A SPECIAL REPORT: SEQUESTRATION AND THE FEDERAL BUDGET

March 7, 2013

National Association of Regional Councils

About the ReportIn a continuing effort to provide information and resources to its membership, the National Association of Regional Councils (NARC) put together this special report on critical areas of, and issues within, the federal budget. This document provides a brief historical perspective of “how we got here” and offers resources for a future path for regional planning in the federal budget.

According to the Congressional Budget Office (CBO), “the United States is facing significant and fundamental budgetary challenges.” Recent and ongoing activities in Washington, including the historic March 1, 2013, sequester enactment, reinforce CBO’s conclusion. The country seems to be at the precipice for economic downturn with every federal budget decision or lack thereof. There are questions to answer when piecing together the federal budget puzzle: Where are we? How did we get here? Where are we going? What should NARC members do? Let’s investigate.

Where are we?2013 started with our nation dangling from an economic “fiscal cliff” – a combination of expiring tax cuts, spending reductions via the sequester and an ongoing debt ceiling debate. We initially slowed our fall with the passage of the American Taxpayer Relief Act and through increasing the debt ceiling until May 19, 2013; however with the enactment of sequestration the nation began to fall into economic uncertainty again. Much of our current local and regional fiscal insecurity stems from the 2011 Budget Control Act, which reduces discretionary spending by nearly $1.5 trillion over the next decade (Center on Budget and Policy Priorities 2012). Sequester’s cuts on top of already reduced annual budget caps, with an ever increasing national debt, puts into focus a picture of economic stress, reduced services at all levels of government and potential increases in unemployment. Further fiscal complications arise from political deadlock that prevents movement on important legislative processes that appropriate government funding or authorize core local and regional programs.

The above graphic depicts the results from a recent Gallup public opinion poll, highlighting what Americans are saying and thinking about sequester. Source: http://www.gallup.com/poll/160760/americans-reactions-sequester-include-bad-disaster.aspx

“The cuts come at a fragile time in our nation’s economic recovery. Families will bear the brunt of the impact as job losses mount and spending pulls back. The cuts that are going into effect are blunt instruments broad sweeping, rather than being strategic and targeted to still allow for smart investments in our nation’s cities and towns. The effects of sequestration will test the resolve and creativity, and most certainly push this nation’s cities, residents, and businesses to the point of another recession.”

Mayor Marie Lopez Rogers, President, National League of Cities; Board Chair, Maricopa Association of Governments, Phoenix, Arizona; and Board Member, National Association of Regional Councils

“Congress and the Administration did not act in time to stop the mandatory cuts under the sequester. NARC will continue work to assess the fiscal impacts to our members as well as work with the Administration on any possible way to lessen the impact of these cuts or minimize them if possible. I hope that in the coming weeks Congress will act to repeal the sequester and employ common sense strategies and serious negotiations that give us fiscal certainty.”

NARC President David F. Shafer, Clerk-Treasurer, Town of Munster, Indiana; Board Member, Northwestern Indiana Regional Planning Commission, Portage, Indiana

A Special Report: Sequestration and the Federal Budget: National Association of Regional Councils

How did we get here?The federal budget process – a complex system that takes into account fiscal policy choices and national priorities – turned into continued series of delays. Each year Congress and the White House undergo a budget exercise that hasn’t been successfully completed since 1994. Here’s what the process should look like:

1. President submits budget request to Congress (1st Monday of every February).

2. Congress creates, reconciles and passes a budget resolution, which establishes the funding priorities and parameters, including limits on the appropriations process.

3. The appropriations committees and subcommittees establish, reconcile and pass the levels of discretionary funding for each program and policy area within the federal government’s purview.

4. The appropriations bills are reconciled and approved by Congress and then the President to become law before the October 1st start of the new fiscal year.

Here’s what it has really looked like since 1994: 1. Delay2. Delay3. Delay4. Continuing Resolutions/Omnibus efforts

The two opposing pictures of what’s supposed to happen and what actually happened begins to illustrate part of the problem for how we got into the fiscal trouble that Washington is trying to correct through budget cuts and other measures.

