Sequestration

How Does it Work

Passed the Congress in August 2011

Established the Joint Select Committee on Deficit Reduction

It’s the Law!P.L. 112-25

The provisions contained in the BCA have the potential to have significant

impact on state budgets starting in 2013.

Already discussion in Congress to amend the Act

The Act provides the framework for everything Congress is doing not just

this year, but for the next 10 years.

Two categories: Defense and non-Defense FY2013 Defense category includes many non-DOD programs

that relate to national security FY2014 – FY2021 Defense category includes only DOD programs Discretionary spending refers to outlays from budget authority

that is provided and controlled by appropriations acts. Mandatory or direct spending refers to outlays from budget

authority that is provided by the laws other than appropriations. Sequestration: Across the board cuts in budget resources of all

programs within a category (new budget authority, unobligated balances, direct spending authority, and obligation limitations).

1. Under the provisions of the 1974 Congressional Budget Act, Congress is suppose to adopt no later than May 15tha conference report on a Budget Resolution that sets a ceiling on total spending (this is an aggregate number that applies to mostly appropriation bills for the coming fiscal year).

2. The Budget Resolution give each House and Senate committee with new budget authority an allocation of what it can spend for the upcoming Fiscal Year (302a allocation).

3. For the Appropriation Committees, each subcommittee is given an allocation of what they can put into their appropriations bill (302b allocation).

4. The Budget Control Act used both sequestration and these allocations to control spending.

Limits on Discretionary Spending between FY2013 and FY2021(In billions)

Fiscal Year Original Limits on all Discretionary 2013 $1,047 2014 $1,066 2016 $1,107 2017 $1,131 2018 $1,156 2019 $1,182 2020 $1,208 2021 $1,234

Limits on Discretionary Spending between FY2013 and FY2021(In billions)

Fiscal Year Original Limits on all Discretionary 2013 $1,047 2014 $1,066 2016 $1,107 2017 $1,131 2018 $1,156 2019 $1,182 2020 $1,208 2021 $1,234

$1,234 - $1,047 = $187 allowable growth over 10 years

50% of all cuts must come from DoD Sequestration applies only to mandatory

spending after FY2013 Cuts in both mandatory & discretionary

spending are allocated proportionally

The spending reduction process will automatically be triggered because the Joint Select Committee on Deficit Reduction fail to achieve any savings. Reductions must equal $1.2 trillion over 10 years (FY2012-FY2021)

 The automatic spending reduction process entails four key steps:

1.The statutory discretionary spending limits for FY2013-FY2021 are revised, by redefining the security and non-security categories and by extending such categories through FY2021;

2.The amount of spending reduction required for each year is calculated and divided equally between two categories—Defense and non-Defense;

The spending reduction process will automatically be triggered because the Joint Select committee on Deficit Reduction fail to achieve any savings. Reductions must equal $1.2 trillion over 10 years (FY2012-FY2021)

 The automatic spending reduction process entails four key steps:

3.The annual amount of spending reductions required each year in each of these categories is further divided proportionally between discretionary appropriations and direct spending programs (excluding certain programs and activities) within each category; and

4.The spending reductions required in each year (FY2013-FY2021) are achieved through a combination of sequestration and a downward adjustment of the revised discretionary spending limits.

The reductions required are implemented in three parts:

1.For discretionary spending for FY2013, a sequestration of budgetary resources in that year2.For discretionary spending for FY 2014-FY2021, a downward adjustment of the revised discretionary spending limits3.For direct spending, a sequestration of budgetary resources in each year from FY 2013 through FY 2021

Human services programs are exempt from sequestration Social Security Medicaid Medicare (Limited to no more than a 2% reduction) Academic Competitiveness/Smart Grant Program Child Care Entitlement to States Child Enrollment Contingency Fund Child Nutrition Programs (with the exception of special milk programs Children’s Health Insurance Fund Commodity Supplemental Food Program Contingency Fund Family Support Programs Federal Pell Grants under section 1070a of title 20 Grants to States for Medicaid Payments for Foster Care and Permanency Supplemental Nutrition Assistance Program Supplemental Security Income Program Temporary Assistance for Needy Families

Human services programs NOT exempt from sequestration include:

Medicare providers, Women, Infants and Children (except Special supplemental

nutrition program) Substance Abuse Block Grant Mental Health Block Grant Community Services Block Grant Promoting Safe and Stable Families Social Services Block Grants Child Care Development Block Grants Child Welfare Services Low-Income Home Energy Assistance Community Health Centers

The Budget Control Act establishes discretionary spending caps through FY2021 for both Defense and non-Defense categories.

