2014 Sequestration: Opportunities Exist to Improve Transparency of Progress Toward Deficit Reduction Goals
Published: 2016-04-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2014, federal agencies implemented the second consecutive year of sequestration reductions to mandatory spending, which are scheduled through fiscal year 2025.
GAO was asked to review the implementation of sequestration on mandatory accounts and any related effects. This report examines 1) the designation of mandatory accounts government-wide under the President's sequestration order for fiscal year 2014, 2) how selected agencies implemented sequestration and any effects they reported on programs or services, and 3) how continued sequestration of mandatory spending relates to the achievement of deficit reduction goals.
GAO analyzed fiscal year 2014 budget data on sequestration; selected a nongeneralizable sample of 6 accounts from USDA, HHS, Treasury, and DOT based on the amount of sequestrable budget authority, budget function, and account type; reviewed documentation on sequestration; interviewed budget officials; and reviewed legislation.
section_title: What GAO Found
paragraphs: GAO found that in fiscal year 2014, total mandatory budget authority government-wide was approximately $2.9 trillion spread across roughly 443 accounts. The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), as amended, required the Office of Management and Budget (OMB) to apply a range of sequestration rates to non-exempt mandatory spending. This resulted in estimated reductions of $19.4 billion in fiscal year 2014, which was less than one percent of mandatory budget authority. Exemptions and special rules in BBEDCA led some areas of government to be reduced more than others. For example, 90 percent or more of mandatory budget authority for the administration of justice and transportation was subject to reduction. Veterans benefits and services were exempt. About two-thirds of the 67 federal agencies with mandatory budget authority implemented sequestration procedures in 2014. The largest drivers of mandatory spending growth—Social Security and health care—are statutorily exempt from sequestration under BBEDCA, with the exception of Medicare and certain health programs which are subject to a special rate.
Agency officials responsible for managing the selected accounts in GAO's review at the Departments of Agriculture (USDA), Health and Human Services (HHS), the Treasury (Treasury), and Transportation (DOT) reported varied administrative and programmatic effects. While they said 2014 sequestration procedures were similar to the prior year, implementation involved additional administrative activities to ensure that reductions were applied correctly and to accommodate the changes in cash flows for programs and services. In certain cases, selected officials said sequestration added uncertainty when planning and executing their budgets. They also said that the required reductions affected program beneficiaries in different ways including smaller direct payments, reduced services, delayed payments, and reduced tax credits.
The processes established by BBEDCA were designed to reduce the deficit over 10 years by at least an additional $1.2 trillion. However, the subsequent availability of temporarily sequestered budget authority in certain accounts—referred to as “pop ups”—provide savings in the year they are sequestered but do not represent lasting savings. OMB staff said they do not tally the total amount of funds that “pop up,” nor are they required to do so. However, doing so would provide additional transparency to Congress about the total amount of funds agencies have available in a given year.
In addition, actual sequestered amounts for certain types of mandatory spending cannot be determined until the end of the fiscal year due to the variable nature of indefinite budget authority—budget authority for an unspecified or indeterminable amount at the time of enactment. OMB staff said they do not aggregate government-wide data on the actual amounts sequestered nor are they required to do so under BBEDCA. However, tabulating actual amounts after the close of the fiscal year would provide a clearer picture of the amount of funds that were permanently canceled, thereby representing the true savings generated from mandatory spending reductions each year. Moreover, compiling such data could improve transparency and serve as a benchmark to evaluate the progress made each year toward the required overall savings of $1.2 trillion.
section_title: What GAO Recommends
paragraphs: GAO recommends that OMB identify and publicly report the total amount of (1) temporarily sequestered budget authority that becomes available in subsequent fiscal years and (2) actual budget authority sequestered government-wide each year. OMB agreed with the first recommendation but disagreed with the second, citing implementation burden. GAO believes such information would enhance the transparency of achieving federal deficit reduction goals as discussed in the report.

section_title: Letter
paragraphs: The Balanced Budget and Emergency Deficit Control Act of 1985  (BBEDCA) first established sequestration, which is the cancelation of  budgetary resources under a presidential order. The act set deficit  reduction targets for the federal government and established  sequestration procedures to enforce those targets. The Budget Control  Act of 2011 (BCA) amended BBEDCA and revived this budgetary  enforcement mechanism to encourage agreement on deficit reduction  legislation or, in the event that such agreement was not reached, to  automatically reduce spending so that an equivalent budgetary goal  would be achieved. Sequestration was triggered after the Joint Select  Committee on Deficit Reduction (Joint Committee) did not propose, and  Congress and the President did not enact, legislation to reduce the deficit  by at least an additional $1.2 trillion. In fiscal year 2014, federal agencies  implemented the second consecutive year of across-the-board spending  reductions to mandatory spending (also known as direct spending).
Discretionary spending is controlled through  appropriations acts, which provide agencies  with budget authority on a one-year, multi- year, or no-year basis. Examples include most  defense spending, education, housing, and  energy programs.
Mandatory spending (also known as direct  spending) generally refers to budget authority  provided through laws other than  appropriations acts. By statute, funding tends  to be driven by eligibility rules and benefit  formulas, which means that funds are made  available as needed to provide benefits to  those who are eligible and wish to participate.  Examples include Medicare, Social Security,  unemployment insurance, and various  veterans’ programs.
While an across-the-board reduction of discretionary appropriations was  not triggered in fiscal year 2014 (and thus did not occur), nor were  discretionary spending limits required to be reduced under BBEDCA,  current law requires mandatory spending to be sequestered every year  through 2025. Mandatory outlays are largely driven by eligibility rules and  benefit formulas, which means that funds are made available as needed  to provide benefits to those who are eligible and choose to participate.  Pursuant to BBEDCA, a great deal of mandatory spending is exempt from  sequestration such as Social Security benefit payments, Medicaid grants,  and funding for veterans’ benefits programs.
Under sequestration, agencies are required to reduce nonexempt  mandatory spending, which includes amounts for Medicare, various farm  programs, unemployment insurance, and citizenship and immigration  services. The list of exemptions was established in the 1980s, when  BBEDCA was first enacted, and has been amended since then. Through  its amendments to BBEDCA in 2011, Congress encouraged the  enactment of deficit reducing legislation and established consequential  procedures in the absence of such legislation. Given that sequestration of  mandatory spending will be in effect over the coming decade, it is  important to evaluate the effects and implications of sequestration as a  tool for reducing the federal deficit.
While under current law, Joint Committee reductions to discretionary  spending limits are not required until fiscal year 2018, and an after  session sequestration of discretionary appropriations will only occur if  spending limits are breached, mandatory spending is to be sequestered  under the Joint Committee sequestration process every year through  fiscal year 2025. You requested that we examine the implementation of  sequestration on mandatory accounts and any related effects.  Specifically, this report discusses (1) the designation of mandatory  accounts across the federal budget under the President’s sequestration  order for fiscal year 2014, (2) how selected agencies implemented the  fiscal year 2014 sequestration order and the effects, if any, they reported  the required spending reductions had on programs or services, and (3)  how continued sequestration of mandatory spending relates to the  achievement of deficit reduction goals.
To accomplish our first objective, we identified how mandatory accounts  were designated under sequestration primarily using a data set provided  by Office of Management and Budget (OMB) staff that was used to  prepare OMB’s Report to the Congress on the Joint Committee  Reductions for Fiscal Year 2014. We also analyzed actual budget  authority data for all mandatory accounts government-wide from OMB’s  MAX database to show trends over time from fiscal year 2005 through  fiscal year 2014. To accomplish our second objective, we selected a  nongeneralizable sample of six accounts for a more in-depth review of the  implementation of sequestration and its effects. We relied on the same  data used for our first objective to select six accounts representing a  variety of characteristics including the amount of sequestrable budget  authority, type of account, agency, budget function, and whether the  account included some portion of budget authority that was exempt from  sequestration. We assessed the reliability of the data sources noted  above through electronic data testing, interviews with agency officials,  and reviewing related documentation. We found the data to be sufficiently  reliable for the purpose of our report.
