NEWSWATCH

Sequestration: The National, State And Local Impact

Budget Cuts Threaten Economic Growth, Stability At Every Level

Joshua Silavent - Staff Writer

March 12, 2013 – What do you call something that few people actually want but fewer still have the willingness to undo? Sequestration.

The $1.2 trillion in cuts to defense and domestic spending over the next 10 years are now underway, with about $85 billion in budget authority lopped off over the next seven months alone, impacting nearly every federal agency and department. The cuts are indiscriminate, save for exempt programs such as veterans’ affairs, child healthcare services, Medicaid, Social Security and highway traffic safety grants. A better than 5 percent across-the-board reduction will hit everything from the Federal Aviation Administration (FAA) to workforce training programs and affordable housing assistance to public education funding.

When coupled with a previous $1.5 trillion cut in 2011, $700 billion in new revenue resulting from the fiscal cliff deal and savings on interest payments, the U.S. government is on pace to reduce its deficit by nearly $4 trillion over the next decade.

But this might not be the full cost of the cuts. In fact, federal budgets will only shrink more with each passing year.

The U.S. Commerce Department reports that the national economy shrank 0.1 percent overall in the fourth quarter of 2012 as government spending began to contract sharply. Indeed, cuts to federal defense spending reduced GDP growth by 1.28 percent, according to the U.S. Bureau of Economic Analysis. Meanwhile, businesses depleted their inventories to the tune of $40 billion, reducing GDP growth by an estimated 1.25 percent. And some forecasts peg sequestration as equivalent to a 0.5 percent loss of GDP.

Though the full weight of sequestration might not be felt for a few weeks or months, which has led to more uncertainty than perhaps anything else, the cuts are beginning to trickle down.

City Of Long Beach

Housing and urban development funding accounts for the city’s largest source – 63 percent – of federal money that is at risk from sequestration. Workforce Investment Act grants account for the next biggest pot of federal dollars. The city received about $6.1 million for adult, dislocated worker and youth services in the current program year. Funding for healthcare (immunizations, emergency preparedness, for example) services is next in line. Long Beach also could possibly lose up to $171,608 in federal reimbursements for the Build America Bonds program, which supported infrastructure projects in recent years.

But uncertainty remains about the true extent of the cuts. Long Beach received an average of $146 million in annual federal funding between the 2008 and 2011 fiscal years, not counting “stimulus” dollars received from the American Recovery and Reinvestment Act. “It would take some time for the effects of the sequester to be known,” Tom Modica, director of government affairs and strategic initiatives for the City of Long Beach, told the Business Journal in an e-mail. “Most funding from the federal government lags a year (for example, we receive our Community Development Block Grant money from last year’s congressional appropriations), so in most areas we would not expect an immediate funding impact.”

Long Beach Airport

The FAA is likely to be among the first federal agencies to feel the impacts of sequestration, and the fallout could ripple through the nation’s air travel industry.

The FAA has already begun taking steps to close about 168 air traffic control towers across the country, mostly at small regional airports that primarily serve business and private aviation. Additionally, the FAA has notified its nearly 47,000 employees to expect furloughs in the coming months.

Moreover, cuts to the FAA’s budget will almost certainly reduce federal support for maintenance projects on tarmacs and runways. The Long Beach Airport receives between $7 million and $10 million annually in federal funding to support these kinds of improvements. Long Beach Airport Director Mario Rodriguez said he has budgeted conservatively in order to deflect the shock of these potential cuts, estimating that the airport has a cash reserve equal to 320 operational days.

“The direct effects of sequestration on the operations of the Long Beach Airport appear to be manageable compared to other airports,” Rodriguez said in an e-mail. “It remains to be seen how the indirect effects will negatively impact the nation’s air transportation system. As the FAA U.S. Transportation and Security Administration (TSA) and U.S. Customs And Border Protection (CBP) begin to accommodate for the realities of sequestration, the capacity of the nation’s air transportation system may have to be reduced to a manageable level. This may translate to longer waits in TSA and CBP, and delayed flights.”

The National Business Aviation Association (NBAA) recently hosted a regional forum at AirFlite, located at the Long Beach Airport. NBAA President and CEO Ed Bolen discussed how sequestration could hurt the business travel sector, describing the spending cuts as “draconian.” “In a lot of ways, this is a manufactured, man-made crisis,” he added. “I’m taking a hopeful approach that there are ways that our federal government, and the FAA, in particular, can function if we have a new baseline that is lower than the one we have today.”

Bolen also addressed the potential for a government shutdown at the end of March if Congress does not pass a continuing resolution to fund federal agencies and departments through the remainder of the fiscal year. He said he expects President Barack Obama’s budget to propose a $100 per takeoff tax on all turbine-powered airplanes, both commercial and non-commercial. “We need to be active and we need to be engaged as this process goes along,” Bolen added.

