Budget “Sequestration” and Selected Program
Exemptions and Special Rules
Karen Spar, Coordinator
Specialist in Domestic Social Policy and Division Research Coordinator
October 2, 2012
Congressional Research Service
7-5700
www.crs.gov
R42050
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Budget “Sequestration” and Selected Program Exemptions and Special Rules
Summary
“Sequestration” is a process of automatic, largely across-the-board spending reductions under
which budgetary resources are permanently canceled to enforce certain budget policy goals. It
was first authorized by the Balanced Budget and Emergency Deficit Control Act of 1985
(BBEDCA, Title II of P.L. 99-177, commonly known as the Gramm-Rudman-Hollings Act).
Sequestration is of current interest because it was included as an enforcement tool in the Budget
Control Act of 2011 (BCA, P.L. 112-25). Sequestration can also occur under the Statutory Pay-
As-You-Go Act of 2010 (Statutory PAYGO, Title I of P.L. 111-139). In either case, certain
programs are exempt from sequestration, and special rules govern the effects of sequestration on
others. Most of these provisions are found in Sections 255 and 256 of BBEDCA, as amended.
Two provisions were included in the BCA that could result in automatic sequestration:
• Establishment of discretionary spending limits, or caps, for each of FY2012-
FY2021. If Congress appropriates more than allowed under these limits in any
given year, sequestration would cancel the excess amount.
• Failure of Congress to enact legislation developed by a Joint Select Committee
on Deficit Reduction, by January 15, 2012, to reduce the deficit by at least $1.2
trillion. The BCA provided that such failure would trigger a series of automatic
spending reductions, including sequestration of mandatory spending in each of
FY2013-FY2021, a one-year sequestration of discretionary spending for FY2013,
and lower discretionary spending limits for each of FY2014-FY2021.
In fact, the Joint Committee did not develop the necessary legislation and Congress did not meet
the January 15, 2012, deadline. Thus, the first automatic spending cuts under the BCA are now
scheduled to take effect on January 2, 2013. Pursuant to the Sequestration Transparency Act (P.L.
112-155), the Administration issued a report on September 14 that previews the estimated impact
of that sequestration on discretionary and mandatory spending.
Under the Statutory PAYGO Act, sequestration is part of a budget enforcement mechanism that is
intended to prevent enactment of mandatory spending and revenue legislation that would increase
the federal deficit. This act requires the Office of Management and Budget (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 sequestration will be triggered.
If sequestration is triggered—either under the BCA or Statutory PAYGO Act—the exemptions
and special rules of Sections 255 and 256 of BBEDCA apply. Most exempt programs are
mandatory, and include Social Security and Medicaid; refundable tax credits to individuals; and
low-income programs such as the Children’s Health Insurance Program, Supplemental Nutrition
Assistance Program, Temporary Assistance for Needy Families, and Supplemental Security
Income. Some discretionary programs also are exempt, notably all programs administered by the
Department of Veterans Affairs. Also, subject to notification of Congress by the President,
military personnel accounts may either be exempt or reduced by a lower percentage.
Special rules also apply to several, primarily mandatory, programs. For example, under Section
256 of BBEDCA, Medicare may not be sequestered by more than 4%. However, under a
sequester triggered by the BCA, reduction of Medicare is further limited to no more than 2%.
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Contents
Introduction...................................................................................................................................... 1
Current Sequestration Triggers ........................................................................................................ 1
Sequestration Triggers Under the BCA ..................................................................................... 2
OMB’s Preliminary Estimates of the January 2013 Sequester............................................ 3
Sequestration Trigger Under Statutory PAYGO ........................................................................ 4
Program Exemptions and Special Rules for Sequestration.............................................................. 5
Section 255 Program Exemptions ............................................................................................. 6
Section 256 Special Rules ......................................................................................................... 8
Student Loans...................................................................................................................... 8
Medicare.............................................................................................................................. 9
Health Centers, Indian Health, and Veterans’ Medical Care ............................................. 13
Child Support Enforcement............................................................................................... 14
Federal Pay........................................................................................................................ 15
Federal Administrative Expenses ...................................................................................... 16
Unemployment Compensation.......................................................................................... 16
Commodity Credit Corporation ........................................................................................ 17
Tables
Table 1. Preliminary OMB Estimates of FY2013 Uniform Percent Reductions Under
BCA-Triggered Sequester Scheduled for January 2, 2013........................................................... 4
Appendixes
Appendix. Section 255 of the Balanced Budget and Emergency Deficit Control Act, as
Amended..................................................................................................................................... 18
Contacts
Author Contact Information........................................................................................................... 25
Acknowledgments ......................................................................................................................... 25
Congressional Research Service
Budget “Sequestration” and Selected Program Exemptions and Special Rules
Introduction
“Sequestration” is a process of automatic, largely across-the-board spending reductions to meet or
enforce certain budget policy goals.1 It was first established by the Balanced Budget and
Emergency Deficit Control Act of 1985 (BBEDCA, Title II of P.L. 99-177, 2 U.S.C. 900-922) to
enforce deficit targets. In the 1990s, sequestration was used to enforce statutory limits on
discretionary spending and a pay-as-you-go (PAYGO) requirement on direct spending and
revenue legislation. After effectively expiring in 2002, sequestration was reestablished by the
Statutory Pay-As-You-Go Act of 2010 (P.L. 111-139) to enforce a modified PAYGO requirement
on direct spending and revenue legislation. Most recently, under the Budget Control Act of 2011
(BCA, P.L. 112-25), sequestration was tied to enforcement of new statutory limits on
discretionary spending and achievement of the budget goal established for the Joint Select
Committee on Deficit Reduction. Under current law, a sequestration has been triggered by the
BCA and is scheduled to occur on January 2, 2013, to affect spending for FY2013.
In general, sequestration entails the permanent cancellation of budgetary resources by a uniform
percentage.2 Moreover, this uniform percentage reduction is applied to all programs, projects, and
activities within a budget account.3 However, the current sequestration procedures, as in previous
iterations of such procedures, provide for exemptions and special rules. That is, certain programs
and activities are exempt from sequestration, and certain other programs are governed by special
rules regarding the application of a sequester. This report provides an overview of those
exemptions and special rules, which are generally found in Sections 255 and 256 of BBEDCA, as
amended (2 U.S.C. 905 and 906).
Current Sequestration Triggers
As noted above, sequestration is tied to certain budget goals established in the Budget Control Act
of 2011, as well as in the Statutory PAYGO Act of 2010. To provide some context for the
exemptions and special rules applicable to these sequestration procedures, brief descriptions of
the budget goals that may be enforced by sequestration are provided below. For more detailed
information on current budget constraints and goals, readers should consult CRS Report R41965,
The Budget Control Act of 2011, by Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan;
and CRS Report R41157, The Statutory Pay-As-You-Go Act of 2010: Summary and Legislative
History, by Bill Heniff Jr. For analysis of the impact of BCA, see CRS Report R42506, The
Budget Control Act of 2011: The Effects on Spending and the Budget Deficit When the Automatic
Spending Cuts Are Implemented, by Mindy R. Levit and Marc Labonte, and CRS Report R42675,
The Budget Control Act of 2011: Budgetary Effects of Proposals to Replace the FY2013
Sequester, by Mindy R. Levit.
1 For more information on sequestration and its historical application, see (1) CRS Report RL31137, Sequestration
Procedures Under the 1985 Balanced Budget Act, by Robert Keith; (2) CRS Report RS20398, Budget Sequesters: A
Brief Review, by Robert Keith; and (3) CRS Report R41901, Statutory Budget Controls in Effect Between 1985 and
2002, by Megan Suzanne Lynch.
2 “Budgetary resources” include new budget authority, unobligated balances, direct spending authority, and obligation
limitations, as defined in Section 250(c)(6) of the BBEDCA, as amended.
3 For accounts included in appropriations acts, “programs, projects, and activities” (PPAs) within each budget account
are delineated in those acts or accompanying reports; and for accounts not included in appropriations acts, they are
delineated in the most recently submitted President’s budget.
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Sequestration Triggers Under the BCA
The Budget Control Act of 2011 (BCA) was enacted on August 2, 2011. It provided for increases
in the debt limit and established procedures designed to reduce the federal budget deficit.4 As
enacted, the BCA had two primary components that could trigger a sequestration of discretionary
and/or mandatory (or direct) spending:5
• Title I of the BCA established discretionary spending limits, or caps, for each of
FY2012-FY2021.6 If Congress appropriated more than allowed under these
spending limits in any given year, the automatic reduction process of
sequestration would cancel the excess amount. For FY2012 and FY2013, the
spending limits were divided into “security” and “nonsecurity” categories, with
security defined broadly to include the Departments of Veterans Affairs (VA),
Homeland Security (DHS), and State, in addition to the Department of Defense
and certain other activities.7 For FY2014 and subsequent years, no distinction
was made between security and nonsecurity, and Title I of the law established a
single discretionary spending limit for each year.