We reviewed budget data, guidance, and documentation of any reported  programmatic effects of sequestration for each of the selected accounts.
We spoke with agency budget and program officials, as well as OMB  staff, about their challenges and lessons learned from implementing  sequestration. We also spoke with a nongeneralizable selection of  interest groups to gain their perspective on the effects of sequestration on  programs and services. To accomplish our third objective, we reviewed  relevant literature and the government-wide federal budget data  described above that was used for our first objective. We reviewed OMB’s  processes compared to federal standards for internal control specifically  related to information and communication. In addition, for each of the  objectives, we reviewed relevant legislation, executive memoranda, and  OMB guidance. For additional details on scope and methodology, see  appendix I.
We conducted this performance audit from February 2015 to April 2016 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.
subsections: section_title: Background
paragraphs: Over the past five decades, mandatory spending has grown as a share of  the total federal budget. For example, figure 1 shows that outlays from  mandatory programs rose from approximately 49 percent of total federal  spending in 1994 to about 54 percent in 2004, and to 60 percent in 2014.  This growth is projected to continue at least through fiscal year 2046.
Current law requires OMB to calculate the reductions to budgetary  resources required each year to ultimately reduce the deficit by at least  an additional $1.2 trillion. For fiscal year 2014, BBEDCA directed OMB to  calculate a sequestration of mandatory spending, which was effective on  October 1, 2013.
A percentage reduction, or sequestration rate, is applied to programs,  projects, and activities (PPA), which are generally sub-elements within  accounts, to achieve the total reduction amount required for the fiscal  year. The sequestration rate varies from year to year based on a formula  outlined in BBEDCA. The annual reduction amount calculated by OMB  ($109.3 billion) is split evenly between the defense and nondefense  functions, and then allocated between discretionary appropriations and  mandatory spending in each function in proportion to their share of the  function.
To determine the requisite percentage reduction to nonexempt budget  accounts in each function pursuant to BBEDCA, OMB must define the  sequestrable base. For fiscal year 2014, the base for mandatory  spending was equal to the current law baseline amounts provided in the  President’s Budget submission for fiscal year 2014, including unobligated  balances in the defense function, and administrative expenses in  otherwise exempt accounts. OMB was directed to calculate a  sequestration consistent with provisions of sections 251A, 255, and 256  of BBEDCA, which limit or exempt the sequestration of certain budget  authority. Under BBEDCA, many mandatory programs are exempt from  sequestration, and Medicare non-administrative spending (spending to  pay for services provided to Medicare beneficiaries) could not be reduced  by more than two percent.
These calculations are issued annually in OMB’s Report to the Congress  on the Joint Committee Reductions. OMB provided guidance to agencies  primarily through memoranda for heads of executive departments and  agencies and other technical assistance. In addition, in July 2014, OMB  updated Circular A-11 to include a new Section 100, providing agencies  with guidance on sequestration. This added section encouraged agencies  to record how sequestration was implemented to maintain consistency  from year to year, inform efforts to plan for sequestration in future years,  and build institutional knowledge.
section_title: Required Distribution of Fiscal Year 2014 Reductions Affected a Relatively Small Portion of Mandatory Spending
paragraphs: In fiscal year 2014, the total amount of mandatory budget authority across  the federal government was approximately $2.9 trillion, spread across  roughly 443 accounts. For each of these accounts, OMB applied the  designations outlined in BBEDCA, which labeled certain accounts or  activities exempt or subject to special rules, to determine how much  budget authority, if any, was subject to sequestration and the relevant  sequestration rate for calculating the amount of the reduction. OMB  reported the estimated reductions for each account subject to  sequestration in the OMB Report to the Congress on the Joint Committee  Reductions for Fiscal Year 2014, which was released in the spring of  2013. Since this report was released prior to the start of fiscal year  2014, the report included estimates for accounts with indefinite budget  authority and actual amounts for accounts with definite budget authority.  We were unable to quantify the actual amount of total sequestered dollars  government-wide in fiscal year 2014 because OMB staff said they do not  have complete records of actual budget authority or the amount actually  sequestered on an account by account basis. Therefore, they cannot  aggregate this data.
subsections: section_title: Sequestration Affected Less Than One Percent of Mandatory Budget Authority in Fiscal Year 2014
paragraphs: The sequestration procedures established under BBEDCA were designed  to serve as a budget enforcement mechanism and reduce the federal  budget deficit. The sequestration procedures do not apply to all  mandatory spending. Certain budget authority is exempt or subject to  special rules. The majority of mandatory budget authority across the  federal government is exempt from sequestration. Among the accounts  subject to sequestration, OMB calculated reductions based on differing  rates ranging from 2 percent to 9.8 percent, as determined under the  provisions of BBEDCA.
As shown in figure 2, about $2.2 trillion, or approximately 77 percent, of  the total estimated government-wide mandatory budget authority in fiscal  year 2014 was exempt from sequestration. Applying the corresponding  rates to each sequestrable account yielded an estimated target of $19.4  billion in sequestration reductions government-wide in fiscal year 2014.  This represented less than 1 percent of the total estimated mandatory  budget authority for that year. The estimated $19.4 billion includes  $11.2 billion from budget authority sequestered at the 2 percent rate, $7.4  billion from budget authority sequestered at the 7.2 percent rate, and  $778 million from budget authority sequestered at the 9.8 percent rate.
Every federal account is assigned a “budget function,” which identifies the  national priority supported by that account. As shown in figure 3,  approximately 58 percent of the $19.4 billion in estimated reductions, or  $11.3 billion, came from Medicare. Although BBEDCA limits the  sequestration of Medicare and certain other health programs to a rate of 2  percent, Medicare comprises the majority of the budget authority  estimated to be sequestered and it is the largest sequestrable national  priority. The projected increases in Medicare spending will likely cause  Medicare to comprise a larger share of the sequestration reductions over  time.
As shown in figure 3, after Medicare the next largest reductions in fiscal  year 2014 came from mandatory budget authority for the administration of  justice ($1.5 billion), transportation ($1 billion), health ($783 million), and  national defense ($778 million). The remaining 20.7 percent of the  estimated reductions were spread across 10 other national priorities.
section_title: BBEDCA Requirements Meant That Some Areas of Government Were Reduced More than Others
paragraphs: BBEDCA specifies that the same percentage reductions must be applied  to each PPA within a sequestered account. However, because BBEDCA  specifies exemptions and special rules for certain mandatory programs,  under the law, different percentage reductions may apply to PPAs within  the same budget account, and some PPAs or budget accounts may be  entirely exempt. The exemptions and special rules lead sequestration to  affect some areas of the federal government more than others. In fiscal  year 2014, certain national priorities had a greater proportion of  sequestrable budget authority. For example, nearly all mandatory budget  authority for Medicare and more than 90 percent of the mandatory budget  authority that supports the administration of justice was sequestrable,  whereas national priorities such as social security and veterans benefits,  which comprise a larger portion of the federal budget, were exempt from  sequestration.
As shown in figure 4, four national priorities had more than 80 percent of  their mandatory budget authority subject to sequestration in fiscal year  2014. In contrast, eight national priorities had less than 25 percent of their  mandatory budget authority subject to sequestration. In addition to the  varying levels at which national priorities were subject to sequestration,  certain national priorities were also subject to different sequestration  rates. As described earlier, while BBEDCA limits the fiscal year 2014  sequestration of Medicare and certain other health programs to 2 percent,  OMB calculated a 9.8 percent sequestration rate for mandatory budget  authority that supports national defense and a 7.2 percent rate for  nondefense mandatory budget authority.
