Source: http://www.cbpp.org/research/two-sequestrations
Timestamp: 2015-04-21 08:23:36
Document Index: 10855317

Matched Legal Cases: ['art 1', 'art 2', 'art 1', 'art 2', 'art 3', 'art 1', 'art 2', 'art 1']

by Richard Kogan This report has been updated to reflect new data.
A prominent part of the "fiscal cliff" is the automatic, across-the-board funding reductions known as sequestration. Required under the 2011 Budget Control Act (BCA), these automatic cuts will occur in both defense and non-defense programs on January 2, 2013 -- absent action by the President and Congress to turn them off. Less well known is that a second automatic sequestration, applying only to defense, is also slated to take effect due to other aspects of the BCA. Absent intervening action, this second sequestration will occur in mid-January or sooner; it must occur within 15 days after Congress adjourns at the end of its current session. Together, these two sequestrations would reduce 2013 funding by about $120 billion.
The first sequestration: Along with raising the debt limit last July, the BCA imposed caps on "discretionary" funding -- funding subject to the annual appropriations process -- and established a congressional Joint Select Committee on Deficit Reduction (Supercommittee) to propose legislation that would reduce deficits by another $1.2 trillion over ten years. In the event that the Supercommittee failed, the BCA created a backup sequestration procedure to ensure that the desired level of deficit reduction over the coming decade would nonetheless be achieved. Because the Supercommittee did not fulfill its goal, sequestration is scheduled to cut defense and non-defense funding in 2013 by $109.3 billion. In this report, we call this the "Supercommittee sequestration."
The second sequestration: The BCA established separate caps for defense and non-defense discretionary funding for each year from 2013 through 2021. For 2013, Congress has so far enacted only a continuing resolution (CR) -- a stop-gap bill that funds discretionary programs through March 27, 2013. When viewed on a full-year basis, the CR's total discretionary funding is consistent with the overall levels in the BCA, but the amount provided for defense breaches the BCA's cap on defense funding (see the box on page 3). That will trigger a separate sequestration of 2013 defense funding, reducing it by $10.9 billion in order tobring defense funding back down to the BCA cap level. We call this the "cap sequestration."
"Supercommittee sequestration":
"Cap sequestration" of discretionary defense funding
In general, the figures are based on OMB's interpretation of the sequestration law, except in those instances in which OMB did not specify its interpretation. Certain legal questions remain about how the sequestration applies, the most important being the relationship between the cap sequestration and the Supercommittee sequestration. We interpret these two sequestrations as independent events, each calculated separately and then added together. That is, the cap sequestration does not provide savings that count toward the Supercommittee sequestration, and the Supercommittee sequestration does not provides savings that count toward the cap sequestration. In this respect, the order in which the two sequestrations occur largely does not matter (see Appendix 2 for a more detailed discussion). All estimates in this report are based on the existing CR, and we assume that the President and Congress will not replace the CR by enacting full-year appropriations until after the sequestrations are triggered.
A part-year CR is treated as providing a full year's appropriation for purposes of the sequestration calculations (both the Supercommittee sequestration described in Part 1 and the cap sequestration described in Part 2). A sequestration thus reduces the full-year amount of the CR. Consider a program that customarily costs $1 billion over the course of an entire fiscal year. Many people would think of a six-month CR as providing $500 million in funding for that program, to last six months. But for purposes of sequestration calculations, the law says that the CR is treated as providing $1 billion over a full year. As a result, a sequestration of 8 percent, for example, would reduce that amount to $920 million for the year. Thus, an 8 percent sequestration means that the agency is expected to operate as though $920 million had been provided for the full year under the CR, but with the authority to operate expiring after six months. A sequestration neither decreases nor increases the flexibility that agencies may have under a CR; the sequestration merely reduces the amount of funding available for each program. In this way, an 8 percent sequestration on January 2, 2013, is no different from the enactment of a rescission on that date that reduces by 8 percent all amounts that are made available under the terms of the current CR.
Part 1 of this report examines how the "Supercommittee sequestration" works for 2013. Part 2 describes the "cap sequestration," which affects only defense discretionary funding in 2013. Part 3 discusses the Supercommittee sequestration in 2014 and subsequent years.
