Sequestration and “The Cliff”
The word “sequestration” has definitions in the fields of Law, Chemistry, Medicine, and, of course, Politics. It is a noun, and in its simplest form, it means nothing more than segregating or separating something. Of course, in politics, it’s not that simple. The Congressional Research Service defines sequestration in this way:
“In general, sequestration entails the permanent cancellation of budgetary resources by a uniform percentage. Moreover, this uniform percentage reduction is applied to all programs, projects, and activities within a budget account.”
Translation: all federal government budgets are reduced by a set percentage, to achieve a specific, dollar amount reduction in Federal spending. At least, that’s the theory. The term “sequestration” was first used politically in 1985, in the Gramm-Ruddman-Hollings Deficit Reduction Act. It has been used several times since, most recently in the Budget Control Act of 2011. The purpose was to ensure a reduction to the country’s growing deficit.
Beginning in August, 2011, Democrats and Republicans were not able to agree on a budget; Democrats wanted to raise taxed on earnings above $250,000 and cut defense spending, while Republicans were opposed to raising taxes and wanted to cut Social Security, Medicaid and Medicare. They finally reached an agreement to raise the debt ceiling, while appointing the Bowles SimpsonSuper-Committee to come up with a solution. They also instituted the mandatory budget cuts, sequestration, in case no solution was found.
According to the Congressional Budget Office (CBO), the deficit totaled $1.1 trillion on September 30, 2012, the end of fiscal year (FY) 2012. The goal was to reduce the deficit by approximately 50% in FY 2013, by instituting across the board budget cuts of 10.71%, totaling $65B, in addition to revenue increases of approximately 19.63%, and other measures. Rates for sequestration were estimated to be between 8.5 & 10%.
The reason for uncertainty about these numbers is that the legislative language is vague as to which budgets are subject to sequester and to what extent. The 2013 fiscal year (FY) began on October 1, 2012. The reductions were not set to take effect until January 1, 2013, 3 months into the fiscal year. This means that the entire budget reduction would have to be drawn from only 9 months of operation, 75% of the FY budget. This would effectively increase the cuts to 11.3 to 13.3% during the remaining 9 months.
This higher rate would also hit some agencies harder than others. If an agency has the greatest expense in the first quarter of the fiscal year, and lower expenses through the remainder of the year, its 10% cut would be a smaller percentage of its total FY budget than for an agency whose expenses are approximately equivalent, month to month. An agency whose expenses are largest in the 2nd, 3rd and/or 4th quarter, whose expenses were nominal in the first quarter, would lose a much greater percentage of its fiscal year budget than the first examples.
Additionally, it was unclear exactly how sequestration would apply to certain budgets, particularly those involving federal contracts. For example, if the Department of Defense had planned to contract to build 10 new ships, each ship could be considered to be a separate “activity”, or budget item. If so, and if the required sequester was 10%, DoD would not be able to simply eliminate construction of one ship, meeting the 10% savings requirement; it would have to build all 10 ships, and cut each budget by 10%. This could lead to slow-downs and losses in efficiency that would actually increase the cost to build each ship, ultimately leading to a higher cost per ship than originally budgeted. Not a good outcome. Spread this scenario over $500 billion in government contracts, and the potential for a really bad outcome is enormous.
Further, some programs would not be subject to sequestration, and some would be subject to it, but to different extents.
The recent “Fiscal Cliff”, which our Congress almost pushed us over, has been delayed to March 1, 2013. If no other agreement is reached by that date, about $65 billion in spending reductions will automatically go into effect for FY 2013. Because FY 2013 ends on September 31, these reductions would be spread over only 7 months, with the same inequalities outlined above.
So the argument begun in August, 2011 rages on. Each side maintains virtually the same position, and the recommendations made by Simpson Bowles have been largely ignored. March is approaching quickly. The President was sworn in for his 2nd term today. It’s time for the kids to start playing nice, and, finally, pass a budget.