As with national priorities, varied proportions of federal agencies’  mandatory budget authority were subject to sequestration in fiscal year  2014. About two-thirds of federal agencies with mandatory budget  authority implemented sequestration procedures in 2014. As shown in  table 1, twelve agencies’ entire mandatory budget authority was subject  to sequestration, while 22 agencies’ mandatory budget authority was  completely exempt. Of the remaining 33 agencies that were somewhere  in between, 9 agencies had 50 percent or more of their mandatory budget  authority subject to sequestration and 24 agencies had less than 50  percent of their mandatory budget authority subject to sequestration.
While there were varying proportions of mandatory budget authority that  was sequestrable within agencies, 45 of the 67 agencies with mandatory  budget authority were responsible for administering sequestration. Some  of the types of resources that agencies needed to redirect, if any, to  implement sequestration are described in a later section of this report.
section_title: The Largest Drivers of Mandatory Spending Growth are Statutorily Exempt from Sequestration
paragraphs: The greatest amount of growth in mandatory spending is attributed to the  effects of an aging population and rising care costs for major federal  health and retirement programs such as Medicare and Social Security.  Most of the mandatory spending that is subject to automatic, annual  sequestration is not from the areas that have been the main drivers  behind the growth in mandatory spending during the past 10 years. While  Social Security and health care are the largest contributors to the overall  growth in mandatory spending, aside from Medicare and certain other  health programs, these areas are either completely or largely exempt  from sequestration. Medicare has a fixed rate of reduction of 2 percent  through fiscal year 2024, and Social Security and 21 other agencies are  exempted from sequestration cuts. The remaining agencies with  sequestrable mandatory budget authority have variable reductions based  on the exemptions and rate calculation formula outlined in BBEDCA.  Figure 5 shows how the amount of mandatory budget authority that is  exempt from sequestration has changed over time compared to the  amount that is subject to the required reductions.
section_title: Potential Exists for Additional Sequestration of Mandatory Accounts
paragraphs: In addition to the annual, automatic reductions to mandatory spending,  the Statutory Pay-As-You-Go Act of 2010 (PAYGO), specifies a second  type of sequestration that can be triggered if certain conditions are met.  The act established a permanent budget enforcement mechanism  intended to prevent enactment of mandatory spending and revenue  legislation that would increase the federal deficit. The act requires OMB to  track costs and savings associated with enacted legislation and to  determine at the end of each congressional session if net total costs  exceed net total savings. If so, a separate sequestration will be triggered.  Under sequestration—triggered either by BBEDCA or the PAYGO Act— the exemptions and special rules of Sections 255 and 256 of BBEDCA  apply. Consequently, the same mandatory accounts that are subject to  sequestration under BBEDCA could incur further reductions if a  secondary PAYGO sequestration is triggered. It is unclear what effects an  additional enforcement sequestration under PAYGO would have on the  level of federal agencies’ operations.
section_title: Selected Agencies Reported Varied Administrative and Programmatic Effects
paragraphs: To provide context and perspective in terms of an individual account or  program, we selected a nongeneralizable sample of six accounts for  further analysis. As shown in table 2, each of the selected accounts had  mandatory budget authority subject to a 7.2 percent reduction including  one account that also had a portion of mandatory budget authority subject  to a 2 percent reduction. The agencies reported that they implemented  these reductions by decreasing the amount of funds or direct payments  provided to other federal partners, state and local entities, or individuals.
For three of the accounts in the table, the actual sequestered amount  differed from the estimate because these accounts have indefinite budget  authority.
subsections: section_title: While Sequestration Procedures Were Familiar to Selected Agencies, Officials Reported Implementation Involved Additional Administrative Activities
paragraphs: OMB’s guidance for the fiscal year 2013 sequestration—which was  issued in the spring of 2013—was the same guidance that applied for the  fiscal year 2014 sequestration. Agency officials from four of the six  agencies we interviewed described aspects of implementing  sequestration in fiscal year 2014 as generally less challenging because  they had already experienced the 2013 sequestration. For example, these  agencies had already categorized accounts based on their sequestration  designation, determined how to allocate the required reductions, and  modified reporting systems to implement the 2013 sequestration. Thus,  these activities did not need to be repeated to implement the 2014  sequestration order.
Even though they had created the administrative framework to implement  sequestration during its first year in fiscal year 2013, the agency officials  we spoke with indicated that implementation of the fiscal year 2014  sequestration required them to engage in additional administrative  activities to ensure that reductions were applied correctly and to  accommodate the changes in cash flows for programs and services. This  included such things as notifying program participants, performing manual  computations, and updating software systems.
For two of our six selected accounts, agency officials said it took time to  clarify which fiscal year’s sequestration rate to apply when calculating  payment reductions to program participants. For example, under the Build  America Bonds (BABs) program, the Internal Revenue Service (IRS)  administered sequestration reductions by reducing direct payments to  bond issuers or reducing tax credits to taxpayers. Officials stated that  payments could overlap fiscal years which brought confusion since fiscal  year 2013 and fiscal year 2014 were subject to different sequestration  rates, thus it was unclear whether the 2013 or 2014 sequestration rate  should be applied to the return. As a result of this confusion, IRS’s Office  of the Chief Financial Officer developed and issued guidance to describe  which sequestration rate should be applied based on which fiscal year  certain administrative actions had been completed and if delays had  occurred. In addition, until required payment programming changes could  be made, IRS staff manually calculated reductions to individual issuers  and individually notified payment recipients of the sequestration rate and  the total reduction applied to their payment. After issuing the guidance,  IRS determined that 262 payments had been made using the wrong  sequestration rate, and those payments had to be corrected and re- issued. In the end, IRS sequestered $263 million, which was 7.2 percent  of the approximately $3.6 billion in BABs payments made in fiscal year  2014.
Similarly, officials from the Farm Service Agency (FSA) within the U.S.  Department of Agriculture (USDA) described their challenge of identifying  which sequestration rate applied to the Commodity Credit Corporation  (CCC) Fund when reducing direct payments to farmers whose crop year  did not coincide with the federal fiscal year. Consequently, similar  program recipients were subject to different reduction rates depending on  the crop year and when their payment was obligated. FSA officials said  this meant there could be two neighboring farmers participating in the  same CCC program but subject to different sequestration rates. To help  ensure appropriate application of the reductions, the agency modified its  software programs to incorporate the sequestration calculations for more  than a dozen programs. FSA described an additional challenge of  determining whether and how to apply fiscal year 2014 sequestration  reductions after the Agricultural Act of 2014, known as the Farm Bill  reauthorization, was enacted in February 2014. The 2014 Farm Bill  created some new programs, while terminating others, which OMB and  FSA staff said required time and resources to identify which programs  were subject to sequestration and how to implement the required  reductions.
In certain cases, officials said that sequestration added further uncertainty  to pre-existing budgetary restrictions on agencies’ programs. For  example, at the Department of the Treasury (Treasury), officials said  sequestration reductions to the Treasury Forfeiture Fund (TFF) created  additional uncertainty about the availability of funds, which led to cash  management concerns. Due to the combination of sequestration  reductions, as well as a cancelation and rescission of budgetary  resources in fiscal year 2014, Treasury’s Executive Office for Asset  Forfeiture (TEOAF) had fewer funds to allocate to participating law  enforcement agencies. Treasury applied sequestration reductions to  federal forfeiture program related expenses of the member agencies,  allowing them to prevent state and local partners, as well as victims, from  seeing reduced payments. Treasury staff said sequestration reduced the  agency’s flexibility to cover unexpected expenses, such as unanticipated  victim payments from prior year forfeitures. While the $125 million in  sequestration reductions later became available to TEOAF in fiscal year  2015, the sequestration reduced the amount of funds available in fiscal  year 2014, which Treasury staff said made it difficult to manage cash  flows. In some circumstances current law allows for budget authority  sequestered in one fiscal year to become available to the agencies again  in a subsequent fiscal year. OMB refers to these amounts as “pop ups.”