• Title IV of the BCA established a bipartisan Joint Select Committee on Deficit
Reduction. Failure by Congress to enact legislation by January 15, 2012,
developed by the Joint Committee and reducing the deficit by at least $1.2
trillion, would trigger a series of automatic spending reductions intended to
achieve that level of savings over the FY2013-FY2021 period. These automatic
reductions include sequestration of mandatory spending for each of FY2013-
FY2021, a one-year sequestration of discretionary spending for FY2013, and
lower discretionary spending limits for FY2014-FY2021. Spending reductions
would be divided equally between security and nonsecurity. However, these
terms are redefined, so that “security” consists only of budget function 050
(effectively, the Department of Defense), and “nonsecurity” includes all other
government spending (including the VA, DHS, and State). The distinction
between security and nonsecurity (as redefined) remains for each of FY2014-
FY2021.
The security-nonsecurity distinction is significant because sequestration is imposed within these
categories. In other words, if Congress appropriated more than allowed for either category in a
given year, the excess spending would be canceled in the category where the breach occurred. As
noted above, security was defined broadly under Title I, and spending was divided between the
4 For a comprehensive discussion of the BCA, see CRS Report R41965, The Budget Control Act of 2011, by Bill Heniff
Jr., Elizabeth Rybicki, and Shannon M. Mahan.
5 Discretionary spending is provided in and controlled through the annual appropriations process and represents a
portion of total federal spending. The other portion, referred to as direct spending (or mandatory spending), is generally
provided in or controlled by authorizing legislation that requires federal payments to individuals or entities, often based
on eligibility criteria and benefit formulas set forth in statute. Some direct spending is funded in appropriations acts,
referred to as appropriated entitlements, but is controlled by the authorizing statute(s).
6 Adjustments are allowed to these discretionary spending limits for certain specified activities, such as costs associated
with disability redeterminations, health care fraud and abuse, overseas contingency operations and the War on Terror,
emergency spending, and funding for disasters.
7 The Office of Management and Budget (OMB) has determined that discretionary amounts provided for FY2012 were
within the BCA spending limits, so that no sequestration was necessary for that year. See http://www.whitehouse.gov/
sites/default/files/omb/assets/legislative_reports/sequestration/sequestration_final_jan2012.pdf.
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two categories only for two years; a single discretionary spending limit was set for FY2014 and
subsequent years. However, under the automatic procedures triggered by failure of the Joint
Committee, security is defined more narrowly and the separate security and nonsecurity
categories remain in effect for each year through FY2021.
Because the Joint Committee did not, in fact, develop legislation to achieve the specified level of
deficit reduction ($1.2 trillion) by the deadline set in the BCA, and Congress did not subsequently
enact such legislation by January 15, 2012, the automatic budget enforcement procedures
provided by the law are now scheduled to occur.8 The first fiscal year these procedures will affect
is FY2013; sequestration of excess spending for that fiscal year (as outlined in the second bullet
on the previous page) is scheduled to happen on January 2, 2013.
The automatic procedures triggered by failure of the Joint Committee process will affect both
mandatory and discretionary spending, and will result in the security and nonsecurity categories
being reduced by an equal amount of spending in each of FY2013 through FY2021. Because the
definition of “security” is revised to mean primarily the Department of Defense, this means that
half of the necessary spending reductions will come from that department while the other half
will come from the rest of the federal budget.9
OMB’s Preliminary Estimates of the January 2013 Sequester
On August 7, President Obama signed into law the Sequestration Transparency Act (P.L. 112-
155), which required the Administration to report to Congress within 30 days of enactment on the
impact of the January 2, 2013, sequestration. In this report, the President was to identify all
accounts to be sequestered—discretionary and mandatory, defense and nondefense—and estimate
the sequestration percentages to be applied and the amounts necessary to achieve the required
savings. Accounts were to be identified at the “program, project and activity” (PPA) level (see
footnote 3). For discretionary accounts funded through enacted FY2013 appropriations laws,
estimates were to be based on those funding levels; for other discretionary accounts, estimates
were to be based on an assumed continuing resolution at FY2012 levels. Estimates for mandatory
accounts were to be based on estimated spending under current law. The law further required the
President to identify all exempt discretionary and mandatory accounts, and to include any other
data or information that would help the public understand the impact of sequestration.
The President’s Office of Management and Budget (OMB) issued the report required by P.L. 112-
155 on September 14, noting that its estimates and classifications of whether a program is exempt
or subject to sequestration are “preliminary.”10 “If the sequestration were to occur, the actual
results would differ based on changes in law and ongoing legal, budgetary, and technical
analysis,” according to OMB. For example, the Sequestration Transparency Act directed OMB to
8 For the statement of the Joint Committee co-chairs, announcing they would not meet the statutory deadline, see
http://www.murray.senate.gov/public/index.cfm/2011/11/statement-from-co-chairs-of-the-joint-select-committee-on-
deficit-reduction.
9 For the mechanics of the BCA’s automatic spending reduction procedures, see the section titled “Budget Goal
Enforcement: Spending Reduction Trigger” in CRS Report R41965, The Budget Control Act of 2011, by Bill Heniff Jr.,
Elizabeth Rybicki, and Shannon M. Mahan. Also see Congressional Budget Office, Estimated Impact of Automatic
Budget Enforcement Procedures Specified in the Budget Control Act, http://www.cbo.gov/publication/42754.
10 OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), September 2012, available at
http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf. Hereinafter referred to as
OMB Report Pursuant to the Sequestration Transparency Act, September 2012.
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base its estimates on the assumption that a continuing resolution would be enacted for FY2013
that would maintain discretionary spending at FY2012 levels. Following enactment of P.L. 112-
155, however, Congress enacted a continuing resolution for the first six months of FY2013 (P.L.
112-175) that will maintain funding at FY2012 levels, plus an additional 0.612%. Moreover,
while OMB provided estimates of the percentage reductions that would occur under sequestration
at the account level, it did not provide that information for each PPA, stating that “additional time
is necessary to identify, review, and resolve issues associated with providing information at this
level of detail.”
Subject to numerous caveats presented in the report, OMB’s preliminary estimates of the
percentage reductions that will occur under the BCA-triggered sequester scheduled for January
2013 are shown in Table 1.
Table 1. Preliminary OMB Estimates of FY2013 Uniform Percent Reductions Under
BCA-Triggered Sequester Scheduled for January 2, 2013
Category of Funding
Defense
Nondefense
Nonexempt Discretionary
9.4%
8.2%
Nonexempt Mandatory (other
10.0% 7.6%
than Medicare and selected health
programs)
Medicare and mandatory
na 2.0%
components of selected health
programs
Source: OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), September 2012.
Notes: “Defense” and “Nondefense” are the same as the revised Security and Nonsecurity categories discussed
above, where Defense (or revised Security) equals budget function 050, and Nondefense (or revised
Nonsecurity) equals everything else. Estimates shown are preliminary and will change if sequestration occurs in
January 2013. See pp. 1-10 of the OMB report for a ful discussion of the limitations of these estimates. na = not
applicable. See sections, later in this CRS report, headed “Section 255 Program Exemptions” and “Section 256
Special Rules” for discussion of exemptions and special rules, including those applicable to Medicare and selected
health programs.
Sequestration Trigger Under Statutory PAYGO
The Statutory Pay-As-You-Go Act of 2010 was enacted on February 12, 2010, as Title I of P.L.
111-139.11 It established a permanent budget enforcement mechanism intended to prevent
mandatory (i.e., direct) spending and revenue legislation that would increase the deficit from
being passed and signed into law. (Statutory PAYGO does not apply to discretionary spending.)
The act requires various scorekeeping procedures, including five-year and 10-year scorecards that
track costs and savings associated with enacted legislation. At the end of each congressional
session, OMB generally must determine whether the net effect of direct spending and revenue
legislation enacted during the session has increased the deficit, and if so, a sequestration will be
triggered.
11 For a detailed discussion of the Statutory PAYGO Act, see CRS Report R41157, The Statutory Pay-As-You-Go Act
of 2010: Summary and Legislative History, by Bill Heniff Jr.
