Sequestration imposes mandatory across-the-board spending cuts to defense and discretionary domestic programs. Federal agencies ranging from Bureau of Prisons to the Internal Revenue Service and the National Institutes of Health are drawing up a mix of unpaid furloughs, hiring freezes, reduced grants and other measures to cut tightened budgets.

If the $85 billion in cuts go into effect March 1st there will be trickle down to the state and local level. During our webinar last week, “2013 Government Spending Hotspots”, we received numerous questions about the potential effects of sequestration. There is a looming fear that budget cuts will affect all contractors doing business with the government. We wanted to further expand on this topic and share some of the impact these cuts are likely to have. A number of areas will be affected including:

  • Federally funded unemployment benefits for the long term unemployed may be reduced from the existing 37 weeks of additional unemployment and the maximum weekly payments may be reduced.
  • The Federal Aviation Administration (FAA) has warned it may shut air traffic control operations at many smaller airports
  • National parks and museums will close
  • Food safety inspections will be slowed down due to furloughs of inspectors
  • Teachers could face layoffs
  • Border crossings will have reduced staffs increasing waiting times
  • Research grants will be reduced or eliminated affecting many college research projects

All of the above will impact employment, public services and businesses that depend on government support to operate. For instance the reduction in air traffic control will affect the movement of goods and services, tourism and business travel.

While these looming cuts will be difficult to digest, state and local governments and economies are showing signs of improvement that may help weather the storm created at the federal level.

After slashing their workforce by over a million in the past 5 years, Moody’s predicts that 220,000 jobs will be added by 4th quarter of 2013 for state & local governments.  U.S. home prices closed out 2012 with the biggest annual gain in more than six years and sales of new homes rose significantly in January. If the housing market continues to improve, state and local economies may be able to weather the cuts at the federal level. Other areas where states are seeing improvements include:

  • Revenues across state & local governments are expected to increase by 3.9% during the 2012-2013 budget years due to increases in tax revenues from growth in consumer spending and property values.
  • Increases in spending for efficiency improvements, like cloud computing and vitalization of IT infrastructure to save costs
  • Increases in spending for energy efficiency projects and green building
  • Increases in spending for construction, infrastructure and transportation projects through public-private partnerships (P3s)

If these improvements persist it could portend a far better economic outlook. Many of our clients with a state and local focus have yet to see a slowdown in spending from the government agencies they work with. This does not mean they won’t be impacted if the cuts go into effect, but does indicate that there are areas of opportunity and some hope that the impact will not affect them as much as federal agencies.

On a broader level there is also hope as there is distaste for long-term sequestration on all sides The President’s 2nd term agenda will have a heavy focus on investing in efforts which drive jobs and efficiency. This could result in more federal aid to state and local governments for infrastructure, job training, energy and education efforts.