On May 29, 2013, the Office of Management and Budget (OMB) distributed a memo to all federal agencies directing them to reduce their overall Fiscal Year 2015 budget submissions by as much as 10 percent — twice as much as OMB asked agencies to cut from this year’s budget to comply with sequestration. The Budget usually proposed each February by the President serves as the starting point for the annual appropriations process. Although President Barack Obama’s recently submitted Fiscal Year 2014 budget included a proposal to replace sequestration with targeted cuts and additional tax revenue, OMB’s request anticipates that sequestration will remain in effect.

Background

The 2011 Budget Control Act (BCA) established a special temporary committee in Congress charged with cutting $1.2 trillion from the federal budget. The so-called “supercommittee” failed to reach a consensus on how to achieve these cuts, which triggered the mandatory, across-the-board sequestration cuts that went into effect on March 1, 2013. Sequestration will reduce Fiscal Year 2013 spending by approximately $85 billion and subsequent annual spending by $109 billion every year through 2021, for a total of $1.1 trillion. This total includes savings achieved from lowered interest payments on the federal debt.

OMB Memo

In her memo to federal agencies, OMB director Sylvia Burwell requested that agencies “reduce spending on lower priority programs in order to create room for effective investments in areas critical to economic growth and job creation, including education, innovation, infrastructure and research and development.” Specifically, agencies are first required to reduce their 2015 discretionary budget submissions by five percent below the level of funding they received in the Obama Administration’s 2014 budget proposal. Agencies are then required to include additional proposed reductions that reflect an overall 10 percent reduction relative to their 2014 funding levels. This overall reduction is required due to the likelihood that sequestration will continue to be in effect in 2015. The OMB memo does not require similar reductions in entitlement programs and other types of “mandatory” spending; rather, it directs agencies to work with OMB to review mandatory spending with “the same rigor” as their discretionary spending prior to submitting their 2015 budget plans.

To comply with this directive, Ms. Burwell recommended that agencies focus on streamlining programs, reducing redundancies, and developing innovative methods to deliver services more effectively. For the first time, each agency will be required to include a separate section in its budget submission that specifically spells out planned reductions. Notably, the OMB memo lists certain types of spending and budgeting that should be excluded from the proposed spending reductions, including: 1) across-the-board reductions; 2) reductions to mandatory spending in appropriations bills; 3) shifts of costs to other parts of the federal budget; 4) reclassifications of existing discretionary spending to mandatory spending; and 5) the enactment of new user fees to offset existing spending.

In addition to reducing discretionary budget submissions by as much as 10 percent, the OMB memo directs agencies to submit an updated strategic plan which should include objectives such as innovative customer service, performance goals, and improvements to management.

Analysis

OMB’s directive to federal agencies to reduce their future budgets is not surprising given the inability of the President and Congress to reach agreement on a long-term budget plan to replace sequestration. As long as sequestration is in effect, federal agencies will continue to face cuts to their programs and must look for ways to deliver services more efficiently. OMB’s memo to federal agencies is consistent with this new reality. At the same time, the budget cuts required by sequestration will have a negative impact on constituencies that rely on federal funding, including states and localities. Indeed, nearly every government program and service is affected by sequestration, including funding for Graduate Medical Education, research and development programs, funding for infrastructure projects, and space for government agencies. Discretionary spending within these and other vital programs would be impacted by the reductions outlined in the OMB memo.

Although agencies typically begin budget planning activities in June for the fiscal year two years away, the release of the OMB’s memo may also be tied to the perception that sequestration has not been as damaging to the economy as the Administration had forecast earlier this year. At that time, many federal officials, including the President, were criticized for raising concerns about the impact of sequestration on federal services that appeared to be exaggerated. As a result, Members of Congress have felt less pressure to strike a long-term budget deal with the President that would replace sequestration. Whether intentional or not, OMB’s memo may serve as a reminder to Members of Congress and the public that significant budget cuts will continue to affect federal programs. This, in turn, may be part of a strategy to increase pressure on Congress to strike a budget deal with the Administration.

Despite this pressure, it remains unlikely that the Administration and Congress will agree in the immediate future to a long-term budget plan that would replace sequestration. As a result, it is becoming increasingly important for affected constituencies to contact federal agencies to advocate for the preservation of their priority programs.