The Annual Sequester of Mandatory Spending through FY2029
Released: 2019-10-04T00:00:00

Introduction

Budget Authority and Budgetary Resources

The Constitution reserves to Congress the power of the purse, exercised through legislation that grants federal agencies legal authority to enter into financial obligations that will result in outlays of federal funds.

When Congress enacts authority for agencies to enter into financial obligations for particular purposes, it is called "budget authority." Newly enacted budget authority and unspent balances of prior year budget authority are referred to collectively as "budgetary resources."

Budgetary resources include two types of spending. The first, "discretionary spending," refers to budget authority provided in annual appropriations funding bills. Discretionary spending makes up about 30% of federal spending but receives the largest share of budgetary scrutiny, because appropriations bills are subject to congressional decisionmaking each fiscal year.

The other 70% of federal spending is called "mandatory" or "direct" spending, because the budget authority flows directly from multiyear authorizing laws enacted outside the annual appropriations process. Examples of mandatory spending are entitlement programs, supplemental nutrition assistance, and multiyear highway bills enacted by authorizing committees.

Sequestration is a budgetary mechanism that requires automatic cancellation of budgetary resources through across-the-board reductions to programs, projects, and activities. Since the creation of the sequester mechanism in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), it has been used to enforce a variety of fiscal policy goals.

The BCA and the Joint Committee Sequester

The Budget Control Act of 2011 (BCA) included two parts: discretionary spending caps for an initial tranche of budgetary savings and a "Joint Committee process" to achieve broader budgetary savings.

For the initial tranche of budgetary savings, the BCA placed statutory limits on discretionary spending for each fiscal year from FY2012 through FY2021. At the time of enactment, the BCA discretionary spending caps were projected to save $917 billion over the ensuing decade.

To accomplish the second, and larger, tranche of savings, the BCA established a bipartisan, bicameral Joint Select Committee on Deficit Reduction (Joint Committee). The committee was to negotiate a deficit reduction package to save another $1.5 trillion through FY2021. As a fallback, the BCA provided that automatic spending reductions would be triggered if Congress did not enact at least $1.2 trillion in budget savings by January 15, 2012.

The deadline was not met, and this triggered the BCA's $1.2 trillion in automatic spending reductions. The automatic reductions were designed to achieve $1.2 trillion in budgetary savings by reducing both discretionary and mandatory spending each year through FY2021:

Most of the $1.2 trillion in additional budgetary savings was to be achieved by reducing the discretionary spending caps. Subsequent legislation has partially or fully rolled back these additional discretionary spending reductions. The remainder of the $1.2 trillion in savings was to be achieved through annual across-the-board cuts (sequestration) in all nonexempt mandatory spending. This portion of the automatic reductions has been fully implementedâand extended for an additional eight years through FY2029 (see below, "Extension of the Joint Committee Sequester").

Calculating the Joint Committee Sequester

The BCA includes detailed statutory directions for the Office of Management and Budget (OMB) to calculate, and the President to implement, the Joint Committee reductions for each fiscal year through 2021. As summarized below, the calculation of the discretionary cap reductions and the across-the-board cuts in mandatory spending are interdependent even though the discretionary spending caps have been revised by subsequent legislation. OMB must still calculate the annual spending cap reductionsâas set forth in the 2011 statuteâin order to arrive at the mandatory spending cuts.

The Joint Committee reductions are calculated as follows (see Figure 1 ):

In order to achieve the required $1.2 trillion of deficit reduction, the BCA first subtracts 18% ($216 billion) for debt service savings associated with the required deficit reduction. It then divides the remainder ($984 billion) over the nine years of the BCA to arrive at a required annual reduction of $109.3 billion for each fiscal year from FY2013 through FY2021. The BCA required the annual reduction of $109.3 billion to be split evenly between defense spending and nondefense spending so that each category is reduced by $54.667 billion in each fiscal year through FY2021. The required reductions of $54.667 billion were allocated between discretionary spending and mandatory spending within each category subject to exemptions and special rules for particular programs. The required reductions in discretionary spending were implemented by lowering the BCA discretionary spending limits, although the required cap reductions have been superseded by legislation revising the caps. The required reductions in mandatory spending were achieved through the mandatory sequesterâautomatic across-the-board cuts in nonexempt mandatory spending.