Revised Statutory Limits on Discretionary Spending if Automatic SpendingReduction Process is Triggered(in billions of budget authority)

Fiscal Year Revised Security Revised Non-security Category Category

2013 $546 $5012014 $556 $5102015 $566 $5202016 $577 $5302017 $590 $5412018 $603 $5532019 $616 $5662020 $630 $5782021 $644 $590

Sequestration applies to both mandatory and discretionary spending in FY2013 only

In FY2014 – FY2021 sequestration applies only to mandatory spending

Spending caps located in the BCA are used in the normal appropriation process to limit discretionary spending using 302a and 302b allocations

For FY 2013, sequestration of $97 billion occurs January 2, 2013.

For FY 2014 – FY 2021 sequestration occurs 15 days after Congress adjourns (either 1st or 2nd session).

Determine Revised Limits on Discretionary Sending

Discretionary spending limits are established in BCA but are subject to revision

The revised limits on discretionary spending may fluctuate to accommodate:

Emergency requirements Appropriations for Overseas Contingency

Operations/Global War on Terrorism Appropriations for continuing disability reviews Appropriations for controlling health care fraud and abuse Appropriations designed as being for disaster relief

Subtract estimated amount of saving from payments on interest from total amount of spending cuts i.e. $1.2 trillion

Subtract estimated amount of saving from payments on interest from total amount of spending cuts i.e. $1.2 trillion

Estimated at 18%

$1,200,000,000,000 x .18 = $216,000,000,000

$1,200,000,000,000 - $216,000,000,000 = $984,000,000,000

Divide target amount equally between Defense and non-Defense spending

$984,000,000,000 ÷ 2= $492,000,000,000 (over nine years)

Determine how much the deficit must be reduced each year from FY2013 until FY2021 (Total of nine years)

$492,000,000,000 ÷ 9= $54,666,666,666

The $54.7 billion reduction is for both discretionary and mandatory spending combined in each category

To determine proportions of spending reductions to allocate toward discretionary

or mandatory:

Multiply $54.7 billion by discretionary spending cap Divide by total (discretionary and mandatory) non-exempt

spending = reduction in discretionary spending in that category

To determine mandatory amount subject to sequestration simply subtract discretionary reductions from $54.7 billion.

Example for FY 2014 Non-Defense Category

Discretionary spending cap = $510 billion

$54.7 billion x $510 billion = $27.88 trillion

$27.88 trillion ÷ ($510 billion +~$206 billion) = $38.9 billion

Discretionary Cap

OMB’s Baseline Estimate for Mandatory Spending

{ {+ = $716 billion in total

non-exempt spending

Example for FY 2014 Non-Defense Category

Discretionary spending cap = $510 billion

$38.9 billion reduction in discretionary spending cap

$15.7 billion reduction in non-exempt mandatory spending

Total savings of $54.7 billion

Example for FY 2014 Non-Defense Category

Discretionary spending cap = $510 billion

$38.9 billion reduction in discretionary spending cap

$510 billion – $38.9 billion = $471.1 billion (new discretionary spending cap for aggregate appropriations in fiscal year)

Revised Statutory Limits on Discretionary Spending if Automatic SpendingReduction Process is Triggered(in billions of budget authority)

Fiscal Year Revised Security Revised Non-security Category Category

2013 $546 $5012014 $556 $4712015 $566 $5202016 $577 $5302017 $590 $5412018 $603 $5532019 $616 $5662020 $630 $5782021 $644 $590

Example for FY 2014 Non-Defense Category

Discretionary spending cap = $510 billion

$15.7 billion reduction in non-exempt mandatory spending

$15.7 billion cut from $206 billion in mandatory spending via sequestration

Example for FY 2014 Non-Defense CategoryDiscretionary spending cap = $510 billion

$15.7 billion reduction in non-exempt mandatory spending

$15.7 billion cut from $206 billion in mandatory spending via sequestration

$15.7 billion is 7.6% of $206 billion, so all non-exempt programs in the non-Defense category would be reduced by 7.6%.

Example for FY 2014 Non-Defense CategoryDiscretionary spending cap = $510 billion

$38.9 billion reduction in discretionary spending capMedicaid is exempted from sequestration and Medicare

provider cuts are limited no more than 2%. Any cuts for Medicare provider benefits above 2% are

subtracted from the discretionary spending cap Final discretionary spending cap reduction is $38.9 billion +

the additional Medicare cuts above 2%

Sequestration in Mandatory spending for FY2014 is estimated at about 7.5%

A budget in FY 2013 of $1, 000,000,000 lowered 7.5% each year for ten years would have $495,764,693 in FY2021

Or less than 50% of its FY2013 funding

$54.7 billion is the amount both Defense and non-Defense spending must be cut each year

This reduction in spending is done proportionally between discretionary and mandatory spending.

Discretionary reductions are done through the normal appropriation process of allocations whereas mandatory reductions are done through sequestration or across the board cuts.

The BCA depends on enforcement of discretionary spending limits by allowing members of Congress to raise a point of

order during consideration of appropriations bills in each house.

Because the caps limit the total amount of budget authority for budget year, the order

in which an individual approbation bill is considered will affect whether or not it is

subject to a point of order.