Sequestration Imminent; Federal Agencies Prepare for Cuts

Amid finger-pointing and political grandstanding, President Obama and congressional leaders failed to come to an agreement to avoid $85 billion in sweeping automatic budget cuts, which kicks in on Friday.

But the cuts will not be immediate and could even be undone if an alternative to the sequester is negotiated in the next month or two, sources said.

Obama met with House Speaker John Boehner, R-Ohio, House Minority Leader Nancy Pelosi, D-Calif., Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., for just over one hour Friday morning.

In a press conference after the meeting, Obama squarely placed blame on Republicans for the “dumb, arbitrary” budget cuts, saying they insist on preserving tax loopholes for the wealthy.

“We just need Republicans in Congress to catch up to their own party and their country on this,” he said.

Boehner’s office said he and McConnell told the president they were willing to close tax loopholes, but not as a replacement for the sequester’s spending cuts, saying Republicans already agreed to raise taxes on the wealthy in the fiscal cliff agreement and that any revenue generated by closing tax loopholes should be used to lower tax rates and create jobs.

On Thursday, competing Republican and Democratic proposals to avoid the sequester were both rejected in the Senate.

In the meeting with the president, Boehner reaffirmed his intention that he would move legislation through the House next week to fund and keep the federal government operating regardless of how and when the sequester is resolved. The current continuing resolution to keep the federal government operating expires on March 27.

Obama also told reporters that he wants to avoid a government shutdown and he would sign a bill that continues the continuing resolution and sequester in order to honor previous commitments made in the Budget Control Act of 2011.

“We will get through this,” Obama said. “This is not going to be an apocalypse. It’s just dumb and it’s going to hurt the economy overall.”

“What’s important to understand is that not everyone will feel the pain of these cuts right away,” he said. “ The pain, though, will be real.”

Obama predicted that the sequester will “cause a ripple effect throughout our economy” and some 750,000 jobs could be compromised.

Treasury/IRS

Meanwhile, federal government agencies are bracing for significant employee furloughs. The Internal Revenue Service sent out an employee-wide memo on Thursday saying it would delay furloughs until after the April 15 tax season.

“If sequestration occurs, we will continue to operate under a hiring freeze, reduce funding for grants and other expenditures, and cut costs in areas such as travel, training, facilities and supplies,” IRS Acting Commissioner Steven Miller wrote. “In addition, we will need to review contract spending to ensure only the most critical and mandatory requirements are fully funded.”

The agency-wide furloughs could last through the end of the fiscal year, which ends Sept. 30, and be a total of five to seven days.

The IRS has not released information regarding Build America Bonds and other direct-pay bonds, but plan to do so soon, sources said.

Treasury Deputy Secretary Neal Wolin talked about the impact on IRS in a Feb. 7 letter to Congress, “Under sequestration, most Treasury employees would face furloughs, which would have a cascading effect on employees’ families as well as on the economy at large. “The effect would be particularly painful at the IRS, reducing the agency’s ability to provide quality services to taxpayers.”

In addition, the Office of Management and Budget sent out a four-page memo to all federal agencies on Thursday warning them of the consequences of sequestration. If the sequestration cuts are not replaced, they must be achieved over the remaining seven months of the fiscal year, the letter said.

As a result, OMB revised its estimates that the effective percentage reductions are approximately 9% for nondefense programs, including Treasury subsidy payments for BABs, and 13% for defense programs.

The OMB memo said federal agencies should ensure “that any new financial assistance obligations or funding increases under existing agreements are consistent with the need to protect the agency’s mission at the post-sequestration level.”

“In light of sequestration, agencies may also consider delaying awarding new financial assistance obligations, reducing levels of continued funding, and renegotiating or reducing the current scope of assistance,” the memo said. “Agencies may be forced to reduce the level of assistance provided through formula funds or block grants.”

SEC

Sequestration could impact some of the 2013 priorities of the Securities and Exchange Commission, which may face budget cuts of more than $65 million under sequestration, according to SEC spokesperson John Nester, citing information from OMB.

Though the SEC does not expect it will need to cut staff or furlough employees, sequestration could affect new hiring and information technology funding, he said.

That does not mean the agency will have a hiring freeze, another spokesperson clarified.

The SEC had planned to hire an additional 676 staffers next year, according to its 2013 budget request, which calls for the agency to receive annual funding of $1.566 billion, $245 million or 19% more than was appropriated last year.

The increase included an additional $14 million for the SEC’s Office of Information Technology, which planned to add 20 more positions and update tools for data and document management, information analysis and internal accounting and financial reporting, said the budget request.

John Cross, director of the SEC’s Office of Municipal Securities, doesn’t expect the sequester will affect his office, adding that he hopes to grow the office in the coming years.

“I don’t think it will have any impact on our office,” he said. There is “no indication of any change in our hiring authority as a result of sequestration.”

Cross declined to say how many staffers he hopes to add, but said discussions are ongoing about whether the office will play a more-central role in overseeing rules from the Municipal Securities Rulemaking Board. Currently, muni rules are mostly overseen by the SEC’s Division of Trading and Markets, with help from the muni office.

Transportation

Although the majority of transportation funding is protected from the sequester, airports are bracing for what many consider to be inevitable flight cancellations due to staffing cutbacks at the Federal Aviation Administration. That agency will be hit with a $600 million cut under sequestration. Major federal grant programs are shielded from the cuts.

“At ports, dredging activities by the U.S. Army Corps of Engineers could be slowed, and grants for security and other projects could also be affected, although credit quality is not likely to be weakened, Fitch said in its analysis of the sequester. “Regarding transit entities, the impact is expected to primarily be on capital projects that may be slowed as federal support declines. Fuel tax revenues that flow into the federal Highway Trust Fund to support Garvee bonds are not expected to be sequestered.”

A U.S. Department of Transportation spokesman said the cuts would be mostly related to belt tightening at various sub-agencies.

“The impacts across DOT range from hiring freezes and cutting back contracts and travel to furloughs at the FAA and possibly the Federal Transit Administration and the Surface Transportation Board,” the spokesman said.

“At the Federal Transit Administration, a 5% cut to the New Starts/Small Starts program would reduce funding for critical transit projects by approximately $100 million this year, creating unplanned borrowing and financing costs for states and local government,” the spokesman said. “The cuts would also require FTA to revise its payment schedule for New Starts/Small Starts projects, slowing the payments the federal government previously committed to making.”

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