FY2020 Defense Calculations

Step 1 . Under the BCA, total spending in the defense category must be reduced by $54.667 billion, allocated proportionally between discretionary appropriations and mandatory spending. OMB calculates how much of the defense spending base is discretionary versus mandatory.

The BCA calculates the discretionary-to-mandatory ratio for the defense category as follows:

defense discretionary spending is set by the BCA defense spending limit for FY2020, which is $630 billion; and mandatory spending is set by OMB's baseline estimate of (nonexempt) mandatory spending, which is $9.844 billion.

This calculation results in a ratio of 98.46% for defense discretionary spending and 1.54% for defense mandatory spending.

Step 2 . To achieve the required overall defense category reduction of $54.667 billion, these percentages result in a defense discretionary reduction of $53.825 billion and a defense mandatory reduction of $842 million.

Step 3 . The required defense discretionary reduction lowers the spending cap to the adjusted cap level of $576.175 billion. This cap level is now superseded by the revised level enacted in the Bipartisan Budget Act (BBA) of 2019, which is $666.5 billion.

Step 4 . The defense mandatory reduction of $842 million is achieved by dividing that amount into the nonexempt mandatory spending base of $9.844 billion. This results in an 8.6% across-the-board cut (sequestration) to be applied to all nonexempt defense budget accounts with mandatory spending.

Once this uniform percentage is determined, Section 256(k)(2) of BBEDCA requires that sequestration be applied equally to all programs, projects, and activities (PPAs) within the affected budget accounts.

FY2020 Nondefense Calculations

The BCA calculations for the nondefense category have more steps than the defense calculations due to special requirements for Medicare and student loans that are explained below.

Step 1 . Under the BCA, total spending in the nondefense category must be reduced by $54.667 billionâwith reductions in discretionary and mandatory spending. The largest portion of the mandatory sequestration comes from the Medicare program, which is subject to 2% across-the-board cuts.

For FY2020, the portion of Medicare subject to the 2% sequester is estimated by OMB to have outlays of $765.495 billion, so a 2% reduction would reduce Medicare outlays by $15.310 billion. This leaves a required non-Medicare reduction of $39.357 billion from the remaining nondefense category.

Step 2 . The remaining reduction of $39.357 billion is allocated proportionally between nondefense discretionary appropriations and nondefense (non-Medicare) mandatory spending.

The BCA calculates the discretionary-to-mandatory ratio for the nondefense category as follows:

nondefense discretionary spending is set by the BCA nondefense spending limit for FY2020, which is $578 billion; and nondefense mandatory spending is set by OMB's baseline estimate of (nonexempt, non-Medicare) mandatory spending, which is $75.518 billion.

This calculation results in a ratio of 88.44% for nondefense discretionary spending and 11.56% for nondefense, non-Medicare nonexempt mandatory spending.

To achieve the required non-Medicare nondefense reduction of $39.357 billion, these percentages result in a nondefense discretionary reduction of $34.807 billion and a nondefense (non-Medicare) mandatory reduction of $4.550 billion.

Step 3 . The nondefense discretionary reduction is implemented by lowering the BCA spending cap by $34.807 billion to the adjusted cap level of $543.193 billion (although this cap level is now superseded by the revised level enacted in the BBA of 2019, which is $621.5 billion).

Step 4 : Under OMB's calculation, the remaining reduction ($4.550 billion) to direct spending is achieved by applying a 5.9% uniform percentage reduction to non-Medicare nonexempt mandatory spending and increasing student loan fees by the same 5.9%.

Once this uniform percentage is determined, Section 256(k)(2) of BBEDCA requires that sequestration be applied equally to all PPAs within the affected budget accounts.