Another account where officials reported that sequestration added  uncertainty to existing budget restrictions was the Highway Trust Fund.  Department of Transportation (DOT) officials said the sequestration of  $907 million—that would have otherwise been transferred into the  Highway Trust Fund—became a complicating factor to deal with on top of  the broader existing cash shortfall the Highway Trust Fund was facing  because revenues from fuel taxes were insufficient to maintain authorized  spending levels for highway and transit programs.
In addition to the agencies managing the six selected accounts included  in our review, we also spoke with staff from OMB, given its oversight role  and responsibilities related to implementing sequestration across all  federal agencies. OMB staff said they also had to redirect staff time and  resources to meet the needs of the agencies including a substantial  amount of staff hours that could otherwise have been devoted to other  agency priorities. For example, staff from OMB’s Budget Review Division  said that they spent a substantial amount of time working closely with  their Office of General Counsel staff to make determinations regarding  the availability of sequestered amounts in subsequent years pursuant to  section 256(k)(6) of BBEDCA and to document these decisions. OMB  staff said this was a new issue that surfaced in fiscal year 2014 since it  was the first year that such amounts would become available for  obligation. Staff also indicated that OMB had developed principles to aid  in sequestration implementation; however, the process must be repeated  every year as new accounts are created. OMB staff also indicated that  while they and the agencies have gained more expertise in implementing  sequestration, it requires resources and adds considerations that must be  factored into the budget process.
In March 2014, we recommended that OMB issue guidance directing  agencies to formally document the decisions and principles used to  implement sequestration for potential future application. In response to  our recommendation, OMB revised its Circular A-11 guidance to include a  new section about sequestration and directed agencies to record how  they implemented sequestration to maintain consistency from year to  year, inform agencies’ efforts to plan for sequestration in future years, and  build institutional knowledge. OMB staff and some agency officials we  spoke with said they rely primarily on apportionment records to document  how sequestration was implemented and how much was actually  sequestered.
section_title: Reported Effects on Program Participants Varied Across Entities and Individuals in Our Review
paragraphs: Selected agencies reported that program beneficiaries were affected in  different ways by the sequestration reductions ranging from smaller direct  payments, reduced services, delayed payments, and reduced tax credits.  For example, the Health Resources and Services Administration (HRSA)  provides services to underserved and vulnerable communities in need of  health care. According to HRSA, sequestration reductions in fiscal year  2014 to the health centers and workforce programs prevented the  expansion of services to an estimated 365,000 new patients. In  addition, HRSA officials reported that, in the absence of sequestration,  the National Health Service Corps program would have been able to  increase the number of practitioners providing primary care, dental,  mental and behavioral health services in the field by 358—from 9,242 to  9,600. According to the officials, this additional staff would have been  able to provide services to approximately 300,000 additional individuals in  fiscal year 2014.
As illustrated in figure 6, in the case of direct payment BABs,  sequestration reductions were transferred directly to issuers through  reducing the outlay by 7.2 percent after IRS determines that a refund can  be disbursed. In the case of tax credit BABs, sequestration reductions of  7.2 percent were taken from any payment owed to the taxpayer by IRS  above the bond holder’s tax liabilities, but no reductions were taken from  the tax credit if tax liabilities were higher than the amount of the BABs tax  credit.
FSA’s CCC Fund provides direct payments to farmers under a variety of  farm programs to support their operational activities. FSA administered an  estimated $574 million in reductions by reducing individual direct  payments to farmers at the 7.2 percent sequestration rate, which FSA  reported affected thousands of producers across different programs. A  senior director from the National Corn Growers Association (NCGA) said  the reductions further exacerbated the uncertainty growers were already  experiencing from delays in final appropriations decisions for federal  programs upon which they rely. FSA officials echoed this concern. In  addition, the NCGA representative emphasized the need for growers to  know the sequestration reduction amounts with enough time that they  may include it in their final projections needed to secure loans for  production costs.
For fiscal year 2014, $12.6 billion was transferred from DOT’s Payments  to the Transportation Trust Fund account directly into the Highway Trust  Fund, which in December 2012, we found had been facing increasing  shortfalls because revenues from fuel taxes were insufficient to maintain  authorized spending levels. This amount was subject to the 7.2 percent  reduction rate, translating into a $907 million reduction in monies  available to reimburse states for highway projects. However, as a result of  a subsequent appropriation of general revenues into the Highway Trust  Fund of approximately $9.8 billion in August 2014, officials said DOT was  able to pay states any outstanding reimbursement amounts. In other  words, states received the full reimbursement, without additional  reductions. The subsequent amount was appropriated under the Moving  Ahead for Progress in the 21st Century Act (MAP-21) extension, the  Highway and Transportation Funding Act of 2014, which was not subject  to the 2014 sequestration because the extension was enacted after the  sequestration order was issued for fiscal year 2014. We spoke with a  senior official from the American Association of State Highway and  Transportation Officials, who said the sequestration reductions  accelerated the timing of the potential cash shortfall in the Highway Trust  Fund. DOT officials echoed this same sentiment. However, this shortfall  was ultimately postponed once the MAP-21 extension was enacted.
Of the agencies we spoke with, only HRSA could quantify the effects of  sequestration on programs or their recipients. The others described the  effects in general terms. For example, in the case of the Build America  Bonds, which are issued by state and local governments, IRS officials  said they do not have a system to track whether bond issuers canceled  projects or refinanced them due to sequestration reductions. A senior  government official from one state that issued BABs, said that, while  sequestration did not lead to the cancelation of any infrastructure  projects, the reductions had a negative effect on the state’s budget as a  whole. Moreover, it affected his perspective on the reliability of federally  subsidized bond programs.
According to Treasury officials, in addition to the $125 million reduction to  comply with the sequestration order, additional amounts in the TFF were  rescinded and canceled, which made it difficult to isolate the specific  effects from sequestration alone. However, officials said the reductions  had an operational effect on TFF member agencies. For example,  officials from IRS’ Criminal Investigation unit (IRS-CI), one of the member  agencies that receives the greatest amount of support from the TFF,  reported that reductions in funding have limited their capacity to address  emerging tax compliance and enforcement issues, such as cybercrime  and identity theft. IRS-CI officials reported that lower funding levels  caused them to reduce hiring, training, equipment purchases, and case  support.
section_title: Opportunities Exist to Increase Transparency to Measure Progress Against Deficit Reduction Goals
paragraphs: As previously described, when the Joint Committee did not propose and  Congress and the President did not enact legislation in January 2012 to  reduce the deficit over 10 years by at least an additional $1.2 trillion, the  sequestration process in section 251A of BBEDCA was triggered to  automatically reduce spending such that an equivalent budgetary goal  would be achieved. BBEDCA requires cuts totaling $109.3 billion in each  year through fiscal year 2021. It is expected that reductions in both  discretionary appropriations and mandatory spending will contribute to  reaching this target. Reporting actual reductions may increase  transparency and help ensure the deficit reduction targets are reached.
subsections: section_title: Some Sequestered Mandatory Budget Authority Becomes Available Again in Subsequent Years
paragraphs: The availability of amounts pursuant to section 256(k)(6) of BBEDCA  could affect progress towards fiscal targets. While those sequestered  amounts are counted as reductions in the fiscal year for which they are  sequestered, because they can be made available for obligation again in  future years, they do not result in lasting savings for the federal  government. For example, amounts from revolving, trust, and special fund  accounts and offsetting collections from appropriations accounts are  temporarily sequestered and may become available in the subsequent  year to the extent otherwise provided in law. If the temporarily  sequestered amounts become available to the agency for obligation,  OMB staff said those amounts are not subject to a second level of  sequestration.
