Background

The Balanced Budget and Emergency Deficit Control Act of 1985  (BBEDCA) established sequestration to enforce discretionary spending  limits and control the deficit. In August 2011, Congress and the President  enacted the Budget Control Act of 2011 (BCA), amending BBEDCA.  Among other things, the BCA established the Joint Select Committee on  Deficit Reduction (Joint Committee), which was tasked with proposing  legislation to reduce the deficit by $1.2 trillion or more through fiscal year  2021. The absence of such legislation triggered the sequestration  process in section 251A of BBEDCA, known as the Joint Committee  sequestration, which is the subject of this report. During fiscal year 2013,  several laws changed the timing and amount of sequestration. As a result  of those changes, the President ultimately ordered a sequestration on  March 1, 2013, to achieve $85.3 billion in budget reductions. Consistent  with BBEDCA, the Office of Management and Budget (OMB) calculated  the following percentage sequestration reductions based on the funding  level set by the CR in effect at that time:
7.9 percent for defense direct spending,
7.8 percent for defense discretionary spending,
5.1 percent for nondefense direct spending—other than Medicare  payments and certain health programs, which are limited to 2 percent  under BBEDCA, and
5 percent for nondefense discretionary spending.
BBEDCA required that the sequestration reductions ordered on March 1,  2013, be applied uniformly, across the board, to nonexempt accounts and  their sub-units, known as PPAs. BBEDCA provides that PPAs are  identified by appropriation acts or accompanying reports for the relevant  fiscal year or, for accounts not included in appropriation acts, with  reference to the most recently submitted President’s budget. On March  26, 2013, Congress and the President enacted the Consolidated and  Further Continuing Appropriations Act, which provided full-year  appropriations to federal agencies and had the effect of reducing the  sequestered amount for fiscal year 2013 from $85.3 billion to $80.5  billion.on total sequestered amounts for programs that are funded by permanent   The final sequestered amount for fiscal year 2013 is dependent  indefinite budget authority, such as entitlement programs like Medicare  payments where obligations depend on the number of eligible  beneficiaries receiving benefits.
Our March 2014 report found that one of the ways agencies responded to  sequestration was by using funding flexibilities to mitigate the effects of  sequestration where available. These funding flexibilities include  reprogramming and transferring funds and using unobligated balances.  Reprogramming is the shifting of funds from one program activity to  another within an appropriation account for purposes other than those  contemplated at the time of appropriation, while transferring is the shifting  of funds between appropriation accounts. remain legally available from prior year appropriations could provide  agencies with funding flexibility to respond to sequestration. If a  multiyear or no-year appropriation is not fully obligated by the end of the  fiscal year, the unobligated balance may be carried forward into the next  fiscal year and may remain available for obligation.
For more information on reprogrammings and transfers, see the glossary of budget  terms in appendix VI. enacted on January 17, 2014, did not exceed defense or nondefense  spending limits, and therefore did not trigger a sequestration of  discretionary appropriations. Nonexempt direct spending, including  Medicare payments, will continue to be sequestered automatically for  fiscal years 2014 through 2024, as it was in fiscal year 2013.

	Sequestration Reduced Selected Federal Components’ Services to the Public and Increased Some Partners’ and Recipients’ Reliance on Other Funding Sources

The selected components and their partners reduced or delayed some  services to the public and operations in 2013 as a result of sequestration.  For example, components of federal agencies reported that their actions  included the following:
Due in part to personnel actions taken in response to sequestration,  international passenger wait times for CBP inspections increased at  some airports, and CBP delayed some air cargo inspections. For  example, CBP officials reported that sequestration reductions did not  leave them with sufficient funds to provide the overtime necessary to  fully staff inspection booths, which resulted in increased average wait  time for international passengers. From fiscal years 2012 to 2013,  wait times increased from 19.7 minutes to 22.8 minutes at one airport  and from 20.9 minutes to 26.8 minutes at another. Meanwhile, officials  at one CBP field office stated that in some instances, officers could  not inspect all cargo in the queue during their normal shift, which  meant that some cargo was not inspected until the next shift began,  which delayed the release of cargo for shipment.
CMS reduced the frequency of certain medical facility inspections. For  example, to implement sequestration reductions, CMS reported  reducing the frequency of surveys to determine the quality of care and  compliance with federal standards at psychiatric hospitals from once  every 3 years to once every 4 to 5 years. Surveys of specialized  organ transplant centers were reduced from once every 3 years to  once every 4 to 6 years. We do not know the effect of the reduced  oversight on patient safety or the quality of care provided by the  health care facilities.  Impact Aid and Title I school districts reduced some services to  students. For example, three of the Impact Aid districts reported  having to increase class sizes. Officials from one of the districts  specifically reported an average increase of two or three students per  elementary school class from the prior school year. Meanwhile,  officials from one district that received Title I funding told us that the  loss of funding contributed to the decision to reduce the number of  reading and math specialists who provide extra instruction to students  and assist teachers in improving their teaching methods.
PIH reduced funding for the Housing Choice Voucher program. As a  result, the number of very low-income households receiving rental  housing assistance through the program at the end of calendar year  2013 declined by about 41,000 (2.2 percent) compared to the end of  calendar year 2012 primarily due to sequestration.
DOD reduced military training and readiness activities, such as  canceling or limiting training, which the agency reported could  increase the number of non-deployable units, decrease surge  capacity to meet additional requirements with ready forces, and lead  to skills gaps.
In some instances, the effects of sequestration compounded other  reductions in federal, state, and local funding sources. Representatives of  a medical provider association have reported that the 2 percent  reductions to Medicare payments required by sequestration compounded  other reductions in payments. Payment reductions can result from the  annual rate setting process for providers or specific legislative actions.  Further, all of the seven Title I and Impact Aid school districts we spoke to  told us that cuts to state funding in prior years had already reduced their  budgets, which were further cut as a result of sequestration. In other  cases, program partners supplied resources, where available, to mitigate  the effects of sequestration. Officials at certain state survey agencies that  we spoke to, which carry out health care facility safety inspections and  investigations on behalf of CMS, said they would use additional state  funds when necessary to compensate for lower federal funding levels and  complete high-priority inspections.reserves accumulated from prior years to avoid terminating housing  vouchers. In addition, officials at one of the four PHAs we interviewed told  us their local government provided funding for public housing—which it  does not usually do—to mitigate the effects of sequestration.
Similarly, some PHAs used funding  However, we found that in some cases the effects of sequestration were  unknown because it is difficult to isolate the effects for some programs  and activities that receive funding from multiple sources. For example, the  effects of the 2 percent sequestration of Medicare payments are difficult  to quantify due to difficulty in isolating the effects of sequestration from  other factors that increased or decreased payments to providers, as well  as possible changes in provider behavior to compensate for the  sequestration reductions. Similarly, it is difficult to isolate the specific  effects of sequestration on Title I school districts because Title I funding  typically makes up a small portion of the school district’s total funding  compared to state and local sources. In addition, because of the statutory  formula for Title I, a reduced Title I allocation could be a result of factors  other than sequestration, such as decreases in the formula count of  children or reduced state per pupil expenditures.

	Federal Components’ Sequestration Planning and Implementation Efforts Varied and Were Hindered by Uncertainty and Other Challenges

Planning for sequestration varied among the selected federal  components. Some planning efforts were more centralized and occurred  primarily at the agency level. For example, OESE and PIH largely  followed sequestration plans set by Education and HUD, respectively. By  contrast, CMS planned for sequestration primarily at the component level  by identifying certain activities as spending priorities, in consultation with  the HHS budget office. CBP headquarters generally managed planning  for the required budgetary reductions and delegated implementation  decisions affecting operations to program offices.
In some cases where sequestration planning primarily occurred at the  component level, technical questions posed challenges. CMS faced  technical challenges in applying sequestration in accordance with the law  and changing budget parameters. Specifically, CMS had difficulty  determining all of the types of provider payments that would need to be  cut and which funding was subject to special sequestration rules.  Similarly, CBP budget officials told us that applying sequestration to fee  accounts was more difficult than other accounts due to uncertainty over  whether fee accounts would be exempt from sequestration, as well as  uncertainty about how to apply sequestration cuts to fee accounts.
Our March 2014 report similarly found that many agencies faced  challenges in applying sequestration to certain programs, such as those  funded through user fees and trust funds. We made two  recommendations that could help alleviate some of the uncertainty for  potential future sequestrations. Specifically, we recommended that OMB  document and make publicly available its decisions regarding how  sequestration was implemented and issue guidance directing agencies to  formally document the decisions and principles used to implement  sequestration for potential future application. OMB agreed with our  recommendation and plans to publish its criteria used for making  determinations about how sequestration was implemented in its guidance  to agencies, OMB Circular No. A-11, Preparation, Submission, and  Execution of the Budget, but did not specify when this guidance would be  available.
In addition, uncertainty surrounding the timing and amount of  sequestration limited the components’ ability to provide substantive  communication to its program partners and recipients. For example, CMS  officials told us that, because sequestration took effect late in the fiscal  year, it was difficult to provide timely communication to state survey  agencies that would allow them to adequately plan their budgets.  Recipients of PIH Indian Housing Block grants told us that uncertainty  surrounding the fiscal year 2013 federal budget process presented  challenges because they did not receive the full amount of their grants  from HUD until several months into the calendar year. These findings are  consistent with our March 2014 report, which found that uncertainty over  if and when sequestration would occur limited agencies’ communication  with stakeholders.
To implement sequestration, federal agencies and components had to  analyze each budget account separately to determine its PPAs in  accordance with section 256(k)(2) of BBEDCA. Section 256(k)(2) of  BBEDCA provides that PPAs shall be identified within the appropriation  act or accompanying report for the relevant fiscal year covering the  budget account, or for accounts not included in appropriations acts, as  delineated within the most recently submitted President’s Budget. We  reviewed a purposeful, nonrandom sample of five PPAs from each of the  four nondefense components. We found that agencies complied with the  criteria set forth in section 256(k)(2) in identifying each of the PPAs in our  sample.
In some cases, certain program characteristics limited the actions  available to components for implementing sequestration. Officials from  OESE and PIH told us that they had few options for implementing  sequestration because some of their largest programs are based on  eligibility formulas—established by law in some cases—or the funds are  disbursed to program partners to fund various services to the public. As a  result, the component could only achieve the required spending  reductions by reducing the amount of the funds distributed to eligible  partners or recipients. Partners and recipients therefore had reduced  federal funds available for services. For example, eligibility criteria and  formulas for allocating Title I grant funds are established by law and  sequestration generally reduced the grant amounts that states and  eligible school districts would have received absent sequestration.  Similarly, CMS had little flexibility in applying sequestration cuts to  Medicare payments because, with few exceptions, under BBEDCA all  types of Medicare payments were subject to the 2 percent sequestration.  Therefore, Medicare fee-for-service providers and Medicare Advantage  and prescription drug plans had to absorb the reduction. In addition,  some agencies had legal mandates that constrained their implementation  options. For example, CBP is required to maintain a certain number of  Border Patrol agents, which limited available personnel actions.
In cases where officials did have some discretion in applying  sequestration reductions, components reported that they had to make  trade-offs to protect higher priority activities in their resource allocation  decisions. For example, the Border Patrol did not apply the required  reductions evenly across sectors because operational demands were  higher in some sectors than others. Further, CMS chose to maintain  funding for implementation of the federal health insurance exchanges  despite the reductions. Similarly, within DOD, the military services sought  to protect training requirements for deployed and next-to-deploy forces.  To do this, DOD took actions such as canceling or limiting training for  forces not preparing to deploy in fiscal year 2014. Furthermore, similar to  our March 2014 report, case study components implemented  sequestration cuts by, for example, reducing training and travel, reducing  program management and support services, and rescoping or delaying  grants.
Previously initiated efficiency efforts helped components absorb some of  the required reductions. For example, CBP was better positioned for  sequestration, according to officials, due to efficiencies implemented over  the past several years in response to declining budgets. Similarly,  according to CMS officials, an initiative to improve the efficiency of its  facility inspections that began in 2011 helped CMS plan for the fiscal year  2013 sequestration.
Consistent with our March 2014 report, we found that actions components  took to mitigate the effects of sequestration on mission priorities will not  be available to the same extent, if at all, in future years. Specifically, CBP  officials told us that it will be more difficult to implement sequestration in  future years without adverse effects on their missions because actions  taken in fiscal year 2013—such as reducing funding for equipment and  fuel—will be difficult to replicate. CMS officials also told us that future cuts  would be more difficult to implement because, for example, carryover  balances may not be available to the same extent in future years.  Similarly, DOD used portions of available unobligated balances from prior  years to mitigate fiscal year 2013 sequestration reductions, but the  agency may have lower prior year unobligated balances available to rely  on in future years. Further, in some cases program partners, such as  tribally designated housing entities and PHAs, used funding carried over  from the previous year or their own reserve funds, but they may have  fewer of these funds available in future fiscal years.

	Concluding Observations

Sequestration reduced funding for the partners and recipients that carry  out federal programs, affecting services to the public and federal agency  operations. These case studies illustrate how some spending reductions  at the federal level ultimately reduced funding for program partners  operating at the local level, which resulted in effects such as less frequent  inspections of certain medical facilities; fewer households receiving  housing vouchers; and reduced services for students in some school  districts. In addition, these case studies provide further evidence that the  uncertainty surrounding the timing and amount of sequestration  hampered communication with program partners and recipients. This  uncertainty limited the abilities of states, tribes, and other partners to  effectively plan to manage their operations with limited resources. OMB’s  implementation of the recommendations in our March 2014 report would  facilitate agencies’ planning and implementation for a potential future  sequestration by documenting federal agencies’ and OMB’s decisions  and principles for planning for and implementing sequestration. Publicly  available documentation would allow agencies and their program partners  and recipients to build institutional knowledge that could better position  them to implement a potential future sequestration.
Some cost-savings strategies used by components and their program  partners—such as deferring maintenance for schools, public housing  units, and Border Patrol vehicles—cannot be continued indefinitely. There  is a limit to agencies’ ability to achieve efficiencies and budget reductions  by deferring or reducing funding for lower priority activities and agencies  have limited authority to reprioritize many activities. As we previously  reported, implementing future budget reductions will likely require  Congress and the executive branch to reexamine how agencies carry out  their missions.