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Certain costs and savings are not counted toward Statutory PAYGO, including designated
emergency spending, debt service costs, costs associated with a shift in timing of certain outlays,
and net savings from the CLASS Act.12 In addition, the law provided that if enacted by December
31, 2011, costs associated with four specified categories of legislation (Medicare physicians’
payments, the estate and gift tax, the alternative minimum tax, and certain “middle-class” tax
cuts) would be excluded within limits set forth in the act. This provision has not been extended to
apply to legislation enacted after 2011.
Program Exemptions and Special Rules
for Sequestration
Certain programs are exempt from sequestration, and special rules govern the sequestration of
others. For the most part, these provisions are found in Sections 255 and 256 of the Balanced
Budget and Emergency Deficit Control Act (BBEDCA), as amended. These provisions would
apply to sequestration orders that occur under either the BCA or the Statutory PAYGO Act.
However, the application of these rules for certain programs might differ, depending on the
specific provision that triggers the sequestration.
Questions about the impact of sequestration on any particular program or account cannot be
answered strictly from reading the relevant provisions of law. If sequestration occurs, all
nonexempt “programs, projects, and activities” must be reduced by a uniform percentage (unless
provided otherwise under special rules; see “Section 256 Special Rules”). However, numerous
factors potentially affect the sequestration process, including the amount of budgetary resources
subject to sequestration and the interpretation of statutory requirements as they apply to specific
programs and activities.
Section 255 of BBEDCA (codified at 2 U.S.C. 905) identifies programs that are exempt from
sequestration, and Section 256 of BBEDCA (codified at 2 U.S.C. 906) establishes special rules.
Readers should note that these sections have been amended as recently as February 2010, under
the Statutory PAYGO Act; however, an actual sequestration has not occurred since the early
1990s.13 Thus, CRS cannot say with certainty how these provisions may be interpreted and
applied in a future sequestration, including the sequestration scheduled to occur in January 2013,
or how potential ambiguities in language may be resolved. The following should be considered as
only a general description of the law and not an attempted interpretation. Ultimately, the
execution and impact of any automatic spending reduction triggered under provisions of the BCA
or Statutory PAYGO will depend in large part on the legal interpretations and actions taken
by OMB. As discussed earlier, OMB issued a report in September 2012, pursuant to the
Sequestration Transparency Act (P.L. 112-155), which estimates the potential impact of the BCA
sequester slated for January 2013. That report provides preliminary insight into OMB’s likely
interpretation of specific provisions if the sequestration occurs as scheduled.
12 The CLASS Act was anticipated but not yet enacted at the time P.L. 111-139 was enacted. See CRS Report R40842,
Community Living Assistance Services and Supports (CLASS) Provisions in the Patient Protection and Affordable Care
Act (ACA), by Janemarie Mulvey and Kirsten J. Colello.
13 See CRS Report RS20398, Budget Sequesters: A Brief Review, by Robert Keith, dated March 8, 2004.
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Section 255 Program Exemptions14
Section 255 contains a list of programs and activities that are exempt from sequestration.15 Most
are mandatory, although a few are discretionary, most notably programs administered by the
Department of Veterans Affairs (VA). In many cases, specific budget accounts are provided, so
readers are referred to the statute for precise identification of exempted programs and activities
(see Appendix). While the law provides a list of programs and types of spending that are exempt
from sequestration, it provides no definitive list of programs or types of spending that would
absolutely be subject to sequestration. As stated above, the impact of sequestration on any given
program will depend on the actions and interpretations of OMB. The following are selected
programs and types of spending identified in Section 255 as exempt from sequestration; readers
are referred to the report issued by OMB in September 2012, pursuant to the Sequestration
Transparency Act, for a preliminary look at how OMB might interpret these provisions with
regard to individual accounts in implementing the sequestration scheduled for January 2013:
• Social Security benefits (old-age, survivors, and disability) and Tier 1 Railroad
Retirement benefits.
• All programs administered by the VA, and special benefits for certain World War
II veterans.16
• Net interest (budget function 900).
• Payments to individuals in the form of refundable tax credits.17
• Unobligated balances, carried over from prior years, for nondefense programs.
• At the President’s discretion (subject to notification to Congress), military
personnel accounts may be exempt entirely, or a lower sequestration percentage
may apply.18
• A list of “other” budget accounts and activities; readers should consult the statute
for a complete list. A few selected examples include
• activities resulting from private donations, bequests or voluntary
contributions, or financed by voluntary payments for good or services;
14 See Appendix for the complete statutory language of Section 255 of BBEDCA.
15 For a table showing some of the largest programs exempt from sequestration, including their FY2010 budgetary
authority and discretionary/mandatory status, see Table 4 in CRS Report R42013, The Budget Control Act of 2011:
How Do the Discretionary Caps and Automatic Spending Cuts Affect the Budget and the Economy?, by Marc Labonte
and Mindy R. Levit.
16 In its report issued pursuant to the Sequestration Transparency Act, OMB clarified that the exemption for VA
programs would also apply to the agency’s administrative expenses. Also, see discussion of special rules in the
“Veterans’ Medical Care” section, below.
17 These would include the Earned Income Tax Credit and the refundable portion of the Child Tax Credit (sometimes
referred to as the Additional Child Tax Credit.). In addition, the Patient Protection and Affordable Care Act (ACA, P.L.
111-148, as amended) established a refundable tax credit for individuals and families with incomes between specified
levels to help them purchase health insurance coverage; presumably this tax credit also would be exempt. See CRS
Report R42051, Budget Control Act: Potential Impact of Sequestration on Health Reform Spending, by C. Stephen
Redhead.
18 On July 31, 2012, Acting OMB Director Jeffrey Zients notified Congress of the President’s intent to exempt military
personnel accounts from sequestration: http://www.whitehouse.gov/sites/default/files/omb/legislative/letters/military-
personnel-letter-biden.pdf.
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• advances to the Unemployment Trust Fund;19
• payments to various retirement, health care, and disability trust funds;
• certain Tribal and Indian trust accounts; and
• Medical Facilities Guaranty and Loan Fund.
• Specified federal retirement and disability accounts and activities (consult the
statute for the complete list).
• Prior legal obligations of the federal government in specified budget accounts
(consult the statute for the complete list).20
• Low-income programs, including
• Academic Competitiveness/Smart Grant Program;21
• mandatory funding under the Child Care and Development Fund;
• Child Nutrition Programs (including School Lunch, School Breakfast, Child
and Adult Care Food, and others, but excluding Special Milk);
• Children’s Health Insurance Program (CHIP);
• Commodity Supplemental Food Program;
• Temporary Assistance for Needy Families (TANF) and the TANF
Contingency Fund;
• Family Support Programs;22
• Federal Pell Grants;
• Medicaid;
• Foster Care and Permanency Programs;
• Supplemental Nutrition Assistance Program (SNAP, formerly food stamps);
and
• Supplemental Security Income (SSI).
• Medicare Part D low-income premium and cost-sharing subsidies; Medicare Part
D catastrophic subsidy payments; and Qualified Individual (QI) premiums.23
• Specified economic recovery programs, including GSE Preferred Stock Purchase
Agreements, the Office of Financial Stability, and the Special Inspector General
for the Troubled Asset Relief Program.
19 Also see discussion of special rules in the “Unemployment Compensation” section, below.
20 Programs on the list include the Federal Crop Insurance Corporation Fund; the exemption of prior legal obligations
for agriculture is similar to a special rule under Section 256 of BBEDCA for the Commodity Credit Corporation
(discussed below).
21 Due to sunset provisions, no grants can be made under this program after June 30, 2011.
22 This account includes the Child Support Enforcement program. See discussion of special rules in the “Child Support
Enforcement” section, below.
23 These programs are not listed in Section 255, but instead Section 256(d) identifies them as programs exempt from
sequestration “in addition to” the programs listed in Section 255. See the “Medicare” section, below.
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• The following “split-treatment” programs, to the extent that the programs’
budgetary resources are subject to obligations limitations in appropriations bills:
• Federal Aid-Highways;
• Highway Traffic Safety Grants;
• Operations and Research NHTSA and National Driver Register;
• Motor Carrier Safety Operations and Programs;
• Motor Carrier Safety Grants;
• Formula and Bus Grants; and
• Grants-in-Aid for Airports.
Section 256 Special Rules
In addition to the exemptions in Section 255 of BBEDCA, Section 256 establishes special rules
for sequestration of certain programs or types of spending. Most Section 256 special rules apply
to mandatory programs, although some discretionary programs are included (e.g., certain health
programs). Once again, the effect of sequestration on any given program is subject to the
interpretation of the law’s provisions by OMB.
