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What Will Happen Jan. 2?

Experts: Date Only Marks Beginning of Spending-Cut Process

Sep. 15, 2012 - 01:14PM   |  
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Jan. 2, the date that the automatic budget cuts known as sequestration are set to take effect, has been described as a day of reckoning. It’s the day that the U.S. government falls over the “fiscal cliff.” Companies have threatened to issue notices to employees warning them of massive layoffs that would roughly coincide with the date because of its perceived devastating impact.

But what would actually happen on Jan. 2 if sequestration is not averted? According to experts: not much.

While sequestration looms as a potentially landscape-changing event for defense, the inner workings of the obscure government budget savings technique that has been dusted off from its last threatened use in the late 1980s look more like the complicated and gradual levers of bureaucracy than a guillotine.

“It’s not like the curtain falls Jan. 2,” said Gordon Adams, who oversaw national security budgets at the Office of Management and Budget (OMB) under President Bill Clinton. “Jan. 2 is not the end of this discussion.”

On the day that sequestration would begin, the president is required by law to issue an order mandating that agencies take action to reach budget savings goals. The order itself would likely lack details, except for one critical piece of information: The document would include the final percentage figure that agencies must cut, as determined by OMB, which cannot be calculated until the last minute because of the inclusion of unobligated funds left over in agency accounts in sequestration.

Aside from the order, no other action is likely to happen immediately, experts said.

With the dollar figure in hand, agencies can make their plans to carry out the cuts. While sources have said the Defense Department has been considering techniques for shielding various segments of the budget, officials continue to state that the cuts would be applied indiscriminately across the board at about 10 percent per year.

Regardless of how the cuts are applied, nothing can happen without the green light from OMB, a process that would take time, said David Berteau, director of the International Security Program at the Center for Strategic and International Studies.

“OMB has got to approve that plan before you implement it,” he said. “You don’t just submit it and then start working. At minimum, you’ve got three weeks, four weeks between the time that the OMB sends its memo out and the time you get back to them, and the time OMB tells you it’s been approved. It could be twice that, maybe two months.”

Complicating matters is that agencies have been ordered not to plan. OMB provided preliminary numbers Sept. 14, and could begin to help agencies plan ahead of Jan. 2, but no indication has been given yet that efforts are being made, nor notification of intent to make efforts.

Sources said advanced planning is being discouraged as the administration continues to seek solutions to avert the cuts. And since the final figures won’t be available until Jan. 2, it is likely that some additional planning would be needed even if discussions begin before the New Year. The more planning time that is given after the order is issued, they say, the less time they will have to find savings, meaning cuts need to be deeper.

“One would assume that that would be the tradeoff that OMB is looking at,” Berteau said. “How long do I give the agencies versus how short a period of time do I want to squeeze savings into?”

Further slowing the immediate impact of the cuts: Contractors already have orders in place for hundreds of billions of dollars of work for fiscal 2013, deals that are not cut by sequestration. The cut applies to new spending, which means that the flow of funds would slow over time, but would face little reduction at first.

“You won’t see that happen immediately on Jan. 2,” said Todd Harrison, a defense budget expert at the Center for Strategic and Budgetary Assessments. “You will see that happen gradually in the weeks that follow, it will pick up even more in the months that follow, and it will take about three or four years before you see the full 10 percent reduction in outlays due to sequestration.”

Sequester and Stopgap

Complicating the fiscal picture further is the likelihood that the government will be operating under a continuing resolution (CR), a temporary spending measure that is used as a stopgap when a new budget can’t be agreed upon.

CRs continue funding at previous levels, but do not allow new programs and contracts or “new starts.” Government has operated under protracted CRs in recent years that have muddled the contracting landscape.

The language in the Budget Control Act, the legislation that created the sequester, creates a cut from the current funding level when the cut takes effect. If the government is in a CR, which is a lower level of funding than if a new budget were passed, the new cap created would be more severe.

One holdover from the Gramm-Rudman-Hollings Act of 1985, upon which the current version of sequestration is modeled, is that Congress has 20 days following the commencement of sequestration to modify its terms. That clock starts as soon as the president’s order is issued.

“I consider that to be one of the more likely scenarios, is if they really can’t get their act together before Jan. 2, they take advantage of that corrective time to adjust the sequester,” Adams said.

While defense contractors will have a more gradual cut, the more immediate threat is to the civil service, he said.

“The industry is in hyper-overreaction here,” Adams said. “The muted reaction is in the civil service.”

With the need to cut civilian payroll accounts — the administration has said that military personnel will be exempted — and an increasingly short period of time to implement the cuts, the furloughs could be drastic.

“Whatever your government/civilian payroll share is, the longer you wait, the more furloughs are squeezed into a shorter period of time,” Berteau said.

Because of the rules for firing government employees, furloughs are the likely option, he said. “The reality of civilian payroll is you don’t actually save money in the year that you fire people, unless you fire them at the beginning of the year,” he said. “So you cannot reach your savings targets for civilian payroll through firing. You can only reach it through furloughs.”

Notification is unlikely to be sent to employees in time for the furloughs to take effect in early January. But the pressure of impending action will be yet another pressure on Congress to modify sequestration after Jan. 2 if it takes effect.

If full sequestration takes effect, all of the experts agreed there would be significant impacts, although in more muted terms than many in Congress and industry have used recently. But the process will be slower and more convoluted than is commonly recognized, they said.

“It will be more gradual than people are letting on,” Harrison said. “It will still be extremely messy. It will still be extremely inefficient. It’s a stupid way to cut funding.”

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