Spending deal leaves future unclear

The Jan. 1 agreement to postpone sequestration and avert steep tax hikes may have bought lawmakers more time for budget-cut bargaining, but it does not clarify the current U.S. fiscal situation.

With President Barack Obama agreeing to sign the legislation passed by the House late Jan. 1, federal agencies receive a two-month reprieve from the roughly 10 percent across-the-board spending cuts mandated by last year’s Budget Control Act. To pay for postponing sequestration, $12 billion will be generated by new tax revenue and $12 billion in cuts will be split evenly between defense and civilian federal spending, according to a White House fact sheet.

While the agreement does forestall $1.2 trillion in federal budget cuts that had been set to take effect on Jan. 2, it also keeps the government – and the community that relies on its business – in a continued holding pattern. That paralysis is familiar by now, but the stakes are climbing as the weeks tick by with no permanent agreement, insiders say.

“Nothing has been done to address the uncertainty in the government marketplace and in the U.S. economy more broadly. We still don’t know what’s coming; [lawmakers] simply have postponed what is coming,” said Trey Hodgkins, TechAmerica senior vice president of the global public sector. “There are no better views into the issues ... The degree of uncertainty has not been diminished at all. They have only expanded the window of uncertainty.”

Under the current continuing resolution, government agencies are allowed to spend only funds obligated at the same level as the previous fiscal year, which makes future budget planning tricky for agency leaders. That becomes more complicated by trying to plan for sequestration, which cuts unobligated funds for fiscal 2013, which is already entering its second quarter.

“We’re already seeing behavior to conserve because of the cuts to come. The bigger challenge is when you put sequestration and a continuing resolution together,” Hodgkins said. “The CR prevents agencies from taking steps to protect dollars, and sequestration is going to cut those unprotected dollars.”

Agencies still need to plan for cuts regardless, with at least $12 billion in immediate reductions to agency spending at the program, project and activity levels.

“The two-month delay, even with reduced spending, doesn’t add consistency or predictability for federal agencies or contractors to do any planning or real preparation. It may actually make things worse, because with any sequestration that might go into effect,” said Alan Chvotkin, executive director and counsel and the Professional Services Council. “Savings would have to be achieved over a six-month period of time rather than nine months. That means fewer opportunities, more drastic action and a shorter time to achieve deeper results.”

In virtually all sequestration discussions, the Pentagon faces cuts that Defense Secretary Leon Panetta has called a “meat-axe approach.” In the temporary deal, half of the $12 billion in spending reductions still will come from the defense budget. However, according to the Stimson Center’s Gordon Adams, former associate director at Office for Management and Budget, it’s not only the Pentagon that will face cuts labeled as defense.

Defense cuts in actuality will be made to security spending, which includes a number of agencies other than DOD, including the Energy, Homeland and State departments, as well as USAID and community management staff, Adams said.

“It’s still the same legislation, same sequestration, and the same [questions of] what is the definition of PPA and what kind of flexibilities does the Pentagon have?” Adams said. He added that for contractors, service contracts – particularly indefinite delivery/indefinite quantity – could see significant reductions, and civil servants also face considerable possibilities for furlough.

Panetta, in Jan. 2 comments regarding the stopgap deal, said his department "is doing its part to help the country address its deficit problem by working to implement $487 billion in spending reductions in accordance with our new defense strategy."

"The specter of sequestration has cast a shadow over our efforts," Panetta said. "We need to have stability in our future budgets. We need to have the resources to effectively execute our strategy, defend the nation, and meet our commitments to troops and their families after more than a decade of war."

But Adams said he still believes DOD is well equipped for oncoming cuts.

“There is no other federal agency that does as much buying, besides [the General Services Administration] and NASA. They know how to set up programs to have reserves,” he said. “When you dig in to the nitty-gritty, DOD, relatively speaking, is in pretty good position for sequestration.”

Nonetheless, in Washington few are celebrating the Jan. 1 agreement. The deadline for a new sequestration deal, March 1, falls within a precarious timetable: not long after the fiscal 2014 federal budget, due Feb. 1 but widely expected to be delayed, and only weeks before the March 27 expiration of fiscal 2013’s continuing resolution. While the three could combine into a real crisis, they each may also have a hand in a final agreement, some believe.

“Some of these issues for sequestration are a question of where do we get funding and savings, and that could get wrapped up in the president’s fiscal 2014 budget submission. My guess the president will identify some spending reductions as part of [2014] budget proposal,” Chvotkin said.

Others, however, are not so optimistic that a complete deal will ultimately come together – or that, if it does not, it will devastate government operations.

“It’s the same old old sideshow. This is debt ceiling: the sequel,” Adams said. “The bottom line is, the follies continue ... but this is not a doomsday.”