Cities’ Message to Congress: Sequestration is Bad Policy

September 21, 2012

By Carolyn Coleman

Now that Congress has passed a continuing resolution to avoid a government shut down and adjourning until after the election, the nation's cities are bracing for sequestration, a set of across-the-board spending cuts to the federal budget set to take effect on January 2, 2013.  NLC opposes these draconian cuts and instead is calling on Congress to take action to prevent the cuts from taking effect.

"It's irresponsible, it's bad policy, and we deserve better from our federal government," said NLC President Ted Ellis, mayor, Bluffton, IN. 

According to studies, the cuts will reduce the nation's gross domestic product by $215 billion; decrease personal earning of the workforce by over $100 billion; will cost the U.S. economy 2.14 million jobs; and raise the national unemployment rate above nine percent. 

"Cities continue to face the effects of the economic downturn; however, local leaders are still paying their bills and working to create opportunities for growth in their local communities," said Ellis. "But local governments need certainty and support from their federal counterparts, not bad policy like the sequestration."

The threat of sequestration became law last August, when bipartisan majorities in the House and Senate passed and the President signed the Budget Control Act of 2011 (BCA). The law forged a framework for reducing federal spending and raising the nation's debt ceiling in order to avoid default on the federal government's loan obligations.  Specifically, the BCA called for the spending cuts to occur in two phases. The first round of cuts happened as part of the fiscal year 2012 appropriations process. To find the second round of cuts—$1.2 trillion over the next 10 years—the BCA called for the creation of a Joint Select Committee on Deficit Reduction, a bipartisan committee of 12 members selected by the respective majority and minority leadership in the House and Senate. 

Although sequestration is now a political orphan for which no one takes credit, the House passed the legislation by a vote of 269 to 161, with 174 Republicans and 95 Democrats voting for it.  The Senate passed the legislation by a vote of 74 to 26, with six Democrats and 19 Republicans voting against it. The President signed it into law on August 2, 2011. 

Under the law, the Joint Select Committee, which became known as the "Super Committee," had until November 23, 2011 to reach agreement on the additional cuts and to refer this package of cuts to Congress for consideration. Recognizing perhaps the tendency in Congress towards gridlock rather than agreement, the BCA included the threat of sequestration to take effect in January 2013 if the Super Committee failed to reach agreement on the second round of cuts. 

These across-the-board cuts would be applied equally to non-defense and defense discretionary spending over the next ten years, with both categories being cut by a total of $54.7 billion each year. Overall, sequestration would result in a 9.4 percent cut in defense discretionary spending and an 8.2 percent cut in non-defense discretionary spending.  Sequestration would also impose cuts of 2.0 percent to Medicare. Transportation programs funded by the Highway Trust Fund, Social Security, Medicaid, and civil and military employee pay are exempt from sequestration. 

The Super Committee failed to reach agreement on the cuts. After months of negotiations, last November Super Committee Co-Chairs Representative Jeb Hensarling (R-TX) and Senator Patty Murray (D-WA) announced that it was impossible for the Committee to reach agreement. 

With the across-the-board cuts now scheduled to take effect in just over three months, and Congress in recess until after the November 6 elections, the consequences of the cuts to communities and families are becoming clearer. It has also become clear that no one expected or intended the cuts to be implemented. What is not clear, however, is how Congress will avoid them.   

In a report released last week, the White House Office and Management and Budget (OMB) provided preliminary estimates of the sequestration's impact on more than 1,200 budget accounts, including programs important to cities and towns.  Here are several of those estimates:

  • The Community Development Fund, which includes the Community Development Block Grant (CDBG), would be cut by $279 million; it is currently funded at $3.4 billion.
  • The Choice Neighborhoods program would be cut by $10 million; it is currently funded at $120 million.
  • The Home Investment Partnership Program (HOME) would be cut by $82 million; this program is currently funded at $1 billion.
  • Department of Justice State and Local Law Enforcement Assistance Grants would be cut by $92 million; these grants are currently funded at $1.12 billion.
  • The Community Oriented Policing Services (COPS) Program would be cut by $13 million; this program is currently funded at $162 million.
  • Environmental Protection Agency State and Tribal Assistance Grants, which includes funding for the Clean and Safe Drinking Water State Revolving Funds, would be cut by $293 million; these grants are currently funded at $3.56 billion.
  • The Department of Labor Training and Employment Services account, which funds job training programs, would be cut by $262 million; it is currently funded at $3.192 billion.
  • The Department of Education Accelerating Achievement and Ensuring Equity Account, which includes Title I funding, would be cut by more than $1 billion; it is currently funded at $15.7 billion.
  • FEMA State and Local Programs, which include Urban Area Security Initiative grants and the State Homeland Security Grant program, would be cut by $183 million; these programs are now funded at $2.2 billion.
  • AMTRAK funding would be reduced by $38 million; it is funded currently $466 million.
  • Federal Transit Capital Investment Grants would be cut by $156 million; these grants are now funded at $1.9 billion.

According to OMB, while "the Department of Defense would be able to shift funds to ensure war fighting and critical military readiness capabilities were not degraded, sequestration would result in a reduction in readiness of many non-deployed units, delays in investments in new equipment and facilities, cutbacks in equipment repairs, declines in military research and development efforts, and reductions in base services for military families."

Sequestration would also impact the subsidy bond market. By OMB's estimates, rebate payments on subsidy bonds authorized for FY 2013 would be reduced by 7.6 percent, totaling $255 million for the $181 billion in Build America Bonds issued between April 2009 and December 2010. 

A cut now will leave issuers on the hook to make the full interest payments without having budgeted for the money. However, the effect on the ability to pay debt service is mitigated to the extent that most general obligation bond issuers budget to pay full debt service without accounting for receipt of the interest subsidies, and most revenue bond issuers did not pledge the subsidies to bondholders. Instead, they use the subsidy to offset debt service costs once the subsidy is received.  

Even if the proposed cut is not enacted, OMB giving voice to the possibility of retroactively reducing the federal subsidy will likely have a chilling effect on any future credit bond program. 

By OMB's own admission, the cuts would "be deeply destructive to national security, domestic investments, and core government functions." NLC agrees and will continue to urge Congress and the President to avoid the automatic budget cuts and adopt a non-partisan plan to reduce the deficit and balance needed reductions in spending with revenue enhancement. 

"Over the last several years, programs important to cities and towns have already been cut by over 20 percent," said Ellis. "Cities acknowledge the need to bring the federal budget into balance, but relying on blunt instruments like the across the board cuts is no substitute for governing. Members of Congress need to step up and do their jobs as legislators just as mayors and council members do at the local level all the time and not let the consequences of inaction be the rule of the day."