Extension of the Joint Committee Sequester

As discussed above, the BCA established statutory limits on discretionary spending for FY2013-FY2021 to achieve about $900 billion in budgetary savings. The BCA triggered an additional tranche of automatic budgetary savingsâ$1.2 trillion over FY2013-FY2021âwhen Congress's Joint Committee did not report, and Congress did not enact, at least $1.2 trillion in budget savings by January 15, 2012.

The automatic Joint Committee reductions include changes in the discretionary spending limits and sequestration (across-the-board cuts) in mandatory spending.

The requirement for a Joint Committee (mandatory) sequester in FY2013-FY2021 has been extended on five occasionsâto offset increases in discretionary spending and other legislationâand is now required for each fiscal year through FY2029:

The BBA of 2013 ( H.J.Res. 59 , P.L. 113-67 ) amended BBEDCA to increase the discretionary spending limits for FY2014 and FY2015 and added two years to the Joint Committee mandatory sequester (FY2022 and FY2023). P.L. 113-82 ( S. 25 , an Act relating to cost of living adjustments for military retirees, February 15, 2014) amended BBDECA to add one year to the Joint Committee mandatory sequester (FY2024). The BBA of 2015 ( H.R. 1314 , P.L. 114-74 ) amended BBEDCA to increase the discretionary spending limits for FY2016 and FY2017 and added one year to the Joint Committee mandatory sequester (FY2025). The BBA of 2018 ( H.R. 1892 , P.L. 115-123 ) amended BBEDCA to increase the discretionary spending limits for FY2018 and FY2019 and added two years to the Joint Committee mandatory sequester (FY2026 and FY2027). The BBA of 2019 ( H.R. 3877 , P.L. 116-37 ) amended BBEDCA to increase the discretionary limits for FY2020 and FY2021 and added two years to the Joint Committee mandatory sequester (FY2028 and FY2029).

Calculation of the Joint Committee Sequester in the ExtensionÂ Years

As explained above, the Joint Committee mandatory sequester is calculated based on the statutory requirement to save $109.3 billion in each fiscal year from FY2013 through FY2021, with half of the savings coming from defense and half from nondefense programs. The defense and nondefense reductions of $54.667 billion per year are apportioned between discretionary and mandatory programs according to the formulas explained in the FY2020 illustrations above.

After FY2021, there is no statutory requirement to achieve $54.667 billion in budgetary savings in defense and nondefense spending and, consequently, no specific amounts to apportion to mandatory (or discretionary) savings. Therefore, the statutes extending the Joint Committee mandatory sequester have tied the defense and nondefense mandatory savings for FY2022-FY2029 to the uniform percentage reductions to be calculated by OMB for FY2021 in the Report on the Joint Committee Reduction that is to be released concurrent with the President's budget in February 2020.

This means that for FY2022-FY2029

the percentage reduction for nonexempt direct spending for the defense category is the same percent as the percentage reduction for the defense category for FY2021, and the percentage reduction for nonexempt direct spending for the nondefense category is the same percent as the percentage reduction for the nondefense category for FY2021.

Scope, Exemptions, and Special Rules

Scope of the Mandatory Sequester

Sequestration is a cancellation of budgetary resources by the Presidentârequired by statuteâin all nonexempt programs and accounts. While many programs and activities are fully or partially exempted from the mandatory sequester, the mechanism nevertheless has a broad reach.

In addition to the sequestration of Medicare payments, the Joint Committee sequester automatically reduces more than 200 budget accounts impacting a broad array of programs, including Affordable Care Act cost-sharing reduction subsidies and risk adjustment; farm price and income supports; compensation and services for crime victims; citizenship and immigration services; agricultural marketing services and conservation programs; animal and plant health inspection; Federal Deposit Insurance Corporation orderly liquidation operations; vocational rehabilitation services; mineral leasing payments; Centers for Medicare and Medicaid Services (CMS) program management; social services block grants; Departments of Justice and the Treasury law enforcement activities; student loan origination fees; highway performance; school construction bonds; spectrum relocation activities; Trade Adjustment Assistance; Consumer Financial Protection Bureau; Drug Enforcement Administration operations; Tennessee Valley Authority; fish and wildlife restoration and conservation; affordable housing; the maternal, infant, and early childhood home visiting program; and Gulf Coast restoration.

