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Posted by on Dec 12, 2012

The Fiscal Cliff, Sequestration, and Federal Grants

In recent weeks, the media has been in a near non-stop reporting frenzy analyzing the daily offers and counteroffers by the major players in the “fiscal cliff.” One local channel in the Washington area has even begun to broadcast a clock counting down the days until the nation plunges off the fiscal cliff. While national polling suggestions a majority of the American public is “very closely” or “fairly closely” following the negotiations between President Obama and Speaker Boehner, many remain confused about the details of the fiscal cliff and what might occur if an agreement is not reached.

The term “fiscal cliff” refers to numerous events affecting the federal budget occurring simultaneously at the end of this calendar year. These factors include sequestration, the expiration of the 2001 and 2003 tax breaks, and the expansion of the Alternative Minimum Tax (AMT). Sequestration – spending cuts to defense and discretionary spending – may have the most significant impact on federal grant recipients and subrecipients. If the president and Congress fail to reach a compromise by January 2, 2013 then current discretionary spending will be automatically reduced by $500 billion.

Sequestration would result in drastic cuts to federal grant funding. It is estimated that budgets for three of every four grant programs would be reduced. The formula Congress developed to impose sequestration does not impact all programs equally. The most significant cuts would be to agriculture, employment, community development, justice, energy, and education grant programs. State and local grant recipients would see reduced funding in many popular and widely utilized programs, including the Community Development Block Grant, community policing, Rural Development, energy and weatherization assistance, and transportation grants. School officials are particularly concerned about the potential $3.5 billion in cuts to U.S. Department of Education programs.

While negotiations between President Obama and Speaker Boehner have primarily focused on tax rates, there is a developing consensus among agency officials that there will be an agreement on sequestration at some point. Should sequestration take effect, grant recipients should be prepared for a period of confusion as agencies attempt to implement the mandatory cuts.

Management Concepts will continue to provide updates in the coming weeks. Stay tuned!

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