Understanding Sequestration and the Impact at Colleges and Universities

Last Updated October 7, 2013.

Unable to come to an agreement with Congress to halt or further delay implementation, President Obama issued a sequestration order on Friday, March 1, 2013, as mandated by the Budget Control Act of 2011. The federal government must now cut FY13 spending by $85 billion, resulting in across-the-board reductions of 7.8 percent for defense programs, and 5 percent for nondefense programs.

Regardless of size or sector, higher education institutions will be impacted in a myriad of ways by these reductions in federal spending.

How did we get here?

On Sunday, July 31, 2011, President Obama and Congressional leaders agreed to raise the current federal debt ceiling of $14.3 trillion in two stages, and by as much as $2.4 trillion. The resulting legislation, the Budget Control Act of 2011, was crafted to avoid having a vote on lifting the debt ceiling again until after the November 2012 elections. The same bill established a bipartisan committee charged with finding an additional $1.5 trillion in deficit reduction, including from entitlements and tax reform. To encourage compromise, the legislation provided that if this "supercommittee" failed to come to agreement, an enforcement mechanism - sequestration - would trigger 10 years of across-the-board spending reductions, beginning in 2013, evenly split between domestic and defense spending. The supercommittee failed to strike an agreement.

Is this the tip of the iceberg?

Without further legislative action, most areas of the federal budget will be cut by a total of $85 billion during the current fiscal year, and by $109 billion in each of the next nine fiscal years, altogether producing approximately $1.2 trillion in total deficit reduction. These across-the-board spending cuts would come in addition to savings scheduled to be achieved through lower discretionary spending caps in each of the 10 fiscal years, as agreed upon in the Budget Control Act.

Will sequester cuts be halted in the foreseeable future?

The mood on Capitol Hill, especially on federal fiscal policy, is not particularly conducive to compromise. Lawmakers have an array of spending and revenue policies yet to deal with, including completing the FY13 budget (presently, the federal government is operating on a continuing resolution that expires on March 27, 2013), and contending with the need to raise the federal debt ceiling (current obligations may only be paid until May 19, 2013).

Some Washington insiders believe that in the FY13 budget bill needed to keep the government running after March 27, the sequester may be modified by giving some agencies limited flexibility in how they achieve the required savings. However, lawmakers appear reluctant to threaten a government shutdown over the sequester cuts. While the situation remains fluid, relief from these across-the-board cuts does not appear to be in the offing.

How will my campus be affected?

It is difficult to anticipate out-year sequestration limitations, but the FY13 cuts are beginning to take some shape. On March 1, Office of Management and Budget Deputy Director Jeffrey Zients issued a memorandum with some guidance to federal agency heads.

It will take some time for all of the specific details to emerge, but here is what we can tell you at this time.

• Student Aid. The Pell Grant, among a select few programs with special treatment, is protected, for one year only (FY13), from sequester cuts. However, by and large, all other federal student aid programs will be cut. The Supplemental Educational Opportunity Grant and the Federal Work-Study program each will be cut across the board. The origination fee of 1 percent for Stafford student and parent loans will be raised by 5 percent (to 1.05 percent) for all loans first disbursed after the sequester took effect.

Note that the sequester is applied at the program level, not at the grantee level. Because the campus-based aid programs are allocated by a formula, campuses will not necessarily see a straight percentage cut to their allocation for Federal Work Study and Supplemental Opportunity Grants. According to estimates by the National Association of Student Financial Aid Administrators, sufficient funds will be available to cover every institution's "base guarantee" amount, the part of the formula based on historic allocations. All cuts will come from the "fair share" amount, which is calculated based on the level of need demonstrated by an institution's students.

Because federal student aid budgets are forward-funded, students will not see any changes to their allocations for the current academic year. Uncertainty about federal funding levels have made it difficult for student aid offices that are in the midst of awarding aid for the 2013-14 academic year.

UPDATE (April 8, 2012): Schools enlisting students who are beneficiaries of the DC Tuition Assistance Grant (DCTAG) may have received noticed that those grant payments had been put on hold because of sequestration and budget uncertainties. One March 21, the DC Office of the State Superintendent of Education announced that funding would resume and continue as scheduled.