	Agency Comments and Our Evaluation

We provided a draft of this product to the Secretaries of DHS, Education,  HHS, and HUD, and the Director, OMB for comment. DHS, Education,  HHS, and HUD provided technical comments that were incorporated, as  appropriate. OMB did not provide comments.
We are sending copies of this report to DHS, Education, HHS, HUD,  OMB, and other interested parties. In addition, the report will be available  at no charge on GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Michelle Sager at (202) 512-6806 or sagerm@gao.gov or Edda  Emmanuelli Perez at (202) 512-2853 or emmanuellipereze@gao.gov.  Contact points for our work at individual agencies are shown appendixes I  through IV of this report. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.

Appendix I: Fiscal Year 2013 Sequestration at U.S. Customs and Border Protection

	Sequestration Cuts Had Short-Term and May Have Long-Term Effects on CBP’s Services to the Public, Operations, and Workforce

CBP headquarters, Border Patrol sector, and OFO field office officials  cited effects resulting from sequestration in three areas: (1) services to  the public, (2) operations, and, (3) CBP’s workforce.
Services to the public: OFO officials from the Houston, Los Angeles, and  New York field offices cited effects on cargo operations resulting from  sequestration. Specifically, to ensure that international air passenger wait  times were kept to a minimum in fiscal year 2013, these three field offices  chose to shift officers who typically inspected cargo to the air passenger  environment. shift in resources, compounded by reductions in overtime, led to some  delays in air cargo inspections. Officials from this field office stated that in  some instances, officers could not inspect all cargo in the queue during  their normal shift. As a result, some cargo was not inspected until the next  shift began, delaying the release of cargo for shipment.
CBP generally calculates air passenger wait times as the time interval between the  arrival of the aircraft and the processing of the passenger by a CBP officer at the primary  booth, less the passenger’s walk time.
FEPA because it was instituted by the Federal Employees Pay Act,  applies to all other positions in OFO (about 20 percent of the workforce,  according to OFO). According to officials from the Airports Council  International-North America, wait times had been a persistent issue over  the last several years. OFO headquarters officials explained that  sequestration reduced funding available to pay overtime necessary to  fully staff inspection booths, which resulted in these increased wait times.
Operations: According to USBP officials, sequestration affected agents’  ability to patrol remote borders because it resulted in reduced funding for  overtime, among other things. USBP officials stated that Border Patrol  agents typically need to work beyond their 8-hour shifts and claim  overtime for the additional hours they spend on duty.
According to CBP budget officials, agents may claim other types of overtime pay, other  than AUO, for hours worked beyond their 8-hour shifts depending on the type of duties  performed during this time and whether the work was scheduled in advance. However,  AUO is the primary overtime for Border Patrol agents.
In January 2014, for reasons unrelated to sequestration, DHS suspended AUO for  certain positions, including those for full-time instructors and employees working in  component headquarters offices, pending further review of AUO policies and practices. the Yuma sector are more than 3 hours away from Yuma sector  headquarters, requiring significant use of AUO, according to sector  officials.
Likewise, USBP reported that a reduction to its vehicle maintenance,  repair, and fuel funding resulted in agents traveling less frequently to  remote sector locations, which led to reported effects on CBP’s  operations. decrease in miles driven compared with miles driven in fiscal year 2012.  For example, the Yuma sector reported about 13.27 million miles driven  in fiscal year 2013 compared with about 19.80 million miles driven in  fiscal year 2012; the Grand Forks sector in North Dakota reported about  2.4 million miles driven in fiscal year 2013 compared with about 3 million  miles in fiscal year 2012. Yuma officials we spoke with stated that they  discontinued the use of vehicles in need of repairs to reduce fleet-related  costs in fiscal year 2013. Yuma officials stated that, as a result, their  sector went from 90 percent vehicle availability before sequestration to 70  to 80 percent availability afterwards, thus limiting the number of miles  patrolled. Officials from the Blaine sector stated that they placed two  agents per vehicle to reduce fuel usage, which affected the miles of  border patrolled in a given day. Blaine officials stated that they could not  patrol one of their distant zones with optimal frequency as a result of the  reductions to fuel.
According to CBP’s Office of Administration, operational offices manage fuel and  maintenance budgets for their vehicles. Accordingly, the Office of Administration was not  able to provide definitive data to support reduced fuel and maintenance funding due to  sequestration. this also had an effect on staffing and operations because home-to-work  authorizations allow personnel to use a government vehicle for official  purposes, which may include travel between the individual’s residence  and various locations required for the performance of field work.  Between March and June 2013, 9 sectors reported to Border Patrol  headquarters that these reductions had led to delays in agents’ response  times. For example, the Big Bend sector reported that an agent was  delayed in arriving at a scene and subsequently county officials were  required to release 10 subjects believed to be illegally in the United  States.
Documentation provided by OFO indicated that, in fiscal year 2013, OFO  experienced a reduction in some enforcement actions at ports of entry,  such as those related to the inspection of cargo and, seizures of inbound   For example, between April and July 2013, OFO  ammunition and drugs. reported that inspections of regulated cargo declined by about 21 percent,  inbound ammunition seized decreased by about 79 percent, fraudulent  documents intercepted at ports of entry decreased by about 15 percent,  and heroin confiscations decreased by about 21 percent.Chicago field office officials stated that to prioritize the processing of  people and goods and keep air passenger wait times down, as directed  by OFO headquarters, the office limited its enforcement efforts in fiscal  year 2013. Chicago officials expressed concern regarding potential long- term effects of declining enforcement efforts; their field office conducted  fewer contraband exams per month, as well as passenger interviews, and  outbound currency seizures during fiscal year 2013. According to Chicago  field office officials, Chicago O’Hare International Airport experienced a 6  percent increase in arriving passenger volume in fiscal year 2013, so they  would have expected these enforcement numbers to increase, not  decrease.
For example,  CBP workforce: As of April 1, 2013, CBP suspended all nonmandatory  training as a result of sequestration. Between March and June 2013, 6  Border Patrol sectors reported the cancellation of training classes ranging  in topics from hazardous materials operations to employee supervision.  Border Patrol and OFO officials we spoke with expressed concern  regarding the effects of this canceled training on employees’ skill sets.  Officials from the Blaine sector stated that nonmandatory training is  essential to their workforce. For instance, Blaine sector officials stated  that nonmandatory training classes that were canceled in fiscal year 2013  provided valuable skills, such as training in high-speed pursuit,  leadership, weapons of mass effect, and incident command system.  Officials from the Rio Grande Valley sector stated that some specialty  training, such as canine training, was also canceled in fiscal year 2013 as  a result of limited travel funding for their agents.
Border Patrol and OFO officials—those in headquarters and in the field— also expressed concern regarding the effect of sequestration on  employee morale. As a result of CBP hiring restrictions for positions other  than agents and officers, officials from the Rio Grande Valley and San  Diego sectors stated that agents were asked to perform administrative   Officials from the Chicago,  tasks, outside of their scope of responsibility. Los Angeles, and New York field offices stated that employee morale was  affected as a result of asking officers and support staff to do more with  fewer resources, including performing duties typically completed by  mission support staff.

	CBP Headquarters Centrally Managed Planning for Sequestration and Delegated Many Implementation Decisions Affecting Operations to Program Offices

According to CBP budget officials, CBP was better positioned to plan for  and address further budget reductions in fiscal year 2013 because prior to  sequestration it had taken efforts aimed at reducing costs and  streamlining operations. As it became more certain sequestration would  occur, CBP’s headquarters initiated planning as the reductions necessary  to comply with sequestration evolved. After the sequestration order, CBP  headquarters generally managed budgetary reductions and delegated  implementation decisions affecting operations to program offices.  According to CBP headquarters officials, it would be challenging for CBP  to replicate some of these actions in future years depending on the levels  of and conditions on any future funding.

		Cost Efficiency Efforts Implemented Prior to Sequestration Helped Absorb Some Budget Reductions

According to CBP officials, cost savings measures implemented prior to  sequestration helped the component address reductions resulting from  sequestration. For example, prior to sequestration, CBP implemented or  expanded initiatives, such as Automated Passport Control and trusted  traveler programs, to expedite screening procedures at ports of entry.  OFO and air travel association officials stated that the implementation of  Automated Passport Control had an effect on efficiently processing  international air passengers at airports and managing wait times. In  addition, CBP took steps prior to sequestration to reduce spending, such  as limiting hiring and reducing operating expenses. Specifically, beginning  in July 2012, CBP restricted non-agent/officer hiring and filled open  positions only from within CBP. In addition, individual sectors and field  offices took steps to operate more efficiently in fiscal year 2013 and  beyond. For example, in August 2011 the Rio Grande Valley sector  partnered with CBP’s Office of Air and Marine to institute a bulk fuel  program that, according to this sector, saved CBP an average of  approximately $1,200 per month through reduced fuel costs.officials at OFO’s Chicago field office stated that they chose to reduce  overtime usage by about one-third from February through May 2013, prior  to the sequestration order, to ensure that the Chicago field office would  have enough funding to cover overtime costs in the peak summer travel  period.

		CBP’s Headquarters Initiated Planning as the Reductions Necessary to Comply with Sequestration Evolved

According to CBP budget officials, CBP headquarters began to plan for  sequestration in November 2012 and led planning efforts across CBP’s  program offices by providing the offices with estimated funding reductions  that they could use to prepare for sequestration. CBP adapted its  sequestration plan as its anticipated reductions changed prior to and after  the March 1, 2013, sequestration order. Table 2 provides a timeline of the  anticipated sequestration reductions prior to and during fiscal year 2013.
According to officials from CBP’s Offices of Administration and Program  Development, in November, 2012, they developed a planned budget  using CBP’s enacted fiscal year 2012 budget with a reduction of 8.2  percent from each discretionary program, project, and activity (PPA), and  7.6 percent for each direct spending PPA. CBP budget officials stated  that in late November 2012 they provided this tentative budget to the  program offices and asked them to provide actions to meet these  reductions, assuming funds could not be transferred or reprogrammed.According to officials from CBP’s Office of Program Development, they  instructed program offices to look for cuts to less critical areas first and  focus on preserving personnel by implementing furloughs only if  necessary.
Program offices provided CBP headquarters with their proposed cuts by  December 5, 2012, according to CBP headquarters officials. Some offices  identified specific cuts to non-personnel areas, while others considered  reductions to overtime or proposed furlough days. According to CBP  budget officials, they worked with program offices that anticipated heavy  employee furloughs to identify other options for achieving reductions.  Although CBP ultimately mitigated the need to furlough employees in  fiscal year 2013, CBP budget officials stated that furloughs were difficult  to avoid given the initial estimates for the sequestered funding and  projected full year budget authority. A major factor is that payroll-related  costs consume a large percentage of CBP’s available funding; for  example, OFO’s payroll expenses comprise more than 90 percent of its  funds. According to DHS’s and CBP’s early sequestration and budget  authority assumptions, OFO anticipated the equivalent of nearly 50  furlough days.
The sequestration amount changed in January 2013 when the anticipated  percentage reductions were revised to 5 percent. At this point, CBP’s  internal preparations for potential reductions revealed that significant  changes were likely to occur. See table 3 for CBP’s considered  reductions to meet sequestration, as of January 2013.
In January 2013, the Office of Management and Budget (OMB) issued a  memorandum directing agencies to intensify efforts to prepare for  sequestration; however, sequestration reductions were not finalized and it  remained unclear whether certain accounts would be exempt, according  to CBP budget officials. On February 21, 2013, the CBP Deputy  Commissioner provided guidance on planning, with guiding principles of  protecting critical missions, mitigating the disruption to employees, and  maintaining operations and programs. This guidance specified that  sequestration cuts, through furloughs and reductions to overtime, could  decrease the number of equivalent work hours by more than 5,000  Border Patrol agents and 2,750 CBP officers. After receiving this  guidance, Border Patrol and OFO headquarters provided planning  priorities for sequestration to sectors and field offices. According to  Border Patrol headquarters officials, sectors communicated their  sequestration implementation plans with Border Patrol headquarters and  worked with them to find appropriate reductions. Some sectors identified  sector-specific areas that were most mission-critical to maintain during  sequestration, including health and safety for agents and detainees, as  well as maintaining control of the border between ports of entry.
OFO field offices had discretion to determine specific reductions within  the field office budgets and to prioritize their own actions, in consultation  with OFO headquarters. According to OFO headquarters officials, they  asked the field offices to outline port contingency plans in the event of  severe reductions and to identify possible results and effects, including  those related to public services. Field offices provided this information to  OFO headquarters, which consolidated them into a formal memorandum  that was distributed back to the field offices on February 26, 2013. The  memorandum instructed field offices to focus on preserving essential  services—such as the clearing of goods and persons—and to consider  reductions to lower priority spending and operational activities—such as  secondary training and enforcement activities, respectively.
The effect of sequestration on specific fee accounts remained uncertain  as of January 2013, according to CBP budget officials. Budget officials  stated that fee accounts, such as the COBRA fee account, play an  integral role in CBP’s planning and budget process because they  reimburse CBP’s Salaries and Expenses account for certain expenses,  such as overtime pay for CBP officers, that comprises about 30 percent of  that account. According to CBP budget officials, they had a better  understanding of their plans for sequestration with respect to fee  accounts by late February 2013, but officials still needed additional  clarification on how the cuts would be applied. Although OMB issued  official guidance based upon input received from agencies in the summer  of 2012, CBP remained uncertain about how this guidance would be  applied to each of the unique fee accounts that it relied upon to fund its  operations until August 2013. Ultimately, OMB determined that  sequestration would be applied to the amount of fees collected and that,  for COBRA fees, the funds would be available in future years.

		CBP Headquarters Generally Managed Reductions and Delegated Implementation Decisions Affecting Operations to Program Offices

CBP headquarters coordinated the components’ reductions in funding  and implemented some component-wide actions to meet sequestration;  CBP’s program offices had the flexibility to determine many  implementation decisions. USBP’s implementation of sequestration  reductions varied among its sectors based on mission needs. Similarly,  OFO’s reductions varied across its field offices. Because of the  complexity of CBP’s fee accounts, reductions to the COBRA fee account  remained unclear until late in fiscal year 2013.