Mandatory Sequester Exemptions

Many programs and activities are exempt from sequestration under Section 255 of BBEDCA (2 U.S.C. Â§905; see Appendix E for a complete list of exemptions). In dollar terms, three-quarters of all mandatory spending is exempt from the mandatory sequester as illustrated in Figure 2 .

In addition to program exemptions, several programs are subject to special rules, including a 2% limit on sequestration reductions to Medicare, explained below.

2% Sequester Limit for Medicare

Medicare is the federal health insurance program for people who are 65 or older, for younger people with permanent disabilities, and for people of any age with end-stage renal disease. It is the largest mandatory spending program subject to sequestration, although special rules limit the sequestration of Medicare benefit payments to 2% rather than the uniform percentage applied to other nonexempt mandatory spending programs (5.9% in FY2020).

Most Medicare spendingâ$765.5 billion in FY2020âis subject to the 2% sequester including payments to health care providers for hospitalizations, physician services, prescription drugs, skilled nursing facility care, home health visits, and hospice care.

Generally, Medicare's provider payment and benefit structure remains unchanged under a mandatory sequestration order, and beneficiaries see few direct impacts. However, the indirect impact on particular health care providers and beneficiaries is more complexâparticularly for Medicare Advantage and Part D prescription drug coverage.

In "traditional Medicare," the program pays providers on a fee-for-service basis, and the 2% sequester reduction is applied directly to provider payments. Under Medicare Advantage, by contrast, private health plans are paid a per-person ("capitated") monthly amount to provide nearly all Medicare-covered benefits to beneficiaries who enroll in their plans. The Joint Committee 2% sequester is applied to Medicare's monthly capitation payment and the Medicare Advantage Organizations (MAOs) administering the plans determine how the reduced capitation payments are to be distributed among medical providers, administrative expenses, risk adjustments, and plan rebates to beneficiaries.

Similarly, under Medicare Part D, the optional outpatient prescription drug benefit plans are paid through capitated monthly payments (the "direct subsidy") to private plans. The 2% Medicare sequester reduces these monthly direct subsidy amounts.

A key consequence of the 2% Medicare sequester limit is that it increases the uniform percentage reduction applied to non-Medicare mandatory programs. For example, in FY2020, if there were no 2% limit on the Medicare sequester, a uniform percentage reduction applied to all nonexempt mandatory spending (including Medicare) would be 3.9% rather than the 5.9% reduction applied in the October 1, 2019, sequester order.

Medicare sequester special rules follow:

Part D low-income subsidies, Part D catastrophic subsidies (reinsurance), and Qualifying Individuals Part B premium assistance are exempted from sequestration. Medicare administrative expenses , if classified as mandatory spending, are subject to the full Joint Committee mandatory sequester (5.9% in FY2020) rather than protected by the 2% limit. Special rules determine whether Health Care Fraud and Abuse Control Program (HCFAC) funds are subject to the 2% limit. After a sequester order is issued, Medicare payments are sequestered beginning on the first day of the following month and remain in effect during the following one-year period, even if there is an intervening sequester order. The total amount sequestered from Medicare depends on actual Medicare spending in a given year rather than an amount based on OMB's estimate. (For example, if actual Medicare outlays exceed the estimated amount included in a sequestration order, the additional outlays would be subject to the sequester.) Medicare sequestration in FY2029 is subject to a special ruleâ4% during the first six months and 0% for the second six months of the order.

Special Rule for Student Loans27

Sequestration impacts federal student loans differently than it does other programs. For federal student loans, sequestration is applied to student loan origination fees.

The origination fee is money the borrower (that is, the student or the student's parents) pays to the federal government to offset the costs of issuing the loan. The fee is calculated as a percentage of the loan's total and is subtracted from the loan amount. Direct Subsidized Loans and Direct Unsubsidized Loans generally have a fee of about 1%, and Direct PLUS loans generally have a fee of about 4%.