The following is a list of programs included in Section 256 (they are discussed in greater detail
below):
• student loans under Title IV-B and IV-D of the Higher Education Act;
• Medicare;
• community and migrant health centers, Indian health services and facilities, and
veterans’ medical care;
• Child Support Enforcement;
• federal pay;
• federal administrative expenses;
• Unemployment Compensation; and
• Commodity Credit Corporation.
Student Loans24
Special sequestration rules (Section 256(b)) apply to federal student loans made under the
William D. Ford Federal Direct Loan (DL) program during the period when a sequestration order
is in effect. Origination fees on DL program loans made during a period of sequestration must be
increased by the uniform percentage specified in the sequestration order.25 Loan origination fees
24 This section was prepared by David Smole, dsmole@crs.loc.gov, 7-0624.
25 Sections 251A(8) and 256(b) of BBEDCA. The William D. Ford Federal Direct Loan (DL) program is authorized
under Title IV, Part D of the Higher Education Act of 1965 (HEA), as amended. BBEDCA, §256(b) references federal
(continued...)
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are calculated as a proportion of the loan principal borrowed and are deducted proportionately
from each disbursement of the loan proceeds to the borrower. The origination fee helps offset the
costs of federal loan subsidies.
Four types of federal student loans are made under the DL program: Subsidized Stafford Loans,
Unsubsidized Stafford Loans, PLUS Loans, and Consolidation Loans.26 In general, for DL
program loans made on or after July 1, 2010, the origination fee on Subsidized Stafford Loans
and Unsubsidized Stafford loans is 1%, and the origination fee on PLUS Loans is 4%. The
Department of Education does not currently charge an origination fee on Consolidation Loans.
Under a sequestration order applicable to direct spending programs, origination fees on DL
program loans made during the sequestration period would be required to be increased by the
uniform percentage amount. As illustrated in Table 1, OMB estimates a uniform percentage
amount of 7.6% for nonexempt nondefense mandatory programs. Thus, the 1% origination fee on
Subsidized Stafford Loans and Unsubsidized Stafford Loans and the 4% origination fee on PLUS
loans would each be increased by 7.6% (i.e., the estimated uniform percentage factor).
Medicare27
Enacted in 1965, the Medicare program provides hospital and supplementary medical insurance
to Americans age 65 and older and to disabled persons, including those with end-stage renal
disease. Medicare enrollment has increased from 19 million in 1966 to about 50 million
beneficiaries in FY2012. CBO estimates that by 2022, the number of Medicare enrollees will
increase by about a third, to almost 67 million.28
Medicare consists of two parts financed through separate trust funds. Hospital Insurance (Part A)
pays health care providers for inpatient care that beneficiaries receive at hospitals; it also pays for
care at skilled nursing facilities, some home health care, and hospice services. Supplementary
Medical Insurance (Parts B and D) pays for physicians’ services, outpatient services at hospitals,
home health care, and outpatient prescription drugs. (Payments to private insurance plans under
Part C are financed by a blend of funds from the two trust funds.) Medicare is administered by the
Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human
Services (HHS).
CBO estimates that in FY2012 gross Medicare outlays will total $575.7 billion.29 Most of this
spending (about 99%) is comprised of mandatory spending that is primarily used to cover benefit
(...continued)
student loans made under HEA, Title IV, Part B and Part D, during the period when a sequestration order is in effect.
With the enactment of the SAFRA Act, part of the Health Care and Education Reconciliation Act of 2010 (HCERA;
P.L. 111-152), student loans are no longer being made under HEA, Title IV, Part B (the Federal Family Education
Loan (FFEL) program). As such, the special rule applies only to student loans made under HEA, Title IV, Part D (i.e.,
DL program loans).
26 For additional information on DL program loans, see CRS Report R40122, Federal Student Loans Made Under the
Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program: Terms and
Conditions for Borrowers, by David P. Smole.
27 This section was prepared by Patricia Davis, pdavis@crs.loc.gov, 7-7362.
28 Congressional Budget Office, March 2012 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/
attachments/43060_Medicare.pdf
29 Congressional Budget Office, March 2012 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/
(continued...)
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payments (i.e., payments to health care providers for their services). CBO projects that spending
on Medicare benefits will increase from $555.9 billion in FY2012 to about $1 trillion in
FY2022,30 an annual growth rate of 7%.
About 0.5% of Medicare mandatory outlays are used for administrative purposes, such as funding
quality improvement organizations, certain activities against fraud and abuse, and payments of
Part B premiums for Qualifying Individuals.31 A small portion of Medicare spending is
discretionary (about $6.3 billion in FY2012). This portion is used almost entirely for program
management activities, such as payments to contractors to process providers’ claims, funding for
beneficiary outreach and education, and the maintenance of Medicare’s information technology
(IT) infrastructure.
Sequestration Rules for Medicare
Section 256(d) of BBEDCA contains special rules for the Medicare program in case of a
sequestration. However, while BBEDCA ordinarily limits reduction of certain Medicare spending
to 4% under a sequestration order (which would apply in the case of a Statutory PAYGO
sequestration), the BCA limits the size of this reduction to 2%.
As stated earlier, if sequestration occurs all nonexempt programs must be reduced by a uniform
percentage. This percentage is calculated by OMB, based on the necessary amount of spending
reduction that must occur overall. Under a sequestration triggered by the BCA, if the uniform
percentage is less than 2%, it will be applied to all nonexempt accounts, including Medicare. If
the percentage is greater than 2%, then a 2% reduction will be made in Medicare spending, and
the uniform reduction percentage for the remaining programs will be recalculated and increased
by the amount necessary to achieve the total level of reductions needed. If sequestration were
triggered by Statutory PAYGO, the process would be the same but Medicare sequestration would
be limited to 4%.
Under sequestration, Medicare’s benefit structure would generally remain unchanged (i.e.,
beneficiaries would not see a change in their Medicare coverage). Additionally, spending for
certain Medicare programs and activities are exempt from sequestration and would therefore not
be reduced under a sequestration order. These include (1) Part D low-income subsidies;32 (2) the
Part D catastrophic subsidy; and (3) Qualified Individual (QI) premiums.33
(...continued)
attachments/43060_Medicare.pdf
30 Congressional Budget Office, March 2012 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/
attachments/43060_Medicare.pdf
31 The Qualifying Individual Program (QI) is one of the Medicare Savings Programs and covers the Part B premium for
eligible individuals. To be eligible for the QI program, one must be entitled to Medicare Part A, have an income of at
least 120% of the Federal Poverty Level (FPL) but less than 135% of FPL with resources not exceeding twice the limit
for SSI eligibility, and not be otherwise eligible for Medicaid benefits. Mandatory funding is provided through 2012.
32 See CRS Report R40425, Medicare Primer, coordinated by Patricia A. Davis for an overview of the Medicare Part D
benefit.
33 The report issued by OMB in September 2012, pursuant to the Sequestration Transparency Act, specified that certain
additional Medicare-related funds would also be exempt from sequestration under Section 225(g)(1)(A) of BBEDCA.
Mandatory spending for Quality Improvement Organizations and discretionary spending for the Office of Medicare
Hearings and Appeals would be exempt as intragovernmental payments; and mandatory payments to health care trust
funds are specifically listed as exempt in Section 225(g)(1)(A).
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For payments made under Medicare Parts A and B, the percentage reductions are to be made to
individual payments to providers for services (e.g., hospital and physician services). In the case of
Parts C and D, reductions are to be made to the monthly payments to the private plans that
administer these parts of Medicare. Reductions are to be made at a uniform rate and are not to
exceed 2%. In the case of inpatient services, the services are considered to be furnished on the
date of the individual’s discharge from the inpatient facility. For services paid on a reasonable
cost basis,34 the reduction is to be applied to payments for such services incurred at any time
during each cost reporting period during the sequestration period, for the portion of the cost
reporting period that occurs during the effective period of the order. For Part B services provided
under assignment,35 the reduced payment would be considered payment in full and the Medicare
beneficiary would not pay higher copayments to make up for the reduced amount. CBO estimates
that Medicare benefit spending will be reduced by about $99.3 billion over the nine-year
sequestration period.36
Section 256(d) of the BBEDCA specifies that the Secretary may not take into account any
reductions in payment amounts under sequestration for purposes of computing any adjustments to
Medicare payment rates, including the Part C growth percentage, the Part D annual growth rate,
and the determination of Medicare Part D risk corridors.37 In other words, annual provider and
plan payment updates may be determined as if the reductions under sequestration had not
taken place.
