MEMORANDUM
TO:
Joint Budget Committee
FROM:
Amanda Bickel, JBC Staff
SUBJECT:
Potential Sequestration Impacts on the State Budget
DATE:
November 28, 2012
The federal Budget Control Act of 2011 (BCA) triggers automatic spending reductions
“sequestration” in federal fiscal year (FFY) 2012-13, because the Joint Select Committee on
Deficit Reduction (the “Super Committee”) was unable, in late 2011, to reach agreement on steps
to reduce the federal deficit. The automatic reductions in the BCA provide $1.2 trillion in
savings over the nine years between 2013 and 2021. Cuts are to be evenly distributed among
defense and non-defense discretionary spending. Various programs—including Medicaid and
some human services programs such as Supplemental Nutrition Assistance Program and
Temporary Assistance for Needy Families—are exempt from cuts.
Scale of Cuts: After accounting for savings from reduced interest payments, sequestration is
projected to drive annual program cuts of about $54.7 billion per year in defense spending and
$54.7 billion per year in non-defense spending from the previous Congressional Budget Office
(CBO) baseline projection. Preliminary estimates of the impact of sequestration issued by the
federal Office of Management and Budget (OMB) in September 2012 reflect reductions to FFY
2012-13 spending levels of:
•
•
•
•
8.2 percent for non-defense discretionary appropriations
7.6 percent for non-defense direct/mandatory spending
9.4 percent for defense function discretionary appropriations;
10.0 percent for defense function direct/mandatory spending;
Note that:
•
•
These percentage reductions are based on the entire FFY 2012-13 budget and not simply
spending that occurs from January 2013 on.
Although the estimates include percentage reductions to some direct/mandatory spending
categories, only a small portion of mandatory spending (spending authorized by Congress
that is not subject to annual appropriation) is subject to sequestration. The vast majority of
mandatory spending (e.g., Medicaid, Medicare, and Social Security) is exempt.
Types of Cuts: Over 70 percent of savings from the BCA come from discretionary appropriations
that are subject to the annual Congressional appropriations process. However, on the nondefense side, the bill authorizes cuts of up to 2.0 percent (around $11 billion in 2013) in
Medicare payment rate cuts, as well as cuts to some other “mandatory” programs that aren’t
exempted, such as the Social Services Block Grant. Defense sequestration includes reductions to
war costs, in addition to other defense expenditures.
Joint Budget Committee, 200 East 14th Ave., 3rd Floor, Denver, CO 80203
Sequestration Impacts
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November 28, 2012
Differences between FFY 2012-13 and FFY 2013-14 and Future Year Cuts: For FFY 2012-13,
the BCA would result in across-the-board percentage reductions to all programs that are not
exempted to generate the approximately $109 billion in savings. In subsequent years, this total
reduction level of approximately $109 billion would be continued. However, Congress would
have greater flexibility in allocating the reductions.
For FFY 2013-14 and subsequently, both defense and non-defense cuts would occur through
statutory reductions in the total annual discretionary appropriation caps, and Congress would
allocate the reductions among programs through its regular budget process. However, over time,
the size of the cuts required to non-defense discretionary programs would be reduced, as a
greater share of non-defense savings would be generated by the mandated 2.0 percent cut in
Medicare rates. 1 Further, over time, for both defense and non-defense cuts, the reductions would
represent a declining share of a growing federal budget.
Timing: Sequestration cuts are scheduled to be implemented January 2013 if Congress does not
take action before then to delay or modify the reductions. However, the reductions would
retroactively apply to the entire FFY 2012-13 budget which began October 1, 2012.
Estimated Colorado State Budget Impacts: In July 2012, Legislative Council Staff prepared a
memo on the projected impact of sequestration on Colorado’s state budget, based on figures
provided by the Governor’s Office of State Planning and Budgeting (OSPB). These estimates
are preliminary and incomplete. However, they provide a sense of the initial order-of-magnitude
impacts on the budget. The table below compares federal funding reflected in the state budget
for SFY 2012-13 and the preliminary estimates due to sequestration from OSPB by department.
1
Kogan, “How the Across-the-Board Cuts in the Budget Control Act Will Work”, Center on Budget and Policy
Priorities, April 2012.
