Implementing the Sequestration: the State and Local ImpactFederal, state, and local governments are bracing for the impact of $85 billion in domestic and defense spending – also known as sequestration – which began March 1, 2013. President Obama’s executive order, signed in accordance with the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, requires a 5.1 percent reduction for all domestic mandatory spending accounts, including payments to issuers of direct-pay bonds, for fiscal 2013.
The total budget authority for fiscal 2013 – $4.265 billion for the five categories of bonds affected, BAB, QZAB, QSCB, QECB, CREB – will be reduced by $218 million, to $4.047 billion. Because the fiscal 2013 payments already made since October 1, 2012, were not reduced, those cuts will have to be recovered from payments yet to be made in fiscal 2013.
Other domestic discretionary funding accounts that provide funding to state and local governments will also be affected, including funding for community development, public safety, and clean water. Localities with the most military presence will be affected immediately, as the military cuts will be made immediately, according to Chris Mier, strategist and head of Loop Capital's Analytical Services Division. State and local governments will also be affected by decreases in sales and income tax, but there will be a time lag. As for municipal bonds, investors aren’t currently showing any concerns about buying munis, Mier said in an interview on CNBC.
http://video.cnbc.com/gallery/?play=1&video=3000151411
Click here to read more about what will these cuts mean for states and localities in the coming months.
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