A few weeks back, a Chapter 13 client from the Bond, Botes, & Lawson PC office in Knoxville, TN called to ask how the sequestration would affect her bankruptcy. She works at one of the government plants in Oak Ridge, TN and feared that her hours would be cut or worse that she may even be laid off. Unsure myself about this vague and rather complex issue, I set out to research what Sequestration is, why is it being discussed now and is it important? This article is the culmination of that research. Below is Part One of a Two Part blog about Sequestration.
There is an interesting debate on Capitol Hill (and to a lesser extent, the rest of the Country) about sequestration. I say interesting because it appears that many people seem to know very little about sequestration. One reason for this is that understanding sequestration and the debate surrounding it is complex and often partisan. I will attempt to explain this with little or no partisan opinions as both political parties have enough blame to share. And although this is a rather complex issue, it is important to understand. So, what is sequestration? The term sequestration actually derives from a legal term referring to the seizing of property, usually by a court or agent of the court, to prevent harm or damage to the property while a dispute over the property is resolved. In the present debate, the more apt term would be “budget sequestration”, which is a procedure in United States law that limits the size of the federal budget. This involves setting a cap on the amount of government spending. If spending exceeds the cap, automatic, across the board spending cuts are imposed, affecting all departments equally.
Budget sequestration first came into existence in 1985 under the authorization of the Balance Budget and Emergency Deficit Control Act of 1985 with the passage of the Gramm–Rudman–Hollings Act, which provided for automatic spending cuts if certain deficit reduction targets were not met. Unfortunately, the process set forth in the Act was ruled unconstitutional in 1986 in Bowsher v. Synar, 478 U.S. 714 (1986). After a series of revisions, Congress eventually passed The Budget Enforcement Act of 1990 (BEA) as part of the larger Omnibus Budget Reconciliation Act of 1990 (OBRA). The purpose of the BEA was to enforce, constitutionally, the deficit reductions set forth in the OBRA. However, a provision if the BEA allowed Congress to avoid the required deficit reductions if “the budget growth was outside of Congress’ control”. This effectively gutted the BEA as Congress would always argue the increase to the budget and budget deficit were “beyond its control”. Thus, with the exception of years 1998 through 2001, the United States has had a budget deficit (spending more money than it collects in tax revenue).
So where we are now and why is budget sequestration being discussed now? Both of these are very good questions with not so good answers. Starting in 2002, the federal government began running deficits again. There are probably numerous reasons for this; The Bush Tax Cuts, The Iraq War, The Afghanistan War, The War on Terrorism and most recently, the financial crisis that started in late 2007. Whatever the reasons, one thing is clear: The United States is now running budget deficits at unprecedented levels, with truly no end in sight. At present, the current budget deficit stands at $1,089 billion, or roughly $298 million per day. That’s right, the government is borrowing $289 million every day in order to maintain its current spending and budget obligations. In fact, the government has amassed $5,106 billion in budget deficits in just the last four years alone. This is truly mind boggling when you consider that from 1789 through 2008 the entire combined US federal deficit was $5,326.1 billion.
In just four years the US has amassed as much combined budget deficits as the previous 219 years of our nations history combined, which included the entire cost of our War of Independence, the Civil War, WWI, The Great Depression, WWII, the entire cost of building the infrastructure of the country, all railroads, public roads, highways, Interstates and bridges, the Vietnam War, The Korean War, the Stagflation of the 1970’s, the Savings & Loan bailout in the 1980’s, the stock market crash of 1987, the first Iraq War, all actions in Somalia, Bosnia and Kosovo, any and all other major and minor conflicts, the DotCom bubble and burst in the 1990’s, all costs for 9-11 through 2008, all costs for the War on Terrorism through 2008, and much of the cost of the second Iraq War and the Afghanistan War. In essence, every dollar that the United States Government has borrowed from 1789 through 2008 that was used to fund every project, War and any and all other expenditures needed to build and defend the Nation have been borrowed in the last four years alone. Sadly, this is where we are now. Which at least begins to answer the question: why is budget sequestration being discussed now?
In 2011, Congress passed the Budget Control Act of 2011. This Act came to be as a result of a standoff between Republicans and Democrats over raising the Debt Ceiling. The Debt Ceiling is a legislative restriction or limit on the amount of National Debt that the US Treasury can issue. The previous paragraph discussed the federal budget deficit, which is the annual amount of money the government borrows in order to fund that years operations. The National Debt is the cumulative amount of all those budget deficits. By law, the Nation is only allowed to borrow (have National Debt) of a certain amount. The primary way in which the government funds budget deficits is to allow the US Treasury to issue new debt to both foreign and domestic lenders. In 2011, the US reached its debt limit (not for the first time) and a bitter and often very partisan debate ensued concerning the Nations’ soaring budget and national debt. The debate lasted for much of 2011 and eventually led to the first ever credit rating downgrade in the US’s history. Congress eventually raised the Debt Ceiling through the passage of the Budget Control Act of 2011 (BCA). Among other things, the BCA created the budget sequestration debate that Congress and the President are now having. In essence, the BCA agreed to raise the Debt Ceiling in exchange for $2.4 trillion of deficit reduction over the next ten years. This included $1.2 trillion in deficit reduction identified in the BCA, with the remaining $1.2 trillion to be determined by a “bipartisan group of Senators and Representatives known as the “Super Committee” or officially as the United States Congress Joint Select Committee on Deficit Reduction. When the “Super Committee” was unable to reach an agreement on the remaining $1.2 trillion in deficit reductions, an automatic trigger in the BCA was activated to implement across the board reductions in the rate of spending, known as sequestration.
In Part Two, I will try to explain what this means and why it is important.