Part 1: How the "Supercommittee Sequestration" Will Work in 2013
The BCA details the steps that OMB must take because the Supercommittee did not reach agreement on a deficit reduction plan. As Table 3 shows, the sequestration law calls for $1.2 trillion in deficit reduction through 2021; it requires $984 billion in budget cuts and assumes those savings will reduce interest payments by $216 billion.[2] The $984 billion in budget cuts is divided equally over each of the nine years 2013-2021, or $109.3 billion per year. Those cuts themselves are divided equally between the "National Defense" budget function[3] and all other budget functions: $54.7 billion per year in defense and $54.7 billion per year in non-defense programs.
Defense sequestration. The $54.7 billion in 2013 defense cuts required by the Supercommittee sequestration are imposed on discretionary and mandatory defense programs that are not exempt from sequestration.[4] The vast bulk of the defense cuts will occur through across-the-board, proportional cuts in funding for discretionary defense accounts in the existing CR. Within the National Defense function, war costs are subject to sequestration, as are unobligated balances carried over from prior years; but military personal funding is not, at the President's option.[5] Table 4 shows the three steps that OMB will take in calculating the Supercommittee sequestration of defense funding. Table 4: Defense Cuts Required by the January 2nd Supercommittee Sequestration In billions of dollars
Step 2 shows the amount of discretionary defense funding that is subject to sequestration, $582.5 billion, after adjusting for war costs, unobligated balances, and military personnel funding.[6] Step 3 divides the required cut for discretionary and mandatory defense funding (Step 1) by the amount of such funding that is subject to sequestration (Step 2) to derive the percentages applicable to discretionary and mandatory defense funding that is subject to sequestration. Sequestrable mandatory funding is cut by 10.0 percent, while sequestrable discretionary funding is cut by 9.4 percent. That's because the required sequestration is allocated to mandatory and discretionary defense programs based on the amount of sequestrable mandatory funding and the discretionary defense cap, as seen in Step 1 of Table 4. But the amount of discretionary, sequestrable defense funding ($582.5 billion) is larger than the defense cap ($546.0 billion); as a result, the required percentage reduction to achieve the needed defense discretionary reduction is lower. Non-defense sequestration. As with the defense cuts, the $54.7 billion in non-defense cuts will come from both mandatory and discretionary programs. The mandatory cuts will include:
Some key mandatory programs are exempt from sequestration, including Social Security, Medicaid, the Children's Health Insurance Program (CHIP), SNAP (formerly known as food stamps), child nutrition, Supplemental Security Income (SSI), refundable tax credits such as the Child Tax Credit and the Earned Income Tax Credit, veterans' compensation and pensions, and federal retirement.[8] Thus, in 2013, about $16.6 billion of the $54.7 billion in non-defense cuts will come from mandatory programs. The remaining non-defense cuts -- about $38.0 billion in 2013 -- will come from discretionary programs. For 2013, the non-defense cuts would occur through across-the-board, proportional cuts in the new funding provided for each non-exempt discretionary program in the CR.[9] The BCA exempts all veterans' funding and Pell Grants from those cuts, even though they count against the BCA caps. Programs that are essentially excluded from the BCA discretionary caps, but that are not exempt from sequestration, include war costs within the International Affairs function, disaster and emergency funding, and program integrity funding.[10] Table 5 on the next page shows the six steps that OMB will take in calculating the Supercommittee sequestration of non-defense funding.
Step 3: apply 2% limit to mandatory funding for "special health" programs:
Base level of mandatory "special health" programs
2% cut in "special health" programs
Add student loans but subtract "special health" from sequestration base
Step 6 divides the required across-the-board dollar sequestrations calculated in Step 3 by the discretionary and mandatory funding subject to those cuts, shown in Step 5, thereby deriving the discretionary percentage (8.2 percent) and mandatory percentage (7.6 percent) cuts that are applicable to each program that's subject to those across-the-board cuts.