Special Considerations Regarding Medicare
The budgetary baseline that must be used in implementing a sequestration has special
implications with regard to Medicare. For direct spending, the baseline is to be calculated by
assuming that the laws providing or creating direct spending will operate in the manner specified,
and that funding for entitlement authority is adequate to make all required payments.38
Specifically, CBO’s projections of Medicare spending incorporate the assumption that Medicare
spending will be constrained beginning in 2013 by the sustainable growth rate (SGR) mechanism
used to calculate the fees paid for physicians’ services.39 Under current law, those fees will be
reduced by about 27% beginning in January 2013 and by additional amounts in subsequent years.
If future legislation overrides the scheduled reductions, as has happened every year since 2003,
then spending for Medicare will be greater than the amounts projected in the baseline. CBO
34 Most providers are paid under a prospective payment system or fee schedule. Some types of providers, such as
Critical Access Hospitals, are paid on a reasonable cost basis under which payments are based on actual costs incurred.
Reasonable cost is defined at Social Security Act §1861(v).
35 Assignment is an agreement by a doctor, provider, or supplier to be paid directly by Medicare, to accept the payment
amount Medicare approves for the service, and not to bill the beneficiary for any more than the Medicare deductible
and coinsurance (if applicable). Providers that don’t accept assignment may charge more than the Medicare-approved
amount.
36 Congressional Budget Office, March 2012 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/
attachments/43060_Medicare.pdf
37 Information on Medicare provider payments and the determination of updates may be found in CRS Report
RL30526, Medicare Payment Updates and Payment Rates, coordinated by Paulette C. Morgan.
38 BBEDCA §257(b)(1).
39 See CRS Report R40907, Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR) System, by
Jim Hahn and Janemarie Mulvey.
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estimated a 10-year cost of freezing payments at current levels at close to $300 billion for 2012-
2021; if payments were increased by a medical inflation factor, the cost could be even higher.40
It is also unclear how reductions under sequestration will affect or be affected by the operations
of the Independent Payment Advisory Board (IPAB).41 The IPAB, established by the Patient
Protection and Affordable Care Act (ACA, P.L. 111-148), is responsible for restraining the growth
rate of Medicare spending per enrollee. If the growth of such spending is projected to exceed
specified targets, the IPAB is required to submit proposals to reduce it, and the Secretary must
implement these proposals unless the Congress acts to change them. While CBO’s baseline
projections incorporate estimates of potential savings from the IPAB process, it remains to be
determined (1) whether the target growth rate would be calculated using the expected rate outside
of sequestration or under sequestration; (2) whether IPAB would be able to find and recommend
additional savings on top of the sequestered amounts; and (3) how savings associated with future
reductions under IPAB would factor into the baseline used to determine needed reductions under
sequestration.
There have also been some concerns that although Medicare benefits are not to be reduced under
sequestration, reductions in provider payments, in addition to reductions already mandated under
ACA,42 could discourage some providers from accepting Medicare patients. For instance, the
Medicare Trustees have cautioned that reductions to certain providers under ACA may not be
sustainable over the long term,43 and the Office of the Actuary for CMS has provided alternative
projections assuming that these reductions are gradually phased out beginning in 2020.44
Additionally, there is concern that costs could be shifted to other third-party payers or
beneficiaries to make up for the additional decrease in payments. For instance, private payers
could see increased costs or Medicare Advantage or Prescription Drug Sponsors could design
their plans in future years so that Medicare enrollees pay higher premiums and/or increased cost
sharing.
Further, while Section 257 of the BBEDCA specifies that “the receipts and disbursements of the
Hospital Insurance Trust Fund shall be included in all calculations,” it does not address how
beneficiary Part B premiums would be determined under sequestration. As Part B premiums are
based on a percentage of expected Part B spending and such spending would be lower under
sequestration, it remains to be determined whether premiums would be adjusted downward to
reflect these lower expected costs.
40 Congressional Budget Office, Medicare’s Payments to Physicians: The Budgetary Impact of Alternative Policies,
June 16, 2011, http://www.cbo.gov/ftpdocs/122xx/doc12240/SGR_Menu_2011.pdf.
41 See CRS Report R41511, The Independent Payment Advisory Board, by Jim Hahn and Christopher M. Davis.
42 See CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act (PPACA):
Summary and Timeline, coordinated by Patricia A. Davis.
43 Statement of Actuarial Opinion of the 2012 Annual Report of the Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds, https://www.cms.gov/Research-Statistics-Data-
and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads//tr2012.pdf.
44 2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, Appendix C, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-
and-Reports/ReportsTrustFunds/downloads//tr2012.pdf.
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Health Centers, Indian Health, and Veterans’ Medical Care
Health Centers45
Community and migrant health centers are two types of federally funded health centers: nonprofit
entities that receive grants to provide primary care to people who experience financial,
geographic, cultural, or other barriers to health care. They are administered by the Health
Resources and Services Administration (HRSA) within the Department of Health and Human
Services (HHS). In addition to these two types of health centers, HRSA provides grants to support
health centers for the homeless and health centers for residents of public housing.
Section 256(e) of BBEDCA limits the amount of funding that can be reduced from community
and migrant health centers under a sequestration to 2%. At the time of BBEDCA’s enactment in
1985, there were four separate health center programs administered by HRSA and funded under
HRSA’s budget account. The Health Centers Consolidation Act of 1996 (P.L. 104-299) combined
the four health center programs—community health centers, migrant health centers, health
centers for the homeless, and health centers for residents of public housing—into Section 330 of
the Public Health Service Act, which receives a single discretionary appropriation as part of the
HRSA budget. With regard to the sequester scheduled to take place on January 2, 2013, however,
OMB has determined that this special rule for community and migrant health centers applies only
to mandatory funds and not to discretionary funds.46 Given this determination, the 2% limit
applies to mandatory appropriations that the health center program received under the Patient
Protection and Affordable Care Act (ACA, P.L. 111-148), from FY2011 through FY2015.47
Indian Health Service48
The Indian Health Service (IHS) in HHS is responsible for providing comprehensive medical and
environmental health services for approximately 1.9 million American Indians and Alaska
Natives who belong to 565 federally recognized tribes located in 35 states. Health care is
provided through a system of facilities and programs operated by IHS, tribes and tribal groups,
and urban Indian organizations. IHS is funded by two discretionary budget accounts—Indian
Health Services and Indian Health Facilities. However, IHS also receives reimbursements from
Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) for services provided
at IHS facilities for beneficiaries eligible for these programs, and in FY2012 and FY2013, IHS
will receive mandatory appropriations for diabetes programs.49
Under Section 256(e) of BBEDCA, sequestration may only reduce funding for the two IHS
accounts by 2% in any fiscal year. With regard to the sequester scheduled to take place on January
2, 2013, however, OMB has determined that this special rule (i.e., the 2% limit) will only apply to
mandatory funds that IHS receives (i.e., diabetes program funding). The IHS discretionary
45 This section was prepared by Elayne Heisler, eheisler@crs.loc.gov, 7-4453.
46 See discussion on pp. 4-5 of OMB Report Pursuant to the Sequestration Transparency Act, September 2012.
47 See CRS Report R41301, Appropriations and Fund Transfers in the Patient Protection and Affordable Care Act
(PPACA), by C. Stephen Redhead.
48 This section was prepared by Elayne Heisler, eheisler@crs.loc.gov, 7-4453.
49 Appropriated under P.L. 111-309.
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
appropriation thus would be fully sequesterable at OMB’s estimated rate of 8.2%.50 OMB did not
include reimbursements that IHS receives from other federal programs, or rent that IHS receives
from renting staff quarters in the amount that could be sequestered from the IHS budget (i.e., it
exempted these amounts from sequestration).
Veterans’ Medical Care51
The VA, through the Veterans Health Administration (VHA), operates the nation’s largest
integrated direct health care delivery system.52 Veterans’ medical care is a discretionary program,
and eligibility for VA medical care is based on veteran status, presence of service-connected
disabilities or exposures, income, and/or other factors, such as status as a former prisoner of war
or receipt of a Purple Heart.53
Under current law, and as originally enacted, Section 256(e) of BBEDCA allows a maximum 2%
reduction in budget authority for VA medical care for any fiscal year. However, Section 255 of
BBEDCA, as amended in 2010 (P.L. 111-139), specifically excludes from sequestration all
programs administered by the VA, which includes veterans’ medical care. This apparent
discrepancy between the two sections of the law raised questions about whether VA will be totally
exempt from sequestration or whether medical care will be subject to a maximum permissible 2%
reduction in budget authority, if a BCA-triggered sequestration occurs as scheduled on January 2,
2013. On April 23, 2012, OMB issued a letter stating that “all programs administered by the VA,
including Veterans’ Medicare Care, are exempt from sequestration under Section 255(b).”54 In its
report issued pursuant to the Sequestration Transparency Act, OMB further clarified that
administration accounts (which include, among others, construction projects, general
administration, and information technology systems) are exempt.55 In other words, all accounts of
the Department of Veterans Affairs are exempt from sequestration.
