of spending than contained in the CR. The larger question is whether they can agree on the elusive “grand bargain”.