			CBP Headquarters Coordinated Funding Reductions and Implemented Some CBP-Wide Actions

Although the final sequestration reduction of 5 percent was lower than the  initial 8.2 percent reduction estimated by OMB, CBP budget officials  reported that it was challenging to absorb this reduction in the last half of  the fiscal year. Budget officials specifically mentioned that implementing  sequestration was difficult because of the large percentage of CBP’s  available funding dedicated to payroll—about 70 percent, or $8 billion. On  the basis of its anticipated funding and sequestration reductions, CBP  began to issue notices to all employees beginning on March 7, 2013, that  they may be furloughed. Though sequestration went into effect on  March 1, the amount of CBP’s anticipated reductions and resulting  actions evolved over the course of the fiscal year. For example, although  CBP issued furlough notices in early March 2013, the component  subsequently mitigated the need for furlough days as a result of  reprogramming, transfers, and increased funding available to CBP  through the enactment of the Consolidated and Further Continuing  Appropriations Act, 2013. Transfers included $36 million from other CBP  accounts and $24 million from other DHS components to CBP’s Salaries  and Expenses account. At the recommendation of the House Committee  on Appropriations, CBP transferred an additional $7 million in unobligated  balances from its 2011 and 2012 Border Security Fencing Infrastructure  and Technology accounts to its Salaries and Expenses account. These  unobligated balances had been set aside for emerging requirements and  pilot programs, but were used instead, along with a transfer from the DHS  Office of Intelligence and Operations account, to maintain minimum  numbers of Border Patrol agents and CBP officers.
To meet the remaining reductions required by sequestration, CBP  reported that it implemented the following actions:  suspended the hiring of operational and mission support staff from  outside of CBP minimized travel to only that which was mission critical; reduced temporary duty station assignments;  reduced retention, recruitment, and relocation expenditures;  canceled the remaining nonmandatory training classes scheduled in  fiscal year 2013; delayed or reduced the scope of certain contracts; and deferred the replacement of over 800 motor vehicles, increasing these  affected vehicles’ lifecycle by a minimum of 1 year.

			USBP Implemented Cuts to Sectors Relative to Mission Needs

USBP reported that reductions varied across its sectors relative to  mission needs in an effort to implement sequestration with limited effects  on personnel. For example, as of May 2013 CBP’s budget office  estimated that the post-sequestration non-payroll reduction to the Yuma  sector was 23 percent, whereas the estimated nonpayroll reduction to the  Spokane sector was about 9 percent. To provide additional funds to  sectors with increased mission requirements, USBP redirected funds  away from one or two sectors that were able to operate on less than they  had originally received, according to USBP officials. According to USBP  officials, some sectors made significant cuts in the first and second  quarters of fiscal year 2013 in anticipation of a possible sequestration.  The funding for these sectors was redirected to other sectors later in the  fiscal year. According to USBP officials, it was challenging to implement  sequestration without affecting employees because salary and benefits  for USBP represent 93 percent of total budget authority.
USBP initially anticipated discontinuing its agents’ use of AUO; however,  USBP ultimately chose to reduce non-pay expenditures and maintain  existing overtime and premium pay reductions, resulting in a cost  avoidance of about $5 million to AUO in fiscal year 2013. According to USBP, it closely managed, monitored, and updated overtime projections  each pay period so the reduction efforts were successful and in July  2013, USBP determined it would continue its agents’ use of AUO.
Border Patrol headquarters and sector officials stated that the reductions  to AUO were challenging to implement because of the unpredictability of  patrolling the border and the need for agents to frequently work beyond  their 8-hour shifts to complete their duties. In addition to overtime  reductions, USBP made reductions in nonpayroll expenditures, such as  vehicle fleet fuel, maintenance, and acquisition. USBP also reduced a  large detainee transportation contract, as well as specialized and  supplemental training. Officials from the Blaine sector explained that to  reduce costs in fiscal year 2013, they delayed necessary repairs on some  vehicles, and used other modes of transportation such as snow mobiles,  bicycles, and motorcycles to the extent possible. These officials stated,  however, that eventually their sector will need to repair its aging vehicles  and purchase new ones to maintain operations.

			OFO Reductions Varied Across Its Field Offices

This funding was intended for other than full-time hiring, but CBP could not bring  students or temporary/seasonal workers on board during the hiring pause. could inspect passengers and cargo. OFO’s actual expenditures on  overtime for its officers and agriculture specialists at the end of fiscal year  2013 exceeded its initial planned overtime budget. Figure 3 illustrates the  fluctuations in COPRA overtime expenditures for OFO in fiscal year 2013.
According to CBP budget officials, it was complicated to apply  sequestration to fee accounts, including the COBRA fee account. Though  OMB issued guidance in the summer of 2012, CBP budget officials stated  that CBP remained uncertain about how this guidance would be applied  to its fee accounts, including the COBRA fee account, until August 2013.  For instance, CBP budget officials stated there was uncertainty about  which fees were exempt from sequestration. According to CBP budget  officials, OMB determined that the sequestration percentage reduction  would be applied to fiscal year 2013 collected fees, and for the COBRA  account, OMB determined that the sequestered funds would be available  in fiscal year 2014. In fiscal year 2013, CBP collected about $647 million  for the COBRA fee account.
In September 2013, CBP budget officials stated that for fee accounts  where the sequestered funds would be made available in the following  fiscal year and not permanently reduced, the sequestered balances would  be apportioned to CBP for use, that is, reimbursement of the Salaries and  Expenses account, in the first quarter of fiscal year 2014. However, CBP  was not apportioned the sequestered COBRA fee balances until  December 2013. CBP’s budget office reported that the delayed  availability of the sequestered COBRA fees created financial challenges  for CBP during the first 2 months of fiscal year 2014. As a result of the  delay, CBP was unable to reimburse certain costs in the Salaries and  Expenses account, which delayed some procurement actions until the  COBRA fee balances were apportioned.

		Actions Taken to Implement Sequestration in Fiscal Year 2013 Would Be Difficult to Replicate in Future Years

According to CBP officials, some of the actions taken in fiscal year 2013  to address sequestration would be difficult or impossible to replicate in  future fiscal years to address additional budget cuts. For example, CBP  Office of Administration and Office of Program Development officials  expressed concern over USBP’s ability to sustain nonpay cuts taken in  fiscal year 2013 such as those related to equipment and fuel. Further,  CBP’s transfer and reprogramming actions were key to its ability to  mitigate furloughs in fiscal year 2013; however, CBP budget officials  stated that, depending on the levels of and conditions on any future  funding, such actions may not be possible in future years to absorb  additional reductions in funding. Nevertheless, according to CBP Office  of Administration and Office of Program Development officials, CBP is in  a better position to respond to possible future budget cuts as a result of  its planning and implementation of the fiscal year 2013 sequestration. In  addition, CBP officials noted some lessons learned from implementing  sequestration in fiscal year 2013. For example, while planning and  implementing sequestration, CBP maintained open communication  internally, which CBP officials credited as a factor to the success in  planning for sequestration. Border Patrol sector and OFO field office  officials highlighted the importance of communication in planning for the  fiscal year 2013 sequestration. Within OFO, field office officials said  coordination internally and with stakeholders was an important aspect of  their sequestration planning.

	GAO Contact

For additional information, contact David C. Maurer at (202) 512-9627 or  maurerd@gao.gov.

Appendix II: Fiscal Year 2013 Sequestration at the Centers for Medicare & Medicaid Services

	Sequestration Affected Some CMS Activities, but Effects of the 2 Percent Reduction to Medicare Payments and Cuts to Other Activities Are Difficult to Quantify

Spending reductions required by sequestration had effects on some CMS  activities, such as Medicare beneficiary outreach, in fiscal year 2013.  However, the effects of reductions to some activities, such as Medicare  payments, are difficult to quantify in part because they are difficult to  isolate from other changes that took place in fiscal year 2013.

		Sequestration Affected Some Survey and Certification Activities and Beneficiary Outreach Activities

			Survey and Certification

CMS actions taken to implement sequestration reductions affected the  frequency of certain surveys and affected certain state survey agencies’  budgets in fiscal year 2013. Specifically, officials from the Center for  Clinical Standards and Quality (CCSQ), which is responsible for federal  oversight of survey and certification, made policy changes that meant  certain Medicare participating medical facilities were inspected less  frequently. CMS officials told us that they made these policy changes to  ensure that state survey agencies were able to complete statutorily  required surveys. Except for frequency requirements that are mandated  in statute, CMS establishes survey frequencies for other facility types  based on available funding. For example, to implement sequester  reductions, CMS officials reported that CMS reduced the frequency of  psychiatric hospital surveys it conducts through a national contractor from  once every 3 years to once every 4 to 5 years, which officials said freed  funding for other activities. In a memorandum issued April 5, 2013, CMS  instructed state survey agencies on how to prioritize their workloads in  response to sequestration. For example, to cut down states’ workload,  the operating division moved specialized organ transplant center surveys  from states to a national contractor and reduced the frequency of these  surveys from once every 3 years to once every 4 to 6 years. CMS also  instructed states not to add nursing homes to the special focus facility  (SFF) program in their state when an existing SFF nursing home has  graduated from the program or has been terminated from Medicare  participation. SFF nursing homes are poorly performing nursing homes  within each state that are subject to two on-site surveys per year instead  of one survey. As a result of the instruction not to replace SFF nursing  homes, the number of such homes nationwide decreased from 152 when  sequestration began to 62 as of March 2014, according to CMS officials.  By reducing national contracts and support services, CMS limited the  sequestration reduction of states’ Medicare provider survey and  inspection funding, known as Medicare allocations, to an average of 3.2  percent rather than imposing the full reduction on states, according to  officials. We do not know the effect of the reduced oversight from state  survey agencies and national contractors on patient safety or the quality  of care provided by the health care facilities.
Several state survey agency officials that we spoke to reported that,  because they had little time to adjust their staffing and budget plans after  CMS established their fiscal year 2013 Medicare allocations, the state  survey agencies used state funds to mitigate some of the effects of  reduced federal allocations. Specifically, officials from four of the five  state survey agencies we spoke to said they needed more than the  amount of their initial federal allocations in fiscal year 2013 and would use  state funds to cover the difference. For example, officials from one state  survey agency told us it needed more than the amount allocated for  survey activities. The officials said the state survey agency moved state  funds originally intended for other health-related activities to avoid staff  reductions that would have affected its ability to complete the statutorily  required surveys. Officials from another state survey agency told us that  as a direct result of sequestration reductions, 2013 was the first year the  state needed more than the amount allocated to it by CMS. CMS  reported that 15 of the 33 state survey agencies that had finalized their  fiscal year 2013 expenditures as of March 2014 had spent all of their  federal allocations and requested supplemental funding for fiscal year  2013, compared to 7 supplemental requests from those same 33 states in  2012. As of March 2014, CMS could not determine how much funding  would be available for redistribution. A reduction in funds available to  CMS for redistribution could create additional pressure for states in  allocating their own funds to cover survey and certification activities. For  example, two states told us they would have to cut licensure activities  funded solely by the state if CMS could not provide the supplemental  funds to reimburse the state for funds used to complete required  activities.
The state officials we spoke to reported that they were able to complete  the highest priority surveys and complaint investigations by spending a  combination of their federal allocations and state funding. However, two  reported difficulty carrying out all of their surveys with the amounts  available. For example, officials from one state said they could not  complete needed revisit surveys that serve to verify that a facility has  corrected serious deficiencies. While CMS considers these activities a  lower priority, they are still an important activity to ensure patient safety.

			Beneficiary Outreach

As a direct result of cuts made to implement sequestration reductions to  discretionary funding in fiscal year 2013, call wait times increased for 1- 800-MEDICARE, a toll-free customer service line for Medicare  beneficiaries to make inquiries about Medicare. Specifically, CMS cut  funding to the 1-800-MEDICARE contractor, which reduced the number of  customer service representatives available to answer calls. According to  CMS, before sequestration callers waited about 2 minutes for their call to  be answered. In the months after sequestration, average wait times  increased to 5 and 6 minutes.

		Effects of Sequestration Are Difficult to Quantify for Some CMS Activities

In some cases, the immediate and longer term effects of sequestration  reductions on CMS’s operations and services to the public are hard to  quantify because of the difficulty isolating the effects of sequestration  from other factors. As a result, CMS officials told us that CMS was not  able to routinely monitor the effects of sequestration.

			Medicare Payments to Providers and Plans

Savings from the 2 percent sequestration reduction of Medicare  payments and the effects of the cuts on overall Medicare spending, as  well as Medicare providers, plans, and beneficiaries are unknown. The  total amount of sequestered Medicare payments for fiscal year 2013 are  not known because providers have up to 12 months to submit claims.  CMS officials reported that $3.3 billion had been sequestered from $167  billion in prospective payments to Medicare Advantage and prescription  drug plans from April 2013 through March 2014. The total amount of  sequestered funds will likely differ from the estimated $11.3 billion that the  Office of Management and Budget (OMB) provided in its fiscal year 2013  sequestration report. As noted in the background of this report, OMB’s  estimates for programs that are funded by permanent indefinite budget  authority, including Medicare payments, were based on estimated outlays  for fiscal years 2013 and 2014. Final payments for fiscal year 2013 will  depend on the actual numbers and types of services used by  beneficiaries during the sequestration period. Research examining the  effects of previous Medicare payment cuts suggests that providers may  attempt to offset cuts by providing more services or more expensive  services. As a result, the cuts may not produce the expected Medicare  savings.
In addition, it is not possible to isolate the effect that the payment  reductions had on providers’ revenues in fiscal year 2013 because  payments to Medicare providers were affected by a number of factors,  such as increases or decreases resulting from the annual rate-setting  process and the implementation of certain statutory provisions affecting  payments. Similarly, it is not possible to attribute any changes in  provider participation in the Medicare fee-for-service program or plan  participation in the Medicare Advantage or prescription drug programs in  2014 directly to sequestration reductions. Although CMS officials and  provider association representatives that we spoke to agreed that  isolating the effects of the 2 percent Medicare payment reductions is  difficult, provider associations reported that the reductions will be  detrimental to providers because they exacerbated other budgetary  pressures, particularly for providers that rely on Medicare payments for  large portions of their revenues. For example, some hospitals have  reported that the Medicare sequestration was one of several negative  factors affecting hospital revenues that resulted in layoffs, decreased  services, and delays in infrastructure investments in fiscal year 2013. A  physician association reported that although the isolated effects on  physicians from the first year of sequestration of Medicare payments are  not detectable, the effects will likely be greater as cuts continue in future  years and physicians face smaller Medicare payment increases and  additional responsibilities associated with Medicare participation. Based  on anecdotes of physicians’ reactions to previous payment reductions,  the association officials predicted that sequestration could contribute to  shifts in physician practice away from specialties with a high proportion of  Medicare patients relative to patients with other forms of payment.  However, they noted that it is difficult to single out actions directly  responding to sequestration. How these potential changes in provider  behavior could influence Medicare beneficiaries’ access to health care  remains to be seen.
Beneficiaries were partially shielded from the payment reductions made  as a result of sequestration. The law did not allow Medicare participating  providers to pass on the payment reductions to beneficiaries. All  coinsurance and deductible amounts remained the same for  beneficiaries. However, beneficiaries would have been financially liable  for any increased cost sharing resulting from providers who provided  more services, or more expensive services, to offset the sequestration  cuts. Beneficiaries who use nonparticipating providers and receive  payments directly from CMS in order to reimburse the provider did see  those payments reduced, which required these beneficiaries to pay  more. A small proportion of practicing Medicare physicians are  nonparticipating.

