April 2013

Sequester

Impact on the national debt: minimal
Potential damage to many research laboratories: priceless

My column is due near the first of each month. As I was starting to write this column in late February, I was following the news regarding the automatic spending cuts set to take place March 1, also known as sequestration or the sequester. Given the amount of brinksmanship that we have seen over the past few years, I expected lots of public posturing with behind-the-scenes negotiations leading to some last-minute act that would at least postpone the implementation of the sequester. I was wrong. March arrived, and there was no deal and, it appears, no serious negotiation.
 
In many phases of our lives, we struggle to find effective ways to motivate ourselves and others around us. This usually involves some combination of rewards and punishments: If my daughter completes her paper, then she can go to the mall with her friends; if I don’t complete my workout, then the Wii will criticize me (and, for some strange reason, I care).
 
The sequester was intended to be such a motivational tool. Across-the-board cuts affecting both nondefense and defense spending were designed to be so undesirable to members of Congress on both sides of the aisle that the threat alone would motivate them to work out a compromise to reduce the deficit without the sequester going into effect. By design, the sequester was intended to be bad policy; cuts would be made to all affected programs equally without analysis of the quality of the programs or the impact of the cuts.
 
What is the impact of the sequester on the national deficit and debt?
In fiscal 2012, the U.S. budget was $3.803 trillion, of which 62.8 percent involved mandatory spending (such as interest on the debt, Social Security, Medicare and Medicaid) and 37.2 percent involved discretionary spending appropriated annually by Congress.
 
Discretionary spending can be divided further into defense discretionary spending and nondefense discretionary, or NDD, spending. In 2012, NDD represented 36.7 percent of discretionary spending, or 13.7 percent of the budget.
 
The sequester is a budget reduction of $85.4 billion from March 1 to Sept. 30 and is focused largely on discretionary spending, with more than 80 percent of the cuts coming from the NDD or defense discretionary categories. Thus, the sequester represents a cut of $85 billion out of $3.8 trillion (although the final budget for fiscal 2013 is not yet settled), or approximately 2.2 percent of the budget (with the sequester in effect for only seven of 12 months of 2012).
 
The sequester is not a one-year adjustment but applies from 2013 to 2021. Over this period, the sequester is expected to avoid $1 trillion in spending, with additional savings in interest payments, to yield a total savings of $1.2 trillion. However, because mandatory spending, particularly Medicare expenditures, is anticipated to continue to rise, the national debt (the accumulated result of budget deficits) is projected to rise from $16 trillion to $26 trillion over this period.
 
What is the anticipated impact of the sequester on science funding?
Cuts from the NDD category account for $28.7 billion, or 5.2 percent of the NDD budget. The National Science Foundation budget is $7.0 billion this year (based on the continuing resolution in effect until March 27), so the sequester cut is $370 million. The National Institutes of Health budget for this year is $30.8 billion, and the sequester cut is $1.5 billion.
 
How will these agencies handle these budget reductions? NSF Director Subra Suresh issued a statement in late February saying existing grants will not be affected but that the primary impact will be a reduction of 1,000 in the number of new grants awarded. Given that the NSF typically awards approximately 13,000 grants annually, this represents a reduction of approximately 8 percent. (NSF fully funds many multiyear awards, so it is difficult to reduce existing awards.)
 
Prior to sequestration, the NIH released a notice that indicated the agency would use a strategy that has become all too familiar in recent years: reducing noncompeting grants below their previously committed levels to avoid decreasing the number of new and competing awards that can be made.
 
Because the average NIH grant lasts four years and the funds for almost all grants are disbursed incrementally, approximately 75 percent of the NIH budget is committed to grants that already have been awarded. If these commitments were not touched, then the full brunt of sequestration cuts would come down on new and competing grants.
 
Suppose that 80 percent (corresponding to the fraction of the NIH budget devoted to extramural research) of the $1.5 billion cut was taken out of new and competing grants. Given an average grant size of $450,000 (direct and indirect costs), this would correspond to a loss of 2,667 grants. Given that NIH Director Francis Collins testified in June before the U.S. House Energy and Commerce Health Subcommittee that a nine-month sequester totaling $2.4 billion would result in the loss of 2,300 grants, the NIH clearly intends to cut noncompeting grants. On March 4, Deputy Director for Extramural Activities Sally Rockey issued a letter to grantees regarding the NIH’s plans. This letter laid out all of the options, to wit:
 
“Examples of this impact could include: not issuing continuation awards, or negotiating a reduction in the scope of your awards to meet the constraints imposed by sequestration. Additionally, plans for new grants or cooperative agreements may be re-scoped, delayed, or canceled depending on the nature of the work and the availability of resources.”
 
Unfortunately, the letter did not provide much insight into the likely balance of approaches. In fairness, the situation is still quite uncertain, because the government is operating under a continuing resolution that expires on March 27, and the situation could change, for better or worse, as an appropriation for the rest of this fiscal year is developed.
 
We can estimate that at the NIH the sequester will result in the loss of 1,400 new and competing grants (based on Collins’ statement about the larger cuts). This represents a reduction of 15 percent from the already low number of 9,158 grants made in fiscal 2012. This reduction will further reduce success rates, which are already at historic lows. Many of the lost grants will affect established and productive laboratories competing for their only major source of funding, while others will affect younger investigators launching their independent careers. For some investigators, the loss of these funding opportunities (despite having outstanding peer-review scores) will cause them to leave academic research.

Update: On March 21, the Congress passed a continuing resolution that funds the government through the end of the fiscal year. This resolution did not substantially restore the sequester cuts to the NIH budget, although the impact on the NSF budget was reduced to a 2.9 percent cut.

I await April 1 every year with some trepidation, because my wife has been known to catch me with some vicious April Fools’ Day tricks. One year she convinced me that the owners of the house for which we had a signed an offer had decided not to sell after all. She let me fume and fuss and get ready to contact our real estate agent and perhaps a lawyer before she let me off the hook. This year, I hope to start April by finding out that the failure to stop the implementation of the sequester was all a joke.

Photo of Jeremy BergJeremy Berg (jberg@pitt.edu) is the associate senior vice-chancellor for science strategy and planning in the health sciences and a professor in the computational and systems biology department at the University of Pittsburgh.
 
 
 
 

 

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