Sequestration: How a Spending Stalemate Would Affect the States

"A self-inflicted wound" to a struggling economy. "Ham-handed cuts" nobody thought would actually happen. "The big, dumb spending cuts that no one wants." Those are just three descriptions given to the looming federal budget reductions that are scheduled to take effect Jan. 2, 2013, unless Congress stops them.
by | September 25, 2012

For full coverage of the fiscal cliff's impact on states and localities, click here.

"A self-inflicted wound" to a struggling economy. "Ham-handed cuts" nobody thought would actually happen. "The big, dumb spending cuts that no one wants."

Those are just three descriptions given to the looming federal budget reductions that are scheduled to take effect Jan. 2, 2013, unless Congress stops them. If they are enacted, more than $1.2 trillion would be cut from federal spending in the next 10 years, including nearly $110 billion next year alone. The specter has produced jitters around the country. Heightening anxiety is the broader, so-called "fiscal cliff," a term that adds in the tax cuts also set to expire at the end of this year.

And there's reason to fear. The Congressional Budget Office has said going over the fiscal cliff would plunge the country back into recession in the first half of 2013. Unemployment would climb back over 9 percent, and economic growth wouldn't return for two years.

"Basically, this is a nightmare," Jared Bernstein, a former economic adviser to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities, said at a recent briefing. "This economy really doesn't need another self-inflicted wound, and that's what this would be."

But for state and local governments in particular, the budget cuts would have acute and tangible ramifications. The reductions, known as the "sequester," would be made across the board to a broad swath of federal spending. The cuts could not only ravage economies, but also force states to backfill funding and scale back countless safety net programs.

Under the sequester, as laid out in the resolution to the 2011 debt ceiling crisis, the cuts would be divided between defense and non-defense discretionary spending. In the next fiscal year, for example, defense-related discretionary spending would be cut $54.6 billion, or 10 percent. Non-defense would be cut $38 billion, or 7.8 percent.

Big-ticket state-federal items such as Medicaid are exempt. Social Security and the bulk of Medicare spending are as well, although Medicare providers are facing a 2 percent, or $11 billion, cut.

But holding those programs harmless means the cuts will fall on about a third of the federal budget, and much of the federal bureaucracy. The Federal Aviation Administration, which supports the operation of airports large and small, would be cut, along with Congress' own budget. Almost every federal agency, from the Small Business Administration to the Army Corps of Engineers and NASA, would face reductions. Even the IRS' fund for paying informants would be cut by $10 million.

Spending cuts wouldn't differentiate between programs on the basis of necessity or effectiveness; reductions would be imposed broadly and equally. As the White House put it in a recent Office of Management and Budget report: "Sequestration is a blunt and indiscriminate instrument. It is not the responsible way for our nation to achieve deficit reduction."

Of all the myriad reductions threatening states, there's one that seems to have generated the most public concern: cuts to education.

States are set to receive more than $15.7 billion in basic elementary and secondary education dollars from the federal government, which includes Title I funding for the disadvantaged. Under sequestration, that would be cut nearly $1.3 billion. The $12.6 billion in federal money for special education would also be reduced more than $1 billion.

While those reductions are about the same 8 percent as the rest of the cuts, they comprise a large portion of the cuts states would have to bear under sequestration. What's more, in many states education spending is dictated by state constitutions or court decisions, which could force legislatures to backfill the reductions.

"Those are big dollars," says Chris Whatley, director of the Council of State Governments' Washington office. "You can't just make easy shifts in education funding."

And in states with a heavy concentration of military installations, the pain could be worse. Military personnel spending is exempt from the cuts, but activities such as equipment maintenance, construction, procurement and research and development are not. That means tens of thousands of civilian Department of Defense and private-sector jobs could be at risk, along with tens of billions in economic activity associated with that spending. Many defense contractors are already preparing pink slips for employees.

States would also be hit by more than $2.5 billion in cuts destined for the National Institutes of Health. Those reductions, which would affect grants that go to pharmaceutical companies and higher education institutions, could cost some states hundreds of millions in research and development dollars next year alone.

But perhaps the most varied effect of the cuts will be felt by the millions of people around the country who rely on federal grants to support social services and safety net programs. If those reductions are enacted, experts say, states would have to decide whether or not to replace them. Some would likely scale back or eliminate programs rather than fill in the gaps themselves.

The federal block grant for energy assistance, which states use to help low-income households pay heating and cooling bills, would be cut even though funding for it has dwindled in recent years. Nearly $550 million would be cut from special food assistance for women, infants and children, known as WIC. And federal funds that support various local housing, health and child care services would be cut as well.

Finally, the economic impact of the cuts would be felt with great force in management ranks at federal agencies. Much of the federal agency reduction would come at the expense of staffing, and federal employees would likely face layoffs and furloughs.

That would include many of the employees who would have to manage the sequestration process itself. Their jobs would be at risk, along with the services they provide. "Personnel is such a huge percentage of the cost," says Marcia Howard, executive director of Federal Funds Information for States.

For all the consternation over the looming cuts, they are still avoidable. Congress could approve an equivalent $1.2 trillion in spending reductions to stop the sequester, or simply delay it outright. The expiring tax cuts could be extended by Congress as well.

But so far, the political will has been lacking, even as most agree the fiscal cliff is an avoidable catastrophe. Lately, the conversation has been more about who's to blame for the policy: Both Republicans and Democrats malign the rigid deficit-reducing rules, but have been hesitant to dismiss the ends, as the budget remains a top concern on the campaign trail.

Still, some suspect a post-election deal will be worked out during Congress' lame-duck session. Others say the fiscal cliff is more like a slope, and Congress could retroactively stop most of the cuts and tax hikes sometime next year, even if January comes and goes.

But with time slipping away, and control of both the White House and Congress up for grabs, there's a growing sense of pessimism in Washington. Many say that even if Congress ultimately blunts the impact of the fiscal cliff, it's increasingly likely the U.S. will at least temporarily careen off of it in early 2013.

That's left a situation where states are preparing for the worst while hoping for the best. As time passes, the concern is palpable. As Whatley of the Council of State Governments sums it up, "All of these things are going to hurt."

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