For example, if a student's parents take out a federal PLUS loan of $16,450, with an origination fee of 4.248%, about $15,750 of the loan would go to the school and $700 to the federal government for the origination fee.

Special sequestration rules (BBEDCA Â§256 , 2 U.S.C. Â§906 ) for student loans provide that the federal budgetary savings are achieved by increasing the origination feeâthe money going to the federal Treasuryârather than reducing the overall loan amount.

For example, for FY2020, the 5.9% uniform sequester percentage is to be applied as an increase to federal student loan origination fees. In the above example, the result would be that the $700 origination fee would be increased by 5.9% or about $41âthe effect of which would be to reduce the amount of the loan going to the school.

Other Special Rules

Community and migrant health centers providing primary care to people who have financial, geographic or other barriers to health care are supported by discretionary and mandatory funding under the Affordable Care Act. In years when mandatory spending is estimated, at the time OMB calculates a sequester, the spending reductions are limited to a 2% sequester. Indian Health Service (IHS) provides health services to 2.6 million American Indians and Alaska Natives. While most IHS funding is provided through discretionary appropriations, IHS receives mandatory appropriations for programs including treatment of diabetes. In years when mandatory spending is estimated at the time OMB calculates a sequester, the spending reductions are limited to a 2% sequester. Administrative expenses : Federal administrative expenses are subject to sequestrationâeven if they are incurred in connection with a program that is exempt or subject to a special rule. However, this special rule applies only to administrative expenses classified as mandatory spending. Defense unobligated balances: Unobligated balances of budget authority carried over from prior fiscal years in the defense category are subject to the mandatory sequester pursuant to Section 255(e) of BBEDCA. Intragovernmental payments: For intragovernmental payments, sequestration is applied to the paying account. The funds are generally exempt in the receiving account in accordance with Section 255(g)(1)(A) of BBEDCA so that the same dollars are not sequestered twice. Revo lving, trust, and special fund accounts and offsetting collections: Budgetary resources in revolving, trust, and special fund accounts and offsetting collections reduced by a mandatory sequester are not available for obligation during the fiscal year in which the sequestration occurs but are available in subsequent years to the extent otherwise provided.

Appendix A. Mandatory Sequester by Fiscal Year

Appendix B. FY2020 Programmatic Impact of the Joint Committee Sequester

On March 18, 2019, OMB, as part of its annual budget transmittal to Congress and as required by the BCA, released the OMB Report to Congress on the Joint Committee Reductions for Fiscal Year 2020 . In addition to setting forth the calculations of the upcoming fiscal year's sequester as required by statute, the report includes account-by-account detail of the amount by which each mandatory spending account is required by statute to be reduced at the beginning of the new fiscal year. Specifically, the report identifies

four mandatory spending accounts to be reduced by the 2% Medicare sequester, six mandatory spending accounts to be reduced by the 8.6% defense sequester, and 208 mandatory spending accounts to be reduced by the 5.9% nondefense sequester.

For illustrative purposes, the table below displays the FY2020 mandatory sequester reductions of $20 million or more, with brief descriptions of the programs. For a complete list of mandatory spending accounts subject to sequester for FY2020, see the Appendix of the OMB Report to Congress .

Appendix C. Sequestration Order for FY2020

EXECUTIVE ORDERS Sequestration Order for Fiscal Year 2020 Issued on: March 18, 2019

By the authority vested in me as President by the laws of the United States of America, and in accordance with section 251A of the Balanced Budget and Emergency Deficit Control Act (the "Act"), as amended, 2 U.S.C. 901a, I hereby order that, on October 1, 2019, direct spending budgetary resources for fiscal year 2020 in each non-exempt budget account be reduced by the amount calculated by the Office of Management and Budget in its report to the Congress of March 18, 2019.

All sequestrations shall be made in strict accordance with the requirements of section 251A of the Act and the specifications of the Office of Management and Budget's report of March 18, 2019, prepared pursuant to section 251A(9) of the Act.

