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OMB – Where Does the Money Go & BABs Default? – Bruce Krasting

The Office of Management and Budget (OMB) has come out with a detailed breakdown of the spending cuts associated with the sequester (LINK). This is one hell of a document, it runs 83 pages.

Those who believe that government is too big should spend some time looking this over. They will get sick. For those who think that government is too small; well, they should also spend some time with the report. No reasonable person could look at this and conclude that all is well in D.C.


I reviewed the report to determine what the consequence of sequestration would be on interest payments on BABs bonds.There was so much more to consider than BABs. First some details on the BABs, then some thoughts about the budget in general.


The Build America Bond program (BABs) was a child created in 2009 when the Muni bond market was freezing up. The federal government agreed to pay 1/3 of the interest on the Muni bonds.  The cost to the Treasury in 2013 was anticipated to be $3.4b, but the 5.1% cut across all budget items reduces the payout by $171m.

Really? The amount involved is small, but a payment default on interest is a payment default on interest. What’s going to happen? Are investors in BABs going to get stiffed? Are the states and cities that did the actual borrowing going to have to pick up the Federal shortfall?

BABs are the biggest category of debt that will suffer from cuts. Qualified School Construction BondsNew Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds  will also see their coupons “clipped” by the sequestration. As this is about money, contracts and debt, it is a sure thing there will be some suits over this. I see it is as a technical default on a debt obligation.


Some broader thoughts on the information from OMB:


* The government has many employees, as a result, the government must contribute to the Social Security Trust Fund and the Medicare Fund. These payment are not much different than what a private sector employer is obligated to do. The federal government was supposed to pay SS $5.7B; as a result of the sequester, the amount will be reduced by $250m.

This is bullshit. Reducing payments to SS in 2013 means that the SSTF will run out earlier. There is no “Savings” associated with this. It’s just a kick of the can. There is no cut of expenses, it’s just a deferral. Each department of the government is scheduled to make payments to various Trust Funds. All of those payments are being reduced by 5%.  There is not one penny of true savings attached to this; it’s a shell game.


* One of the greatest deals the country gets is with the Supreme Court. The Supremes have a cost of only $73m. By comparison, the Federal Court of Appeals spends $3.8B.


* The President was correct when he said that money for food inspection would be cut. As a result of sequestration, $106m will be lopped from the inspector’s budgets. But the budget was $2.3B to start with. We spend this much money, and we still get 50m case of food born illnesses a year.


* NOAA costs $3.3b, the Patent Office runs another $3b. The Department of Education spends $15.8b onAccelerating Achievement and Ensuring Equity. What’s that about?


* The Department of Energy has a budget of $7.7b to build nukes. It also has a budget to spend $2.4b onNuclear Nonproliferation. So the US builds them, while spending big bucks to stop others.


* The Department of Energy is scheduled to spend $5.4b on Defense Environmental Cleanup. The sequester will cut $250m off the tab. Think Rocky Flats and Hanford.


* The CDC costs $5.7b a year. The National Institute of Health drops $31b a year! What are the doing at NIH?


The TSA spends $5.5b on Aviation Safety, but only $136m on Surface Transportation Security. Maybe that’s the right ratio of spending given what happened with 911. Time will tell. The Border Patrol costs a mega $11b; while on the other hand, you have spending for Protection of Foreign Missions and Officials at only $27m! Think Libya.


* FEMA has a budget of $18b, $900m of that will be cut. This a joke. If the country has another Sandy or Katrina, the cost will be $100b. Congress will pass a supplemental bill for the cost when another storm hits. The US is “Self insured”, but it has no reserves for losses, and we are having 100 year storms, three times a year. There is a category for Unanticipated Needs, a lousy $1m is the budget, it will be cut by 50k.


* The operating cost for the IRS is a lumpy $12b. One budget item, Informant Payments caught my eye. The budget for “rat fees” comes to $125m.


* The Foreign Military Financing Program spends $6.4b. The budget for Pakistan Counterinsurgency Capability Fund is another 1b. Probably nothing to see here, right?


* The military sucks down huge bucks. There are pages and pages of details. It’s hard to make sense of it all. The annual fixed costs at the the Pentagon come to $76b, nearly half of that cost is for healthcare. The operating costs of the Air Force, Navy, Army and Marines comes to $189b

The real cost of the military is all of the “stuff” that it buys. Big ticket things like aircraft carriers, jets, missile systems, tracked vehicles and the like. It’s over $130b a year. The sequester requires an 8% cut of these expenditures. The numbers are big enough to move the GDP, and this certainly will hit employment.

The military is spending $60b in R&D; think there is any “fat” in that budget? One item I thought was interesting was in the budget for procurement for Ammunition. $4b for bullets. Do they really need 10 billion bullets a year?


I could go on for a bit. There was not a single page of the 70 detailed pages that did not have one or two items that were questionable. The sequester is a stupid way of going about cutting expenses, but there is a ton of fat in what is spent.


Warning: The report is endless. It will hurt your eyes and piss you off.




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