• Post-9/11 GI Bill. All veterans programs, including the Post-9/11 GI Bill, are exempt from sequester cuts in FY13. This exemption includes both benefits and Veteran's Administration administrative expenses.
• Department of Defense (DOD) Tuition Assistance. DOD's Tuition Assistance program that helps active-duty service members pay for higher education expenses is not exemptfrom the sequester. The program will be cut an estimated 7.8 percent, although as noted above, the sequester is applied at the program level, not at the grantee level. The Marine Corps has already halted new enrollments in the Tuition Assistance Program due to the sequester.
  • UPDATE (April 8, 2012): On Wednesday, March 20, Congress passed a measure requiring Defense Department officials to fund Tuition Assistance programs. Prior to passage of the measure, the Air Force, Army, Marine Corps, and Coast Guard had announced that they would not accept any new enrollments because of the sequestration order. While the Coast Guard was not included in the measure (because it is funded through the Department of Homeland Security), the Coast Guard separately announced that it, too, would be reinstating Tuition Assistance.
• Research. Most federal research budgets at agencies such as the National Institutes of Health, National Science Foundation, and Department of Energy will see a 5 percent budget reduction, but defense research is subject to a 7.8 percent reduction. Different agencies are likely to manage programs differently. NIH announced last week that it "likely will reduce the final FY 2013 funding levels of non-competing continuation grants and expects to make fewer competing awards to allow the agency to meet the available budget allocation." Additionally, "each NIH Institute and Center will assess allocations within their portfolio to maximize the scientific impact, non-competing continuation awards that have already been made may be restored above the current level as described in NOT-OD-13-002 but likely will not reach the full FY 2013 commitment level described in the Notice of Award."
  • UPDATE (April 8, 2012): NIH update on sequestration can be found on its Grants and Funding Web site. A March 4, 2012, letter to grantees states, "To the extent that fiscal year 2013 funds for your grants or cooperative agreement are affected due to these budget cuts, you will be contacted by the appropriate Grant Management Officer with additional details at a later point."
  • UPDATE (April 8, 2012): Upon finalizing the FY13 budget, Congress boosted the budget for the National Science Foundation by $152 million, or 2.7 percent, thereby lessening the impact of sequestration; its budget is now 2.4 percent below FY 2012 levels.
• National Institute of Food and Agriculture (NIFA). The United State Department of Agriculture is not exempt from the sequester cuts; programs will be cut by 5 percent across the board. Note that because some NIFA programs, like Smith-Lever and Hatch Act funds, are formula-driven, campuses many not see a straight 5 percent cut to their allocation. Additionally, research programs could see their cuts handled in any number of ways, including, but not limited to, reduced funding levels and fewer awards. 
• UPDATE (April 8, 2012): In a Monday, March 11 e-mail message, Sonny Ramaswamy, Director of NIFA, announced the following funding impacts:
  • A reduction of $13 million for the Agriculture and Food Research Initiative (AFRI) competitive grants program, potentially resulting in fewer new proposals that may be funded during FY 2013;
  • AFRI Continuation awards from previous fiscal years will not be impacted by the sequestration, and continued funding will be based on evaluations of performance and meeting stated goals;
  • Reductions totaling almost $37 million for capacity/formula funding; and
  • Reductions for other research, education, and extension programs totaling over $10 million.
• Build America Bonds. On March 4, the Internal Revenue Service announced that payments to issuers will be reduced by 8.7% of the amount budgeted. Campuses that have issued Build American Bonds should note that the Bond Buyer also reported, "some direct-pay bonds are subject to extraordinary optional redemption provisions that allow issuers to call them under certain circumstances, possibly if the sequester reduces their subsidy payments."
  • UPDATE (October 7, 2013): On September 30, 2013, the IRS announced that subsidy payments on Build America Bonds will be reduced 7.2%. Build America Bond subsidy payments processed on or after October 1, 2013 and on or before September 30, 2014 will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent. The new rate replaces the 8.7% reduction rate applied to subsidy payments from March 1 through September 30, 2013.
• Federal Agency Processing and Service Delays. Thousands of furlough notices are expected to be distributed to federal employees across the federal government this week, and temporary layoffs will likely begin sometime in April (because of the requirement for 30 days' notice). This could result in loan processing delays for students, delayed distribution of monetary awards to grantees, and limited availability of federal employees across the government.