			Fewer New Initiatives

Sequestration resulted in fewer funds for new initiatives, according to  CMS officials, but the effects on operations and services to the public will  not be known until future years, if at all. Budget officials explained that in  most years CMS funds new initiatives after core activities have been  funded, but in fiscal year 2013 few or no programs had funds available for  new initiatives because of sequestration. For example, CCSQ officials,  who are responsible for survey and certification, told us they could not  continue efficiency initiatives that had saved money in prior years  because they did not have funds to pay for the upfront activities  involved. data planned for fiscal year 2013 that was required but not separately  funded by the Patient Protection and Affordable Care Act (PPACA). To  meet discretionary spending limits for program operations, CMS cut $15  million from its information technology (IT) funding which delayed several  system enhancements. However, it is difficult to quantify the forgone  benefit of unfunded initiatives. For example, it is hard to predict the  amount of savings CMS could have achieved from eliminating IT  redundancies had IT system enhancements occurred. Moreover, budget  officials said they could not identify all of the initiatives that CMS will not  initiate as a result of funding reductions because program offices may  have stopped bringing forward budget requests for new activities due to  known budgetary constraints.
For example, a prior efficiency initiative re-designed the survey process for dialysis  centers. The survey redesign shortened the survey process for surveyors, thus saving  money, according to CMS officials.

			CMS Staffing

The effect of sequestration on CMS’s staffing and operations is unclear  because CMS has multiple sources of budget authority that may support  payroll and benefits. CMS’s total full-time equivalents (FTE) increased  from 5,926 at the beginning of fiscal year 2013 to 5,959 at the end of the  year due in part to targeted hiring for activities related to increased  responsibilities, including aspects of health care reform with funding  provided by PPACA. For example, PPACA appropriated $10 billion for  activities associated with CMS’s Center for Medicare and Medicaid  Innovation over 9 years that supported 67 additional FTEs in fiscal year  2013. However, CMS lost 120 FTEs funded through its primary salaries  and benefits PPA—the federal administration PPA—and could not fill  another 299 vacancies as a result of a hiring freeze it implemented to  achieve sequestration reductions without requiring furloughs. CMS staff  funded through this PPA carry out the majority of CMS activities, including  implementation of the federal health insurance exchanges in 2013. CMS  officials said that, in general, CMS offices are experiencing difficulties in  terms of staff doing more work with fewer resources. The reduced staff  and inability to hire new staff throughout the fiscal year to address  increasing workload had a negative effect on operational time frames,  according to officials. For example, CMS officials reported that CMS  processing times for providers seeking certification for participating in the  Medicare program increased from between 1 and 4 weeks to up to 6  months due to the hiring freeze.

	CMS Sought to Limit Effects of Sequestration on Priority Areas, but Implementation Options Varied by Funding Structure

		CMS Sought to Limit Effect of Sequestration on Priority Areas

To plan for reductions of CMS’s discretionary funding, CMS’s Office of  Financial Management (OFM), in consultation with the CMS Administrator  and HHS budget office, identified high-level priority areas to protect from  budget cuts. For example, one spending priority identified by the  operating division for 2013 was federal health insurance exchange  implementation in those states not electing to operate an exchange or not  certified or approved to operate one. When sequestration occurred, CMS  determined that it would not cut funding planned for this activity, including  from within its discretionary program management account. CMS also  prioritized funding for Medicare fee-for-service appeals because, officials  said, cuts to these activities could delay their contractors’ ability to  address appeals and result in increased costs in future years.said funding for the durable medical equipment competitive bidding   Officials  program was also prioritized because CMS attributed savings to the  program.

		Funding Structures and Prior Year Preparations Influenced Sequestration Implementation

CMS officials reported that their options for implementing sequestration  reductions varied by the type of funding—discretionary versus direct  spending—and application of sequestration rules. According to HHS  officials and CMS officials from the Center for Medicare, CMS had no  flexibility in implementing the Medicare payment reductions because, with  limited exceptions, all payments had to be sequestered and sequestration  rules dictated the formula, timing, and limitations on how CMS was to  implement the reductions. Officials also reported having to reduce by 7  percent grants made to states after March 1 to establish health insurance  exchanges in accordance with OMB’s sequestration guidance for  programs with permanent indefinite budget authority. In fiscal year  2013, CMS awarded such grants to 25 states and the District of  Columbia, but only those amounts obligated after March 1, 2013 were  subject to sequestration, according to officials. Because sequestration  began in the middle of the year, officials told us that CMS had to achieve  the required reductions for state exchange grants by applying  sequestration to the amounts obligated in the remaining months of the  fiscal year, requiring it to reduce each grant made after March 1 by 7  percent from the expected amount. Additionally, because the state  insurance grants are structured as the only activity within their PPA, CMS  could not reallocate the sequester reductions to other activities in order to  spare the grants from the reductions.
In contrast, CMS officials told us the operating division had flexibility to  implement reductions within the large PPAs contained in the discretionary  program management account. In particular, they said that this funding  structure provided flexibility within the program operations PPA to move  funds around the many activities funded by the PPA, including Medicare  fee-for-service claims processing by MACs, contractor administration,  federal implementation of health insurance exchanges, provider  education, beneficiary outreach, and many other initiatives. For instance,  MAC funding through the program operations PPA was reduced by 2.4  percent. This reduction ended up having had no effect on MAC  operations because CMS needed less funding than expected in fiscal  year 2013 for transition costs for new MACs and the awarding of two  MAC contracts scheduled for the end of fiscal year 2013 was delayed  until fiscal year 2014 for reasons other than sequestration. The two  MACs we spoke to confirmed that sequestration had no effect on their  contracts or ability to carry out any activities in their statements of work.
CMS also reported using carryover funds to mitigate the effects of  sequestration reductions when available. Through direct spending, funds  are available to the Medicare integrity program within the Health Care  Fraud and Abuse Control (HCFAC) account without fiscal year limitation,  which may result in funds remaining available for obligation during the  next fiscal year. According to officials, CMS had enough carryover funds  from fiscal year 2012 program integrity activities to offset $13 million in  discretionary fiscal year 2013 sequestration reductions in HCFAC funding  for CMS, which minimized the effect on a medical review support  contractor, Part D data analysis, and Medicaid and CHIP Business  Information Solution project that were slated to lose funding due to  sequestration. CMS also used no-year funding remaining available for  the Medicare-Medicaid Data Match Project (Medi-Medi) to offset  sequestration reductions of the program’s fiscal year 2013 funding.  According to officials, available carryover balances also mitigated the  reduction of an estimated $2.2 million to CLIA surveys.agencies with which we spoke confirmed there were no reductions to their  CLIA activities.
CMS officials noted, however, it is possible that carryover funds will not  be available in future years to offset funding reductions to the extent they  were in fiscal year 2013. For example, officials reported having used up  much of the funding available from prior years for Medicare program  integrity.
In addition to using carryover funds, certain offices told us that prior year  initiatives helped them respond to the sequestration reductions. Officials  in the Center for Medicare began considering how to implement specific  percentage reductions to payments for Medicare fee-for-service claims as  early as 2008 in response to proposals for Medicare cost reductions.  They increased their preparation for sequestration of payments in late  2011. Officials said that these early preparations helped the center  implement payment reductions quickly through the various contractors  that maintain their payment systems when sequestration occurred. In  addition, CCSQ officials told us that, beginning in 2011, officials started a  broad-based initiative to improve the efficiency and effectiveness in  survey processes as they recognized a significant gap between an  increasing workload and the funding amount typically allocated for survey  and certification activity. This initiative, including corresponding outreach  to state survey agencies, helped CCSQ plan for sequestration in fiscal  year 2013.

		Complexity of CMS Programs and Timing of Sequestration Presented Challenges for CMS and Stakeholder Planning and Implementation

CMS officials said that it was difficult and time consuming to determine  how to apply sequestration pursuant to the law and within changing  budgetary parameters. In particular, CMS had difficulty determining all of  the types of Medicare provider payments subject to sequestration and  which Medicare funding was subject to special sequestration rules. For  example, CMS officials initially thought that subsidies for the Program of  All-inclusive Care for the Elderly (PACE) were exempt from sequestration,  like certain Medicare low-income subsidy payments. Upon further  discussion with OMB late in the planning process, CMS determined that  these payments were not exempt and adjusted the plan payments  accordingly. Officials said the adjustments accounted for a very small  amount of PACE funding. The timing of sequestration and changing  budgetary parameters also delayed CMS’s ability to make final planning  decisions. For example, CMS based its initial sequestration planning  decisions on the annualized amount set out in the continuing resolution in  effect at the time sequestration was ordered. After the Consolidated and  Further Continuing Appropriations Act, 2013, which provided a lower  discretionary appropriation base than CMS used to calculate the  sequestration reductions, CMS officials said they had to determine how to  absorb the same amount of reductions, which then represented a larger  portion of the appropriation, in the remainder of the fiscal year.
The timing of sequestration and related CMS guidance created  uncertainty for some stakeholders. For example, CCSQ officials told us  that they strive to limit uncertainty for states so the states can plan their  budget adequately. This was difficult in fiscal year 2013 because  sequestration took effect in March, which effectively doubled the  percentage cut because it all had to be taken in the second half of the  fiscal year. On April 5, 2013, CMS issued a memorandum informing  states about sequestration reductions and actions states should take to  implement the cuts. Although officials from several state survey agencies  we spoke to described the timing of CMS’s communication regarding  sequestration as the best it could have been, they still faced challenges  adjusting their budgets. For example, one state survey agency told us it  received official notice of its allocation amount in May 2013, which left the  state very little time to plan for absorbing the cut by the end of the fiscal  year in September 2013. CMS informed providers and plans about the  Medicare payment reductions following the sequestration order in March.  In early May CMS issued additional guidance to Medicare Advantage and  prescription drug plans regarding the application of reductions for various  plan types. In this communication, CMS noted, for example, that the  agency is prohibited from interfering in payment arrangements between  plans and providers who contract with them. A hospital representative  reported anecdotally that the timing of sequestration and CMS’s official  communication to providers limited hospitals’ time to plan adequately for  the reduced payments. In addition, hospital and physician representatives  said that CMS’s guidance regarding payment reductions was not  sufficient for them to understand how cuts were applied without additional  clarification. See figure 5 for information on CMS actions related to  Medicare payments and survey and certification.

	GAO Contact

For additional information, contact Kathleen King at (202) 512-7114 or  kingk@gao.gov.

Appendix III: Fiscal Year 2013 Sequestration at the Office of Elementary and Secondary Education

	Sequestration Cuts to OESE’s Funding Resulted in Some Reduced Services Provided by Selected School Districts and Hindered Some Administrative Activities

		Cuts to Grant Funding Affected Grant Recipients in Different Ways and Reduced Some Services for Selected School Districts

Sequestration resulted in cuts of about 5 percent to Title I and Impact Aid  grant funding that supports services to thousands of school districts  nationwide. These sequestration cuts affected grant recipients in different  ways and contributed to some reduced services to students. Title I is the  largest grant program administered by OESE, with grants issued to over  53,000 schools in districts nationwide in fiscal year 2013. The program  provides much of its total funding to districts serving high concentrations  of students from low-income families, to provide services to help improve  the academic achievement of students in high-poverty schools or  students at risk of academic failure (see table 6).
For Impact Aid, many districts receive funding from this program—a little  over 1,100 districts serving almost 930,000 federally connected students  nationwide in fiscal year 2013 (see figure 7).
Effects of sequestration on school districts varied due to the timing of  funding disbursements to grant recipients. In general, Title I grant  recipients felt the effects of sequestration later than districts that received  Impact Aid grants. Specifically, the sequestration cuts affected Impact Aid  recipients in school year 2012-2013, while the cuts did not affect Title I  recipients until school year 2013-2014. This is, in part, due to when  Education disburses funding to states and school districts. Education  typically disburses Title I grants to states, for disbursement to school  districts, in July and October each year. Education disbursed some of its  Title I fiscal year 2013 funding to states in October 2012, prior to  sequestration, for school year 2012-2013. Education then applied the  entire amount of the sequestration cuts for fiscal year 2013 to the next  grant disbursement, in July 2013, for school year 2013-2014. Therefore,  the sequestration cuts did not affect the October 2012 disbursement used  for the 2012-2013 school year. In contrast, Education disbursed a  majority of the fiscal year 2013 funding for Impact Aid in October and  November 2012, during school year 2012-2013, prior to sequestration,  and applied the sequestration cuts to grant disbursements made in May  2013. According to Education officials, delaying the cuts from the 2013  sequestration for the larger state grant programs, such as Title I, enabled  recipients to plan and may have tempered some of the negative  consequences of sequestration.
Another reason sequestration affected districts differently is that the  relative importance of Title I and Impact Aid grant funding in districts’  budgets varies greatly. School district budgets are generally funded by  multiple sources and are determined by many factors, including local  taxes, state government contributions, and other federal financial support  sources. Moreover, the relative contribution of these resources varies  among school districts. As a result, the effects of grant reductions from  Education vary for grant recipients based on their respective situations,  including the availability of other resources to fill any budget gap. While  the receipt of Title I grants is widespread among districts, funds from this  program generally account for a small portion of most districts’ overall  funding. Though the proportion can vary by district, for fiscal year 2010,  the most recent year for which data are available, Title I made up about 3  percent of total elementary and secondary education funding from all  sources nationwide, according to the National Center for Education  Statistics. The extent to which districts rely on Impact Aid funding also  varies, with one district’s reliance as high as 88 percent of its fiscal year  2013 operating budget, according to Education data.
In addition, five of the districts we contacted said that it is difficult to  isolate the effects of sequestration cuts solely to Title I or Impact Aid  because the districts had also experienced reductions to state funding  and to other federal programs and activities due to sequestration. These  various state and federal funding cuts the districts experienced have led  to reductions in staffing levels, transportation, and school programs, as  well as districts having to shift funding from other sources to support  programs affected by the cuts, according to district officials. For example,  officials from all of the selected districts that received Title I or Impact Aid  grants mentioned how the districts had experienced reductions to their  state funding prior to sequestration. In one case, district officials told us  that, prior to sequestration, from 2010-2012, the district had to lay off  teachers in order to balance the district’s budget after the state cut  funding to education; however, additional local tax revenue allowed the  district to avoid further layoffs when sequestration occurred. Related to  reductions to other federal programs and activities, officials from one  district reported that in addition to Impact Aid, the district also  experienced funding cuts to other federal programs due to sequestration  such as special education, vocational education, Indian education, and  Title I, among others. While this district received about 25 percent of its  funding from Impact Aid, the other federal funding sources contributed an  additional 23 percent to its total budget in fiscal year 2013. In another  example, an Impact Aid district we contacted reported that the  Department of Defense cut funding to bus routes, among other things,  which the district was then forced to fund, placing a further strain on the  district’s budget.
Even though sequestration cuts affected grant recipients in different ways  and the effects are difficult to isolate, we found from our interviews with  state officials and the seven school districts we contacted that cuts from  sequestration had contributed to some extent to reductions in services to  students.

