As of last Friday, March 1, we are now experiencing “fiscal sequestration”.  For most of us, this isn’t an intuitively obvious term.  The discussion around it isn’t intuitively obvious either. I thought I’d take a few minutes to offer some explanation of the term and why there’s so much confusion surrounding it.  (Note: my observations are based only only on my experience with the Federal budget process.  I have not worked the process at the State level.)

The Process: First, it’s important to understand that the Federal budget process is an ongoing cycle.  At any given time, we are dealing with the prior fiscal year (program evaluation), current fiscal year (program execution), and next fiscal year (program planning).  It typically takes about 18 months from the time an agency begins to build it budget to the time it is actually able to execute it.  The hoped for objective in any given year is to have the President’s Budget in-hand and ready to execute prior to the start of the new fiscal year (Oct 1).  The figure below provides a generalized illustration of the process (for the purposes of this discussion, think of “Before FY” as 2012; “Fiscal Year” as 2013; and “After FY” as 2014):

Continued Delays Breed Uncertainty: When the process is delayed, and agencies do not receive the President’s Budget in time to begin execution for the new fiscal year, Congress will typically pass temporary (stop-gap) appropriations known as a continuing resolution so that federal dollars continue to flow and programs are not forced to halt.  The current continuing resolution is set to expire on March 27.  The truth is that any interruption in the process can, and usually does, create a snowball effect – a cumulative set of impacts that give program managers less time, less money, and less flexibility to carry out programs.  For the past several years, we’ve been piling interruption on top of interruption, and now, we’ve added sequestration spending cuts on top of that.  Under these circumstances, agencies can’t actually plan.  They can only react.

The “S” Word: Sequestration is essentially a set of automatic spending cuts that will take place across the U.S. Government in order to meet the spending cap set by the budget resolution process.  Congress created the automatic cuts (totaling $1.2 trillion) in August 2011 as part of an agreement to raise the U.S. debt ceiling (currently set at $16.4 trillion).  While a few programs will be exempt from the cuts, most discretionary programs will take a hit.  The world of higher education will also be impacted.  The Department of Education anticipates cuts in funding for student financial aid, and agencies that fund research (NSF, NIH, and others) estimate a 5% reduction in funding along with continued uncertainty.  In an article recently published by the Chronicle, “Fears about sequestration have been compounded by the fact that federal research agencies still don’t know what their budgets are for the coming fiscal year.”

Cumulative Strain: The Federal Government has been operating under a series of continuing resolutions for some time (almost continuously for the past few years).  This is bad business.  As we move from one continuing resolution to another, agencies never have a chance to execute the full range of their budget and program plans.  Under a continuing resolution, agencies are given a pro-rated funding amount on a quarterly basis and they exist hand-to-mouth until budget resolution occurs.  As a result, agency program managers are forced to take a very conservative approach that is essentially zero risk and zero tolerance.  New project starts are typically shelved, existing projects are cancelled or slowed down, and a great deal of uncertainty and nervousness pervades the system.  At this point, it is unlikely that the President will have a Fiscal Year 2014 Budget ready to send forward to Congress before the end of March.

What Should we be Watching for? We’ve got a fairly sticky fiscal situation at the moment.  The finalization of the 2014 President’s Budget was delayed in part by the Fiscal Cliff tax deal that occurred on Jan 1 this year.  It is likely that additional changes to the Budget were required last Friday when the deadline passed for addressing the sequestration spending cuts.  With the current resolution set to expire on March 27 (and looming threat of a government shutdown), and very low likelihood that the 2014 Budget will be sent to Congress before that, the delays and uncertainty are certain to continue.  So, what can we expect?

• We’ll likely see another set of continuing resolutions that allow the Federal Government to limp along after March 27.  (Federal employees have been notified that they may be furloughed [laid off] in the coming months as a result of the lack of resolution on the budget, spending, and debt.  This is as tense as I’ve seen it get in the last 10 years within the Federal Government.)  
• Don’t be surprised if you see delays in announcements, reviews, award payments, and ultimately in total award amounts for Federally funded research contracts and grant programs.  The last thing that any agency wants to do is rescind or cancel funds to grantees and awardees.  (Believe me – I’ve been responsible for grant programs and large budgets that support Federally funded research).  In some cases, they don’t have a choice.  Make sure you watch websites closely for announcements and changes.
• Be vigilant and patient.  The mess will go on for some time.  It takes a lot longer to rebuild manpower and programs than it does to cut them.  Also, try to remember that the folks on the other end of research contracts, grants, and other efforts (Federal employees) are also impacted on a personal level.

Let’s all hope that reason prevails at some point and we can get things back on a predictable path.  For now, we’re relegated to the spectator seats.  Even though this seems tedious and ridiculous, it really does pay to watch and understand.