In response to our March 2014 recommendation, OMB revised Circular  A-11 to include a description of what happens to sequestered budgetary  resources, including funds that are temporarily reduced. This guidance  also instructs agencies on how to record such amounts, which OMB staff  said helps to avoid a re-sequestration of those same amounts in the  subsequent year. More recently, we asked OMB staff to provide  aggregate data to show what amount of funds were sequestered  permanently versus those that may become available for obligation in  future fiscal years pursuant to the statute. OMB staff said they could not  provide total government-wide dollar amounts on this, in part, because  the determinations vary case-by-case, depending on the specific statutory  language related to each account. BBEDCA does not require OMB to tally  the total amount of funds that “pop up” in a given year. However, the act  established annual deficit reduction targets. In addition, providing such  information is consistent with the internal control standard for information  and communication, which states, among other things, that entities must  have relevant, reliable, and timely information and communications to  achieve their objectives. While we recognize the need for a case-by- case approach to confirm the amount of funding available from “pop ups,”  actual amounts for each of these situations could be assembled after the  close of each fiscal year. Such information would provide insight about  actual progress against the $1.2 trillion deficit reduction target, and would  also provide additional transparency to Congress about the total amount  of funds agencies have available in a given year.
section_title: For Certain Types of Sequestered Mandatory Spending, Actual Amounts Cannot be Determined Until After the End of the Fiscal Year
paragraphs: Section 251A of BBEDCA requires OMB to provide estimates of the  required reductions for any fiscal year in which a sequestration of  mandatory spending and reductions of discretionary spending limits has  been ordered. These estimates include a listing of the reductions required  for each nonexempt mandatory account and are reported each spring in  OMB’s Report to the Congress on the Joint Committee Reductions.  OMB staff confirmed that the reductions listed for mandatory accounts  with definite budget authority—that is, accounts for which a specific  amount of budget authority is determinable at the time of enactment—are  equal to the actual amounts sequestered from those accounts. However,  OMB staff also confirmed that the reductions listed for mandatory  accounts with indefinite budget authority may differ from the amounts that  were actually sequestered because the amount of budget authority for  these accounts is for an unspecified or indeterminable amount at the time  of enactment. This lack of specified amount makes it difficult to determine  the total amount to be sequestered in advance of the fiscal year. In  addition, OMB staff said there were changes in budget authority for some  indefinite accounts and their database has not been updated to reflect  those changes to show the actual amounts sequestered in fiscal year  2014. As a result, the database does not reflect the actual amounts  sequestered. Thus, while OMB staff calculated the amounts ordered to be  sequestered, they were unable to provide an aggregate actual amount  sequestered government-wide. Moreover, they are not required under  BBEDCA to tally the actual amounts reduced in a given year. This makes  it difficult to determine whether progress is being made toward the  required reductions.
While there is uncertainty in estimating sequestration reductions for  accounts with indefinite budget authority, actual amounts could be  tabulated after the close of the fiscal year. These data would provide a  clearer picture of the precise amount of funds that were permanently  canceled, thereby representing the true savings generated from  mandatory spending reductions in each year. Moreover, compiling such  data could serve as a benchmark to evaluate the progress made each  year toward the overall savings of $1.2 trillion required by law. Providing  this information is also consistent with the internal control standard for  information and communication. Among other things, this standard states  that entities must have relevant, reliable, and timely information and  communications to achieve their objectives.
section_title: Conclusions
paragraphs: Of the approximately $2.9 trillion of estimated mandatory budget authority  across the federal government in fiscal year 2014, an estimated $19.4  billion was sequestered after OMB and the agencies implementing  sequestration carried out their responsibilities under BBEDCA. This  represents less than one percent of mandatory budget authority in fiscal  year 2014. Dozens of agencies implemented sequestration procedures in  2014 to administer the required reductions. In addition, the reductions  affected certain national priorities more than others as provisions of  BBEDCA provided exemptions and special rules for certain programs and  accounts. Aside from Medicare and certain other health programs, the  largest drivers of mandatory spending growth are statutorily exempt from  sequestration.
The selected agencies we spoke with reported that they were more  familiar with sequestration procedures in 2014 since it was the second  consecutive year of implementing the required reductions. However,  these agencies said implementation involved additional administrative  activities, and in certain cases, an additional element of uncertainty when  planning and executing their budgets. The form of the reported reductions  varied by program and affected beneficiaries differently ranging from  smaller direct payments, reduced services, delayed payments, and  reduced tax credits.
The processes established under BBEDCA were designed to reduce the  federal deficit by at least an additional $1.2 trillion over 10 years.  However, in certain cases, sequestered amounts become available to  agencies in subsequent fiscal years, thereby reversing the corresponding  savings from those reductions. OMB does not tally the total amount of  funds that are temporarily sequestered and become available in the next  fiscal year, referred to as “pop ups.” Identifying these amounts would  provide additional transparency to Congress about the total amount of  funds agencies have available in a given year. In addition, while OMB  publicly reports the estimated amount of sequestration reductions each  year, it does not tabulate and report the total amount of the actual  reductions government-wide at year-end. Doing so, along with reporting  the amount of “pop ups,” would provide a clearer picture to decision  makers of the amount of funds that were permanently canceled, thereby  representing the true savings generated from mandatory spending  reductions each year. Moreover, this data would increase the  transparency of the process and provide annual benchmarks to measure  progress toward the overall savings of $1.2 trillion required by law.
section_title: Recommendations for Executive Action
paragraphs: To increase the transparency to Congress about the total amount of funds  agencies have available in a given year, we recommend that the Director  of the Office of Management and Budget identify and publicly report the  total amount of actual budget authority government-wide that is  temporarily sequestered and “pops up,” or becomes available again to  agencies for obligation in the subsequent fiscal year.
To promote further transparency in measuring the federal government’s  progress against deficit reduction targets required under current law, we  recommend that the Director of the Office of Management of Budget  identify and publicly report the total amount of actual reductions in budget  authority government-wide each year as a result of sequestration or the  reduction of discretionary spending limits under BBEDCA.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to OMB and the Departments of  Agriculture, Health and Human Services, Transportation, and the  Treasury for review and comment. OMB agreed with the first  recommendation but disagreed with the second, as discussed below.  Each of these agencies provided technical comments, which we  incorporated as appropriate.
In oral comments received on January 20, 2016, OMB staff agreed with  the first recommendation in this report and said they have started to take  action. For example, beginning with the fiscal year 2016 budget, the  President’s budget contains a data field to record “pop up” amounts. OMB  staff said “pop up” amounts are delineated with a particular value in the  OMB MAX database and are identified so as not to re-sequester those  same funds in the subsequent fiscal year.
OMB staff disagreed with the second recommendation in this report and  said this would be a burdensome new requirement that is not applied for  other types of budget enforcement. For example, they said estimated  savings are used for PAYGO enforcement, and there is no requirement  for agencies to track actual PAYGO savings over time. In addition, OMB  staff said this would be problematic for programs with indefinite funding  for direct payments (e.g., benefit payments) because agencies typically  record indefinite budget authority equal to obligations incurred as they  operate the program. Further, they said requiring agencies to capture the  sequestration savings separately in their accounting records would  require changes to agencies’ financial systems so that both a pre- sequestration amount and a reduction amount could be recorded for each  payment. OMB staff said that their current oversight of sequestration via  an annual exercise requiring agencies to certify that they are executing  the reductions to payments required by the sequestration order and  OMB’s review of estimated reductions is a balanced approach that  focuses attention on the critical control elements needed to achieve  savings. OMB staff said the attempt to provide additional precision is  outweighed by the cost and confusion—and potentially erroneous  conclusions—that would be engendered by this recommendation. They  said collecting such data would require significant accounting changes  both by OMB and agencies and would require coordination and approval  by the Department of the Treasury—all of which could take years to  implement.