Long Beach Unified School District (LBUSD)

The LBUSD is facing $3.5 million in cuts this year as a result of sequestration. But it’s unclear how these cuts will be applied once they come down the pipe. Moreover, the White House reports that 8,200 children across the state would lose access to early childhood education programs like Head Start, including some students in Long Beach.

“We don’t know yet exactly how the cuts would impact the district,” LBUSD spokesperson Chris Eftychiou said in an e-mail to the Business Journal. “The cuts are not yet set in stone, and our school board would make those decisions as part of the budget process. But $3.5 million is a considerable sum for us, and we’d be hard pressed to make additional reductions given the unprecedented cuts we’ve already made as a result of the state budget crisis.”

California State University, Long Beach (CSULB)

Though an exact figure remains “murky,” CSULB President F. King Alexander told the Business Journal that he expects cuts between $3 and $5 million this year as a result of sequestration, plus another $70,000 in reductions to financial aid programs, likely impacting a few hundred students.

Thanks to the passage of Prop. 30 last November, CSULB and other state universities thought they had seen an end to years of budget cuts. Indeed, in his proposed fiscal year 2014 budget, Gov. Jerry Brown has allocated $2.7 billion in additional funding for K-12 schools and community colleges. The University of California and California State University systems each would receive an increase of $125 million in funding under Brown’s plan. The governor forecasts a budget surplus of $851 million by the end of the 2014 fiscal year if his plan is approved. “It gets us back on the right track,” Alexander said. Still, he thinks this new funding could now be in jeopardy if sequestration reduces economic growth and produces worse than forecasted revenues for the state budget. “All of that gets thrown out the window if our economy” slows, Alexander said. “We can’t keep taking these hits and have everybody expecting us to keep getting better each year. Money does matter.”

Long Beach City College (LBCC)

According to the National Association of Student Financial Aid Administrators, LBCC is expected to lose about $58,000 in student financial aid funding. “The sequester will directly affect our financial aid programs and reduce the amount of aid available to our students through grants and work-study programs, and poses a larger threat to our improving state funding by threatening our fragile economic recovery,” LBCC Superintendent-President Eloy Ortiz Oakley told the Business Journal in an e-mail. “Despite this, LBCC will continue to serve the needs of our students by focusing on our core mission of educating students and preparing them to succeed in this economy. Our dedication and mission to serve all students will not be altered by the sequester.”

State Of California

To complicate matters further, sequestration could also pummel state governments, sending waves through social services programs supported at the state, county and municipal level.

According to a report from the White House, California will lose more than $87 million in funding for primary and secondary education, as well as $63 million in educational support for children with disabilities.

The state is at risk of losing more than $12 million in federal funds to support clean air and water programs; $54 million in funding for Army base operations across the state; and an estimated $1.6 million in justice assistance grants to support an array of law enforcement initiatives.

Funding for public health programs also might take a substantial hit, according to White House forecasts, including the potential loss of about $2.6 million in funding to support emergency preparedness programs, $12.4 million in substance abuse treatment and $1 million for childhood vaccinations.

Moreover, the Los Angeles County Economic Development Corporation reports that sequestration could result in a loss of nearly $23 billion in gross state product, with 225,000 jobs potentially at risk. The Golden State could see its share of federal funding reduced by more than $4 billion.

H.D. Palmer, spokesperson for the California Department of Finance, told the Business Journal that a process will be in place “in the coming weeks” to address when the reductions will take effect, what adjustments need to be made to programs funded all or in part with federal dollars, and the extent to which, if at all, sequestration will impact the state’s general fund. If there is an affect on the budget, Palmer said adjustments would be made for the governor’s May budget revise.

Port Of Long Beach

The impact of sequestration is “very speculative” at this point, said Port of Long Beach spokesperson Art Wong. That’s because so many federal agencies operating at the port are going to be impacted. CBP, U.S. Coast Guard, U.S. Department of Agriculture and the Federal Bureau of Investigation all have a stake in the nation’s largest seaport complex.

But a letter from the Foreign Trade Association (FTA) to its members posted on the Port of Long Beach’s website provides a glimpse of how troublesome sequestration could be for the international trade industry. For example, CBP is preparing to begin issuing furlough notices to about 10 percent of its workforce. And immediate cuts are expected to reduce available overtime funding, which the FTA said acts as a force multiplier for the CBP outside of regular operating hours. Wait times at all ports of entry are expected to increase significantly.

Port Of Los Angeles

As often is the case, what’s true at the Port of Long Beach is true at the Port of Los Angeles, and sequestration is no different in this regard.

“At this point it’s unclear what impact the potential cuts would have on port operations,” Port of Los Angeles spokesperson Phillip Sanfield told the Business Journal in an e-mail. “We’re in contact with customs, coast guard and homeland security, but it remains to be seen what the actual impact will be. Essentially, we’re in a wait-and-see mode with respect to the potential cuts and in communication with the federal agencies that we work with here at the port.”

The FTA letter states that CBP estimates it will take five days or more for cargo release at the ports, with delays compounding as vessels queue up.