So how did we get to the point where we were sitting on a mountain of debt and saw only cutting discretionary programs as a solution? The nation got here through almost a decade of continued and high levels of spending with reduced revenue. In 2011, the government took in $2.3 trillion in revenue, but spent $3.6 trillion. Almost every year since 1969, Congress spent more money than it collected (CBO 2011). This historical cycle of spending more than we make in revenue coupled with various policy decisions started the deep deficit and ultimately the debt conundrum. Our national debt is currently at over $16.6 trillion.

In 2001 there was a tax cut of $2.8 trillion. From 2001 to 2011 discretionary spending increased by $3 trillion; the largest share of this was defense spending for Iraq and Afghanistan, and homeland security upgrades. $1.4 billion from the Medicare prescription-drug program, the Trouble Asset Relief Program (TARP) bank bailout and the stimulus package added billions more to the debt. The housing bubble and subsequent collapse also took a toll on the revenue side of the equation (CBO 2011). During this same time period, spending for core local government and regional discretionary programs, like housing, water, aging, workforce training, etc., declined or held even. Discretionary spending is “everything else” in the federal budget not related to mandatory entitlement programs like Social Security or payments of interest on the debt.

Source: http://politicalcalculations.blogspot.com/2012/06/president-obamas-unsustainable-fiscal.html#.UTjeLhz5p8E

The above graphic illustrates how the annual budget process should work. Source: http://nationalpriorities.org/media/uploads/federal_budget_101/Figure4.3color.jpg

A Special Report: Sequestration and the Federal Budget: National Association of Regional Councils

This is critical for NARC members to understand; click HERE or visit http://narc.org/wp-content/uploads/aureport2012.pdf to access a NARC - American University joint report, which details some of these funding gaps.

The 2011 Budget Control Act, the current sequestration’s birthplace, will cut discretionary spending in fiscal year 2013 by $85 billion split evenly between defense and non-defense programs. These across-the-board and “indiscriminate” cuts are expected to reduce funding from nine to 13 percent in real terms over the next seven months (White House Office of Management and Budget 2013). A bigger threat to national fiscal sustainability is not discretionary spending (31 percent of the federal budget), but mandatory spending (62 percent of the federal budget), i.e. Social Security, Medicare, and Medicaid. Their expected growth will continue to disproportionately affect federal spending.

Where are things going?While Congress and the President are likely to ink an agreement for the FY13 continuing resolution (CR) to fund the government through September 30, 2013, problems still remain –

• Implementing sequester (in 2013 and beyond);

• FY13 and FY14 appropriations;• Increasing the debt ceiling; and,• Conducting authorizations

Implementing sequester – This is history repeating itself. Back in 1985, the Gramm-Rudman-Hollings Act was instituted to get the deficit and debt under control. It didn’t work. It amounted to accounting tricks and budgetary shifts. Sequester was never to be the primary tool to address deficit and debt issues. In fact, sequester was never supposed to happen at all, and now sets a new level for federal spending – at (roughly) $100 billion less per year until 2021. Congress may use these new lower budget reduction numbers as a base to enact further cuts. According to former Hill staffer and federal budget expert Scott Lilly, “[t]he sequester won’t reduce the deficit by anything close to the $85 billion that’s being advertised. What’s more, it may not reduce the deficit at all” (Center for American Progress 2013). It is not the “Grand Bargain” President Barack Obama and Congress hoped for. While the sequester accelerates deficit reduction in the short term, it does so by slashing programs across the board. Several initiatives are underway to repeal sequester. Click HERE or go to http://narc.org/?p=3273 to access NARC’s sequestration page for more information.