			Effects on Select LEAs Receiving Title I

Title I funding comprised between 5 and 18 percent of the budgets of the  three Title I districts we selected. Even though this was not a large  percentage of the districts’ budgets, cuts to Title I funding contributed to  decisions to reduce staff positions and professional development  opportunities, reduce or delay academic programs, and defer  maintenance and technology upgrades, according to the officials we  spoke with. Specifically, for the three Title I districts we contacted,  officials provided this information:
One Title I district reported that cuts to Title I funding contributed to  decisions to reduce staffing levels by not filling vacated positions in  certain areas. Officials told us that the loss of funding contributed to  the decision to reduce the number of reading and math specialists  which provide extra instruction to students and assist teachers in  improving their teaching methods. Since this district has a large  population of low income students, officials were concerned that the  loss of these specialists could cause students in need of additional  tutoring to fall further behind.
Officials from two of the selected districts told us the funding  reductions contributed to decisions to reduce professional  development opportunities for their staff. Officials from one of the  districts thought these reductions could affect teaching staff  preparedness in advance of implementing new academic standards,  which would then affect the instruction that the district’s students  received.
Two districts reported that Title I reductions contributed to decisions to  reduce or delay some academic or after-school programs. For  example, one district reported that the loss of funding contributed to  the decision to reduce after-school programs, while officials from  another district told us the reductions contributed to the decision to  delay implementation of new academic programs designed to improve  the district’s academic performance.
All three Title I districts reported that Title I reductions contributed to  decisions to defer maintenance and technology upgrades.example, officials from the three districts said their district delayed  technology upgrades with one official describing the district  technology as aging.

			Effects on Select Districts Receiving Impact Aid

Impact Aid funding represented anywhere from 15 to 35 percent of the  total budget of the four Impact Aid districts we selected. District officials  told us that they had to take a number of steps to absorb the reductions in  Impact Aid. Two of these selected districts are located entirely on federal  lands, while federal lands made up 80 percent of a third district, according  to officials from each of the respective districts. As a consequence, these  districts do not have a local tax base to mitigate the loss of federal  funding. According to district officials, to absorb the cuts to Impact Aid in  the 2012-2013 school year they had to reduce staff positions and  professional development opportunities, increase class sizes, reduce  school programs, defer maintenance and technology upgrades, and  reduce transportation. Specifically, for the four Impact Aid districts we  contacted, officials provided this information:
Three districts reported that they had to reduce staffing levels,  primarily through attrition and not filling vacated positions, including  those for teachers and aides. Officials from one of these districts  reported having to reduce their instructional staff positions by 14 full- time equivalents. Officials from these districts told us that they  primarily reduced staffing levels by not replacing departing staff.
Four of the districts reported having to reduce professional  development opportunities. One district official told us that, as a  consequence, there was concern the district will be unable to support  its teachers during a time when the official thought there were sizable  changes in the expectations for how the teachers delivered  instruction.
Three districts reported having to increase class sizes. For example  officials from one of the districts reported increasing elementary  school classes by an average of two or three students.
Three of the selected districts told us they reduced school programs,  which included reductions to art, music, or athletic programs. For  example, officials from one of the districts on Indian lands told us that  they reduced the program teaching the Navajo language and culture– a program that is in high demand in their district.
Four districts reported needing to defer maintenance and technology  upgrades because of sequestration. For example, officials from one  district reported that they were only performing emergency  maintenance. In addition, these officials reported that deferring  maintenance on a roof at one of the high schools led to flooding in  three of the classrooms. In another example of deferred maintenance,  district officials from another district told us they reduced funding for  maintenance on their large fleet of buses. These officials told us that  they were concerned about the reductions in maintenance because  the bus routes cover a large geographic area over sections of  unfinished roads, which places a strain on the bus fleet. In addition to  deferring maintenance, officials from this district also described  deferring upgrades to the district’s technology. Officials expressed  concern over the district’s ability to implement new educational  standards and assessments without the upgrades considering that the  new standards rely on using technology.
Two of the selected districts reported reducing or eliminating  transportation routes, though for one of the districts state cuts from  prior years also contributed to this decision. These districts also said  that as a consequence of route reductions and eliminations, some  students travelled further to reach their bus pickup points which, for  one district, caused students to miss school. One district also reported  that the district had to eliminate bus routes for students who attended  after-school tutoring and academic enrichment programs.

		Sequestration Further Reduced OESE’s Staffing Levels and Hindered Some Grant Administration Activities

Agency-wide cuts in administrative expenses due to sequestration  resulted in reduced OESE staffing levels and required OESE to spend  less on travel and other expenses, which OESE officials said led to  increasing workloads for staff and reductions in some grant oversight  activities. For example, according to OESE officials, decreases in hiring  since 2011, which were exacerbated by sequestration, have led to  increased workload for current staff and may have contributed to staff  burnout. Overall, OESE lost 10 staff positions in fiscal year 2013,  resulting in a total of 233 staff by the end of the fiscal year.
OESE also reported that from fiscal year 2012 to fiscal year 2013 it  experienced a 47 percent reduction to its travel budget, which affected  its ability to conduct grantee oversight and technical assistance. For  example, according to OESE officials, due to sequestration cuts, they had  to conduct about four to five fewer on-site compliance reviews for the  Impact Aid program in fiscal year 2013, which also reduced the amount of  technical assistance that would have been provided to grant recipients by  way of these reviews. Officials said that while some grant oversight and  technical assistance can be done remotely, it is also necessary to be on  the ground to review actual documents for compliance reviews and to  build strong working relationships with grantees. Additionally, OESE  officials said they offered technical assistance via webinars to assist  grantees or grant applicants in lieu of on-site visits or attending technical  conferences. However, officials were concerned that applicants may be  more comfortable asking questions privately rather than during a webinar  session with other grantees listening in on the conversation. As a result of  these changes to OESE’s delivery of technical assistance, officials were  concerned, for example, that there could be an increase in late Impact Aid  grant applications in the future, which could subject grantees to a penalty  and reduce their funding. The reductions to the travel budget also  reduced OESE’s ability to provide general outreach, such as by  presenting at conferences and sending staff to conferences for training,  among other travel needs.
Overall, OESE officials were not certain whether they could determine the  extent to which sequestration has affected OESE’s progress toward  achieving some of its performance and priority goals because  achievement of some goals are dependent on many factors, such as the  actions of states or school districts, as well as budgetary resources. For  example, one of the agency’s priority goals for elementary and secondary  education, which is supported by some OESE programs, is to improve  learning by ensuring that more students have an effective teacher.  Education’s target goal is that a majority of states will have developed  and adopted statewide requirements for comprehensive teacher and  principal evaluations and support systems, and at least 500 school  districts will have implemented these evaluations and systems, by  September 30, 2013. The agency’s fiscal year 2013 Annual Performance  Report released in March 2014 showed that while the agency has results  for one of three metrics related to this goal, results for the remaining two  metrics were forthcoming, pending the release of state progress reports.  Furthermore, the report cited challenges, which could be unrelated to  federal budget constraints, that could hinder the achievement of this  priority goal including districts’ and states’ current fiscal situation; potential  changes in leadership; scaling up of systems in a relatively short time  frame; and coordination among the agency’s programs to ensure  consistency of policy and communication.

	To Plan and Implement Sequestration, OESE Followed Agency- Wide Protocols, While Specific Grant Requirements Limited Its Flexibility in Allocating Grant Funds

In response to sequestration, OESE followed the plan set out by  Education, which included the reductions in Education’s overall  administrative accounts and OESE’s grant programs. OESE officials told  us that planning for sequestration started at the top of the agency and  filtered down to the agency’s components. Officials told us they were  informed about Education’s budget plans in a series of meetings with the  agency’s budget office.
Due to sequestration, officials told us OESE reduced staffing by limiting  the hiring of new staff to replace those that departed. Officials told us they  were required to follow a process implemented agency-wide for approving  personnel actions in which components within the agency were to submit  hiring plans for approval that prioritized proposed personnel actions along  with a description of the effects of not fulfilling the proposed positions.  The Office of Management, the Budget Service, and the Office of the  Deputy Secretary were required to coordinate in approving high-priority  personnel actions while also allowing the agency to operate within  sequestration budget levels. OESE officials told us this meant that OESE,  in some cases, replaced senior level staff with lower paid entry level staff  in order to allow the agency to fill more of the vacated positions. By  implementing this agency-wide personnel action, along with other actions  to achieve administrative savings, Education avoided furloughs in fiscal  year 2013.
While there were staff reductions, officials told us that OESE received  more funding for training in fiscal year 2013 in order to better prepare staff  for working with fewer resources. Officials described how OESE  developed a needs assessment for individual staff and, then, if the  assessment identified an area of need that affected that staff member’s  performance plan, OESE prioritized training to address that need. Overall,  officials thought OESE would be stronger in the long run because of the  commitment to training their staff.
OESE officials said they followed certain priorities in implementing the  sequestration cuts to grants awarded through a competitive process. For  these grants, OESE officials said, agency regulations generally require  components to prioritize funding of existing grants over new grants. As a  consequence, officials overseeing these grant programs only awarded  new grants if there were funds remaining for the program after all of the  existing grants were funded. Officials then had the option to fund new  grants to qualified applicants remaining from the previous year. Officials  could also open a grant to new competition if there were not sufficient  numbers of qualified applicants from the previous year or if the grant  program had a new policy priority. Agency officials could not quantify how  many fewer competitive grants were issued due to sequestration. By  contrast, OESE had limited flexibility in determining how to allocate  reductions to formula grants, such as Title I or Impact Aid, because  specific eligibility criteria and formulas for allocating grant funds are  established by law and Education is required to provide funds to grantees  that meet the statutory criteria.
As part of implementing sequestration of the Title I and Impact Aid  programs, OESE officials said they informed grantees about  sequestration by disseminating information on the potential reductions  through advocacy organizations and states. According to officials, OESE  disseminated information to grantees whenever the information became  available through a variety of means including the National Association of  Federally Impacted Schools (NAFIS), an advocacy organization  representing districts receiving Impact Aid, and the National Council for  Impacted Schools. OESE also communicated with state educational  agencies, such as through each agency’s chief state school officer. In  addition, OESE officials disseminated information through Education’s  relevant e-mail list. As an example of how grant recipients were informed  about sequestration, in a July 2012 letter Education informed the chief  state school officers of the potential timing of the sequestration for  formula grant programs to help the states plan for sequestration, should  the reductions occur. Specifically, among the grants referenced, the letter  informed the chief state school officers that districts receiving Impact Aid  would absorb their funding cuts during the 2012-2013 school year, while  for Title I districts sequestration would not be implemented until the 2013- 2014 school year. Both representatives from NAFIS and select state  representatives we spoke with through the National Title I Association  confirmed having received this communication from Education. The chief  state school officers also provided examples of other communication from  Education, but also noted that, while Education provided what information  it could to help with planning, it was difficult to predict final funding levels  due to the complexity of the Title I formula.

	GAO Contact

For additional information, contact Melissa Emrey-Arras at (617) 788- 0534 or EmreyArrasM@gao.gov.

Appendix IV: Fiscal Year 2013 Sequestration at the Office of Public and Indian Housing

	Sequestration Reduced the Number of Households Receiving Rental Assistance, Housing Agencies’ Reserves, and Maintenance and Other Housing Services

		The Number of Households Receiving Vouchers Declined Even As PHAs Used Voucher Reserves to Mitigate Effects

HUD data indicated that about 1.86 million very low-income households  were receiving rental housing assistance through the Housing Choice  Voucher program at the end of calendar year 2013, a decline of about  41,000 (2.2 percent) compared to the end of calendar year 2012,  primarily due to sequestration (see figure 9). HUD officials told us that  PHAs generally reduced the number of households that received  assistance by not re-issuing vouchers made available by households that  left the program rather than by terminating vouchers of current recipients.
Some of the households participating in the rental assistance program  also faced higher costs and other challenges in 2013 because some  PHAs reacted to the sequestration cuts by increasing minimum rents,  decreasing inspections of units, or reducing utility allowances.funding reduced, three of the PHAs we interviewed also reported taking  steps to reduce costs they incurred when a household receiving rental   With their  assistance moved to an area covered by a different PHA or vice versa.
For example, one PHA did not continue to provide rental assistance if a  household moved to a higher-cost area. These PHA actions can make it  more difficult for households to maintain their benefits when moving.
Aggregate PHA voucher reserves decreased 46 percent from $1.3 billion  in December 2012 to $709 million in September 2013. The reserves are  funds these agencies have accumulated from prior appropriations and  which they generally use to fill funding shortfalls if program expenses are  higher than expected. PHAs used these reserves to mitigate some of the  effect of sequestration on the number of vouchers they administered.  However, PHA program reserves for vouchers had been reduced by $650  million in the aggregate in 2012 because of reductions in HUD’s fiscal  year 2012 funding. and the subsequent sequestration cuts in fiscal year 2013, PHAs will  have reduced capacity to mitigate effects of any funding cuts in future  years. As of the end of September 2013, the most recent month for which  data were available, PHAs had on hand reserves adequate to fund an  average of 0.5 months of voucher expenses, compared to 0.9 months in  December 2012. Also by the end of September 2013, 165 PHAs had  exhausted their reserves, compared with 84 PHAs in the same situation  at the end of 2012.
PHA reserves for vouchers were generally reduced to about 1 month of expenses.

