Get Ready to Hear the Word "Sequestration" Again — And This Time It'll Hit Closer to Home

Sequestration, the “fiscal cliff” designed to force a dysfunctional Congress to enact a bipartisan compromise, has arrived in force. If predictions hold, the U.S. could suffer a 0.5% drop in real gross domestic product (GDP), $75.4 billion in lost production. That’s on a national scale, where much of the debate on government spending has raged: Would entitlements be protected? What about the military? Could all of Washington be forced into shutdown?

Pressing questions, to be sure, but ultimately non-issues. A highly visible government shutdown could wreak havoc on the crucial 2014 midterm elections. Congress recognized the political threat and planned accordingly, sparing the sacred cows (primarily federal entitlement programs) for less tumultuous times. But the rest — funding for employee salaries, defense contracts, scientific research, project grants, social services, and more — were left on the chopping block.

Once America went over the fiscal cliff, the media found little related drama to drive a juicy headline. The so-called American Taxpayer Relief Act (ATRA) enacted January 2, 2013 was billed as a “grand compromise” to end the sequestration debate, and it did. But it did not end sequestration itself, merely delaying it long enough for the public and media to move on. Two months later, federal agencies were forced to begin implementation, this time without cameras or congressmen to dramatize the affair.

This is where most Americans lost track of sequestration. By April, public interest had dropped off entirely. It’s hardly surprising that no one’s paid attention, given how federal budget sequestration actually works. First, legislation like ATRA cuts the funding available to federal agencies going forward. In some (usually political) cases, Congress may outline how a specific program such as Social Security is to be treated, but the actual programmatic cuts were largely left to individual agencies’ discretion.

Those agencies have unsurprisingly attempted to mitigate the effects of sequestration as much as possible — after all, it’s their priorities taking the congressional axe. They’ve delayed wherever possible, hoping to spare projects the pain a little longer, but even that has ripple effects down the line. In Massachusetts, analysts in the public and private sectors are scrambling to chart those effects before they hit home.

What have they found? Ironically, that the single greatest threat posed by sequestration to the Massachusetts economy was its “innovation economy” itself. Anchored by education, health care, and high-tech research and development, the commonwealth relies heavily on federal grant funding to fuel its innumerable hospitals, universities, and other research centers. As federal agencies struggle to spare highly-visible (and heavily politicized) social services, state grants may appear increasingly tempting alternatives. No one will miss a genetics project here or there, right?

But the threat there extends beyond the academic. Representatives from the state’s private sector warned that they were equally reliant on federal grant funding for defense contracts, medical device production, and more. In state government, critical services could be jeopardized where federal funding provides the bulk of an agency’s budget. That’s the case for a number of government entities in Massachusetts, from the Department of Housing and Economic Development, at 55% federally funded, to the Office for Refugees and Immigrants at 95%. Six others hover between the two, including the Executive Office of Education (71%) and the Massachusetts Emergency Management Agency (78%).

Though less than 10% of the commonwealth’s annual funding comes from federal sources, the figures range well into the billions of dollars. And many agencies head into sequestration with a disproportionate handicap. A 5% cut to federal funding at the Massachusetts Department of Revenue, which normally receives just 0.02% of its budget from Washington, poses little threat. The same percentage cut at Refugees and Immigrants, however, could cost jobs and entire programs. When you factor in federal requirements that some state programs maintain a minimum funding/staffing level to authorize grants for other state programs, careless cuts could prove disastrous.

Complicating matters is the system by which federal funds arrive in state coffers. Executive agencies (U.S. Departments of State, Defense, Commerce, etc.) establish numerous grant programs, but payout is limited to reimbursement. State governments are expected to supply up-front investment, with funding to be supplied at a later date provided the state met program criteria. But the system relies on the basic assumption that Washington will at some point provide reimbursement. Should politics pull the availability of that earmarked funding, states are left to make up the difference. You do the math.

If sequestration will affect states harder than most may expect, it will hit cities and towns worst of all. Just as federal agencies have tried to spare federal programs the axe in favor of state initiatives, state officials (necessarily) put the needs of their own projects first. Many cuts may then be pushed down onto municipalities still reeling from the realities of recession. It may spare Social Security, but those benefits will be paid for in terms of teachers, roadwork, and police. Can Massachusetts afford that? Can New Jersey? Mississippi?

The outlook may be grim, but no one can say for certain until federal agencies actually order planned spending cuts into effect. Mitigation strategies can only delay so long, and some officials at the Federal Reserve worry that time is running out. Relatively strong economic performance through the end of 2012 and beginning of 2013 may have given Americans a false sense that sequestration had passed them by. That illusion will probably be shattered at the start of the next federal fiscal year this October.

Americans shouldn’t expect some eleventh hour solution, as it’s too late for Congress to provide one. Though the body came together to spare the airline industry Federal Aviation Administration (FAA) furloughs, that was a self-serving exception to a very solid rule. For most of the country, the damage has already begun. Businesses fearful of sequestration’s impact have already put off new purchases or hiring, while state agencies stand paralyzed by uncertainty.

It’s a sad state of affairs when the world’s most powerful and prosperous nation is reduced to this kind of “governing.” But as has been the case for some time, it’s likely to get worse before it gets better. Compromise remains a dirty word in politics, and the 2014 midterms will set Democrats and Republicans to war over control of Congress. Perhaps the victor in the 2016 presidential election will capture the political capital necessary to restore sanity in Washington. In the meantime, sequestration awaits. Again.