DONALD J. TRUMP

THE WHITE HOUSE March 18, 2019.

Appendix D. OMB Description of Sequester Calculations

Each year through FY2021, concurrent with transmittal of the President's budget, OMB transmits to Congress a report explaining the Joint Committee reductions for the upcoming fiscal year. Relevant portions of the OMB report for FY2020 are included below to illustrate how OMB calculates the mandatory sequester percentages. (The footnotes appearing in this Appendix are from the OMB report.)

OMB Report to the Congress on the Joint Committee Reductions for Fiscal Year 2020âMarch 18, 2019

The Balanced Budget and Emergency Deficit Control Act (BBEDCA) requires the Office of Management and Budget (OMB) to calculate reductions of fiscal year (FY) 2020 budgetary resources and provide them to the Congress with the transmittal of the Budget. This report provides OMB's calculations of the reductions to the discretionary spending limits ("caps") specified in section 251(c) of BBEDCA for FY 2020 and a listing of the FY 2020 reductions required through sequestration for each nonexempt budget account with direct spending.

OMB calculates that the Joint Committee reductions will lower the discretionary cap for the revised security (defense) category by $54 billion and for the revised nonsecurity (nondefense) category by $35 billion. Additionally, the Joint Committee reductions require sequestration reductions to nonexempt direct spending of 2.0 percent to Medicare, 5.9 percent to other nonexempt nondefense mandatory programs, and 8.6 percent to nonexempt defense mandatory programs.

Calculation of Annual Reduction by Function Group

Under section 251A of BBEDCA, the failure of the Joint Select Committee on Deficit Reduction to propose, and the Congress to enact, legislation to reduce the deficit by $1.2 trillion triggers automatic reductions in FY 2020 through adjustments in the discretionary spending limits and sequestration of direct spending. As shown in Table D-1 , the total amount of deficit reduction required is specified by formula in section 251A(1), starting with the total reduction of $1.2 trillion required for FY 2013 through FY 2021, deducting a specified 18 percent for debt service savings, and then dividing the result by nine to calculate the annual reduction of $109 billion for each year from FY 2013 to FY 2021. Section 251A(2) requires the annual reduction to be split evenly between budget accounts in function 050 (defense function) and in all other functions (nondefense function), so that each function group will be reduced by $54.667 billion.

Base for Allocating Reductions and Method of Reduction

The annual reduction is further allocated between discretionary and direct spending within each of the function groups. Once the reductions are allocated, separate methods are used to implement the reductions for discretionary appropriations and direct spending.

Discretionary Reductions. The base for allocating reductions to discretionary appropriations is the discretionary spending limit for FY 2020 set forth in section 251(c). The reductions are implemented by lowering the discretionary spending limits for the revised security (defense) category and the revised nonsecurity (nondefense) category.

Direct Spending Reductions. Pursuant to paragraphs (3) and (4) of section 251A, and consistent with section 6 of the Statutory Pay-As-You-Go Act of 2010, the base for allocating reductions to budget accounts with direct spending is the sum of the direct spending outlays in the budget year and the subsequent year that would result from sequestrable budgetary resources in FY 2020.

Estimates of sequestrable budgetary resources and outlays for budget accounts with direct spending are equal to the current law baseline amounts contained in the President's FY 2020 Budget, and include direct spending unobligated balances in the defense function and Federal administrative expenses that would otherwise be exempt.

The majority of estimated direct spending unobligated balances in the defense function are in Department of Defense accounts. The Department of Defense estimates of unobligated balances as of October 1, 2019, are consistent with the estimates in the FY 2020 Budget.

For purposes of applying the Joint Committee sequestration to direct spending under BBEDCA, "administrative expenses" for typical Government programs are defined as the object classes for personnel compensation, travel, transportation, communication, equipment, supplies, materials, and other services. For Government programs engaging in commercial, business-like activities, administrative expenses constitute overhead costs that are necessary to run a business, and not expenses that are directly tied to the production and delivery of goods or services.

