Will new budget negotiations unravel the sequestration riddle?

For the first time since the government shutdown ended two weeks ago, lawmakers are sitting down at the table to negotiate over the fiscal 2014 budget.

A bipartisan House-Senate budget conference committee met Wednesday to begin discussing how to avert a second year of automatic, across-the-board spending reductions from going into effect.

Democrats and Republicans have remained at odds over how to account for the sequester cuts in their respective spending plans. But even though formal budget negotiations have now commenced, experts and insiders are throwing cold water on any notion of a comprehensive budget accord, or so-called “grand bargain,” that would see the cuts repealed or replaced.

What does that mean for federal agencies, managers and employees? Sequestration is likely to stick around — at least in some form — and about the best agencies can hope for is a small-bore deal that grants them some greater flexibility in implementing the cuts, these experts said.

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“Managers have to at least recognize the possibility that the second round of automatic cuts may kick in and that they’re unlikely to be able to recover what they have lost through the first round,” said Don Kettl, dean of the University of Maryland’s School of Public Policy. “But they may have more flexibility in figuring out how to allocate it. And beyond that, who knows what deal may be made?”

Grand bargain? Forget about it

The experts are clear on one front. The possibility of a “grand bargain” on the budget, giving agencies long-term certainty over the direction of federal spending, is highly unlikely.

(Story continues below chart)

2014 Funding Levels

 
Current levels
(after sequester) 2014 – BCA caps 2014 – BCA caps
(after sequester) Defense $518 billion $552 billion $498 billion Nondefense $468 billion $506 billion $469 billion Total $986 billion $1.058 trillion $967 billion Source: Center on Budget and Policy Priorities

Budget experts and members of the committee, themselves, are downplaying any talk of a comprehensive budget deal.

“I don’t think much is going to come out of this at all,” Stan Collender, a partner with Qorvis Communications, told Federal News Radio. “No matter what happened with the shutdown and the debt ceiling almost-debacle, the basic issues about the budget continue to remain, and that is that Republicans don’t want to raise taxes and Democrats don’t want to cut entitlement programs. And that only leaves one other area of the budget to look at and that, unfortunately, is appropriations where most federal agencies and employees get dollars to spend.”

For much of the year, Democrats and Republicans have remained at odds over how to account for sequestration in fiscal 2014 and are billions of dollars apart from a compromise.

In their spending blueprint, Senate Democrats have called for replacing sequestration outright with alternative cuts and tax increases, allowing spending to remain at about $1.058 trillion. The House Republican budget lowers spending to $967 billion, the level allowed for after a second round of sequestration, although it shifts funding to Defense to spare it from further reductions.

But Collender pointed to even more fundamental disagreements about the overall purpose of the federal budget: Whether its focus should be on continuing to stimulate the stalled economy or to continue reducing the deficit.

“It’s not a question of compromising between two people on the same playing field,” he said. “It’s not even clear they’re in the same game, and that’s what the problem’s going to be.”

Sequestration here to stay?

Such chasmic disagreement makes it unlikely that Congress will be able to come up with an alternative to sequestration’s harsh budget-cutting mechanism.

“The real problem with the sequester is that everybody hates it, except everyone hates all of the alternatives even more,” Collender said.

Kettl agreed that a continuation of sequestration seems likely, albeit with some adjustments to blunt its impact.

“In some ways, the most likely outcome of this may very well be locking into place sequestration that is scheduled to occur but to give agencies more flexibility in figuring out how to manage it,” he said.

Collender agreed that that outcome is probably the “ultimate fallback” for Congress: Keep the sequester in place but make it a little less painful.

“One of the alternatives may be to … allow both domestic and defense agencies a bit more flexibility so that they can determine priorities, and some things get more money and others get less as long as the top line stays the same,” he added.

2014 spending to be capped, not cut

Sequestration has confused and confounded the budget process this year.

Over its full 10-year lifespan, sequestration is set to cut about $1.2 trillion, split evenly, from Defense and nondefense discretionary spending. Each year that translates to roughly $109 billion, according to budget estimates.

For fiscal 2013, however, as part of the “fiscal cliff deal,” Congress delayed the onset of sequestration and scaled back the size of the cuts by about $20 billion — to roughly $89 billion.

