How $85 Billion Became $80 Billion: The Story of the Shrinking 2013 Sequester

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Monday, June 10, 2013
If the two parties fail to reach a budget agreement, another sequester will be triggered for FY 2014

Asim Manizada contributed to this post.

If you’re reading this blog, you’ve probably heard of the across-the-board cuts – sequestration – that are currently being implemented for defense and many domestic programs. You’ve also probably read in various places that those reductions will total $85 billion for the current fiscal year. At one time, that was true, but not anymore.

A little-known provision from the original 1985 legislation that created the concept of a sequester provided Congress with the capability to reduce the magnitude of the Fiscal Year (FY) 2013 discretionary reductions by reallocating funding among programs – in other words, without explicitly turning off or mitigating the cuts. While the sequester reductions were set to total $85 billion for FY 2013 (after the “fiscal cliff” deal postponed sequestration for two months), details within the continuing resolution and appropriations law (H.R. 933) that were enacted on March 27 mean that those automatic cuts will “only” amount to $80 billion ($4.8 billion less than scheduled).

So what exactly is going on here?

First, it is important to understand that the Budget Control Act of 2011 (BCA), which set the current sequester into motion, was written as an amendment to the Balanced Budget and Deficit Control Act of 1985 (known as “Gramm-Rudman-Hollings” or GRH). Thus, many of the provisions that dictate the current sequester’s implementation were taken from the original text of GRH. So, let’s look at the relevant portions of that law, as amended by the BCA:

“253(f) BASELINE ASSUMPTIONS; PART-YEAR APPROPRIATIONS.—

(2) PART-YEAR APPROPRIATIONS.—If, on the date specified in subsection (a), there is in effect an Act making or continuing appropriations for part of a fiscal year for any non-exempt budget account, then the dollar sequestration calculated for that account under subsection (d) or (e), as applicable, shall be subtracted from —

(A) the annualized amount otherwise available by law in that account under that or a subsequent part-year appropriation; and

(B) when a full-year appropriation for that account is enacted, from the amount otherwise provided by the full-year appropriation; except that the amount to be sequestered from that account shall be reduced (but not below zero) by the savings achieved by that appropriation when the enacted amount is less than the baseline for that account.

“251A(7) IMPLEMENTING DISCRETIONARY REDUCTIONS.—

(A) FISCAL YEAR 2013.—On March 1, 2013, for fiscal year 2013, OMB shall calculate and the President shall order a sequestration, effective upon issuance and under the procedures set forth in section 253(f), to reduce each account within the security category or nonsecurity category by a dollar amount calculated by multiplying the baseline level of budgetary resources in that account at that time by a uniform percentage necessary to achieve—

(i) for the revised security category, an amount equal to the defense function discretionary reduction calculated pursuant to paragraph (5); and

(ii) for the revised nonsecurity category, an amount equal to the nondefense function discretionary reduction calculated pursuant to paragraph (6).” [text bolded for emphasis]

 

Since this legislation sounds as if it was written in a foreign language, some background may be helpful. As mentioned in our earlier posts, a part-year continuing resolution (H.J.Res 117) was in effect on March 1 when the sequester went into effect, meaning that the sequester was set to shave a set percentage off of the annualized allocation for each non-exempt program, project, and activity (PPA) in order to meet the total requisite $85 billion cut. The post-sequester funding for each PPA – calculated from the original H.J.Res. 117 figures, annualized – was called the “base” or “baseline” level.

 

However, when the continuing resolution providing funding for the remainder of FY 2013 – was enacted on March 27, certain PPAs saw their pre-sequester funding (since the sequester cuts were not incorporated into the appropriations bills) bumped up from their H.J. Res 117 levels, while other PPAs were cut – in some cases, even deeper than the base levels (again, before accounting for sequestration). What the legislative text of GRH states is that for every dollar that a PPA (referred to as an “account” above in 253(f)(2)(B)) was cut below its base level, the sequester to that PPA is reduced by a commensurate amount.

For example, the Office of the Chief Information Officer for the Department of Homeland Security was originally allotted $324 million on an annualized basis under the part-year H.J.Res. 117 continuing resolution, with the 5-percent sequester cuts implying a $16 million reduction to a base value of $308 million. Under H.R. 933, however, the Office was only allocated $298 million – $10 million less than the base value. Therefore, with $10 million already cut below the base level for that PPA, the sequester cut only an additional $6 million ($16 million minus $10 million) in order to meet the terms of the statute. The funding for that PPA ended up at $292 million.

This is important because of what it allowed policymakers to do in other PPAs. For instance, hypothetically, assume that there was another PPA of the same size that H.R. 933 bumped-up by $26 million. The sequester’s $16 million cut would then leave that account at $334 million, $26 million above the sequester’s base level. Notice, in comparison, that the PPA for the Chief Information Officer only ended up $16 million below its base level, but according to the provision of the law that is copied above, these adjustments would essentially count as offsetting.

The net result of these changes across various departments means that the $85 billion requirement for the FY 2013 sequester was effectively reduced to around $80 billion.

While such reduction in the overall level of cuts might render the sequester slightly less disruptive, the broad picture remains unchanged. Just last week, the Federal Reserve Chairman Ben Bernanke expressed his concerns over the fiscal drag – caused, in part, by the sequester – on the economy. Looking ahead, the nation is facing even bigger challenges: If the two parties are unable to come to a budget agreement – be it through a compromise between the House- and Senate-passed budget resolutions or through a separate framework – another sequester will be triggered for FY 2014. With the additional arresting effect that such developments would impose on economic growth, Congress and the President should work towards a compromise that can chart a better, more growth-conducive policy that will avoid worsening the nation’s sluggish recovery and already-troubled fiscal outlook.


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