Sequester, Fiscal Cliff Offer Great Uncertainty to Federal Agencies

After voters have their say this November, lawmakers will have to quickly negotiate a barrage of legislative decisions with enormous economic consequences for the country, said Paul Carliner, managing partner at Carliner Strategies. Between Dec. 31 and Jan. 2, the Bush tax cuts, payroll tax cuts, emergency unemployment benefits and alternative minimum tax exemption will all expire and sequestration will kick in. A month later Congress will again have to consider raising the federal debt ceiling or face another potential credit downgrade, and in March the six-month continuing resolution which is currently funding federal agencies will expire. “Any one of those issues would tie up the entire chamber for weeks, and yet they are all happening virtually at the same time,” he said.

While the presidential race continues to tighten, the congressional races are unlikely to cause a major shift in the distribution of party members in the House or Senate, Carliner said. “It does not appear that a wave is emerging for either party … the Republicans will certainly maintain a majority in the House and the Senate is 50/50 -- certainly in play but neither party has 60 votes to make the majority” needed to stop a filibuster, he said. As a result, members in the lame duck session of Congress will likely “seek the path of least resistance,” said Carliner.

Members will be forced to strike a short-term bargain to avoid the fiscal cliff on Jan. 2 and then hash out a longer-term solution to deal with sequestration and the debt limit, said Carliner. “There will have to be a delay of sequestration and a symbolic tax cut of some kind,” he said: “I don’t think anyone thinks this will be dealt with in one bill. It will be bifurcated between a short-term and a long-term solution.”

Several wild card issues could further complicate lame duck negotiations, like an economic upheaval in European markets, or a tight election with a split between the popular vote and the electoral vote. Carliner also said it’s important to keep in mind that following this election more than 60 percent of Congress will have served in office for six years or less. “So we are dealing with a group that does not have a long institutional memory for dealing with these kinds of issues,” he said. “It will be messy and difficult."

Officials at some federal agencies are already planning for life under a sequester, as they take steps now to be “prudent managers to keep their options open,” said David Taylor, managing partner at Capitol Solutions. For agency budget officers, the “prime directive is to protect the agency head count,” he said. To do that agencies will likely delay planned new starts, and halt, stretch or renegotiate all ongoing contracts that the agency does not view as mission critical, he said.

In general, agency managers are thinking about how they can reassess agency needs to figure out how to “do more with less money,” said Beth Ferrell, a partner at the McKenna Long law firm. She said agency heads will likely react by reducing what is being bought, extending schedules to match funding levels, terminating some contracts, seeking restructuring options and taking other actions to move or defer costs to the future. It’s important to remember that the because the sequester is scheduled to go into effect on Jan. 2 the projected 8.2 percent cuts to federal spending must be spread out over three fiscal quarters, rather than a full fiscal year, said Ferrell. Therefore agency officials should consider that the effective sequestration rate would be somewhere between 10 or 11 percent, she said. As a result federal contractors can expect to see an increase in contract disputes, said Ferrell, who quipped: “People fight when money is tight.”