		The Number of Public Housing Units Did Not Substantively Decrease, but PHA Cost-Cutting Measures Affected Families and Public Housing Reserves Declined

Although sequestration did not substantively reduce the number of units  of public housing available, it necessitated that PHAs draw down on their  reserves for these programs. None of the PHAs we interviewed told us  that sequestration reduced the total number of units operated (either  occupied or vacant). HUD data showed that the total number of public  housing units operated declined from December 2012 to December 2013  by about 6,000 (0.5 percent), to 1.151 million. HUD officials attributed this  decline to the general deterioration of units due to funding in recent years  being lower than needed to repair and maintain all units, which was  extended and deepened by the effects of sequestration.
Stakeholder groups told us that the time necessary to prepare units for  occupancy by new residents after others vacate has increased as a result  of cuts in spending on maintenance staff, which also led to lower  utilization of units and fewer people served. However, HUD data showed  that the average occupancy rate for units remained at 96 percent  throughout 2013.
Other steps PHAs took to reduce costs in the aftermath of sequestration  also negatively affected families residing in public housing. For example,  two PHAs we interviewed increased the case loads for their staff, and two  PHAs reduced their office hours, both of which could reduce the level of  service provided to families. In addition, two PHAs we interviewed took  longer to complete maintenance or repairs, and two canceled some  ancillary tenant programs, both of which HUD officials told us could  negatively affect a PHA’s performance and scores in HUD’s assessments  of resident satisfaction and management.
To mitigate the effects of sequestration, two PHAs reported that they  drew down reserve funds maintained to address public housing operating  fund shortfalls. PHAs need a reserve level equal to 4 months of operating  expenses to obtain the highest possible score in HUD’s assessments of  PHAs’ financial health. Although PHAs had $4.3 billion (about 8 months of  total operating expenses) in such reserves as of the end of their fiscal  year in 2012, their level of reserves varied.PHAs, accounting for about 21 percent of units operated, had less than 4  months of operating expenses in reserves. Further, 3 percent of PHAs,  accounting for 6 percent of units operated, had less than 1 month of  operating expenses in reserves. HUD officials told us that continued  funding cuts could cause larger declines in the number of units of public  housing operated as some PHAs deplete their reserves.
For example, 16 percent of  Data reflecting the amount of reserves PHAs held at the end of calendar  year 2013, which would reflect the effects of sequestration, were not  available in time for this report. Further, PHAs whose fiscal year ended at  the end of June or September were affected in the same fiscal year both  by sequestration as well as a $750 million reduction in reserves in fiscal  year 2012 that resulted from a reduction in HUD’s appropriation. This  would prevent a determination of how much of any decline in reserves in  the PHAs’ fiscal year was due to sequestration even after the data are  available.

		Carry-Over Funding and Reserves Mitigated the Effects of Sequestration for Some Indian Housing Block Grant Program Grantees

Representatives from all four of the tribes and TDHEs we interviewed told  us that sequestration did not have a large effect on their activities in 2013  because the entities typically carry over some previous year funding or  still had reserves available from the predecessor to the IHBG program. As  a result, they were able to draw on these funds to offset sequestration’s  cuts and complete planned projects or activities in 2013. However, three  said that sequestration would reduce the activities they could conduct in  future years because they would be carrying over fewer funds at the end  of fiscal year 2013. In addition, HUD officials told us that not all tribes and  TDHEs had carry-over funding or reserves on which they could rely. Of  the 361 tribes and TDHEs that received IHBG funding in 2013, 61 applied  for and received interim funding from HUD prior to receiving their final  funding, for which having no carry-over funding or reserves was a  requirement. According to a HUD official, the number of tribes and  TDHEs without carry-over funding or reserves was likely higher than 61,  as not all tribes and TDHEs that were eligible for interim funding may  have applied.
Representatives from tribes and TDHEs told us that the federal budget  process for fiscal year 2013 created challenges for budget planning  because they did not know the full amount of their grants under IHBG  until several months into the calendar year. While HUD released  approximately $39 million in interim funding from January through May to  tribes and TDHEs that would have exhausted their reserves and carry- over funding, recipients did not know their final fiscal year 2013 grant  amount until May 20, 2013. By comparison, in 2012, HUD notified tribes and TDHEs of their final grant amount on January 18. HUD began to  provide final funding to tribes and TDHE’s on June 18, 2013. Staff from  two IHBG recipients and two tribal housing associations told us that the  funding delays created challenges or uncertainty. For instance, according  to one association, in some cases construction plans were delayed or  halted or construction-related contracts had to be renegotiated.
Some IHBG recipients were more severely affected than others because  sequestration reduced the portion of the IHBG grant formula that is based  on estimated tribal needs. Under the IHBG formula, funding is first  allocated for operating and modernizing units developed under the  predecessor of the IHBG program, and the remaining funding is then   As a  allocated based on tribes’ needs for additional affordable housing.result, the need-based component of the formula funding was reduced by  9 percent to achieve the overall reduction in funding due to sequestration  of 5 percent. Therefore, tribes whose funding primarily comes from the  need-based component of the formula, because they have  proportionately fewer housing units developed under the predecessor of  the IHBG program, received a larger cut in funding. Officials from one  IHBG recipient we interviewed said that sequestration exacerbated the  decrease in the need portion for their small tribes, which consequently  limited the services they provided to families.
Sequestration also contributed to HUD delaying reviews and decreasing  services to tribes. For instance, although HUD regulations required a  review of the formula to apportion IHBG grants by May 2012, HUD  officials said they had not completed this review because of effects on the  agency from lower funding in recent years, continuing resolutions, and  sequestration cuts. HUD has begun taking some actions to assess the  formula, including establishing an Allocation Formula Negotiated  Rulemaking Committee and holding public meetings with tribes in August  and September 2013. HUD officials said they anticipate holding another  meeting in spring 2014 to continue negotiating the IHBG formula but do  not know when the new formula will be completed because of the  numerous steps involved in the process.
In another example, staff from HUD’s Office of Native American Programs  (ONAP) said the general hiring freeze the agency implemented in  response to sequestration limited the office’s ability to replace several  senior staff who retired. The staff had no estimate of when those  vacancies would be filled. Moreover, representatives of two of the IHBG  recipients and one tribal housing association told us of delays and other  difficulties contacting HUD staff, which they attributed to turnover in  ONAP and other effects of sequestration. For example, one tribe reported  delays in receiving needed approvals on a new construction project from  its ONAP regional office. According to the tribe, the delays hindered the  project’s progress, resulting in protracted timelines.

	HUD Took Personnel and Program Actions to Implement Sequestration and Limit Effects on Families

In response to the budget reductions resulting from sequestration, HUD  planned and implemented several department-wide personnel actions  that applied to PIH. PIH employees, along with most other HUD  employees, were furloughed for 5 days, saving PIH about $3.5 million.  HUD initially planned to furlough employees for 7 days, but in August  2013 HUD reduced the number of furlough days by using funds it initially  planned to use to reorganize its Office of Multifamily Housing Programs  and to close 16 of its 80 field offices.reprogrammings between and within accounts to provide an additional  $0.9 million for PIH to use to pay salaries and expenses. HUD further  reduced PIH expenses for salaries, predominantly through a hiring freeze  but also through additional means such as reduced overtime and  monetary awards. Finally, HUD reduced non-salary expenses such as  travel and training by $1.3 million.

		HUD Mitigated the Effects of Reduced Rental Assistance Funding by Providing Public Housing Agencies with Supplemental Funding and Technical Assistance

To implement sequestration cuts for the Housing Choice Voucher  program, HUD used a set-aside appropriation to provide supplemental  funding to PHAs that would otherwise be required to terminate some  families’ assistance and expanded a special team that offers technical  assistance to PHAs. HUD officials told us that because HUD determines  funding for individual PHAs by formula, based primarily on each PHA’s  costs in the previous year, sequestration’s cuts were passed directly to  the PHAs. HUD provides PHAs with a portion of the funding for which  they are eligible based on HUD’s appropriation for the voucher program,  which can be lower than the total formula eligibility of all PHAs. In 2012,  HUD provided PHAs with 100 percent of their eligible amount. Because of  sequestration, in 2013 HUD provided PHAs with 94 percent of the funding  for which they were otherwise eligible, rather than the 99 percent they  would have received in the absence of sequestration.
Because HUD did not have a final fiscal year 2013 appropriation before  the beginning of calendar year 2013, HUD obligated funding for the first 3  months of 2013 at 98 percent of PHAs’ funding eligibility, which reflected  the amount of funding the program had under the continuing resolution  that funded HUD through March 27, 2013. HUD officials told us that PHAs  may have spent funds at the 98 percent level for the first few months of  the year. As a result, to reduce their expenditures for 2013 overall to the  94 percent level, they likely reduced the number of vouchers they leased  by the end of the year to an amount lower than they otherwise would  have had to if they had known their final funding amount earlier.
PHAs are also eligible to receive funding for administrative expenses  based on a formula involving the number of units they lease. As with the  program funding, PHAs receive a portion of the funding for which they are  eligible based on HUD’s appropriation for the voucher program. In recent  years, that funding has been lower than the total formula eligibility of all  PHAs. For example, in 2012, PHAs received 80 percent of their  administrative expenses eligibility. In 2013, prior to sequestration HUD  expected PHAs would receive 72 percent of their administrative expenses  eligibility, but due to sequestration PHAs received 69 percent of their  eligibility.
As in recent years, part of HUD’s fiscal year 2013 appropriation for the  Housing Choice Voucher program contained a set aside of $103 million  that HUD could provide to PHAs for four specified purposes. The  appropriation act altered the purposes for which this funding could be  used. Specifically, HUD could provide supplemental funding to PHAs that  faced terminating some participating families from the rental assistance  program due to insufficient funds (even after taking reasonable cost  saving measures). HUD chose to prioritize this use of the set aside, and  used $83 million to prevent terminations, which HUD officials stated was  sufficient to prevent all terminations. To receive the supplemental  funding, PHAs had to demonstrate that they would have had to terminate  families from the program, immediately stop issuing new vouchers, and  use all their reserves to fund vouchers. HUD provided the supplemental  set-aside funding to 294 PHAs. Most PHAs we interviewed reported that  the set-aside funding was helpful, but one association of PHAs noted that  because most of the set aside was used to prevent terminations, less  funding was available for the other purposes that had previously assisted  PHAs in prior years, such as providing additional funding to PHAs  experiencing significant increases in voucher costs from unforeseen  circumstances.
In response to sequestration, PIH increased the number of staff (from 6 to  13) assigned to its shortfall prevention team, which provides technical  assistance and other support to PHAs that are at risk of needing to  terminate families from the program. The team worked with staff from  PIH’s Financial Management Center and regional offices to identify PHAs  at risk of having a funding shortfall, which would require the PHA to  terminate some families from the program. The team then worked with  the at-risk PHAs to implement cost-cutting measures such as immediately  ceasing to issue vouchers to families on their waiting lists, pulling  previously issued vouchers from families that had not yet used them and  returning those families to the waiting list, increasing minimum rents and  reducing utility allowances. PIH officials told us that in some cases these  actions were sufficient to prevent PHAs from having to terminate families  from the program. If the team determined that a PHA was still at risk of a  shortfall despite the cost-cutting measures, the team encouraged the  PHA to apply for set-aside funds from HUD to protect currently assisted  families from termination.

		HUD Assisted PHAs in Implementing Significant Public Housing Funding Cuts by Providing Guidance and Reducing Some Administrative Requirements

HUD officials told us that the nature of the grant for operating public  housing led to sequestration’s cuts being passed directly to PHAs and  HUD had no flexibility to decide where to make cuts. As with the voucher  program, eligibility for funding for public housing operating expenses is  determined by formula. PHAs receive a portion of the funding for which  they are eligible based on HUD’s appropriation for the public housing  operating fund. The total amount of formula funding for PHAs for public  housing operations effectively was $450 million lower than in 2012, before  accounting for sequestration, a decline of almost 10 percent.  Sequestration reduced this funding by an additional $199 million, and the  across-the board-rescission reduced funding by $8.5 million, resulting in a  total decline in formula allocations of $658 million (14 percent) relative to  fiscal year 2012. As a result, PHAs received 82 percent of their formula  eligibility in total for fiscal year 2013. In 2012, PHAs received 95 percent  of their formula eligibility.
Before sequestration, HUD funded PHAs in January and February of  2013 at 92 percent of their public housing formula eligibility, based on the  lower of the House and Senate versions of the appropriations bill. In  March, HUD reduced the funding proration to 81 percent due to the  likelihood of sequestration. After sequestration, because January and  February funding had been provided at a level higher than the 82 percent  proration for the year, HUD provided funding for April through December  2013 at 79 percent of PHAs’ formula eligibility.
To assist PHAs in implementing sequestration and reducing costs, PIH  issued documents with frequently asked questions on sequestration and  administrative streamlining related to sequestration. For example, PIH  notified PHAs that it was lowering the reporting frequency for energy  efficiency reports from quarterly to annually thereafter. PIH also noted it  would conduct fewer on-site and remote monitoring reviews, prioritizing  PHAs with higher risk and significant problems.
HUD officials told us they considered applying broad waivers of  administrative requirements to assist PHAs in reducing costs, such as  reducing the frequency of required income verifications for residents with  fixed incomes. However, they decided that HUD did not have authority to  change some of the requirements and for others would have had to go  through the full regulatory rulemaking process, which includes a public  comment period, and thus decided not to proceed with these actions.

		Appropriation Timing and Administrative Processes Led to Delays in Providing Indian Housing Block Grant Funding to Grant Recipients

HUD officials told us they had little flexibility in implementing  sequestration for IHBG because funding through the program is  determined by formula. HUD sent letters to tribes on March 12, 2013,  notifying them of sequestration and that their funding likely would be  reduced. However, HUD did not notify recipients of their final formula  funding amounts until May 20, 2013, for two reasons. First, the full-year  appropriation providing funding for federal government programs was not  enacted until March 26, 2013. Second, the processes that HUD must  follow to finalize the IHBG grant funding formula took about 60 days to  complete. HUD sent grant agreements to most tribes on June 11, 2013,  and funds were available to tribes beginning in mid-June, depending on  how quickly the tribes approved and returned the agreements. In 2012,  funds were available to tribes beginning in February.