OMB's published report on sequestration, as required by the Sequestration Transparency Act (STA), derives 8.2 percent in non-defense discretionary cuts and 7.6 percent in non-defense mandatory cuts. Although our percentage figures are the same as OMB's, our discretionary funding figures are based on the CR as scored by CBO, rather than on a hypothetical CR that OMB was directed to assume under the terms of the Sequestration Transparency Act.
Part 2: How the "Cap Sequestration" for Defense Funding Will Work in 2013
The existing CR for 2013 is subject to the BCA's caps on defense and non-defense discretionary funding. While the full-year amounts in the CR are consistent with the overall $1.047 trillion funding total that the BCA allows, the levels in the CR exceed the defense cap by $10.9 billion and are below the non-defense cap by the same amount (see the box on page 3).
Table 6 on the following page shows that cutting $10.9 billion requires a 1.9 percent cut in defense funding subject to sequestration. The amount of defense funding subject to sequestration is $582.5 billion, greater than the $556.9 billion that the CR provided that's subject to the defense cap. As shown in Table 6, the differences are that sequestrable funding includes war funding and unobligated balances of defense budget authority carried over from prior years, but excludes military personnel funding (identical to the adjustments made for the Supercommittee sequestration to defense discretionary funds; see Step 2 in Table 4). Table 6: Sequestration to Offset the Breach of the 2013 Defense Cap In billions of dollars
The sequestration required by the Supercommittee's failure entails an annual cut of $109.3 billion in each year from 2013 through 2021. The process for the 2013 sequestration (described in Part 1) has several unique features for discretionary programs that are not repeated in future years.
For the non-defense sequestration, the first step is to calculate the 2 percent cut to Medicare payments to providers and health insurance plans. Because Medicare costs are projected to rise from 2013 through 2021, the dollar amount saved by this 2 percent cut will increase each year, from $11.1 billion in 2013 (see Table 5) to $11.3 billion in 2014 and ultimately to $17.6 billion in 2021 (see Table 7 on the following page). In each year from 2014 through 2021, the remaining amount of the $54.7 billion in annual non-defense cuts will be applied proportionally to: 1) other non-exempt mandatory programs and 2) the statutory cap on overall non-defense discretionary funding. Because Medicare will account for a growing share of the $54.7 billion annual non-defense cut -- it will account for 21 percent of that amount in 2014, but 33 percent in 2021 -- other non-defense programs will absorb a falling share of the cut, as Table 7 shows.
Because the defense and non-defense discretionary cuts will occur through the normal appropriations process, Pell Grants, veterans' medical care, and military personnel will have no special status; the normal process of policymaking will determine how the President and Congress adhere to the newly reduced caps, and they will be able to cut these programs to help fit within the reduced caps, if they so choose. Table 7 Sequestration in 2014 through 2021 In billions of dollars
The Supercommittee sequestration of Medicare will begin February 1, 2013, and last for 12 months. This means that the "2013" sequestration of Medicare occurs partly in fiscal year 2013 and partly in fiscal year 2014. CBO's budgetary estimates of the Medicare savings by fiscal year reflect this fact. However, under the Statutory PAYGO Act, which the Budget Control Act cross-references in describing how sequestration will be implemented, the fiscal year 2014 Medicare savings from the cut in reimbursement rates ordered in January 2013 will count toward the sequestration target for fiscal year 2013. (The same phenomenon applies in each subsequent year, but we will illustrate this point by reference to the 2013 sequestration.) In our estimates, therefore, we take this requirement into account, which is why we attribute $11 billion in Medicare savings -- a full 12 months' worth -- to achieving the 2013 non-defense sequestration target of $54.7 billion, rather than attributing only eight months of Medicare savings.14] The student loan program is mandatory and is not exempt from the Supercommittee sequestration. The law includes a special rule for the program: under a sequestration, origination fees that borrowers pay to the government rise by the uniform percentage applicable to non-exempt mandatory programs generally. For example, if a student's origination fee would otherwise be $100 and the sequestration would be 8 percent, the fee rises to $108. In its Sequestration Transparency Act (STA) report, OMB stated that each 1 percent increase in the sequestration rate would save the government $12 million. In effect, this means that the student loan sequestration base is $1.2 billion. Although OMB did not portray its calculations this way, that $1.2 billion was effectively part of the mandatory sequestration base of $73.158 billion shown in Table 5 at the end of Step 4. In this respect, we and OMB make identical calculations.