Enacting FY13 and FY14 appropriations – Congress is considering a FY13 CR extension through the remainder of the fiscal year. It doesn’t address sequester in its entirety, but provides flexibility in reallocation of funding in defense programs. Click HERE or go to www.narc.org/government-affairs/federal-budget for more information. The FY14 process has been delayed due to the other fiscal issues mentioned. It is unlikely, building off past precedent, that Congress will complete the appropriations process on time - the nation will continue operating under a CR. This creates an environment of uncertainty when planning for and implementing projects. CRs also typically fund programs at prior fiscal year levels; there are generally no program increases or fixes for inflation or cost of living. An important thing to note about the FY14 appropriations efforts is that appropriators will be determining sequestration’s cuts for 2014. It is critical that NARC members are directly involved to highlight vital program funding.

Increasing the debt ceiling – The debt ceiling must be raised in May. As its name would suggest, the debt limit is simply the maximum amount that the U.S. government can borrow at any given time. The debt limit does not

Source: http://www.marktaw.com/culture_and_media/politics/USA_debt_2009.html

Source: http://www.fixthedebt.org/blog/a-timeline-of-impending-fiscal-speed-bumps#.UTjfphz5p8E

authorize new spending; instead, it provides the funding to pay for spending commitments that Congress already made. The debt ceiling may again be an issue like it was in 2011 if Republicans and Democrats cannot strike a deal balancing debt-limit increases and spending cuts (About.com).

Conducting authorizations – Congress also failed to reauthorize significant national programs like the Economic Development Administration (last authorized in 2003); the Older Americans Act (last authorized in 2006); and, the Workforce Investment Act (last authorized in 1998). These programs survive through appropriations, but going through an authorization is an important process to make policy changes and to define a commitment to core community and regional programs. It is unlikely that many, if any, of these programs will get authorized in the 113th Congress – NARC is committed to getting them done.

Contact:Fred Abousleman, Executive Director, at 202.986.1032 x216 or fred@NARC.org.

National Association of Regional Councils777 North Capitol Street NE, Suite 305; Washington, DC 20002

202.986.1032 phone; 202.986.1038 fax; www.NARC.org

The National Association of Regional Councils (NARC) serves as the national voice for regionalism by advocating for regional cooperation as the most effective way to address a variety of community planning and development opportunities and issues. NARC’s member organizations, including metropolitan planning organizations, are composted of multiple local governments that work together to serve American communities – large and small, urban and rural. For additional information, please visit www.NARC.org.

ACTION ITEMS: What should NARC members do?NARC has been and will continue to work on federal budget issues to ensure the voice of regions and their local governments is considered in all deliberations moving forward. Click HERE or go to www.narc.org/government-affairs/federal-budget to access NARC’s Federal Budget webpage, which includes updates on the federal budget and national debt, as well as resources for NARC members.

All is not lost. NARC members should be in regular contact with their members of Congress to discuss priority funding, providing local stories and on-the-ground examples of successful programs, specifically highlighting economic impact, job creation, return on investment, tangential impacts, etc.

Some messages to carry to Congress:• Immediately pass a fiscal year 2013 CR that provides funding for the government and its programs to

cover the remainder of the federal fiscal year (through September 31, 2013). Another short-term funding measure would provide a great deal of uncertainty and difficulty when planning and implementing critical projects at the local and regional levels.

• Repeal sequestration in its entirety. Sequestration’s automatic, across-the-board cuts are blind to maintaining and supporting programs that make our regions and communities economically viable. Additionally, several experts have indicated that significant harm to the national interest would occur unless sequester is addressed by March 31, the end of the second fiscal quarter. As history has proven, sequester will not provide the desired effects on reducing the national debt, but will inflict hardship on state and local governments and the communities they represent.

• Complete the FY14 appropriations process on-time and through the proper channels, but without sequestration.

• Authorize several outstanding core government functions and programs, such as the Economic Development Administration, the Older Americans Act, Clean Water State Revolving Fund, Drinking Water State Revolving Fund, Department of Homeland Security and Workforce Investment Act.

NARC is also: • Working with our partners to research and minimize federal regulatory impact;• Working to continue to find government efficiencies and opportunities to “cut the cost of doing business”; • Working to better align federal programs and funding to promote economic competitiveness; and• Finding new opportunites to attract public and private capital investment in our regions.

See NARC’s policy positions (go to www.narc.org/government-affairs) for specific recommendations.