Sequestration Impacts
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November 28, 2012
State Department
Agriculture
Corrections
Education
Governor
Health Care Policy and Financing
Higher Education
Human Services
Judicial Branch
Labor and Employment
Law
Legislative Branch
Local Affairs
Military and Veterans Affairs
Natural Resources
Personnel and Administration
Public Health and Environment
Public Safety
Regulatory Agencies
Revenue
Secretary of State
Transportation
Treasury
TOTAL
SFY 2012-13 Federal
Preliminary Sequestration
Funds Appropriations & Estimates for FFY 2012-13 Informational Notations
OSPB - July 2012
$
3,887,150
At least ($580,643)
1,014,328
(1,374,530)
628,704,003
(34,147,894)
6,497,635
(2,665,359)
2,770,497,472
(4,049,196)
19,113,229
At least (390,000)
616,568,241
(16,755,006)
4,425,000
(450,000)
96,976,002
(451,563)
1,576,165
No Impact
No Impact
102,623,672
(2,577,798)
214,128,024
No Impact
20,744,426
At least (1,017,643)
No Impact
246,167,561
At least (3,325,000)
53,355,759
(122,416)
1,314,203
Uncertain Impact
824,388
No Impact
No Impact
409,409,045
No Impact Reported
No Impact
$
5,197,826,303
At least ($67,907,048)
Note: JBC staff anticipates impacts to the Department of Transportation in the $10-$40 million range.
As shown in the table, OSPB’s survey of state departments indicated that total budget cuts would
likely be at least $67.9 million federal funds, representing an overall reduction of 1.3 percent to
total federal funds reflected in the budget.
•
The largest recipients of federal funds that are reflected in the state budget are the
Departments of Health Care Policy and Financing ($2.8 billion), Education ($0.6 billion),
Human Services ($0.6 billion), Transportation ($0.4 billion), Public Health ($0.2 billion) and
Military Affairs ($0.2 billion).
•
Although Health Care Policy and Financing federal funds dwarf all other departments’
federal funds, virtually all HCPF spending (Medicaid and Children’s Basic Health Plan) is
exempted from sequestration. As a result, the departments that reflect the highest level of
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November 28, 2012
impact are Education, which projects substantial cuts to various federal grant programs, and
Human Services, which projects cuts to those programs that are not exempted (many are).
•
Many departments initially projected no impact, although in some cases (e.g.,
Transportation), JBC staff anticipates that there would be a sequestration impact. Federal
authorities have been very slow to disseminate information about anticipated cuts, likely
based on the hope that Congress will negotiate an alternative.
Other Colorado Budgetary and Economic Impacts: Many sequestration impacts will not be
shown in federal funds in the Long Bill.
•
Indirect Economic Impacts: Sequestration will affect direct payments for Colorado’s many
military facilities and personnel and defense contractors, as well as federal transfers that pass
directly to local governments. The Congressional Budget Office (CBO) has projected that
without Congressional action and if all components of the “fiscal cliff” move ahead, GDP
would drop 0.5 percent between the fourth quarters of 2012 and 2013. This would obviously
have revenue implications for the State. Legislative Council Staff and economics staff from
the Governor’s Office have also indicated that if the sequester and other elements of the
“fiscal cliff” move forward, there could be significant impacts on the overall state economic
outlook.
•
State Budget Impacts Not in the Long Bill: Although federal funding estimates for many
programs are included in the Long Bill, a large share of federal funding received by the State
is not. 2 For SFY 2010-11, the State Controller’s Comprehensive Annual Financial Report
(Schedule of Revenues and Expenditures – Budgetary Basis) reflects total state spending of
federal funds of $8.9 billion, which is substantially greater than the $5.4 billion included in
FY 2010-11 budget bills. Major federal transfers to the State that are not included in the
Long Bill include unemployment insurance (UI), outlays for the Supplemental Nutrition
Assistance Program (SNAP), and various federal education and higher education grants,
among other items. Although UI and SNAP are largely exempted from sequestration,
educational grants are affected.
Sequester Delay/Alternatives: As the Committee is aware, there is widespread concern in
political and economic circles about the impact of the “fiscal cliff” anticipated in January 2013,
including both sequestration and tax increases. It seems likely that Congress will take some
action to avert automatic sequestration before January. If nothing else, such action might
temporarily delay sequestration to allow additional time to reach agreement on policy
alternatives. The National Conference of State Legislature’s October 2012 Fiscal Link noted
some of the sequestration alternatives that are under discussion, including (among others):
2
Most federal funds in the Colorado state budget are not subject to appropriation and are shown
for informational purposes only. This is due to State Supreme Court decisions interpreting the
State Constitution and differs from the situation in most other states. Because of this, state
agencies are usually able to spend federal funds whether or not they appear in the Long Bill.
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November 28, 2012
•
The President’s FFY 2013 budget proposal proposed $3 trillion in deficit savings over ten
years through a combination of revenue (allowing tax cuts for high income families to
expire) and through various entitlement program reforms in lieu of sequestration.
