Unless your television has (mercifully) not functioned these past two weeks, you have heard that federal sequestration will carve $1.1 trillion out of the federal budget starting today.
The sequester is a series of automatic, across-the-board spending cuts to federal government agencies that are scheduled to take place in fiscal years 2013 through 2021. The cuts will be split evenly between defense and domestic discretionary spending.
If you believe the media, this is Day 1 of Armageddon. What’s more, it’s an Armageddon that was agreed to by our elected officials. How exactly?
Fortunately, one of my fellow Rotarians, Elaine Shanley, is a fellow political junkie–and a successful financial planner to boot. I tip my hat to her for giving a me crash course on all things sequester. She took me back to where to it all started.
For a while it was tough to determine where the idea came from. If you asked the President, he pointed at Capitol Hill. If you asked the Speaker of the House, he pointed at the White House.
Eventually, Bob Woodward of the Washington Post printed a paternity test: the sequester has White House DNA, but adoptive (and supportive) Congressional parents. With much squirming and little eye contact, the President’s press secretary reluctantly confirmed this part of Woodward’s findings–just before another presidential aide threatened the journalist with a time out in the press room.
Drama aside, why even agree to this mess in the first place?
Well, sequestration was intended as a measure of last resort, a sort of line drawn in the sand during the debt limit crisis of 2011. Step over the line and nobody would be happy with the “meat cleaver” cuts that would be hacked out of the budget. With that ultimatum, Congress would be motivated to replace the sequestration cuts with an equal amount of alternate spending reductions, only applied more judiciously.
That was the idea, at least. Unfortunately, nobody came to an agreement, so here we are wringing our hands as we worry about which programs and jobs are going on the chopping block. Another financial planning colleague of mine, Ann Alsina, has an idea:
Beyond the outrage, here are relevant numbers: From 2013 through 2021, sequestration is scheduled to cut $1.2 trillion from government agencies. More than $500 billion will be cut from the Defense Department and other national security agencies. The remaining cuts will affect a variety of domestic programs, including education, public safety, energy, national parks, food inspections, housing aid, transportation, and law enforcement.
Social Security, Medicaid, and Medicare benefits are exempt from sequestration. Although cuts to Medicare provider payments are on the table, they cannot exceed 2% of current payments.
Is this end of the world? That’s not for me to say, but it’s important to understand that the government will not be shutting down. In fact, while it’s hard to pinpoint exactly how the cuts will play out over time, most individuals are probably not going to notice a significant, immediate effect.
Also, there is something real tricky about that word “cut” when it comes to the federal budget. You see, the federal budget has automatic growth provisions included to help it keep pace with inflation. In many instances, it is the rate of growth that is getting cut while the actual budget number remains static. So when the heads of government agencies crawl out of the woodwork to declare, as Homeland Security Secretary Janet Napolitano did, that they may not be able to adequately do their jobs with the sequester in effect, we must take her words with a grain of salt; Napolitano’s agency actually has more money this year than last.
Don’t let my bluster fool you. There is true palace intrigue afoot. Federal agencies have been notifying employees of possible furloughs, and the Defense Department is doing the same with civilian employees. In addition to potential job losses, agencies have been announcing and implementing other cost-saving measures. Those cost cutting measures include slowing down the work for the government contractors that surround Washington, which is why you see Maryland and Virginia getting hit so hard in the infographic below.
The excitement is far from over. Remember, this is only Day 1 of the cuts. Fox News and MSNBC will have plenty to talk about. If you want some more of the hard numbers connected with this drama, refer to the figures in this Washington Post review or contact my friends Elaine and Ann. Either one will be happy to put you on their mailing list.
In the meantime, pass the popcorn!
Good luck and good hunting.
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The Fisher Law Office is known for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.
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