Analysis: Sequestration postponed? What does that mean?

Wednesday - 1/2/2013, 12:20pm EST

Brian Friel, federal business analyst, Bloomberg Government

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A bill to delay sequestration and extend tax cuts heads to President Obama's desk today, after a down-to-the-wire vote in the House last night.

Brian Friel, a federal business intelligence analyst with Bloomberg Government, told The Federal Drive with Tom Temin and Emily Kopp today that the new legislation both delayed sequestration and reduced its potential effect.

"We were looking at $109 billion in potential sequestration prior to the passage of this bill," he said. "Now we're looking at $85 billion as the ceiling, because Congress took $24 billion of the original $109 billion and shifted it. So, $12 billion of that cut has now been taken care of through a change in the tax code. The other $12 billion is being dealt with by changes in the budget caps for 2013 and 2014, so kind of pushing out the potential effect of the cuts so that they can be dealt with later. It's basically a 22 percent reduction in the potential threat of sequestration, which will potentially take place in March unless Congress and the White House can agree on further reducing the potential impact of it."

Currently, the government is operating under a 2012 countinuing resolution, which runs out in March.

"The way they structured those cuts is they reduced what they called the discretionary spending caps for non-security and security spending both for 2013 and 2014," Friel said. "So, $8 billion of that $12 billion has been shifted out into 2014 in the form of lower overall caps for that year." That leaves only $4 billion in potential cuts for 2013, split 50-50 between defense and non-defense spending.

New Congress must resolve sequestration

Friel said those cuts would occur in an after-session sequestration, which the new law says will occur on March 27, the day the CR expires.

Brian Friel

"Essentially, that $4 billion would have to come through a second sort of follow-on sequestration order from the administration," he said. "One thing to keep in mind is that $2 billion on the non-defense side, the reduction in the cap, still leaves the overall cap higher than what the current spending level is for non-defense. Essentially, that's something of a phantom cut. It can be made without actually affecting any programs."

If Congress had done nothing and sequestration kicked in, the budget would have gone up in 2013 and 2014. The new cuts, however, flat-line the overall budget by eliminating an expected increase over the next two years.

It will be up to the new Congress, which will be sworn in on Thursday, to figure out how to deal with the remaining 85 percent of sequestration.

"Congress will have to deal with this by March 1 or [the Office of Management and Budget] will have to issue the sequestration order that everyone was expecting to happen today," Friel said. "That basically gives us two months."

What the government was facing before for defense was an overall 9.4 percent cut in fiscal 2013 and for non-defense was an 8.2 percent cut. "We did sort of an initial calculation," Friel said. With $24 billion taken off of sequestration, now we're looking at, if sequestration starts to take place in March, 7.3 percent cut for fiscal 2013 on the defense side and probably in the 6.5 percent range for non-defense."

Debt ceiling faces March deadline too

Complicating matter is the debt ceiling issue will have to be resolved early in March as well. "All this sequestration fight might be wrapped into the debt ceiling increase," Friel said.

Even though the government reached the debt ceiling limit on Christmas Eve, Treasury Secretary Timothy Geithner told Congress he could avoid breaching of the debt ceiling by moving money around through accounting procedures.

"It's things like that that really bothers federal employees every year," Friel said. "They take money allocated in the G Fund, which is sort of the super-safe fund for the Thrift Savings Plan for federal employees, and kind of jostle that around. They always restore that money once an agreement is reached to raise the debt limit, but it certainly causes angst for federal employees while that's happening."

With a final resolution about the sequester delayed until March, many contractors may be left wondering how to weather the uncertainty of the next two months.

Friel likened the current situation to what happened in 2011 when Congress failed to pass a full-year appropriation until mid-April.

"Contractors can think back to two years ago and how they dealt with the uncertainty then and apply the lessons they learned then to now," he said.

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