The reductions to direct spending are implemented through sequestration of nonexempt budgetary resources. Pursuant to sections 251A(6), 255, and 256, most direct spending is exempt from sequestration or, in the case of the Medicare program and certain other health programs, is subject to a 2 percent limit on sequestration.

Defense Function Reduction

Steps 1 and 2 on Table D-2 show the calculation of the reduction required for discretionary appropriations and direct spending within the defense function. Steps 3 and 4 on Table D-2 reflect the implementation of the reductions calculated in steps 1 and 2 through an adjustment to the discretionary spending limit for the defense category and a sequestration of direct spending in the defense function.

The calculation of the reduction involves the following steps:

Step 1 . Pursuant to section 251A(3), the total reduction of $54.667 billion is allocated proportionately between discretionary appropriations and direct spending. The total base is the sum of the FY 2020 discretionary spending limit for the defense category ($630 billion) and OMB's baseline estimates of sequestrable direct spending outlays ($9.844 billion) in the defense function in FY 2020 and FY 2021 from direct spending sequestrable resources in FY 2020. Discretionary appropriations comprise approximately 98 percent of the total base in the defense function.

Step 2 . Total defense function spending must be reduced by $54.667 billion. As required by section 251A(3)(A), allocating the reduction based on the ratio of the discretionary spending limit to the total base (the sum of the defense discretionary spending limit and sequestrable direct spending) yields a $53.825 billion reduction required to be made to discretionary appropriations. Under section 251A(3)(B), the remaining $0.842 billion is the reduction required for budget accounts with direct spending.

The implementation of the reductions involves the following steps:

Step 3 . As required by section 251A(5)(B), the discretionary spending limit for the defense category is lowered by the amount calculated in step 2, which results in a discretionary defense cap for FY 2020 of $576.175 billion.

Step 4 . As required by section 251A(6), the percentage reduction for nonexempt direct spending is calculated by dividing the direct spending reduction amount ($0.842 billion) by the sequestrable budgetary resources ($9.844 billion) for budget accounts with direct spending, which yields a 8.6 percent sequestration for budget accounts with nonexempt direct spending.

Nondefense Function Reduction

Steps 1 and 2 on Table D-3 show the calculation of the reduction required for discretionary appropriations and direct spending within all other functions besides 050 (nondefense function). The calculation is more complicated than the calculation for the defense function due to a two percent limit in the reduction of Medicare non-administrative spending and a special rule for applying the reduction to student loans. Steps 3 and 4 on Table D-3 reflect the implementation of the reductions calculated in steps 1 and 2 through an adjustment to the discretionary spending limit for the nondefense category and a sequestration of direct spending in the nondefense function.

The calculation of the reduction involves the following steps:

Step 1 . Total spending in the nondefense function must be reduced by $54.667 billion. The portion of Medicare subject to the two percent limit is estimated to have combined FY 2020 and FY 2021 outlays of $765.495 billion from FY 2020 budgetary resources, so a two percentage point reduction would reduce outlays by $15.310 billion, leaving a reduction of $39.357 billion to be taken from discretionary appropriations and other direct spending in the nondefense function.

Step 2 . Pursuant to section 251A(4), the remaining reduction of $39.357 billion is allocated proportionately between discretionary appropriations and other direct spending in the nondefense function. The base ($653.518 billion) is the sum of the FY 2020 discretionary spending limit for the nondefense category ($578.000 billion) and the remaining sequestrable direct spending base ($75.518 billion). The latter amount equals OMB's 2020 Budget baseline estimates of total sequestrable direct spending outlays in the nondefense function in FY 2020 and FY 2021 from direct spending sequestrable resources in FY 2020 ($841.013 billion) minus the portion of Medicare subject to the two percent limit ($765.495 billion). Discretionary appropriations account for 88.44 percent of the remaining base in the nondefense function, and direct spending accounts for 11.56 percent.

As required by section 251A(4), applying these percentage allocations to the remaining required reduction for programs in the nondefense function yields the reduction for discretionary appropriations ($34.807 billion) and for remaining direct spending ($4.550 billion).

