6 State and Local Questions About Sequestration
Now that President Barack Obama said that he plans to sign the $1.2 trillion in spending cuts into law, how will states and municipalities be impacted?
The March 1 sequestration deadline has arrived and while the administration has said it will wait until late Friday to approve the law, Washington is settling in for lean times. Congress is leaving town and President Barack Obama said on Friday that he plans to sign the $1.2 trillion in spending cuts into law when it arrives on his desk. Of course, lawmakers could certainly find a compromise later in the month to avoid the cuts over the next decade.
When asked Friday why he couldn't force lawmakers into a deal, Obama replied, "I’m not a dictator, I’m the president," and if Congressional leaders "say we need to catch a plane, I can’t block the doorway."
He added that the notion "floating around Washington" that "I should somehow do a Jedi mind-meld with these folks and convince them to do what’s right" is misguided.
So what do states and municipalities need to know about the months ahead? While no one can say with certainty what sequestration will look like, that hasn’t stopped people from making their predictions:
What is the overall impact to state programs?
Let’s put it this way: States have certainly suffered through worse. About 82 percent of federal funding that's most important to states -- including Medicaid and the Children’s Health Insurance Program -- is actually exempt from the automatic cuts, according to Federal Funds Information for States.
But Governing’s Ryan Holeywell reported last week that governors are still fearful of the impact to other key programs like Head Start; the Women, Infants and Children program, which provides nutritional assistance to poor families; the Low Income Home Energy Assistance Program, which helps the poor pay for heating and cooling; programs that address substance abuse prevention; and various workforce and vocational training efforts.
In fact, states and municipalities may already be fairly well prepared to handle the effects of sequestration, thanks to cutbacks and other austerity measures they've already made in response to a weaker revenue environment. Standard & Poor's Ratings Services said in a report Thursday that sequestration “may have only minor negative credit consequences for state and local governments and their affiliated entities."
"States and many local governments have been actively monitoring developments at the federal level, and we believe they have evaluated the potential effects of sequestration in their revenue forecasts and budgets," Standard & Poor's credit analyst Gabriel Petek said Thursday in a statement.
- More information on funding cuts by program.
- Background on how federal reductions can impact state and local budgets.
How will public health programs be affected?
Public health programs are taking about an 5.9 percent loss in federal funding, according to FFIS. Governing’s Dylan Scott reported this week that means 5 million fewer families served through the Maternal and Child Health block grant (roughly 1 million in New York and Texas alone), more than half a million fewer people tested for HIV and about a quarter-million fewer children receiving vaccinations.
What about education funding?
Municipalities actually won’t feel much of the effects of sequestration until the 2013-14 school year, as funding for the current school year has already been doled out.
One exception? The $69 million in cuts this school year to the Impact Aid program, which provides federal funding to school districts near federal land (such as military bases). If sequestration holds until the fall, state and local governments face a loss of about 5.3 percent, or $2 billion, in the type of education grants they rely on, according to FFIS.
Those cuts could be brutal. According to the National Education Association, that will result in more than 40,000 layoffs for teachers and paraprofessionals: more than 14,500 from cuts to Title I funding alone, 24,400 total in elementary and secondary education and another 11,350 from cuts to special education grants.
Will the airports really be a mess?
Employee furloughs won’t kick in until April, so airline travel should not be immediately affected.
But the Federal Aviation Administration is tasked with reducing its expenditures by $600 million over the next seven months, which means 47,000 FAA employees (the vast majority) will be subject to up to two furlough days per pay period, 233 airport traffic control towers with fewer than 150,000 flight operations or 10,000 commercial operations per year will be closed and midnight shifts at 73 towers nationwide will be eliminated.
Still, some Republicans remain skeptical of the FAA’s reduced staffing plans, which the agency says could cause delays of up to 90 minutes at airports. “This is a false alarm,” Rep. Bill Shuster, who heads the House Transportation and Infrastructure Committee, told Fox News Tuesday. “There is no financial data to back this up. There’s plenty of money there. They need to sharpen their pencil.”
Is it really a fiscal cliff?
Not really. The latest catchphrase coming from lawmakers is that sequestration is more of a fiscal “slowdown” than a cliff.
It’ll take some time for any impact to be felt: Furloughs of federal workers generally won't start until April due to notification requirements; government contracts will still be funded using previously approved money although agencies will slow down the awards of new contracts.
And it should be noted that the Mar. 1 sequestration deadline is just the first of two budgetary deadlines that month. On Mar. 27, the Continuing Resolution is set to expire, meaning lawmakers must approve a budget through the remainder of the fiscal year (which ends Sept. 30) or face a government shutdown. Some observers say the CR deadline should be more feared than sequestration.
As far as economic growth goes, sequestration will cause a roughly 0.6-point drop in Gross Domestic Product this year, the equivalent of 750,000 more full-time jobs, according to the Congressional Budget Office. Tom Kozlik, municipal credit analyst for Janney Montgomery Scott, noted in a Feb. 28 report that the economy is only expected to grow 1.2 percent to 1.5 percent for 2013. “But,” Kozlik wrote, “the sequester could also support longer term growth, especially as the U.S. debt to GDP ratio is further brought under control.”
The CBO takes a similar view, noting that if the federal government relaxed on its fiscal tightening, “the resulting increase in federal borrowing would weaken the economy in the longer term unless other changes in spending or tax policy were made to offset that additional borrowing.” That trade-off is discussed in a number of CBO’s reports, including the recently issued Macroeconomic Effects of Alternative Budgetary Paths. Another CBO report, Choices for Deficit Reduction, discusses the criteria that might be used to evaluate proposed changes in fiscal policy.
Why can’t anyone agree?
That's the $1.2 trillion question. After all, the only reason the sequestation is even happening is because Congress and the president couldn't agree on an economic plan in the first place.
Kozlik noted that Bloomberg Power Broker data “illustrates why an agreement to avoid it has not been reached.” According to the data, sentiment from Congressional Republicans, Congressional Democrats, the White House and the business community all have cemented into the negative over the past week. “Lawmaker pessimism has dipped to the lowest levels of the year,” Kozlik wrote, “making for conditions not very conducive to deal-making.”
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