As stated earlier in this report, we acknowledge the uncertainty in  estimating sequestration reductions for accounts with indefinite budget  authority, thereby requiring actual amounts to be tabulated at the close of  the fiscal year. In our view, identifying the actual amounts reduced at the  close of each fiscal year would be consistent with the type of budgetary  reporting practices OMB and agencies already follow when preparing the  President’s budget each year. Regarding OMB’s concern that this would  require modifications to agencies’ financial systems, we found that the  selected agencies who manage the six accounts included in our more in- depth analysis were able to readily provide us with actual amounts  reduced under sequestration, including cases where indefinite budget  authority was involved. Moreover, there is evidence that at least these  agencies have developed their own tracking mechanisms to identify the  actual amounts that were reduced each fiscal year. We recognize such  tracking mechanisms may vary across agencies, but OMB could request  agencies to report the actual amounts as part of the annual preparation of  the President’s budget, which could also be compared to apportionment  records for the relevant fiscal year. Regarding OMB’s concern that  collecting such data would require accounting changes across agencies  and coordination with the Department of the Treasury, we recognize that  it will take time to establish and refine a government-wide data set of  sequestered amounts that is reliable and comparable across agencies. In  the interim however, there are data available to both OMB and the  agencies that can serve as a meaningful starting point to tally  sequestered amounts and calculate a government-wide total, which could  be refined over time. The fact that sequestration of mandatory spending  will be in effect over the coming decade and an issue that agencies will  have to continue to manage heightens the significance of identifying and  tracking the actual amounts reduced to promote transparency to key  decision makers. Moreover, we believe that taking the next step to  calculate a government-wide aggregate dollar amount that could be  publicly reported would provide confirmation of the amount of funds that  were permanently canceled thereby adding transparency on the true  savings generated from mandatory spending reductions each year. We  continue to believe that this could help serve as a benchmark to evaluate  the progress made each year toward the overall savings of $1.2 trillion  required by law.
We are sending copies of this report to the appropriate congressional  committees; Director of OMB; the Secretaries of Agriculture, Health and  Human Services, Transportation, and the Treasury; and other interested  parties. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-6806 or sagerm@gao.gov. Contact points for our Office  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines: (1) the designation of mandatory accounts across  the federal budget under the President’s sequestration order for fiscal  year 2014; (2) how selected agencies implemented the fiscal year 2014  sequestration order and the effects, if any, they reported the required  spending reductions had on programs and services; and (3) how  continued sequestration of mandatory spending relates to the  achievement of deficit reduction goals.
To accomplish our first objective, we identified how mandatory accounts  were designated under sequestration primarily using a data set provided  by OMB staff. This data set was generated by OMB through a  government-wide data collection exercise to calculate the sequestration  percentage and reductions by account, and issue the report required  under the Joint Committee process. The data set includes the estimated  budget authority, sequestration designation, sequestration rate, and the  budget subfunction for every account with mandatory budget authority in  fiscal year 2014. We assessed the reliability of this data set through  interviews with agency officials, review of relevant documentation, and  electronic data testing. We found the data to be sufficiently reliable for the  purpose of our report. We focused on fiscal year 2014 because  mandatory accounts were sequestered but discretionary accounts were  not. Additionally, fiscal year 2014 was the most recently completed fiscal  year for which actual data were available for the selected accounts  included in our review. We also analyzed actual budget authority data for  all mandatory accounts government-wide from OMB’s MAX database and  matched it with the sequestration designation data to show trends over  time from fiscal year 2005 through fiscal year 2014. We assessed the  reliability of the data extracted from OMB’s MAX database through  electronic data testing. We found the data to be sufficiently reliable for the  purpose of our report.
To accomplish our second objective, we selected a nongeneralizable  sample of six accounts for a more in-depth review of the implementation  of sequestration and its effects. To select the six accounts, we reviewed  OMB sequestration data for all mandatory accounts across the federal  budget for fiscal year 2014 and sorted for those accounts with at least  $50 million in estimated reductions. This analysis yielded 31 accounts,  which represented over 90 percent of all sequestrable mandatory budget  authority government-wide in fiscal year 2014. From these accounts, we  selected six accounts representing a variety of characteristics including  the amount of sequestrable budget authority, type of account, agency,  budget function, and whether the account included some portion of  budget authority that was exempt from sequestration. In addition, we  identified which national priorities (i.e., budget function) were affected the  most (in percentage terms) by the fiscal year 2014 sequestration. We  eliminated accounts that were recently discussed in prior GAO work, such  as Medicare. Table 3 lists the six accounts that we selected.
Furthermore, we reviewed budget data, guidance, and documentation of  any reported programmatic effects of sequestration for each of the  selected accounts. We spoke with agency budget and program officials,  as well as OMB staff, about their challenges and lessons learned from  implementing sequestration. In addition, we spoke with a  nongeneralizable selection of interest groups to gain their perspective on  the effects of sequestration on programs and services. We also  interviewed agency officials on how their agency implemented OMB’s  revised A-11 guidance on sequestration.
To accomplish our third objective, we reviewed relevant literature and the  government-wide federal budget data described above that was used for  our first objective. In addition, we reviewed relevant legislation, executive  memoranda, OMB guidance and federal standards for internal control to  identify the criteria used in our analysis. Also, to inform our analysis, we  interviewed a nongeneralizable selection of budget specialists with a  broad range of agency, congressional, and academic experiences  including current and former congressional staffers and agency officials to  obtain their perspective on the implications of sequestration. Each  selected specialist had at least 15 years of experience with extensive  backgrounds in federal budget and policy issues and served in a variety  of positions across the federal government and academia. While the  views from these selected specialists are not generalizable nor do they  represent the full range of possible views on sequestration, they provided  insight and perspectives about sequestration.
We conducted this performance audit from February 2015 to April 2016 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.
section_title: Appendix II: Case Illustrations of Mandatory Accounts Subject to Sequestration in Fiscal Year 2014
paragraphs: As part of our review, we selected a nongeneralizable sample of six  accounts and examined how the agencies responsible for managing  those accounts reported implementing sequestration procedures in fiscal  year 2014. These six accounts serve as case illustrations to better  understand how the required spending reductions were applied and what  effects, if any, these reductions had on agencies’ programs and services.  We selected accounts based on several characteristics including the  amount of sequestrable mandatory budget authority, budget function,  type of account, agency, and whether the account included some portion  of funds that were exempt from sequestration.
subsections: section_title: Account Overview
paragraphs: Build America Bonds (BABs) were created as a part of the American  Recovery and Reinvestment Act of 2009 (Recovery Act) to stimulate  municipal infrastructure spending by reducing borrowing costs for state  and local governments. BABs are taxable government bonds with federal  subsidies for a portion of the borrowing costs. BAB subsidies could be  either in the form of nonrefundable tax credits provided to holders of the  bonds (tax credit BABs) or refundable tax credits paid to state and local  governmental issuers of the bonds (direct payment BABs). The funding  for this account was authorized under the Recovery Act. State and local  governments had the ability to issue BABs through December 31, 2010.  The BABs account supports our national priority on general purpose fiscal  assistance (budget subfunction 806).
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: In the case of direct payment BABs, sequestration reductions were  transferred directly to issuers through reducing the outlay by 7.2 percent  after IRS determines that a refund can be disbursed. In the case of tax  credit BABs, sequestration reductions of 7.2 percent were taken from any  payment owed to the taxpayer by IRS above the bond holder’s tax  liabilities, but no reductions were taken from the tax credit if tax liabilities  were higher than the amount of the BABs tax credit. In fiscal year 2014,  approximately $263 million was reduced and permanently canceled from  this account in accordance with sequestration procedures.