Unlike OMB, we believe that the $1.2 billion student loan sequestration base should also be part of the mandatory base that is used in Step 2 of Table 6 to allocate the non-defense cuts between discretionary and mandatory programs. OMB, in contrast, does not include this $1.2 billion as a "sequestrable budgetary resource" in Step 2. In this analysis, we nonetheless follow OMB's approach as outlined in the STA. Had we used the approach that we believe appropriate, the mandatory sequestration base in Step 2 would have been $74.502 billion. In that case, there would have been $79 million less in discretionary cuts and $79 million more in mandatory cuts.
That's a technical issue. We believe that our approach is correct because: the student loan special rule states that the student origination fees are subject to sequestration; those fees are (negative) budget authority under the statutory definition of budget authority even though they flow to, rather than from, the government; and budget authority is defined in the sequestration law as a budgetary resource subject to sequestration. As noted, the STA report treats student loans as subject to sequestration for purposes of Steps 4-6, but does not treat the $1.2 billion student loan sequestration base as a budgetary resource for purposes of Step 2. We believe that it would be more consistent with the structure of the sequestration act, and appropriate under legal definitions, to do so.
In these two tables, we have used the dollar value of the defense and NDD caps before any adjustments for war, disaster, emergency, or program integrity funding that the BCA permits. This is the correct approach if the Supercommittee sequestration is ordered first, on January 2, 2013, because cap adjustments are only implemented when OMB issues a final sequestration report with respect to the caps -- not when it issues the report associated with the Supercommittee sequestration. The end-of-year cap sequestration report, however, must be issued within 15 days of Congress' sine die adjournment, and it is at least conceivable that OMB could issue that report before issuing the Supercommittee sequestration report.
Table 8: Changes to Tables 4 and 5 if the "cap sequestration report" is issued before the "Supercommittee sequestration report" and if relief from Hurricane Sandy is enacted In millions of dollars
[6] The OMB report (cited in footnote 1) that was issued in September shows $580.1 billion in sequestrable defense funding rather than the $582.5 billion we show here. However, OMB's estimates were based on a hypothetical freeze-level CR defined in the Sequestration Transparency Act, while our estimates are based on CBO's scoring of the actual CR now in effect. [7] A special rule in the sequestration law provides that the Medicare sequestration starts the first full month after the order is issued and continues for 12 months. See Appendix 1. [8] The Budget Control Act is drafted as a portion of the Balanced Budget and Emergency Deficit Control of Act of 1985 (BBEDCA, also known as Gramm-Rudman-Hollings), which contains a list of exemptions in section 255 and a list of special rules in section 256. Those two provisions of BBEDCA were most recently updated by the Statutory Pay-As-You-Go Act of 2010, and were not changed by the Budget Control Act.
[9] For non-defense appropriations, "new funding" means new budget authority and includes advance appropriations that first become available for obligation in 2013. The term does not include unobligated balances carried over from prior years.
[11] A portion of Medicare, such as the low-income subsidy for the prescriptions drug benefit, is exempt from sequestration. Also, about $1 billion of mandatory Medicare funding for administrative costs is subject to across-the-board sequestration rather than being limited to 2 percent. For simplicity this analysis refers to a "2 percent limit on Medicare sequestration" but the calculations account for the portion of Medicare that is completely exempt and the portion that is subject to across-the-board sequestration.
[13] OMB will re-estimate the amount of mandatory savings from sequestration -- for example, the amount estimated to be saved by the 2 percent cut in Medicare reimbursement rates -- at the beginning of each Congressional session. While these estimates are unlikely to change much from year to year from those shown in Table 7, any changes in estimated mandatory savings will necessarily produce offsetting changes in the size of the reduction in the non-defense discretionary cap, since the total amount of non-defense savings each year must equal $54.7 billion.
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