Child Support Enforcement56
The Child Support Enforcement (CSE) program is a mandatory spending program that seeks to
enhance the well-being of children by obtaining child support, including financial and medical
support, from noncustodial parents through services and activities that locate noncustodial
parents, establish paternity, establish child support obligations, and collect and monitor child
support payments. The CSE program is a federal-state program, administered by HHS. The
50 See discussion on pages 4 and 5 of OMB Report Pursuant to the Sequestration Transparency Act, September 2012.
51 This section was prepared by Sidath Panangala, spanangala@crs.loc.gov, 7-0623.
52 U.S. Department of Veterans Affairs, FY 2010 Performance and Accountability Report, Washington, DC, November
17, 2008, p. I-20. Established on January 3, 1946, as the Department of Medicine and Surgery by P.L. 79-293,
succeeded in 1989 by the Veterans Health Services and Research Administration, renamed the Veterans Health
Administration in 1991.
53 For more information on eligibility for VA health care, see CRS Report R42747, Health Care for Veterans: Answers
to Frequently Asked Questions, by Sidath Viranga Panangala and Erin Bagalman.
54 Letter from Steven D. Aitken, Deputy General Counsel Office of Management and Budget (OMB), to Julia C. Matta,
Assistant General Counsel for Appropriations and Budget, U.S. Government Accountability Office, April 23, 2012,
http://www.murray.senate.gov/public/_cache/files/f8868d52-eec0-43a5-b5c8-cecbff4596e/VASequesterQuestion.pdf.
55 OMB Report Pursuant to the Sequestration Transparency Act, September 2012, pp. 160-165.
56 This section was prepared by Carmen Solomon-Fears, csolomonfears@crs.loc.gov, 7-7306.
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federal government reimburses each state for 66% of all expenditures on CSE activities and also
provides states with an incentive payment to encourage them to operate effective CSE programs.
Section 256(f) of BBEDCA stipulates that any required reduction in CSE program expenditures
or CSE incentive payments must be accomplished by reducing the federal matching rate for state
CSE program costs. However, subsequent to enactment of this provision, Section 255 was
amended (in 1997, by P.L. 105-33), and specifically excludes from sequestration Family Support
Programs, which include the CSE program.
Federal Pay57
In general, for purposes of sequestration, Section 256(g) provides that federal pay under a
statutory pay system—the General Schedule (GS), Foreign Service (FS) pay schedule, and
Department of Medicine and Surgery at the Department of Veterans Affairs (VA) pay schedule—
is subject to reduction in the same manner as other administrative expense components of the
federal budget (see “Federal Administrative Expenses,” immediately below).58 Likewise,
elements of military pay59 are subject to such reduction. Such an order may not, however, reduce
or have the effect of reducing the rate of pay an employee is entitled to under the GS, FS, or VA
pay systems or any increase in special pay rates authorized by 5 U.S.C. §5305. The order also
may not reduce or have the effect of reducing the rate of any element of military pay an
individual is entitled to or any increase in rates of pay authorized by 37 U.S.C. §1009, or any
other provision of law.
The conference report (H. Rept. 99-433) that accompanied the original BBEDCA explained the
provision as follows:
The conference agreement provides that rates of pay for civilian employees (and rates of
basic pay, basic subsistence allowances and basic quarters allowances for members of the
uniformed services) may not be reduced pursuant to a sequestration order. The agreement
retains the House position that a scheduled pay increase may not be reduced pursuant to an
order and the Federal pay be treated as other components of administrative expenses. The
conferees urge program managers to employ all other options available to them in order to
achieve savings required under a sequestration order and resort to personnel furloughs only if
other methods prove insufficient.60
57 This section was prepared by Barbara Schwemle, bschwemle@crs.loc.gov, 7-8655.
58 Budgetary resources available for federal pay, which would be subject to sequestration as part of the reduction of
administrative expenses, are detailed in the September 2012 OMB report issued pursuant to the Sequestration
Transparency Act under the “Salaries and Expenses” function for each account.
59 The term “elements of military pay” means the monthly basic pay adjustments for members of the uniformed
services authorized by 37 U.S.C. §1009, allowances provided to members of the uniformed services under 37 U.S.C.
§§403a and 405, and cadet pay and midshipman pay under 37 U.S.C. §203(c). The term “uniformed services” means
the Army, Navy, Air Force, Marine Corps, Coast Guard, National Oceanic and Atmospheric Administration, and
Public Health Service.
60 Congressional Record, vol. 131, December 10, 1985, p. 35776.
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Federal Administrative Expenses61
In general, under Section 256(h) of BBEDCA, federal administrative expenses are subject to
sequestration, regardless of whether they are incurred in connection with a program, project,
activity, or account that is otherwise exempt or subject to a special rule.62 As examples, while
Social Security and Supplemental Security Income (SSI) are exempt from sequestration, the
federal administrative expenses associated with these programs would generally not be exempt.
With regard to the sequester scheduled to take place on January 2, 2013, however, OMB has
determined that the special rule for federal administrative expenses applies only to mandatory
funds and not discretionary funds.63 This means, according to OMB, that mandatory
administrative expenses for an otherwise exempt program are subject to sequestration, but that
discretionary administrative expenses for an exempt program are not. Therefore, since federal
administrative expenses for Social Security and SSI are discretionary (although program benefits
are mandatory), they would not be subject to sequestration on January 2, 2013, despite the special
rule described above.
Section 256 also states that federal payments to state and local governments that match or
reimburse these governments for their administrative costs are not considered “federal
administrative expenses” and are subject to sequestration only to the extent that the relevant
federal program is subject to sequestration. In other words, if a program is exempt under Section
255, then federal payments to states for the costs of administering that program also are exempt.
(However, certain unemployment compensation payments are not covered by this provision, as
noted below.)
Unemployment Compensation64
Section 256(i) of the BBEDCA reiterates the exemption from sequestration (provided under
Section 255) of federal loans to the states for payment of unemployment benefits. Additionally,
Section 256(i) exempts regular unemployment compensation (UC) benefits from sequestration.
This exemption is extended to UC for former federal workers (UCFE) and UC for former
servicemembers (UCX). Generally, these benefits have a duration of up to 26 weeks and are paid
by state unemployment taxes. However, Section 256 specifically does not exempt administrative
grants to the states and the federal share of the permanently authorized extended benefit (EB)
program from sequestration. States would be required to continue to pay their share of EB
payments. If a state’s unemployment insurance law allows it, the state may reduce the EB benefit
amount by a percentage that does not exceed the percentage by which the federal share of EB has
been reduced. The current authorization of the temporary emergency unemployment
compensation (EUC08) benefit ends at the end of calendar year 2012. If the authorization of the
EUC08 benefit were extended, the EUC08 benefit would be subject to sequestration unless new
legislation directing a different treatment were to be enacted.
61 The BBEDCA does not define administrative expenses. For purposes of its report issued pursuant to the
Sequestration Transparency Act, OMB states that “’administrative expenses’ for typical government programs are
defined as the object classes for personnel compensation, travel, transportation, communication, equipment, supplies,
materials, and other services.”
62 The statute lists several federal financial services entities that would not be covered by this section (e.g., Comptroller
of the Currency, Federal Deposit Insurance Corporation, and others).
63 See discussion on pp. 4-5 of OMB Report Pursuant to the Sequestration Transparency Act, September 2012.
64 This section was prepared by Julie Whittaker, jwhittaker@crs.loc.gov, 7-2587.
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Commodity Credit Corporation65
The Commodity Credit Corporation (CCC) is the funding mechanism for the mandatory spending
of the U.S. Department of Agriculture (USDA) for farm commodity support and certain
conservation programs. The CCC is a wholly owned government corporation that has the legal
authority to borrow up to $30 billion at any one time from the U.S. Treasury. Its borrowing
authority is replenished annually in the Agriculture appropriations bill by a “such sums as are
necessary” appropriation. Most spending for these programs was authorized by the 2008 farm bill
(P.L. 110-246).
Section 256(j) says that sequestration should not restrict the CCC’s authority to discharge its
primary duties. Specifically, it states that commodity loan contracts entered into before the
sequestration order shall not be reduced.66 Section 256 says, though, that loan contracts after the
sequestration order shall be reduced. The farm commodity programs have evolved to include
other support mechanisms than the loan program, and the loan program is no longer the primary
outlay. It is unclear whether the Section 256 special rule applies to any of the more recent farm
commodity, conservation, and other programs that are funded by the CCC.
