The federal contracting community has been waiting with bated breath for more details to determine the impact of sequestration on their businesses. Although the Budget Control Act (BCA) of 2011, which brought sequestration to the table, provided a (fairly) clear description of the dollar impact at the aggregate level, the impact at the program level is still unclear. The devil is in the details, so as the true implications of sequestration became more clear, and the deadline closer, Congress became more concerned with how the sequestration cuts would be implemented. To force the administration to provide those details, they passed the Sequestration Transparency Act (STA) which Obama signed on August 7. Potentially the shortest piece of legislation on record (a whopping 2 pages), the STA gave the Obama administration 30 days to report, for each account to be sequestered, estimates of the “level of sequestrable budgetary resources and resulting reductions at the program, project, and activity (PPA) level based upon the enacted level of appropriations.”
My team of analysts and I, who have analyzed the federal budget account-by-account, literally laughed out loud at the idea that the administration could pull together that amount of information within 30 days. We wondered if they could even find the people who knew the people who knew where the data was within 30 days. The report acknowledges this challenge by stating that, “Regularizing reporting across different budget accounts and agencies requires the resolution of many definitional questions, and the sheer volume of data presents administrative challenges that require additional time for OMB to address.”
OMB Report Applies BCA Percentages to Major Budget Accounts
Released a week after the September 7 deadline, the report sheds some light onto the impact of sequestration, but not much. The BCA established a uniform percentage reduction across accounts, specifically stating that “except as otherwise provided, the same percentage sequestration shall apply to all programs, projects, and activities within a budget account.”
Those percentages vary, depending on the sequestration category as seen in the chart below:
Key Areas of Sequestration and Exemption
Although the number crunching is far from over, OMB’s report does shed some light into areas that will be subject to sequestration and which areas will be exempt:
Preliminary analysis of the data shows a few trends:
· Defense hit hard, but small elements of major accounts have been shielded. The relative size of DoD budget accounts make them very large targets, but there are elements of the major accounts that are under exemption. There are several accounts in which DoD exempts nearly as much (or more) as it sequesters, such as:
- Defense-wide: Defense Health Program, Operation and Maintenance, and Research, Development, Test and Evaluation
- Navy: Operation and Maintenance
- Army: Operation and Maintenance and Procurement
- Air Force: Research, Development, Test and Evaluation
· Agencies’ working capital funds are largely protected. In most cases, all of the vast majority of working capital funds have been exempted. Some contract work is funded from these accounts.
· Fund accounts with economic implications are largely exempted. Although not completely exempt, many of the accounts that support insurance and credit programs are exempt.
· Senate and House member compensation is exempt. Although general salaries and expenses are sequestrable, compensation for Senate and House members, approximately $127 million is exempt.
· Contractors and government employees will take hits. With the exemption of military personnel compensation, employees of most agencies will likely be impacted as a large percentage of most Salaries and Expenses accounts are sequestrable. Accounts funding general operations and facilities management are largely sequestrable so contractors will be impacted.
· States (and other grant holders) will be impacted. Although some grant accounts are fully or partially exempt (such as State Medicaid Grants), others are sequestrable, such as:
- HHS Child Care and Development Block Grant
- HHS Social Services Block Grant
- HHS Affordable Insurance Exchange Grants
- HHS State Grants and Demonstrations
- HUD Homeless Assistance Grants
- DOT Capital Investment Grants
The most glaring omission from this report and previous discussions is implementation. How will agencies execute these cuts, especially when they will occur after the fiscal year has already started (and under a continuing resolution)? Sequestration is not a new concept so OMB likely has plans for implemention – they’re just not yet sharing them with us.
Clearly, most contracts are funded from defense and non-defense discretionary accounts, but the details provided do not yet allow for much insight into specific program impacts. OMB noted that additional time was needed to report on sequestrable funds at the PPA level, which is something that those contractors prepping employee pink slips would find of great interest. That data would allow for some level of mapping between sequestrable programs and contracts, and allow contractors to prepare themselves for the eventuality of sequestration or, at a minimum, mitigate the impact that the uncertainty has created.