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Big pay raise means big tradeoffs under spending stalemate

Agencies could struggle to absorb cost of workers' 5.2 percent hike

President Joe Biden at the White House on Dec. 11.
President Joe Biden at the White House on Dec. 11. (Tom Williams/CQ Roll Call)

President Joe Biden finalized the largest annual pay raises for federal employees in decades last week after the worst inflation since the 1980s — finally coming down now to more acceptable levels — took its toll on workers and their families over the past two years.

The only problem: Federal agencies will need to find room for that boost within budgets that are currently operating with no growth from the previous year and could end up facing steep cuts starting in a few months. That could mean negative outcomes of varying degrees, according to experts, ranging from contractor cutbacks to hiring freezes to furloughs and layoffs.

The 5.2 percent raises for civilian and military employees Biden set in motion via executive order and his signature on the fiscal 2024 defense authorization law are set to take effect in January. Most workers won’t see the impact show up until their first full paychecks of the new year arrive on Feb. 2.

At least in theory, agencies could muddle through to that point by scraping up the money here and there while Congress finishes up the fiscal 2024 spending bills. After that point, however, it’s anyone’s guess what agencies will need to do to make ends meet.

Current stopgap funds, mostly at prior-year rates, run out Jan. 19 for the departments of Agriculture, Energy, Housing and Urban Development, Transportation and Veterans Affairs, as well as the Army Corps of Engineers and Food and Drug Administration. Budget authority for the rest of the federal agencies lapses after Feb. 2.

Those dates are intended as deadlines for lawmakers to act on full-year spending bills. But House Republicans are at odds with their Democratic counterparts as well as Senate Republicans on what overall funding levels they can agree on, with no signs of a breakthrough yet in sight though talks are underway over the holiday break.

If there’s no deal, Speaker Mike Johnson, R-La., has threatened to bring a full-year continuing resolution to the floor, which in typical situations would extend similar funding rates or even allow for increases that conform to the new fiscal year’s discretionary spending caps.

But fiscal 2024 is no typical situation after last spring’s debt limit package, which set in motion a series of potential scenarios that could lead to steep across-the-board spending cuts.

The most likely scenario in a full-year CR, according to most budget experts, is flat defense spending and nondefense cuts that could range up to 10 percent depending on the Office of Management and Budget’s eventual calculations.

Another possible scenario would be slimmer cuts to nondefense accounts with defense also taking a slight hit. So far OMB isn’t tipping its hand, and on Friday the budget office told agencies not to get ahead of themselves by planning for cutbacks just yet.

Either way, there’s little to no room for agencies across the government to absorb the federal pay boost, which is expected to require at least $5 billion more than the previous fiscal year, without increases to their salaries and expenses accounts.

‘Horrendous consequences’

Because the pay raise is mandated, in a worst-case scenario that could mean headcount reductions, furloughs, hiring freezes or simply reducing the agency’s footprint through attrition by not replacing those who retire if agencies are forced to make cuts elsewhere.

The largest federal employee union isn’t worried specifically about the pay raise’s impact on staffing, arguing agencies for decades have had to contend with rising fixed costs within tight annual budgets.

Jacqueline Simon, policy director for the 750,000-strong American Federation of Government Employees, said agencies would find other ways to cut back, such as services contracts. “I think the agencies have many, many choices where to cut back if they have to cut back to absorb increased payroll costs,” she said.

However, Simon acknowledged concern about what could happen if agency budgets generally face deep cuts in the fiscal 2024 appropriations process. “There could be horrendous consequences,” she said, from “any kind of cuts to agency funding generally that could cause people to be laid off or not replaced when they retire.”

Congress very rarely resorts to a yearlong stopgap bill, and with limited exceptions typically completes work on appropriations no later than March of the new calendar year. But there is precedent for what might happen next year if Johnson follows through on his pledge of no more short-term CRs and there’s no topline funding deal.

In 2006, Republicans controlling the White House and Congress finished just two of the fiscal 2007 spending bills — Defense and Homeland Security — before the midterm elections. Democrats won control of both chambers, and the remaining appropriations bills were punted into the new calendar year.

Rather than spend time on the prior year’s unfinished business when they had a full agenda to tackle, Democrats wrote a full-year CR for the rest of the fiscal 2007 spending bills.

They wrote it to conform to the fiscal 2007 discretionary ceiling Republicans put in place the year before — with a $9 billion or 2 percent increase over the previous year’s comparable levels — rather than simply extend the lower fiscal 2006 funding rates.

President George W. Bush had earlier proposed a 2.2 percent pay raise for military and civilian federal workers in 2007. Congress later upped the military raise to 2.7 percent but kept Bush’s request for civilians in place.

The fiscal 2007 Defense spending law’s 5.3 percent boost was enough to keep pace with the military pay raise. But other agencies struggled to cover the costs, and the full-year CR for fiscal 2007, signed on Feb. 15, 2007, included an anomaly granting agencies a special $785 million appropriation so they’d only have to cover half of the pay raise.

A fact sheet from Senate Democrats at the time said the extra funds were necessary “in order to avoid Reductions in Force (RIFs) and furloughs.”

‘Woke and weaponized’ bureaucracy

Fast forward to this year’s appropriations process, when zero spending bills have become law, including the Pentagon bill.

Appropriators in both chambers have proposed roughly 4 percent increases for DOD, in line with the debt limit law, enough to finance the 5.2 percent raise. House GOP appropriators have included a special extra raise for junior enlisted servicemembers and want to add $1.4 billion more to military personnel accounts than their Senate counterparts.

However in a flat-funded yearlong CR, around $30 billion in proposed Pentagon funding increases disappear, and the agency could even be left with billions of dollars cut from current levels. Some reprogramming and transfer authorities are available, but other sacrifices would likely be needed in order to implement servicemembers’ pay boost.

On the nondefense side, the situation would be even bleaker, with agencies facing tens of billions of dollars in cuts alongside the rising fixed cost of employee pay. So far, there’s no movement on a special funding anomaly to absorb at least some of that blow — and it’s unlikely that House Republicans would seek do the federal workforce any favors.

The House GOP should “combat inflation and the woke and weaponized federal bureaucracy” by demanding nondefense spending cuts in final appropriations talks, Rep. Chip Roy, R-Texas, the Freedom Caucus policy director, wrote in a recent op-ed.

Peter Cohn, Aidan Quigley and Niels Lesniewski contributed to this report.

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