SEQUESTRATION

1. SEQUESTRATION What is it? What does it mean for my district? Daniel Lunghofer Supervisor, School District/ESD Accounting 360-725-6303 daniel.lunghofer@k12.wa.us December 4, 2012

2. Background • In 2011, to end the battle over the debt ceiling, the Budget Control Act of 2011 was passed by Congress. • $917 billion in cuts over ten years. • Creation of Joint Select Committee on Deficit Reduction.

3. Background • Supercommittee met to try and find cuts. • 5 public hearings, number of closed-door sessions. • Committee announced impasse on November 21, 2011. • Triggered the mechanism of sequestration. • $1.2 trillion in cuts over nine years.

4. What is Sequestration? • (Dictionary) To remove or separate into solitude or retirement. • (Law) To remove (property) temporarily from the possession of the owner; seize and hold, as the property and income of a debtor, until legal claims are settled. • For our purposes, it is the lowering of budgetary authority at the federal level for federal programs, making that money unavailable for states to use.

5. DISCLAIMERS • There are two important caveats that must be made when talking about sequestration. • It may not come to pass. • The magnitude of the cuts needed may differ greatly from what is shown here. • This is an attempt to estimate the impact of sequestration using currently-known knowledge.

6. Sequestration Process • Annual deductions to the budgetary authority for federal programs are needed to meet the required cut amount. • First Federal Fiscal Year that is affected is FFY 13. • FFY 13 runs October 1, 2012 through September 30, 2013. • Takes effect January 2, 2013, unless Congress meets certain requirements in the law.

7. Sequestration Process (Cont.) • Annual decreases to federal spending are needed to achieve $1.2 trillion total. • Office of Management and Budget (OMB) projects a non-defense function cut of $54.667 billion for FFY 13. • OMB Report projects 8.2% cut to most education-related programs. • Full report available at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf

8. How Much Money is at Risk? • Current estimate for FFY 13 money for Washington in elementary and secondary programs (just from ED) is $604,892,138. • 8.2% of that amount is $49,601,155. • If we look at non-ARRA Federal money from 2010–11 F-196 data, 8.2% is $69,112,065.

9. Do I Lose Money This Year? • Generally, no. Well, maybe. • Most federal programs are front-funded: the majority of funds districts are receiving this school year (2012–13) were front-funded from FFY 12. • Most federal programs are exempted from cuts this school year. • Impact Aid is the main notable exception.

10. Are all Federal Revenues Affected? • The best answer we have is “yes.” • Any grants or similar funding should be expected to take a cut. • Unclear of impact to food service commodities, but federal meal reimbursement most likely affected. • Others: • Medicaid Administrative Match. • Bond interest subsidy payments (BABs, certain QSCBs).

11. Selected Programs

12. Other Considerations • A state-level cut of 8.2% does not necessarily mean that your district’s cut will be 8.2%. • Funds will be allocated in accordance with established funding formulas. • Cuts will be equitable, but may not be equal. • Sequestration affects funding amounts. It DOES NOT affect program requirements. • The 8.2% cut is only for FFY 13. There are eight more FFYs to go.

13. Example: Title I, Part A • The information contained on the next few slides is a projection of the potential cut impact to Title I, Part A. • Poverty counts were kept constant into the next year. • Assumption is that Washington’s share of national Title I pot does not change. • Cuts are done to the total for each grant source within Title I. • SUBJECT TO CHANGE UPON RELEASE OF ALLOCATIONS FROM DEPARTMENT OF EDUCATION. FOR DEMONSTRATION PURPOSES ONLY!!!

14. Example: Title I, Part A (Cont.) A cut of 8.2% statewide could mean the following gross cuts: *Common cut is ~7.25%.

15. Example: Title I, Part A (Cont.) • OSPI is required to withhold 4% of state amount for School Improvement. • Hold-harmless provisions normally protect districts. • Combination of 8.2% cut in state allocation plus 4% required reservation is too much for hold-harmless. • May require withholding below hold-harmless provision.

16. Example: Title I, Part A (Cont.) If we withhold School Improvement beyond hold-harmless, the following are the changes in final net allocations: Greatest cut: 17.108%

17. Federal Bond Interest Subsidy Payments • Under ARRA, districts could issue bonds, the interest on which would be at least partially subsidized by Federal government. • BABs. • QZABs and QSCBs after March 18, 2010. • Subsidy was not automatic. • Per analysis by Foster Pepper LLC, interest subsidies face a 7.6% cut. • You still have to make the full interest payment; just the subsidy is reduced.

18. Other Impacts • A portion of a district’s levy base is the amount of Federal funds received. • Fewer Federal dollars = smaller levy base = smaller levy amount. • May also affect LEA. • Impact felt: • Impact Aid: 2014 Levy base. • Other Federal funding: 2015 Levy base (slight decrease in 2014).

19. District-level Impacts • Currently, OSPI does not have any district-level impact estimates. • If you are interested in estimating the impact for your district for budget and planning, assume 8.2% in cuts for your district from any Federal revenue (5XXX or 6XXX revenue code). • As information becomes available, OSPI may provide updates.

20. Questions?