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Over the next couple of days and weeks you can expect to hear a lot about sequestration.  Much like the “fiscal cliff” dominated news coverage at the end of last year - sequestration coverage will likely be ubiquitous on cable news outlets.  Given how high profile – and important – this issue is, we thought that a primer on sequestration might be helpful to you and your business.

What is sequestration?

Sequestration is the across the board budget cuts that are the product of the Budget Control Act of 2011.  Sequestration, which was insisted on by Jack Lew and the Obama administration as part of the Budget Control Act, was intended to be so draconian and so mindless that it would force the bipartisan, bicameral “super committee” to come to a deal on a deficit and debt reduction package.  Unfortunately, the super committee was unable to reach a deal and now we are facing the looming reality and uncertainty of the sequester.

How much will be cut?

In September, the Office of Management and Budget estimated that if the cuts occurred as projected in January, discretionary defense spending would be cut by 9.4 percent in FY2013, mandatory defense spending would be cut by 10 percent, discretionary nondefense spending would be cut by 8.2 percent, mandatory nondefense spending would be cut by 7.6 percent, and Medicare and other mandatory health programs would be cut by 2 percent.  Social security and Medicaid are exempt.

When will it take effect?

Unless Congress acts the sequester will occur on March 1, 2013.

What will be the impact?

Analysts estimate that the sequester could reduce the nation’s GDP by $215 billion, decrease the personal earnings of the American workforce by $109.4 billion, and cost the U.S. 2.14 million jobs.  Indeed, it has been estimated that the U.S. unemployment rate could increase by as much as 1.5 percent above the current level if sequestration occurs.

State-by-State  

George Mason University released a study last year that details, on a state-by-state basis, the potential job losses from sequestration in the Fiscal Year 2013.  Below are selected state job loss numbers:

StateJob Losses DefenseJob Losses Non-DefenseTotal Job Loss
DC15,169112,238127,407
FL41,90537,55479,459
IL23,24530,41153,656
MD39,39575,400114,795
MI13,53117,67931,210
OH21,28019,12340,403
TX98,97960,494159,473
VA136,19171,380207,571

The losses to the states will not be limited to just jobs.  Below is the impact of the sequester in Fiscal Year 2013 on selected states’ Gross State Product (GSP) – the state equivalent of GDP - in billions of dollars: 

StateGSP Losses DefenseGSP Losses

Non-Defense

Total GSP Loss
DC$1.31 $11.50 $12.81
FL$3.63 $4.37 $7.99
IL$2.02 $3.38 $5.40
MD$3.41 $8.13 $11.55
MI$1.17 $1.20 $3.14
OH$1.85 $2.22 $4.06
TX$8.58 $7.46 $16.04
VA$11.80 $9.07 $20.88

Key non-defense programs

According to Pew, a number of key non-defense programs will face significant cuts as a result of sequestration, including:

$1.3 billion in cuts to basic education (including Title 1)

$1 billion in cuts to special education

$2.5 billion in cuts to the National Institutes of Health

$285 million in cuts to Low Income Home Energy Assistance Program 

$187 million in cuts to child care and development

$136 million in cuts to social services block grants

$543 million in cuts to Special Nutrition Program for Women, Infants and Children (WIC)

Defense cuts

The defense industry will bear a disproportionate share of the mandatory sequestration cuts.  The House Armed Services Committee has described the impact of sequestration on the defense budget as “catastrophic.” According to a memo from the House Armed Services Committee, sequestration would result in the smallest US military since before World War II and “devastate” the defense industrial base. The sequestration cuts to defense, on top of existing defense budget cuts, would result in over $1 trillion being cut from the defense budget over the next 10 years.

What is being done to avoid it?

Sadly, little is really being done to avoid sequestration at this point.  Republicans point to several bills passed by the GOP-controlled House last year that would have avoided or replaced sequestration (none of these bills ever saw the light of day in the Democratic-controlled Senate).  For their part, Democratic leaders in the Senate have proposed a one-year delay of sequestration that is paid for – in part – by implementing the so-called “Buffet rule” that would raise taxes on anyone making more than $1 million.  This proposal was declared “dead on arrival” by Republicans in both chambers. President Obama, while expressing a desire to avoid the sequestration, has so far proposed little in the way of actual details on how to make this happen. Realistically, with only four legislative days left before March 1st, it is very likely that the sequester will occur.

What is being done to mitigate it?

A number of members - in both parties and in both chambers – are pushing for legislation that would give agencies greater flexibility to implement the cuts required by sequestration.  Such flexibility could give agency heads the ability to shift the cuts within their agency.

For more information, please feel to reach out to McDonald Hopkins Government Strategies regarding sequestration and how it may impact you and what you can do about it.

Steven C. LaTourette, President  |  202.737.8933

McDonald Hopkins Government Strategies LLC

101 Constitution Avenue NW, Suite 600 East, Washington, D.C.  20001

www.mcdonaldhopkinsgs.com

IMPORTANT NOTICE:

Although McDonald Hopkins Government Strategies LLC is owned by the law firm McDonald Hopkins LLC, McDonald Hopkins Government Strategies is not a law firm and does not provide legal services. Accordingly, the retention of McDonald Hopkins Government Strategies does not create a client-lawyer relationship and the protections of the client-lawyer relationship, such as attorney-client privilege and the ethics rules pertaining to conduct by lawyers, do not apply.

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