Those cuts went into effect March 1, lopping billions from the agency spending Congress had already approved — the “meat ax” approach derided by the Obama administration and some members of Congress.

But for 2014 and beyond, the Budget Control Act eschews automatic cuts in most circumstances and instead puts in place spending caps that constrain spending. Because Congress has been unable to come up with a deal that replaces the automatic sequester cuts, those reductions will be automatically incorporated into the annual budget caps.

For example, in 2014, without sequestration, the Budget Control Act would allow Congress to spend $1.058 trillion to fund federal agencies and government operations. However, when sequestration is rolled into the mix, the cap is automatically lowered to $967 billion.

So going forward, sequestration is less a meat ax than a vise, constraining federal spending within pre-set levels. Lawmakers, when doling agency funding, must stay within the caps or risk a secondary sequestration that automatically reduces spending across-the-board down to the allowable limits.

Defense vs. nondefense

Further complicating matters, however, is the fact that even with those cuts in place, nondefense spending will remain essentially flat year-to-year while Defense spending will be on the hook for a $20 billion reduction going into 2014, according to an analysis by the Center on Budget and Policy Priorities.

How is this possible?

“Part of the problem is that what was supposed to happen and what has actually happened aren’t the same,” said Sharon Parrott, vice president for budget policy and economic opportunity at the Center on Budget and Policy Priorities. The Budget Control Act is supposed to divide the cuts evenly between Defense and nondefense spending. However, last year Congress made some one-time changes to the law, which allowed it to boost Defense spending to the tune of about $20 billion.

Since Congress hasn’t made any effort to repeal or replace sequestration, the original caps revert back into place.

The outsized Defense cuts could act as a firewall of sorts, forcing Congress to do something to lessen the overall impact of sequestration, experts said.

But if that also means accepting tax increases as part of a broader deal, Republicans will likely balk, Collender said.

“If it comes down to a Democratic insistence that revenues be part of any package or sequester occurs, I think Republicans will just go along and say, ‘Look, we’d prefer that these Defense cuts not happen, but the Democrats are giving us no choice,'” Collender said. “I think it’s entirely possible that some or all of that Defense sequester occurs, even though it’s going to hurt Defense pretty badly, and everybody agrees it’s going to be a pretty substantial hit.”

Federal managers face hidden costs of uncertainty

But don’t think that nondefense is getting off scot-free. While year-over-year, Defense faces a steeper cut in 2014, domestic spending has declined over the last few years more sharply than Defense spending — 15.7 percent to 11.6 percent, according to CBPP.

“It’s just not the case that Defense has been cut more deeply than nondefense discretionary spending since 2010,” Parrott said.

Even without a year-to-year cut, sequestration in 2014 will still be painful for nondefense agencies, according to a CBPP analysis published in September.

“All of the cuts made this year will continue next year, and, in many cases, the impact of those cuts will be larger in 2014 than in 2013 … Many agencies cushioned the impact of the 2013 sequestration where possible by using one-time measures such as delaying needed purchases or repairs or relying on unused 2012 funding,” the CBPP report stated. “Many such one-time ‘fixes’ will not be available … again next year.”

The committee faces a Dec. 13 deadline to come to agreement on divvying up fiscal 2014 funding. However, the short-term spending measure that ended the 16-day government shutdown earlier this month extends funding through Jan. 15.

“There’s not only uncertainty about what’s going to happen,” Kettl said. “There’s also uncertainty about when it’s going to happen.”

That’s not welcome news for federal managers.

According to research done by Kettl’s University of Maryland colleague Philip Joyce, uncertain agency funding carries a real price tag for federal agencies, including higher contracting costs, deferred maintenance, which leads to ballooning costs down the road, and declines in federal-employee morale and retention.

“One of the enormous hidden costs going on is the enormous uncertainty that has surrounded everything, especially in the last year, and the loss of productivity in figuring out how to try to negotiate around that,” Kettl said. “It’s just really made the lives of government managers so difficult and has significantly shrunken the productivity of government programs. It’s made a mess out of the effort to try to manage things.”

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