Relatively small cuts to a budget are generally characterized as having little effect. The magnitude of the overall cut may be expressed as a small percentage, such as 1.5%. This does not look very large. However, budget analysts cannot stop at this point. The actual effect must be analyzed because the cuts will be concentrated on those things that can be controlled and the programs that are not mandated in some way.
Budget cuts are not made in isolation. They may be highlighted, but there is seldom a budget cut that is not part of some other actions in the appropriations process. The full range of actions must be taken into account. These actions can include "earmarks," or funding for items mandated by the appropriators; legislatively mandated items that are not changed by the appropriation action; actions mandated by the appropriation itself, such as a pay raise or a prohibition on reducing programs or staffing; and politically untouchable items, such as Presidential priority programs. The analyst needs to exclude from the cuts these items. What is left is what is cut, which is usually a small portion of the overall appropriation. This results in a cut that is significantly larger, in percentage terms, than the originally mentioned small percentage cut.
An example will illustrate the effect. Let's assume a Sample Agency Office (SAO), which is an operating component of Large Agency (LA). The Large Agency receives funds in four main appropriations accounts. Our Sample Agency Office is funded from one of these accounts, the Operations and Research Account, or ORA. The ORA is for $1.3 billion in the appropriation passed by Congress, which was a reduction of $0.3 billion, or 18.8% from the original request. The across the board cut of 1.5% is applied to this account, for a cut of $0.0195 billion, or $19,500,000. Does not look like a very large cut given the $1.3 billion base.
However, Congress has dictated that the state and local grants support funds included in the ORA not be cut. The grants are appropriated at $500,000,000. The LA now has to find a way to cut $19.5 million from a base of $800,000,000 (the $1.3 billion appropriated less the untouchable $500,000,000 in grants), or a cut of 2.4%.
In addition to making the grants untouchable, Congress has also taken care of a few members' interests, and has earmarked 23 projects to be funded within the ORA appropriation. These projects total $89 million. This now leaves a base of $711 million to cut ($800 million less the $89 million in earmarks), for a cut of 2.74%.
The Large Agency top management is at a loss as to what to do, and time is running short, so it passes down to the operating components the 2.74% cut, plus an additional 1% to provide a reserve for the Administrator's contingencies (which Congress had eliminated at the time of appropriations passage). These instructions are passed on to the operating component mangers.
The SAO's management simply looks at the Office's Budget Officer and asks "what is the effect? What do we do?" The Budget Officer (who is short in staff) does the math himself (see below) and concludes that SAO is being cut over 5%:
- Budget request for SAO $100.0
- Congressional cut of 18.8% -$18.8
- After Congressional cut $81.2
- Needed for payroll -$20.8
- Travel & supplies -$0.8
- Mandatory funding items* -$3.1
- Left for other items $56.5 This is what can be cut 3.74%
- LA cut $3.0 Applied to amount left after the Congressional cut
- Left for other items $53.5 or a 5.3% cut from what was available before the "1.5% cut."
* Mandatory funding includes the computer support contract, which is outsourced by SAO, at $1,730,000; telephone and postage charges at $540,000; rental of a small field lab $350,000; safety equipment for the lab $125,000.The SAO is left with $53.5 million rather than $56.5 million for its discretionary programs. (Why payroll and other items are not considered as discretionary at this point is discussed in the payroll page.) This is a reduction of over 5% in this example. (The consequences of this level of reduction are not addressed at this point, but they are real.)
As a result of various actions associated with the appropriations action and prior commitments, the "across the board" cuts end up focused or concentrated on the parts of the organization that are not hamstrung by other dictates, resulting in relatively large cuts to the parts of operating components that directly result in the products that the public and higher level managers see.