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: Sequestration reduced the amount of the subsidy that bond issuers  received, thus increasing borrowing costs for state and local infrastructure  projects. According to one official, the reduced borrowing subsidy, along  with other factors such as market interest rates changing, may have  contributed to some bond issuers prepaying their BABs. Officials from  Treasury’s Office of Tax Analysis (OTA) estimated that some of the  infrastructure projects funded by these prepaid BABs may have been  refinanced at a lower cost and some projects may have been canceled,  but IRS staff said they cannot report how many projects were canceled  because issuers are not required by law to report the reason for early  prepayment of bonds.
On a higher level, one OTA official said that sequestration of BABs  reduced the credibility of federally subsidized municipal bond programs.  This presented a challenge for this program since direct payment bonds  were a new type of municipal financing tool. As a result, OTA officials said  that the proposal for a new municipal bond program called Fast Forward  Bonds, which uses a similar type of direct payment mechanism, was  crafted to assure potential bond issuers and holders that sequestration  will not affect the level of subsidies provided by the federal government.
According to officials, implementing sequestration for BABs was  administratively challenging for IRS since the reductions had to be  applied to each payment manually until programming changes could be  made. IRS individually notified payment recipients of the sequestration  rate and total reduction applied to their payment. During the transition  between fiscal year 2013 and fiscal year 2014, IRS staff said they also  encountered ambiguity determining which sequestration rate to apply to  payments. For example, if a tax return was received toward the end of  fiscal year 2013 but was not fully processed until fiscal year 2014 had  already begun, it was often unclear if the 2013 or 2014 sequestration rate  should be applied to the return. As a result of this confusion, IRS  developed and issued guidance about which cases to apply the current or  previous year’s sequestration rate. After issuing the guidance, IRS  determined that 262 payments had been made using the wrong  sequestration rate, and those payments had to be corrected and re- issued.
section_title: Account Overview
paragraphs: The Commodity Credit Corporation (CCC) is a government-owned and  government-operated entity that was created in 1933 to stabilize, support,  and protect farm incomes and prices. CCC also helps maintain balanced  and adequate supplies of agricultural commodities and aids their orderly  distribution. The CCC has an authorized capital stock of $100 million held  by the United States and the authority to have outstanding borrowings of  up to $30 billion at any one time. Funds are borrowed from the U.S.  Treasury. The U.S. Department of Agriculture’s (USDA) Farm Service  Agency (FSA) is responsible for providing management and oversight of  the CCC Fund, which supports the national priority of farm income  stabilization (budget subfunction 351).
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: FSA applied the 7.2 percent sequestration rate to the CCC Fund’s actual  mandatory budget authority of $9.1 billion in fiscal year 2014. The OMB  estimate of the account’s mandatory budget authority was based on the  estimated program participation for that year, whereas the final reduction  was based on actual program participation. An estimated $574 million  was to be sequestered, but the actual amount was approximately $646  million. While approximately $646 million was reduced from the account  in fiscal year 2014 and not available for obligation during that year, this  reduction was designated as temporary, meaning that funds were not  canceled nor reverted to the General Fund of the Treasury. Instead, these  amounts remain in the fund or account and may be available in  subsequent years only to the extent provided in appropriations or  authorizing language. FSA officials said the sequestered amounts did not  “pop up” the next year nor have they been made available to the agency  for obligation.
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: The required spending reductions affected a range of program areas  supported by the CCC Fund, according to officials. For example, under  the Crop Direct Payments program, 1.7 million farmers received reduced  payments. Under the Emerging Market program, fewer grants were  funded. Agency officials reported that their software had to be modified to  apply the sequestration rate to reduce each obligation or payment for 13  different programs and activities. In addition, FSA officials said it took  some time to determine which sequestration rate to apply since the crop  year for certain programs does not coincide with the federal fiscal year.  For example, FSA officials said two neighboring farmers who participate  in the same program might be subject to different sequestration reduction  rates depending on which fiscal year the payment was obligated to the  program participant.
FSA officials characterized sequestration as a complicating factor on top  of their broader existing budget constraints related to the reauthorization  of the Farm Bill. In February 2014, halfway through the fiscal year, the  Farm Bill was re-authorized and included the creation of new programs  and the termination of others. Agency officials said it took some time to  clarify whether any of the new programs were subject to sequestration  and in which fiscal years.
section_title: Account Overview
paragraphs: The Health Resources and Services account supports the Health  Resources and Services Administration’s (HRSA) goal of increasing  access to basic health care for those who are medically underserved. The  Health Resources and Services account consists of both discretionary  and mandatory budget authority and supports the national priorities of  health care services (budget subfunction 551) and health research and  training (budget subfunction 552).
The following programs are supported by mandatory budget authority:
Health Center Program: Since 1965 this program has been delivering  comprehensive preventive and primary health care to vulnerable  populations regardless of their ability to pay. Mandatory budget  authority provided funding for community health centers under the  Affordable Care Act in 2010, which also established a Community  Health Center Fund to provide for expanded and sustained national  investment in community health centers.
National Health Service Corps (NHSC): Created in 1970, the NHSC is  a clinician recruitment and retention program that Congress created to  reduce health workforce shortages in underserved areas. The NHSC  provides scholarships and loan repayment opportunities to individuals  in exchange for a commitment to serve in NHSC approved sites  where there is a shortage of health professionals. In fiscal year 2014,  the NHSC was fully funded by the Community Health Center Fund.
Federal Capital Contribution Loan programs: HRSA administers the  Health Professions and Nursing Federal Capital Contribution Loans.  Through these revolving fund accounts, funds are awarded to  institutions that in turn provide loans to individual students. As the  loans are repaid, the account is replenished by offsetting collections.
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: HRSA grants awards to more than 3,000 grantees including community- based organizations; colleges and universities; hospitals; and state, local,  and tribal governments that support the mission of the agency. To  implement the sequestration reductions, officials reported that HRSA  decreased the number of awards granted to recipients and made fewer  loan repayments and scholarships to health professionals. These funds  were permanently sequestered. Funds from the Health Resources and  Services account related to loan programs were temporarily sequestered  because they are financed through a revolving fund supported by  collections. These funds became available again in fiscal year 2015 as a  “pop up”. Because the loan programs are financed through revolving  fund accounts, they are subject to temporary sequestration under  BBEDCA.
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: The Health Resources and Services Administration (HRSA) provides  services to underserved and vulnerable communities in need of health  care. According to HRSA, sequestration reductions in fiscal year 2014 to  the health centers and workforce programs prevented an expansion of  services to an estimated 365,000 new patients. In addition, HRSA officials  reported that, in the absence of sequestration, the National Health  Service Corps program would have been able to increase the number of  practitioners providing primary care, dental, mental and behavioral health  services in the field by 358—from 9,242 to 9,600. According to those  officials, this additional staff would have been able to provide services to  approximately 300,000 additional individuals in 2014.
Generally, institutions that have excess funds from loan repayments  received from borrowers are required to return these funds to HRSA. The  agency can then redistribute these funds to other institutions in need of  additional funds. Agency officials said HRSA was not able to redistribute  approximately $1.2 million of these excess funds in fiscal year 2014  because they were subject to the sequestration reductions.
section_title: Account Overview
paragraphs: This account functions as a mechanism to transfer appropriated funds  from the General Revenue Fund of the Treasury into the Highway Trust  Fund as a result of legislative action. In recent years, the Administration  has proposed to rename the Highway Trust Fund to the Transportation  Trust Fund.
