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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:

State Job Losses Defense Job Losses Non-Defense Total Job Loss
DC 15,169 112,238 127,407
FL 41,905 37,554 79,459
IL 23,245 30,411 53,656
MD 39,395 75,400 114,795
MI 13,531 17,679 31,210
OH 21,280 19,123 40,403
TX 98,979 60,494 159,473
VA 136,191 71,380 207,571

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:

State GSP Losses Defense GSP 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

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.

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