	GAO Contact

For additional information, contact Daniel Garcia-Diaz at (202) 512-8678  or garciadiazd@gao.gov.

Appendix V: Objectives, Scope, and Methodology

This report examines: (1) the effects of fiscal year 2013 sequestration on  the operations, performance, and services to the public for selected  components within federal agencies; and (2) how selected components  planned and prepared for and implemented fiscal year 2013  sequestration. This report builds off of our previously issued report that  evaluated how 23 federal agencies, including the Departments of  Defense (DOD), Education, Health and Human Services (HHS),  Homeland Security (DHS), and Housing and Urban Development (HUD),  prepared for and implemented the fiscal year 2013 sequestration at the  agency level, and the effects of sequestration on agencies’ operations,  performance, and services to the public.

	Case Study Selection

To achieve these objectives, we selected six case study components  within federal agencies for review. In selecting components, we sought to  cover a significant share of the $85.3 billion in funds ordered for  sequestration on March 1, 2013, including both direct spending and  discretionary appropriations, as well as programs with a high level of  interaction with the public. We also sought to cover a range of federal  missions (e.g., education, health, and defense) and the different program  delivery tools the federal government uses to achieve its missions, such  as grants, vouchers, contracts, loans and loan guarantees, and direct  services. Based on these criteria, which are discussed in more detail  below, we selected the following components:
DOD’s Operation and Maintenance accounts;
DOD’s Procurement accounts;
DHS’s U.S. Customs and Border Protection (CBP);
Education’s Office of Elementary and Secondary Education (OESE);
HHS’s Centers for Medicare & Medicaid Services (CMS); and
HUD’s Public and Indian Housing (PIH).
We used a multistep process to select these components. First, we began  the selection process by considering the 24 federal agencies identified in  the Chief Financial Officers (CFO) Act of 1990, as amended. These  agencies accounted for approximately 98 percent of the total sequestered  funding in fiscal year 2013. They also accounted for the majority of  federal spending in 13 of the federal government’s 17 broad mission  areas, or budget functions. We excluded from consideration the  Department of Veterans Affairs, because its accounts were exempt from  sequestration. We excluded the Department of State and the Agency for  International Development (USAID), because we determined that the  effects of reductions at these agencies were less likely to directly affect  the American public than reductions at the other agencies under  consideration. The Department of State and USAID were both included in  our government-wide review.
These data were used as a proxy for determining those agencies with the largest amount  of sequestered funding, because data on the amount of sequestered funds by agency  were not readily available in a format that we could analyze at the time that we began the  selection process. Once such data were available, we compared the results of our  analysis with the results when using the amount of sequestered funding by agency as  calculated by OMB. We determined that our final selections were broadly consistent with  the results when using OMB data on the amount sequestered and that no further  adjustments were needed. we chose not to include two nondefense components from the same  agency.
We used a matrix to determine that certain criteria were satisfied.  Specifically, we used OMB data on budget functions to ensure that we  had a range of federal missions (e.g., education, health, and national  defense) and OMB object class data to ensure that we had a range of  different program delivery tools the federal government uses to achieve  its missions. We used data from OMB’s March 1 sequestration report to  ensure that the selected case study components represented both  sequestered direct spending and discretionary appropriations. If multiple  components met our criteria, we gave preference to components that  were determined to have a higher impact on services to the public.
Overall, these six case study components accounted for roughly $48  billion, or more than 56 percent, of the total sequestration ordered on  March 1, including roughly 77 percent of sequestered defense spending  and almost 36 percent of sequestered nondefense spending. Results  from selected case studies, however, cannot be generalized. We issued  the results of our review of DOD’s Operation and Maintenance and  Procurement accounts along with our review of DOD’s Research,  Development, Test, and Evaluation account separately in November.

	Program Selection

Within the four nondefense components, we selected a limited number of  programs, activities, or offices for more in-depth data gathering and  analysis. See table 1 at the beginning of this report for an overview of the  selected programs. We selected these programs based on the size of  their budget, level of interaction with the public, the availability of  measurable estimates of the effects of sequestration, and other factors.  Similar to our criteria for selecting case study components, we also  sought to cover a range of the different program delivery tools the federal  government uses to achieve its missions, such as grants, vouchers,  contracts, and direct services. For details on how we selected programs  and activities within individual case study components, see appendixes I  through IV.

	Data Collection and Analysis

To address our objectives, we reviewed documents previously obtained  for our agency-level review, such as a list of sequestered PPAs, total  discretionary and direct spending funding levels for fiscal year 2013, and  total amount sequestered. We also reviewed reprogramming restrictions  and transfer authorities identified as part of the information request and  supporting documentation of how these authorities were used, if at all, in  response to sequestration. In addition, we reviewed additional agency  documents, such as operating and spending plans for fiscal year 2013  and illustrative examples of sequestration-related guidance and formal  communications with agencies’ employees, unions, and other  stakeholders.
We reviewed additional documents—provided by agency officials at the  selected components—related to planning for and implementing  sequestration in fiscal year 2013. These documents included guidance  issued to internal subcomponents or to external program partners and  recipients. We also reviewed relevant planning documentation, when  available, demonstrating the components’ analysis of alternatives for  implementing spending reductions. We analyzed budget and financial  data for fiscal year 2013 to identify spending reductions at the PPA level  and documentation of reprogramming, transfer, and other funding actions  used in response to the fiscal year 2013 sequestration. We did not assess  the appropriateness of actions that agencies or components took to  implement sequestration, such as transfer and reprogramming actions.
We interviewed agency officials from each component, including officials  in budget and management offices as well as officials in program offices.  In discussing the effects of sequestration, we asked agency officials to  isolate the effects of sequestration from other factors such as operating  under a continuing resolution (CR) and the rescissions enacted in the  Consolidated and Further Continuing Appropriations Act, 2013, to the  degree possible. We recognize that these other factors could also  contribute to budget uncertainty and affect component’s operations,  performance, and services to the public. For example, because CRs only  provide funding until an agreement is reached on final appropriations,  they create uncertainty for components about both when they will receive  their final appropriation and what level of funding ultimately will be  available. Our past work has shown that an agency may delay hiring or  contracts during the CR period, potentially reducing the level of services  agencies provide and increasing costs.
We asked agencies to identify the source of any data provided and a  description of any known limitations or purposes for which the data being  provided should not be used. We reviewed agencies’ supporting  documents to assess the reasonableness of their data and any  quantitative estimates of the effects of sequestration on agency  operations, performance, and services to the public. Specifically, we  reviewed the data and methodology used to calculate the estimates and  we reported the estimates when they met our evidentiary standards. In  some cases we found it appropriate to report agency estimates, as long  as we also included significant contextual information and information  about limitations regarding the estimates. In other cases, if agency  explanations of the data and methodologies used to estimate the effects  of sequestration indicated significant uncertainty surrounding the  estimates, we did not report the estimates. To further assess the reliability  of the data provided by agencies we interviewed knowledgeable officials  as needed. We determined that the data were reliable for the purposes  used in this report.
To obtain further information on the effects of fiscal year 2013  sequestration on selected components’ services to the public, we  interviewed select program partners that assist the components in  carrying out their missions, recipients of the components’ support and  services, or their representatives.
For CBP, we interviewed representatives from the Airports Council  International, Airlines for America, the American Association of State  Highway and Transportation Officials, and the American Trucking  Association.
For CMS, we interviewed officials from a purposeful sample of  Medicare contractors—two Medicare Administrative Contractors and a  Zone Program Integrity Contractor—and state survey agencies to  obtain information on CMS’s planning and implementation of  sequestration, as well as effects to CMS’s fee-for-service operations,  CMS program integrity activities, and state survey and certification  oversight activities.
For OESE, we interviewed officials from seven school districts that  receive Title I or Impact Aid grants. We selected these school districts  based on variation in the grant amounts they received, each district’s  reliance on grant funding, and geographic location. In addition, we  interviewed two national associations representing states and districts  receiving Title I and Impact Aid grants and six state Title I grant  administrators.
For PIH, we interviewed officials from four local public housing  agencies, which we selected based on their size, geographic location,  and use of set-aside funding to avoid terminations in their voucher  program, two national associations, and the National Low Income  Housing Coalition.
For more information on the program partners and recipients we spoke  with and how they were selected, see appendixes I to IV.
To examine the extent to which selected components identified their  PPAs in accordance with the criteria set out in section 256(k)(2) of the  Balanced Budget and Emergency Deficit Control Act of 1985, as  amended, we reviewed a purposeful sample of five PPAs from each of  the four nondefense components discussed in this report. In selecting  PPAs, we sought to include some of the PPAs that fund programs and  activities within case study components selected for more in-depth  review. However, we also considered the source used to define the PPA,  whether the PPA contained direct spending or discretionary  appropriations, the types of activities the PPA supports, and instances in  which the agency reported that a PPA was defined at the account level.  Therefore, some of the PPAs selected do not align with the programs and  activities selected for more in-depth review. Table 8 provides a list of the  PPAs that we reviewed.
Because we used a nonrandom, purposeful sample, the results of our  analysis of the selected PPAs cannot be generalized to other PPAs within  the component or department. While we assessed the extent to which  selected components identified their PPAs in accordance with the criteria  set out in section 256(k)(2) of BBEDCA, we did not assess each PPA for  compliance with other sections of BBEDCA. For example, we did not  assess the extent to which a PPA was properly characterized as  “discretionary appropriations” or “mandatory spending” for the purposes  of implementing sequestration. While we reviewed components’ operating  plans and other budgetary data, we did not test components’ financial  systems to determine that the component implemented sequestration at  the PPA level as reported.
We conducted this performance audit from April 2013 to May 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix VI: Glossary of Budget Terms

Appropriation: Budget authority to incur obligations and to make  payments from the Treasury for specified purposes. An appropriation act  is the most common means of providing appropriations; however,  authorizing and other legislation itself may provide appropriations.
Annual appropriation: A provision of law appropriating funds  enacted annually to provide budget authority to incur obligations and  make payments from the Treasury for specified purposes.
Supplemental appropriation: A provision of law appropriating funds  in addition to those already enacted in an annual appropriation act.  Supplemental appropriations provide additional budget authority,  usually in cases where the need for funds is too urgent to be  postponed until enactment of the regular appropriation bill.  Supplemental appropriations may sometimes include items not  appropriated in the regular bills due to a lack of timely authorizations.
Advance appropriation: Budget authority that becomes available 1  or more fiscal years after the fiscal year for which the appropriation  was enacted. For example, a fiscal year 2012 appropriation could  provide that budget authority for a specified activity would not become  available until October 1, 2012 (the start of fiscal year 2013) or later.  For sequestration, funding enacted as advance appropriations— available in fiscal year 2013—was included in the sequestrable base.
Availability: Budget authority that is available for incurring new  obligations.
Budget account: An item for which appropriations are made in any  appropriation act and, for items not provided for in appropriation acts, the  term means an item for which there is a designated budget account  identification code number in the President’s budget.
Budget authority: Authority provided by federal law to enter into financial  obligations that will result in immediate or future outlays involving federal  government funds.
One-year appropriation: Budget authority available for obligation  only during a specific fiscal year that expires at the end of that fiscal  year.
Multiyear appropriation: Budget authority available for a fixed period  of time in excess of 1 fiscal year. This authority generally takes the  form of 2-year, 3-year, and so forth availability but may cover periods  that do not coincide with the start or end of a fiscal year.
No-year appropriation: Budget authority that remains available for  obligation for an indefinite period of time. A no-year appropriation is  usually identified by language such as “to remain available until  expended.”
Permanent appropriation: Budget authority that is available as the  result of previously enacted legislation and is available without further  legislative action. Many programs with permanent appropriations are  exempt from sequestration (see “mandatory” below).
Definite appropriation: Budget authority that is stated as a specified  sum at the time the appropriation is enacted. This type of authority,  whether in an appropriation act or other law, includes authority stated  as “not to exceed” a specified amount.
Indefinite appropriation: Budget authority that, at time of enactment,  is for an unspecified amount, such as entitlement programs where  obligations depend on the number of eligible beneficiaries receiving  benefits. Also for fee-funded accounts in which total obligations  depend on demand for the good or service provided by the program  (e.g., programs funded by regulatory fees). Indefinite appropriations  may be appropriated as all or part of the amount of proceeds from the  sale of financial assets, the amount necessary to cover obligations  associated with payments, the receipts from specified sources—the  exact amount of which is determinable only at some future date—or it  may be appropriated as “such sums as may be necessary” for a given  purpose. For sequestration, unless otherwise specified in law,  agencies were directed to implement sequestration for accounts with  indefinite authority by reducing the remaining obligations from fiscal  year 2013 sequestrable resources by a uniform percentage.
Expired budget authority: Budget authority that is no longer  available to incur new obligations but is available for an additional 5  fiscal years for disbursement of obligations properly incurred during  the budget authority’s period of availability.
Budget function: The functional classification system is a way of  grouping budgetary resources so that all budget authority and outlays of  on-budget and off-budget federal entities and tax expenditures can be  presented according to the national needs being addressed. National  needs are grouped in 17 broad areas to provide a coherent and  comprehensive basis for analyzing and understanding the budget.
Carryover balance (unexpended balance): The sum of the obligated  and unobligated balances.
Continuing resolution: An appropriation act that provides budget  authority for federal agencies, specific activities, or both, to continue in  operation for a specific period of time when Congress and the President  have not completed action on the regular appropriation acts by the  beginning of the fiscal year.
Direct spending: Budget authority that is provided in laws other than  appropriation acts and entitlement authority (for example, Supplemental  Nutrition Assistance, Medicare, and veterans’ pension programs). Direct  spending, also referred to as mandatory spending, includes payment of  interest on the public debt, and nonentitlements such as payments to  states from Forest Service receipts. For sequestration, many mandatory  programs are exempt. But for those that are not exempt, the PPAs for  mandatory accounts are generally delineated in the President’s budget for  fiscal year 2013.
Discretionary spending: Outlays from budget authority that is provided  in, and controlled by, appropriations acts.
Expended funds: Funds that have actually been disbursed or outlaid.
Mandatory spending: See definition of direct spending above.
Obligated balance (obligated funds): The amount of obligations already  incurred for which payment has not yet been made. Technically, the  obligated balance is the unliquidated obligations. Budget authority that is  available for a fixed period expires at the end of its period of availability,  but the obligated balance of the budget authority remains available to  liquidate obligations for 5 additional fiscal years. At the end of the fifth  fiscal year, the account is closed and any remaining balance is canceled.  Budget authority available for an indefinite period may be canceled and  its account closed if (1) it is specifically rescinded by law or (2) the head  of the agency concerned (or the President) determines that the purposes  for which the appropriation was made have been carried out and  disbursements have not been made from the appropriation for 2  consecutive years.
Obligation: An obligation is a definite commitment that creates a legal  liability of the government for the payment of goods and services ordered  or received, or a legal duty on the part of the United States that could  mature into a legal liability by virtue of actions of another party.
Program, Project, or Activity (PPA): An element within a budget  account. The programs, projects, and activities as delineated in the  appropriation act or accompanying report for the relevant fiscal year  covering that account. For accounts not included in appropriation acts,  PPAs are delineated in the most recently submitted President’s budget or  congressional budget justifications, specifically the program and financing  schedules that the President provides in the “Detailed Budget Estimates”  in the budget submission for the relevant fiscal year.
Reprogramming: Reprogramming is the shifting of funds from one  program to another within an appropriation or fund account for purposes  other than those contemplated at the time of appropriation. The authority  to reprogram is implicit in an agency’s responsibility to manage its funds;  no statutory authority is necessary but the agency may be required to  notify the congressional appropriations committees, the authorizing  committees, or both of any reprogramming action.
Rescission: Legislation enacted by Congress that cancels budget  authority previously enacted before the authority would otherwise expire.  For sequestration, the Consolidated and Further Continuing  Appropriations Act, 2013 included across-the-board rescissions, which  were applied to full-year appropriations for fiscal year 2013 (in addition to  the reductions required by the Joint Committee sequestration).
Sequestration: In general, the permanent cancellation of budgetary  resources under a presidential order. For fiscal year 2013, the uniform  percentage reduction is applied to all programs, projects, and activities  within a budget account, with some program exemptions and special  rules.
Spending authority: A specific form of budget authority that authorizes  obligations and outlays using offsetting collections credited to an  expenditure account. Spending authority is typically provided in  authorizing laws and in some cases appropriation acts limit obligations.
Transfer: The shifting of funds between accounts is called a transfer. An  agency may not transfer funds unless it has statutory authority to do so.
Unobligated balance (unobligated funds): The portion of budget  authority that has not yet been obligated. For an appropriation account  that is available for a fixed period, the budget authority expires after the  period of availability ends and is no longer available for new obligations,  but its unobligated balance remains available for 5 additional fiscal years  for recording and adjusting obligations properly chargeable to the  appropriations period of availability. For example, an expired, unobligated  balance remains available until the account is closed to record previously  unrecorded obligations or to make upward adjustments in previously  under-recorded obligations (such as contract modifications properly within  scope of the original contract). At the end of the fifth fiscal year, the  account is closed and any remaining balance is canceled. For a no-year  account, the unobligated balance is carried forward indefinitely until (1)  specifically rescinded by law or (2) the head of the agency concerned (or  the President) determines that the purposes for which the appropriation  was made have been carried out and disbursements have not been made  from the appropriation for 2 consecutive years.
For more information on budget terms and concepts, see GAO, A  Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP  (Washington, D.C.: September 2005) (published in cooperation with the  Secretary of the Treasury and the Directors of OMB and the  Congressional Budget Office).