The implementation of the reductions involves the following steps:

Step 3 . As required by section 251A(5)(B), the discretionary spending limit for the nondefense category is lowered by the amount calculated in step 2, which results in a discretionary nondefense cap for FY2020 of $543.193 billion.

Step 4 . The remaining reduction ($4.550 billion) to direct spending is applied as a uniform percentage reduction to the remaining budget accounts with sequestrable direct spending and by increasing student loan fees by the same uniform percentage, as specified in sections 251A(6) and 256(b). Each percentage point increase in the sequestration rate is estimated to result in $0.010 billion of savings in the direct student loan program. Solving simultaneously for the percentage that would achieve the remaining reduction when applied to both the remaining sequestrable direct spending ($75.518 billion) and to student loan fees yields a 5.9 percent reduction. This percentage reduction yields outlay savings of $0.059 billion in the direct student loan program and $4.491 billion from the remaining budget accounts with nonexempt direct spending.

Appendix E. List of Federal Programs Exempt from the Mandatory Sequester

Many programs and activities are exempt from the mandatory sequester under Sections 255 and 256(d)(7) of BBEDCA (2 U.S.C. Â§905). In dollar terms, three-quarters of all mandatory spending is exempt from the mandatory sequester (see Figure 2 ).

Exempt manda tory spending programs include

Social Security benefits and Tier I railroad retirement benefits

Veterans' compensation, pensions, life insurance

Net interest (payments on accumulated federal debt)

Refundable income tax credits

Nondefense unobligated balances of budget authority carried over from prior fiscal years

Claims, judgments, and relief acts

Exchange Stabilization Fund

Federal Deposit Insurance Corporation, Deposit Insurance Fund

Federal Home Loan Mortgage Corporation (Freddie Mac)

Federal Housing Finance Agency, administrative expenses

Federal National Mortgage Corporation (Fannie Mae)

Federal Reserve Bank Reimbursement Fund

National Credit Union Administration funds

Federal retirement and disability including civil service, military, foreign service, and judicial

Low-income programs including

Child Care Entitlement to States Child Nutrition Programs (with the exception of Special Milk) Children's Health Insurance Program Family support programs (including Child Support Enforcement) Federal Pell Grants (under Section 1070a of Title 20) Grants to states for Medicaid Medicare Part D low-income subsidies, catastrophic subsidies, and Qualified Individual premiums Payments for foster care and permanency Supplemental Nutrition Assistance Program (formerly "food stamps") Supplemental Security Income Temporary Assistance for Needy Families

Economic recovery programs including GSE preferred stock purchase agreements, Office of Financial Stability

Federal-Aid Highways and Safety Programs

Unemployment compensation (but federal share of extended benefits is not exempt)

Postal Service Fund

Salaries of Article III judges

Certain tribal and Indian trust accounts

Universal Service Fund

Various prior legal obligations of the government including

Credit liquidating accounts Federal Crop Insurance Corporation Fund (however, farm price and income supports are not exempt from the Joint Committee sequester) Federal Emergency Management Agency, National Flood Insurance Fund Pension Benefit Guaranty Corporation Fund Terrorism Insurance Program.

Appendix F. Additional CRS Resources on Sequestration

CRS Insight IN11148, The Bipartisan Budget Act of 2019: Changes to the BCA and Debt Limit , by Grant A. Driessen and Megan S. Lynch.

CRS Report R44874, The Budget Control Act: Frequently Asked Questions , by Grant A. Driessen and Megan S. Lynch.

CRS Report R45106, Medicare and Budget Sequestration , by Patricia A. Davis.

CRS Report R42050, Budget "Sequestration" and Selected Program Exemptions and Special Rules , coordinated by Karen Spar.

CRS Report R42972, Sequestration as a Budget Enforcement Process: Frequently Asked Questions , by Megan S. Lynch.

CRS Report R43133, The Impact of Sequestration on Unemployment Insurance Benefits: Frequently Asked Questions , by Katelin P. Isaacs and Julie M. Whittaker.