The primary funding sources for the Highway Trust Fund are federal  excise taxes on motor fuels (gasoline, diesel, and special fuels taxes) and  truck-related taxes (truck and trailer sales, truck tire, and heavy-vehicle  use taxes). The purpose of the transfer of funds from the General  Revenue Fund of the Treasury to the Highway Trust Fund is to maintain  the solvency of the Highway Trust Fund throughout the reauthorization  period and cover the structural deficit created by the demands of new  transportation programs. The Highway Trust Fund, administered by the  Department of Transportation (DOT), is the major source of funding for  federal surface transportation; however the fund’s revenues are eroding  while outlays have outpaced these revenues since 2001. To maintain  authorized spending levels for highway and transit programs and to cover  revenue shortfalls, Congress transferred a total of about $63 billion  (before sequestration) in general revenues to the Highway Trust Fund on  six occasions between fiscal years 2008 and 2014.
The Highway Trust Fund primarily supports surface transportation  programs administered by four DOT operating administrations: the  Federal Highway Administration, Federal Transit Administration, Federal  Motor Carrier Safety Administration, and the National Highway Traffic  Safety Administration.
For fiscal year 2014, Section 40251 of the Moving Ahead for Progress in  the 21st Century Act (MAP-21) appropriated $12.6 billion from general  revenues to the Highway Trust Fund. This appropriation was recorded on  the Payment to the Transportation Trust Fund account. This account  supports our national priority on ground transportation (budget  subfunction 401).
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: This appropriation was subject to sequestration in fiscal year 2014, which  resulted in a total appropriation of approximately $11.7 billion. A  subsequent appropriation in the amount of approximately $9.8 billion was  provided in August 2014, under the MAP-21 extension that was not  subject to the 2014 sequestration because the extension was enacted  after the sequestration order was issued for the applicable year. The  sequestered amount of $907 million was permanently canceled in fiscal  year 2014 in accordance with sequestration procedures.
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: DOT officials indicated that sequestration did not reduce spending;  instead, it only reduced the general revenue amounts initially transferred  into the Highway Trust Fund. They said this reduction had the effect of  hastening the eventual cash shortfall; however, Congress acted in time to  infuse additional funds and thus further postpone this situation. As a  result, the Federal Highway Administration did not have to reduce any  payments.
DOT officials characterized sequestration as a complicating factor on top  of their broader existing budget constraints related to the revenue  shortfalls in the Highway Trust Fund. They said that staff time and  resources were focused on ensuring that there were sufficient funds  available to cover obligations of the Highway Trust Fund, in addition to  time spent to implement the sequestration reductions and attend high- level meetings with senior staff. The recurrence of sequestration adds to  a broader concern, which is ensuring the long-term solvency of the  Highway Trust Fund.
section_title: Account Overview
paragraphs: The Social Services Block Grant account (SSBG) is a federal block grant  which provides funding directly to states to support a wide range of social  policy goals such as promoting self-sufficiency, preventing child abuse,  and supporting community-based care for the elderly and disabled. Social  services activities supported with these funds include child care, foster  care, protective services for adults, and special services for the disabled.  SSBG funds are allocated to states according to the relative size of each  state’s population. States have total discretion to set their own eligibility  criteria for program participants and have broad discretion over the use of  the funds. The Office of Community Services within the Department of  Health and Human Services’ Administration for Children and Families  (ACF) is responsible for providing management and oversight of the  SSBG account, which supports the national priority on social services  (budget subfunction 506).
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: ACF implemented the sequestration reductions to the SSBG’s fiscal year  2014 mandatory budget authority of $1.8 billion by applying the 7.2  percent sequestration rate to the statutory grant formula. Approximately  $129 million were reduced and permanently canceled from this account.
ACF officials said that the states bore the primary challenge because they  were responsible for identifying areas for reductions in services.
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: In November 2013, ACF informed grant recipients of the sequestration  reductions by announcing each state’s allocation for the first quarter of  fiscal year 2014 with the sequestration rate already applied. ACF officials  said that all states and territories that received SSBG funds incurred a  proportional reduction in their grant amount based on the statutory  formula. Agency officials said that while they have not collected  information on the effects of the sequestration reductions, they know that  each state reduced funds for services and individually determined the  specific service categories to be reduced. ACF officials said they do not  have any information on any challenges that states may experience as a  result of the continued sequestration in effect under current law.
section_title: Account Overview
paragraphs: The Treasury Forfeiture Fund (TFF) is a multi-departmental fund and has  four primary goals: to (1) deprive criminals of assets used in or acquired  through illegal activities; (2) encourage joint operations among federal,  state, and local law enforcement agencies, as well as foreign countries;  (3) protect the rights of individuals; and (4) strengthen law enforcement.  The Treasury Executive Office for Asset Forfeiture (TEOAF) is  responsible for providing management and oversight of the TFF.
The funding for this account comes from non-tax forfeitures made  pursuant to laws enforced or administered by participating agencies  within the Department of the Treasury (Treasury) and the Department of  Homeland Security. TFF funds are used to cover expenses associated  with its member agencies’ forfeiture programs, including the storage and  maintenance of seized property; investigative costs leading to seizure;  payments to financial victims and other third parties; and equitable  sharing payments to law enforcement partners.
If there is a remaining unobligated balance at the close of the fiscal year  after an amount is reserved for Fund operations in the next fiscal year;  Treasury may declare a “super surplus.” This balance can be used for  any federal law enforcement purpose, whether or not it is related to  forfeiture. Treasury officials report that super surplus is used to fund top  priorities of TFF agencies, as well as initiatives supporting financial  investigations. This account supports our national priority for the  administration of justice (budget subfunction 751).
section_title: Implementation of the Fiscal Year 2014 Sequestration
paragraphs: Treasury applied the 7.2 percent sequestration rate for the TFF’s fiscal  year 2014 budget authority of $1.74 billion. The OMB estimate was based  on anticipated forfeiture revenue for fiscal year 2014, whereas the final  reduction was based on actual revenue. Although roughly $125 million  was sequestered in fiscal year 2014, the law allowed for this amount to  become available again in fiscal year 2015 as a “pop up.”
section_title: Effects of the Fiscal Year 2014 Sequestration
paragraphs: In addition to sequestration, a portion of the TFF was rescinded and  canceled during fiscal year 2014. Treasury officials emphasized that it is  too difficult to parse out the effects of sequestration on the TFF separately  from the rescissions and cancelation, but the combined effect of these  reductions has impeded the TFF’s ability to support law enforcement. In  fiscal year 2015, as a result of cumulating reductions on TFF balances,  Treasury was unable to declare super surplus for the first time in the  fund’s 22-year history. In fiscal year 2014, Treasury officials reported they  were able to spare equitable sharing with state and local law enforcement  partners and payments to victims from reductions, but this meant  reducing the amount of budgetary resources available to support other  forfeiture-related expenses and agencies’ priorities.
Rescissions and sequestration resulted in a large portion of TFF’s budget  authority being unavailable for obligation according to officials. As a  result, Treasury officials reported that the TFF must rely almost solely on  incoming monthly revenue from newly completed forfeiture cases to be  able to allocate the funds. According to Treasury officials, every low  revenue month causes cash flow problems and delays in funding  allocations for various programs, resulting in interruption and delays in  TFF’s agencies’ operations and the processing of equitable sharing  payments and refunds, which they said results in victims and state and  local agencies having to wait longer to receive their payments.
Administratively, the officials indicated that sequestration adds uncertainty  to the TFF budget and reduces program flexibility to handle unexpected  expenses. Though the sequestered funds may become available in the  subsequent fiscal year, sequestration reduces the amount of funds  available in the current year which makes it difficult to manage cash  flows.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Carol M. Henn, Assistant Director  and Leah Q. Nash, Analyst-In-Charge made major contributions to this  report. Also contributing to this report were Shari Brewster, Evelyn  Calderon, Deirdre Duffy, Ellen Grady, Ricky Harrison, Donna Miller, John  Mingus Jr., Katherine D. Morris, Kathleen Padulchick, Cindy Saunders,  Timothy N. Shaw, Stewart Small, and Lou V.B. Smith.