Appendix VII: U.S. Customs and Border Protection Organization Chart and Fiscal Year 2013 Funding Levels

	U.S. Customs and Border Protection (CBP) Commissioner’s Office

In fiscal year 2013, CBP employed about 60,000 employees, including  CBP officers, Border Patrol agents, agriculture specialists, and Air  Interdiction agents (pilots), among others.

	Office of Field Operations

Established geographically by region, the Office of Field Operations  (OFO) and its respective 20 field offices around the United States  distribute key policies and procedures to field staff. Field offices provide  guidance to their regional ports and ensure the dissemination and  implementation of CBP guidelines. For fiscal year 2013, OFO was  congressionally directed to maintain 21,775 officers. OFO’s post- sequestration fiscal year 2013 funding represented about 27 percent of  CBP’s fiscal year 2013 post-sequestration funding.  a: Explanatory Statement, Consolidated and Further Continuing  Appropriations Act, 2013, 159 Cong. Rec. S1287, S1549 (daily ed. Mar.  11, 2013).

		OFO Fiscal Year 2013 Discretionary Funding:

Fiscal year 2013 funding prior to sequestration: $3.2 billion  Sequestered amount: $156.3 million  Post-Sequestration funding: $3.05 billion  b: According to CBP’s budget office, the $3.2 billion represents funding  for CBP’s Border Security Inspections and Trade Facilitation Programs,  Projects, and Activities (PPA). Funding for OFO comprises the majority of  this PPA.
CBP collects COBRA user fees for air passenger customs and vessel  passenger customs inspections, among other things. COBRA fee  collections fund activities involving CBP officers ensuring that all carriers,  passengers, and their personal effects entering the U.S. are compliant  with customs laws. According to CBP, fees, such as the COBRA fee, play  an integral role in CBP’s planning and budget process because they  reimburse CBP’s Salaries and Expenses account, for certain expenses,  such as overtime for CBP officers, that comprise about 30 percent of that  account. The COBRA account post-sequestration fiscal year 2013  funding represented about 3.5 percent of CBP’s total fiscal year 2013  post-sequestration funding.

		COBRA Fiscal Year 2013 Direct Spending :

Fiscal year 2013 funding prior to sequestration: $419.4 million  Sequestered amount: $27 million  Post-Sequestration: $392.4 million  c: This amount represents the fiscal year 2013 budget authority as stated  in the explanatory statement accompanying the Consolidated and Further  Continuing Appropriations Act, 2013. The OMB baseline established in its  March 1 report for this account was $529.4 million.

	Office of Border Patrol

The U.S. Border Patrol (USBP) is responsible for patrolling nearly 6,000  miles of Mexican and Canadian international land borders and over 2,000  miles of coastal waters surrounding the Florida Peninsula and the island  of Puerto Rico. For fiscal year 2013, USBP was legislatively mandated to  maintain 21,370 agents across its 20 sectors. USBP’s post-sequestration  fiscal year 2013 funding represented about 31 percent of CBP’s fiscal  year 2013 post-sequestration funding.

		USBP Fiscal Year 2013 Discretionary Funding:

Fiscal year 2013 funding prior to sequestration: $3.7 billion  Sequestered amount: $180.7 million  Post-Sequestration funding: $3.52 billion  d: Pub. L. No. 113-6, 127 Stat. 198, 345 (2013).  e: According to CBP’s budget office, the $3.7 billion represents funding  for CBP’s Border Security and Control between Ports of Entry PPA.  Funding for USBP comprises the majority of this PPA.

Appendix VIII: GAO Contacts and Staff Acknowledgments

	GAO Contacts

Michelle Sager, Director, Strategic Issues, (202) 512-6806 or  sagerm@gao.gov.
Edda Emmanuelli Perez, Managing Associate General Counsel, (202)  512-2853 or emmanuellipereze@gao.gov.
For issues related to the Department of Housing and Urban Development:  Daniel Garcia-Diaz, Director, Financial Markets and Community  Investment, (202) 512-8678 or garciadiazd@gao.gov.
For issues related to the Department of Defense: John Pendleton,  Director, Defense Capabilities and Management, (202) 512-3489 or  pendletonj@gao.gov, or Michael Sullivan, Director, Acquisition and  Sourcing Management, (202) 512-4841 or sullivanm@gao.gov.
For issues related to the Department of Education: Melissa Emrey-Arras,  Director, Education, Workforce, and Income Security, (617) 788-0534 or  emreyarrasm@gao.gov.
For issues related to the Department of Health and Human Services:  Kathleen King, Director, Health Care, (202) 512-7114 or kingk@gao.gov.
For issues related to the Department of Homeland Security: David C.  Maurer, Director, Homeland Security and Justice, (202) 512-9627 or  maurerd@gao.gov.

	Staff Acknowledgments

The following staff contributed to this report: Elizabeth Curda and Melissa  Wolf (Assistant Directors); Katherine Lenane (Assistant General  Counsel); Thomas McCabe (Analyst-in-Charge); Margaret Adams, Shari  Brewster, Robert Gebhart, Lauren Grossman, Donna Miller, Laurel  Plume, Alan Rozzi, and Walter Vance.
In addition, staff that contributed to sections of this report on selected  agencies are listed in table 9.

Summary:
Why GAO Did This Study

On March 1, 2013 the President ordered a sequestration of $85.3 billion across federal government accounts. Final appropriations enacted on March 26, 2013 reduced this amount to $80.5 billion. Under current law, a sequestration of direct spending will occur through fiscal year 2024 and another sequestration of discretionary appropriations could occur in any fiscal year through 2021.
GAO was asked to evaluate how agencies prepared for and implemented sequestration in fiscal year 2013. GAO's March 2014 report broadly examined fiscal year 2013 sequestration at 23 large federal agencies. This report examines in greater depth: (1) the effects of fiscal year 2013 sequestration on the operations, performance, or services to the public for selected components within federal agencies; and (2) how those selected components planned for and implemented the fiscal year 2013 sequestration.
GAO reviewed programs and activities operated by four components of federal agencies: CBP, CMS, OESE, and PIH. GAO selected these case studies based on factors such as the share of total sequestered funds and level of direct services provided to the public. GAO also incorporated findings from a November 2013 report that addressed similar objectives for select operations at DOD. GAO's case study selections account for about 77 percent of the total defense funding sequestered and 36 percent of the total nondefense funding sequestered in fiscal year 2013.

What GAO Found

Fiscal year 2013 sequestration reduced funding to selected components of federal agencies and their program partners—such as state and local governments—that assist in carrying out agency missions. As a result, the selected components and their partners reduced or delayed some services to the public and operations in 2013. For example:
Public housing authorities reported providing rental assistance to about 41,000 fewer very low-income households compared to 2012—a 2.2 percent reduction—because the authorities received less program funding from the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH).
The Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS) reported reducing the frequency of surveys to determine quality of care and compliance with federal standards at psychiatric hospitals from once every three years to once every four to five years and specialized organ transplant centers from once every three years to once every four to six years.
The Department of Homeland Security's U.S. Customs and Border Protection (CBP) reported that sequestration reductions did not leave them with sufficient funds to provide the overtime necessary to fully staff inspection booths which resulted in increased average wait times for international passengers. From fiscal years 2012 to 2013, wait times increased from 19.7 minutes to 22.8 minutes at one airport and from 20.9 minutes to 26.8 minutes at another.
School districts GAO spoke with reported that reduced funding from the Department of Education's Office of Elementary and Secondary Education (OESE) resulted in less resources for specialists providing extra instruction to students and an increase in the average number of students per elementary school class. For example, one district reported an average increase of two or three students per elementary school class from the prior school year.
The Department of Defense (DOD) reported that canceled or limited military training and readiness activities could increase the number of nondeployable units, decrease surge capacity to meet additional requirements with ready forces, and lead to skills gaps.
In some cases, program partners reported increasing reliance on other federal, state, and local funding sources, where available, to mitigate sequestration's effects on their services to the public. Certain state agencies reported that they relied on additional state funds to inspect and investigate health care facilities on behalf of CMS. However, in other cases, program partners reported that reductions in other funding sources magnified sequestration's effects on services to the public. For example, officials at 7 school districts that receive federal education grants reported that sequestration compounded prior-year reductions in state funding.
However, GAO found in some cases the effects of sequestration could not be isolated from the effects of other changes in funding. For example:
The effects of the 2 percent sequestration of Medicare payments are difficult to quantify due to the challenge of isolating the effects of sequestration from other factors that increased or decreased payments to providers, as well as possible changes in provider behavior to compensate for the sequestration reductions.
It is difficult to isolate the specific effects of sequestration on Title I school districts because Title I funding typically makes up a small portion of the school district's total funding compared to state and local sources. A district's Title I formula allocation could also be reduced as a result of factors other than sequestration.
GAO found that sequestration planning and implementation varied among the selected components. In some cases, agencies directed components' efforts, while in others components provided guidance and set priorities for program offices. Consistent with GAO's March 2014 report, officials from all federal agency components reported that uncertainty regarding the timing and amount of sequestration and technical questions about how to apply sequestration to certain complex accounts presented challenges for planning and implementation. For example:
CMS officials had difficulty determining all of the types of provider payments that would need to be cut and which funding was subject to special sequestration rules.
According to CBP budget officials, applying sequestration to fee-based accounts was more difficult than applying sequestration to other accounts.
In addition, uncertainty surrounding the timing and amount of sequestration limited some components' ability to substantively communicate with program partners and recipients, making it difficult for partners to plan and execute their budgets during the fiscal year. For example, recipients of Indian Housing Block grants from PIH did not receive the full amount of funds until several months into the calendar year.
Components that had initiated efficiency efforts prior to sequestration reported that they were better positioned to plan for and implement sequestration in fiscal year 2013. For example, CMS officials reported that savings from a 2011 initiative to improve the efficiency of its facility inspections helped the component plan for and implement sequestration.
In reviewing how agencies implemented sequestration, GAO also selected five programs, projects, and activities (PPAs) from each of the four nondefense case study components based on the specific programs or activities reviewed within each component and other factors and found that components complied with the provision in the Balanced Budget and Emergency Deficit Control Act of 1985 that specifies how PPAs should be identified for the purpose of sequestration.
In cases where officials had some discretion in implementing sequestration reductions, components reported that they sought to protect higher priority activities, either by using funding flexibilities or modifying or canceling contracts or other ongoing activities. For example, within DOD, the military services sought to protect training requirements for deployed and next-to-deploy forces by canceling or limiting training for forces not preparing to deploy in fiscal year 2014.
However, for some programs, officials reported having limited options to implement sequestration. For example, some of the case study components' largest programs—such as HUD's Housing Choice Voucher Program and Education's Title I grants—are based on eligibility formulas and the funds are disbursed to program partners to provide services to the public. As a result, these program partners had to identify specific actions—such as limiting the number of housing vouchers issued and increasing classroom size—to absorb the reductions and mitigate their effects on the public.

What GAO Recommends

GAO is not making new recommendations in this report.
We provided a draft of this product to the selected case study agencies and the Office of Management and Budget (OMB) for comment. DHS, Education, HHS, and HUD provided technical comments that were incorporated, as appropriate. OMB did not provide comments.