65 This section was prepared by Jim Monke, jmonke@crs.loc.gov, 7-9664.
66 Commodity loans are one part of the farm support program that makes government loans to farmers at farm-bill
specified support prices per unit of commodity. Farmers can use these loans as financing to pay their expenses and, if
market prices are below the support price, can benefit financially by the difference between the support price and the
market price. Outlays of the federal crop insurance program are not funded under the CCC but instead have their own
mandatory funding mechanism, addressed in Section 255, that exempts the prior legal obligations of the Federal Crop
Insurance Fund from sequestration.
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Appendix. Section 255 of the Balanced Budget and
Emergency Deficit Control Act, as Amended
SEC. 255. (2 U.S.C. 905) EXEMPT PROGRAMS AND ACTIVITIES.
(a) SOCIAL SECURITY BENEFITS AND TIER I RAILROAD RETIREMENT
BENEFITS.—Benefits payable under the old-age, survivors, and disability insurance program established
under title II of the Social Security Act (42 U.S.C. 401 et seq.), and benefits payable under section 231b(a),
231b(f)(2), 231c(a), and 231c(f) of title 45 United States Code, shall be exempt from reduction under any
order issued under this part.
(b) VETERANS PROGRAMS.—The following programs shall be exempt from reduction under any order
issued under this part:
All programs administered by the Department of Veterans Affairs.
Special Benefits for Certain World War II Veterans (28–0401–0–1–701).
(c) NET INTEREST.—No reduction of payments for net interest (all of major functional category 900)
shall be made under any order issued under this part.
(d) REFUNDABLE INCOME TAX CREDITS.—Payments to individuals made pursuant to provisions of
the Internal Revenue Code of 1986 establishing refundable tax credits shall be exempt from reduction
under any order issued under this part.
(e) NON-DEFENSE UNOBLIGATED BALANCES.—Unobligated balances of budget authority carried
over from prior fiscal years, except balances in the defense category, shall be exempt from reduction under
any order issued under this part.
(f) OPTIONAL EXEMPTION OF MILITARY PERSONNEL.—
(1) IN GENERAL.—The President may, with respect to any military personnel account, exempt that
account from sequestration or provide for a lower uniform percentage reduction than would otherwise
apply.
(2) LIMITATION.—The President may not use the authority provided by paragraph (1) unless the
President notifies the Congress of the manner in which such authority will be exercised on or before the
date specified in section 254(a) for the budget year.
(g) OTHER PROGRAMS AND ACTIVITIES.—
(1)(A) The following budget accounts and activities shall be exempt from reduction under any order issued
under this part:
Activities resulting from private donations, bequests, or voluntary contributions to the Government.
Activities financed by voluntary payments to the Government for goods or services to be provided for such
payments.
Administration of Territories, Northern Mariana Islands Covenant grants (14–0412–0–1–808).
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Advances to the Unemployment Trust Fund and Other Funds (16–0327–0–1–600).
Black Lung Disability Trust Fund Refinancing (16–0329–0–1–601).
Bonneville Power Administration Fund and borrowing authority established pursuant to section 13 of
Public Law 93–454 (1974), as amended (89–4045–0–3–271).
Claims, Judgments, and Relief Acts (20–1895–0–1–808).
Compact of Free Association (14–0415–0–1–808).
Compensation of the President (11–0209–01–1–802).
Comptroller of the Currency, Assessment Funds (20–8413–0–8–373).
Continuing Fund, Southeastern Power Administration (89–5653–0–2–271).
Continuing Fund, Southwestern Power Administration (89–5649–0–2–271).
Dual Benefits Payments Account (60–0111–0–1–601).
Emergency Fund, Western Area Power Administration (89–5069–0–2–271).
Exchange Stabilization Fund (20–4444–0–3–155).
Farm Credit Administration Operating Expenses Fund (78–4131–0–3–351).
Farm Credit System Insurance Corporation, Farm Credit Insurance Fund (78–4171–0–3–351).
Federal Deposit Insurance Corporation, Deposit Insurance Fund (51–4596–0–4–373).
Federal Deposit Insurance Corporation, FSLIC Resolution Fund (51–4065–0–3–373).
Federal Deposit Insurance Corporation, Noninterest Bearing Transaction Account Guarantee (51–4458–0–
3–373).
Federal Deposit Insurance Corporation, Senior Unsecured Debt Guarantee (51–4457–0–3–373).
Federal Home Loan Mortgage Corporation (Freddie Mac).
Federal Housing Finance Agency, Administrative Expenses (95–5532–0–2–371).
Federal National Mortgage Corporation (Fannie Mae).
Federal Payment to the District of Columbia Judicial Retirement and Survivors Annuity Fund (20–1713–0–
1–752).
Federal Payment to the District of Columbia Pension Fund (20–1714–0–1–601).
Federal Payments to the Railroad Retirement Accounts (60–0113–0–1–601).
Federal Reserve Bank Reimbursement Fund (20–1884–0–1–803).
Financial Agent Services (20–1802–0–1–803).
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Foreign Military Sales Trust Fund (11–8242–0–7–155).
Hazardous Waste Management, Conservation Reserve Program (12–4336–0–3–999).
Host Nation Support Fund for Relocation (97–8337–0–7–051).
Internal Revenue Collections for Puerto Rico (20–5737–0–2–806).
Intragovernmental funds, including those from which the outlays are derived primarily from resources paid
in from other government accounts, except to the extent such funds are augmented by direct appropriations
for the fiscal year during which an order is in effect.
Medical Facilities Guarantee and Loan Fund (75–9931–0–3–551).
National Credit Union Administration, Central Liquidity Facility (25–4470–0–3–373).
National Credit Union Administration, Corporate Credit Union Share Guarantee Program (25–4476–0–3–
376).
National Credit Union Administration, Credit Union Homeowners Affordability Relief Program (25–4473–
0–3–371).
National Credit Union Administration, Credit Union Share Insurance Fund (25–4468–0–3–373).
National Credit Union Administration, Credit Union System Investment Program (25–4474–0–3–376).
National Credit Union Administration, Operating fund (25–4056–0–3–373).
National Credit Union Administration, Share Insurance Fund Corporate Debt Guarantee Program (25–
4469–0–3–376).
National Credit Union Administration, U.S. Central Federal Credit Union Capital Program (25–4475–0–3–
376).
Office of Thrift Supervision (20–4108–0–3–373).
Panama Canal Commission Compensation Fund (16–5155–0–2–602).
Payment of Vietnam and USS Pueblo prisoner-of-war claims within the Salaries and Expenses, Foreign
Claims Settlement account (15–0100–0–1–153).
Payment to Civil Service Retirement and Disability Fund (24–0200–0–1–805).
Payment to Department of Defense Medicare-Eligible Retiree Health Care Fund (97–0850–0–1–054).
Payment to Judiciary Trust Funds (10–0941–0–1–752).
Payment to Military Retirement Fund (97–0040–0–1–054).
Payment to the Foreign Service Retirement and Disability Fund (19–0540–0–1–153).
Payments to Copyright Owners (03–5175–0–2–376).
Payments to Health Care Trust Funds (75–0580–0–1–571).
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Payment to Radiation Exposure Compensation Trust Fund (15–0333–0–1–054).
Payments to Social Security Trust Funds (28–0404–0–1–651).
Payments to the United States Territories, Fiscal Assistance (14–0418–0–1–806).
Payments to trust funds from excise taxes or other receipts properly creditable to such trust funds.
Payments to widows and heirs of deceased Members of Congress (00–0215–0–1–801).
Postal Service Fund (18–4020–0–3–372).
Radiation Exposure Compensation Trust Fund (15–8116–0–1–054).
Reimbursement to Federal Reserve Banks (20–0562–0–1–803).
Salaries of Article III judges.
Soldiers and Airmen’s Home, payment of claims (84–8930–0–7–705).
Tennessee Valley Authority Fund, except nonpower programs and activities (64–4110–0–3–999).
Tribal and Indian trust accounts within the Department of the Interior which fund prior legal obligations of
the Government or which are established pursuant to Acts of Congress regarding Federal management of
tribal real property or other fiduciary responsibilities, including but not limited to Tribal Special Fund (14–
5265–0–2–452),
Tribal Trust Fund (14–8030–0–7–452),
White Earth Settlement (14–2204–0–1–452), and Indian Water Rights and Habitat Acquisition (14–5505–
0–2–303).
United Mine Workers of America 1992 Benefit Plan (95–8260–0–7–551).
United Mine Workers of America 1993 Benefit Plan (95–8535–0–7–551).