•
House Budget Resolution: Representative Paul Ryan (House Budget Chairman) proposed a
plan to replace sequestration with $5 trillion in cuts over 10 years, including block-granting
Medicaid to the states. This was passed by the House but not considered by the Senate.
•
Senate Budget Resolution: Senator Kent Conrad (Senate Budget Chairman) offered a plan
for $5 trillion in savings similar to the Bowles-Simpson recommendations. This did not reach
the Senate floor.
As discussed extensively in the media, Congress and the President continue to negotiate plans for
spending reductions and/or revenue increases in lieu of sequestration behind closed doors.
Considerations for the Joint Budget Committee
•
Federal funding available for the State—even for FFY 2012-13—may be murky for months
to come. If Congress adopts an alternative to sequestration, impacts on some portions of the
state budget may be greater, while on others it may be less. Although Congressional leaders
and the President have committed to swift action to avoid the fiscal cliff, any substantive
alternative to sequestration may take time for Congress to negotiate. If Congress wishes to
avoid sequestration, some short-term stop-gap action may be approved.
•
Section 24-75-1305, C.R.S., may be interpreted as restricting the JBC’s ability to approve
backfill of federal funds reduced through sequestration. The statute reads as follows:
“(1) Except as otherwise provided in subsection (3) of this section, beginning January 1,
2011, the general assembly shall not make an appropriation of moneys from the general
fund or from any other source of state moneys to fund a program, service, study, or other
function of state government that was previously funded through grant moneys and that
has not received adequate grant moneys to support the program, service, study, or other
function of state government for the applicable fiscal year.
(2) Except as otherwise provided in subsection (3) of this section, beginning January 1,
2011, a state agency that oversees any program, service, study, or other function of state
government shall not request as part of its annual budget request to the joint budget
committee that the general assembly make an appropriation from the general fund or any
other source of state moneys to fund a program, service, study, or other function of state
government that was previously funded through grant moneys and that has not received
adequate grant moneys to support the program, service, study, or other function of state
government for the applicable fiscal year.
(3) The general assembly may adopt legislation to reauthorize any program, service,
study, or other function of state government that was previously funded through grant
moneys and, if such legislation includes an appropriation from the general fund or any
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November 28, 2012
other source of state moneys and becomes law, may make an appropriation from the
general fund or from any other source of state moneys to a state agency to oversee the
program, service, study, or other function of state government."
.
•
Whether or not sequestration moves forward, the focus on federal deficit reduction will
affect federal funds available to the State in the coming years—through restricted growth
on discretionary programs, as well as any modifications to mandatory spending categories.
•
The CBO has projected that caps on discretionary spending enacted in the BCA—
entirely separate from the lower, sequestration-related caps—will slow
discretionary spending growth to about 2 percent per year, which is below inflation
and recent experience. Under these caps, the CBO estimated that, by 2021, discretionary
appropriations would be about 9 percent lower than the previous CBO baseline
projection, which assumed increases at the rate of inflation.
•
A negotiated alternative to sequestration could have larger impacts on the state
budget than sequestration per se. For example, sequestration exempts Medicaid and
the Children’s Basic Health Plan from reductions, but a negotiated agreement might not.
•
To provide additional context on the drivers and potential components of federal cuts,
web links and selected tables and charts from recent CBO publications have been
attached for reference.
Selected Resources for More Information
Congressional Budget Office – Economic Effects of Policies Contributing to Fiscal Tightening in
2013
http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf
List of Congressional Budget Office Publications Analyzing the Budget Control Act of 2011
http://www.cbo.gov/publication/43190
Office of Management and Budget Report on Sequestration Impacts by Program
http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf
Federal Budget Process
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/concepts.pdf
Center on Budget and Policy Priorities – Sequester Description
http://www.cbpp.org/cms/?fa=view&id=3635
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National Conference of State Legislatures - Summary and Links on Sequestration Alternatives
http://www.ncsl.org/issues-research/budget/sequestration-alternatives.aspx
Congressional Research Service Report on Effects of Some Proposals to Replace the Sequester
http://www.fas.org/sgp/crs/misc/R42675.pdf
Source: Congressional Budget Office, Update to the Budget and Economic Outlook: Fiscal
Years 2012 to 2022, August 2012
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Source: Congressional Budget Office, Update to the Budget and Economic Outlook: Fiscal
Years 2012 to 2022, August 2012
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November 28, 2012
Source: Congressional Budget Office, Discretionary Spending, Testimony of Douglas W.
Elmendorf, Director before the Joint Select Committee on Deficit Reduction, U.S. Congress,
October 26, 2011