United Mine Workers of America Combined Benefit Fund (95–8295–0–7–551).
United States Enrichment Corporation Fund (95–4054–0–3–271).
Universal Service Fund (27–5183–0–2–376).
Vaccine Injury Compensation (75–0320–0–1–551).
Vaccine Injury Compensation Program Trust Fund (20–8175–0–7–551).
(B) The following Federal retirement and disability accounts and activities shall be exempt from reduction
under any order issued under this part:
Black Lung Disability Trust Fund (20–8144–0–7–601).
Central Intelligence Agency Retirement and Disability System Fund (56–3400–0–1–054).
Civil Service Retirement and Disability Fund (24–8135–0–7–602).
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Comptrollers general retirement system (05–0107–0–1–801).
Contributions to U.S. Park Police annuity benefits, Other Permanent Appropriations (14–9924–0–2–303).
Court of Appeals for Veterans Claims Retirement Fund (95–8290–0–7–705).
Department of Defense Medicare-Eligible Retiree Health Care Fund (97–5472–0–2–551).
District of Columbia Federal Pension Fund (20–5511–0–2–601).
District of Columbia Judicial Retirement and Survivors Annuity Fund (20–8212–0–7–602).
Energy Employees Occupational Illness Compensation Fund (16–1523–0–1–053).
Foreign National Employees Separation Pay (97–8165–0–7–051).
Foreign Service National Defined Contributions Retirement Fund (19–5497–0–2–602).
Foreign Service National Separation Liability Trust Fund (19–8340–0–7–602).
Foreign Service Retirement and Disability Fund (19–8186–0–7–602).
Government Payment for Annuitants, Employees Health Benefits (24–0206–0–1–551).
Government Payment for Annuitants, Employee Life Insurance (24–0500–0–1–602).
Judicial Officers’ Retirement Fund (10–8122–0–7–602).
Judicial Survivors’ Annuities Fund (10–8110–0–7–602).
Military Retirement Fund (97–8097–0–7–602).
National Railroad Retirement Investment Trust (60–8118–0–7–601).
National Oceanic and Atmospheric Administration retirement (13–1450–0–1–306).
Pensions for former Presidents (47–0105–0–1–802).
Postal Service Retiree Health Benefits Fund (24–5391–0–2–551).
Public Safety Officer Benefits (15–0403–0–1–754).
Rail Industry Pension Fund (60–8011–0–7–601).
Retired Pay, Coast Guard (70–0602–0–1–403).
Retirement Pay and Medical Benefits for Commissioned Officers, Public Health Service (75–0379–0–1–
551).
Special Benefits for Disabled Coal Miners (16–0169–0–1–601).
Special Benefits, Federal Employees’ Compensation Act (16–1521–0–1–600).
Special Workers Compensation Expenses (16–9971–0–7–601).
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Tax Court Judges Survivors Annuity Fund (23–8115–0–7–602).
United States Court of Federal Claims Judges’ Retirement Fund (10–8124–0–7–602).
United States Secret Service, DC Annuity (70–0400–0–1–751).
Voluntary Separation Incentive Fund (97–8335–0–7–051).
(2) Prior legal obligations of the Government in the following budget accounts and activities shall be
exempt from any order issued under this part:
Biomass Energy Development (20–0114–0–1–271).
Check Forgery Insurance Fund (20–4109–0–3–803).
Credit liquidating accounts.
Credit reestimates.
Employees Life Insurance Fund (24–8424–0–8–602).
Federal Aviation Insurance Revolving Fund (69–4120– 0–3–402).
Federal Crop Insurance Corporation Fund (12–4085–0–3–351).
Federal Emergency Management Agency, National Flood Insurance Fund (58–4236–0–3–453).
Geothermal resources development fund (89–0206–0–1–271).
Low-Rent Public Housing—Loans and Other Expenses (86–4098–0–3–604).
Maritime Administration, War Risk Insurance Revolving Fund (69–4302–0–3–403).
Natural Resource Damage Assessment Fund (14–1618–0–1–302).
Overseas Private Investment Corporation, Noncredit Account (71–4184–0–3–151).
Pension Benefit Guaranty Corporation Fund (16–4204–0–3–601).
San Joaquin Restoration Fund (14–5537–0–2–301).
Servicemembers’ Group Life Insurance Fund (36–4009–0–3–701).
Terrorism Insurance Program (20–0123–0–1–376).
(h) LOW-INCOME PROGRAMS.—The following programs shall be exempt from reduction under any
order issued under this part:
Academic Competitiveness/Smart Grant Program (91–0205–0–1–502).
Child Care Entitlement to States (75–1550–0–1–609).
Child Enrollment Contingency Fund (75–5551–0–2–551).
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
Child Nutrition Programs (with the exception of special milk programs) (12–3539–0–1–605).
Children’s Health Insurance Fund (75–0515–0–1–551).
Commodity Supplemental Food Program (12–3507–0–1–605).
Contingency Fund (75–1522–0–1–609).
Family Support Programs (75–1501–0–1–609).
Federal Pell Grants under section 401 Title IV of the Higher Education Act.
Grants to States for Medicaid (75–0512–0–1–551).
Payments for Foster Care and Permanency (75–1545–0–1–609).
Supplemental Nutrition Assistance Program (12–3505–0–1–605).
Supplemental Security Income Program (28–0406–0–1–609).
Temporary Assistance for Needy Families (75–1552–0–1–609).
(i) ECONOMIC RECOVERY PROGRAMS.—The following programs shall be exempt from reduction
under any order issued under this part:
GSE Preferred Stock Purchase Agreements (20–0125–0–1–371).
Office of Financial Stability (20–0128–0–1–376).
Special Inspector General for the Troubled Asset Relief Program (20–0133–0–1–376).
(j) SPLIT TREATMENT PROGRAMS.—Each of the following programs shall be exempt from any order
under this part to the extent that the budgetary resources of such programs are subject to obligation
limitations in appropriations bills:
Federal-Aid Highways (69–8083–0–7–401).
Highway Traffic Safety Grants (69–8020–0–7–401).
Operations and Research NHTSA and National Driver Register (69–8016–0–7–401).
Motor Carrier Safety Operations and Programs (69–8159–0–7–401).
Motor Carrier Safety Grants (69–8158–0–7–401).
Formula and Bus Grants (69–8350–0–7–401).
Grants-In-Aid for Airports (69–8106–0–7–402).
(j) IDENTIFICATION OF PROGRAMS.—For purposes of subsections (b), (g), and (h), each account is
identified by the designated budget account identification code number set forth in the Budget of the United
States Government 2010–Appendix, and an activity within an account is designated by the name of the
activity and the identification code number of the account.
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Budget “Sequestration” and Selected Program Exemptions and Special Rules
SEC. 256. (2 U.S.C. 906) [excerpt]
(7) EXEMPTIONS FROM SEQUESTRATION.—In addition to the programs and activities specified in
section 255, the following shall be exempt from sequestration under this part:
(A) PART D LOW-INCOME SUBSIDIES.—Premium and cost-sharing subsidies under section 1860D–14
of the Social Security Act.
(B) PART D CATASTROPHIC SUBSIDY.—Payments under section 1860D–15(b) and (e)(2)(B) of the
Social Security Act.
(C) QUALIFIED INDIVIDUAL (QI) PREMIUMS.—Payments to States for coverage of
Medicare cost-sharing for certain low-income Medicare beneficiaries under section 1933 of the
Social Security Act.
Author Contact Information
Karen Spar, Coordinator
Barbara L. Schwemle
Specialist in Domestic Social Policy and Division
Analyst in American National Government
Research Coordinator
bschwemle@crs.loc.gov, 7-8655
kspar@crs.loc.gov, 7-7319
Patricia A. Davis
David P. Smole
Specialist in Health Care Financing
Specialist in Education Policy
pdavis@crs.loc.gov, 7-7362
dsmole@crs.loc.gov, 7-0624
Elayne J. Heisler
Carmen Solomon-Fears
Analyst in Health Services
Specialist in Social Policy
eheisler@crs.loc.gov, 7-4453
csolomonfears@crs.loc.gov, 7-7306
Jim Monke
Julie M. Whittaker
Specialist in Agricultural Policy
Specialist in Income Security
jmonke@crs.loc.gov, 7-9664
jwhittaker@crs.loc.gov, 7-2587
Sidath Viranga Panangala
Specialist in Veterans Policy
spanangala@crs.loc.gov, 7-0623
Acknowledgments
The coordinator of this report appreciates the helpful comments received from Bill Heniff Jr., Analyst on
Congress and the Legislative Process, and Todd Tatelman, (now former) Legislative Attorney.
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