The Sequestration Process

The Sequestration Process

Order Code RS20007
Updated March 19, 2001
CRS Report for Congress
Received through the CRS Web
The Sequestration Process
Bill Heniff Jr.
Consultant in American National Government
Government and Finance Division
Sequestration is the cancellation of budgetary resources for the purpose of enforcing
statutory budget limits and pay-as-you-go (PAYGO) requirements. This process is
triggered automatically when these statutory limits or PAYGO rules have been violated
as a result of legislative actions.
The sequestration process was first established in 1985 by the Balanced Budget and
Emergency Deficit Control Act (title II of P.L. 99-177), commonly known as the Gramm-
Rudman-Hollings Act. Initially, the sequestration process was tied to annual maximum
deficit targets, declining to zero by a date certain, established by the law. If the budget
deficit exceeded those target levels (plus a margin-of-error amount in some years),
automatic across-the-board spending cuts would be triggered. The process was intended
to provide an incentive to Congress and the President to reduce the deficit through
legislative action to avoid an automatic sequestration. The law was amended and modified
in 1987, 1990, 1993, and 1997. Most notably, the Budget Enforcement Act (BEA) of
1990 (title XIII of P.L. 101-508) changed the focus of the sequestration process. Instead
of maximum deficit targets, the BEA of 1990 tied sequestration to new statutory spending
limits and PAYGO rules. The change was intended to hold Congress and the President
accountable for projected budget outcomes that would result from new legislation, rather
than the level of the deficit which could be affected by factors beyond their direct control,
such as economic growth, inflation, and demographic changes.
The current process includes two separate sequestration procedures: (1) the
discretionary sequestration process, which applies to discretionary spending funded
through the annual appropriations process, and (2) the PAYGO sequestration process
which applies to direct spending and revenues.
Currently, discretionary spending limits exist for the following categories: highway
and mass transit spending for FY2001-2002; conservation spending for FY2002-2006; and
other discretionary spending, also called general purpose discretionary spending, for
FY2001-2002. For more information on the discretionary spending limits and how they
may be adjusted, see CRS Report RS20008, Discretionary Spending Limits.
Sequestration is triggered automatically if the applicable spending cap is exceeded
through the enactment of legislation. The Office of Management and Budget (OMB)
publishes preview and update sequestration reports on the status of discretionary spending
and the appropriate limits during the year. The Congressional Budget Office (CBO)
Congressional Research Service ˜ The Library of Congress

CRS-2
publishes similar reports, but these are advisory only. The final OMB sequestration report,
published 15 days after the end of each congressional session, is the one that can
automatically trigger a sequestration order. If the OMB director determines that a
spending limit has been breached, the President is required to issue a sequestration order
permanently canceling budgetary resources (except for revolving funds, special funds, trust
funds, and certain offsetting collections) by the amount of the breach in nonexempt
programs by a uniform percentage in the applicable category. A within-session
sequestration is possible if a supplemental appropriations bill causes the spending levels
of the current fiscal year to exceed the statutory limit for a particular category. If a
violation of a discretionary spending limit occurs in the last quarter of the fiscal year (i.e.,
July 1 through September 30), the applicable spending limit must be reduced by the
amount of the violation for the following fiscal year.
The 1990 BEA created a separate sequestration procedure to enforce PAYGO rules
that apply to direct spending and revenues. The PAYGO rules apply to legislation through
FY2002, but the PAYGO sequestration procedure applies to the net deficit effects of that
legislation through FY2006. PAYGO rules require that an increase in direct spending or
a decrease in revenues must be offset by an equal amount of spending reductions, revenue
increases, or a combination of the two so that the budgetary effect of new legislation is not
projected to increase the deficit, or reduce the surplus, for any fiscal year through FY2006.
As with the discretionary spending sequestration process, OMB and CBO publish reports
on the status of new legislation affecting direct spending and revenues. OMB also
maintains a PAYGO scorecard that keeps track of the net impact on the deficit or surplus
resulting from new direct spending and revenue legislation. If the OMB director
determines in the final sequestration report that the net effect of new legislation has caused
a deficit increase or surplus reduction on the PAYGO scorecard, the President is required
to issue a sequestration order reducing most, but not all, nonexempt direct spending
programs by a uniform percentage offsetting the amount of the net deficit increase, or
surplus reduction.
Social Security benefits, federal deposit insurance guarantee commitments, and any
direct spending or revenue legislation the President and Congress designate as an
emergency requirement are excluded from PAYGO calculations. While the remaining
direct spending programs are included in the PAYGO scorecard calculations, most are
exempt from reduction (see section 255 of the Deficit Control Act, as amended). In
addition, the Medicare program is limited to a 4% reduction in direct spending. For more
information on the PAYGO procedures, see CRS Report RS20006, Pay-as-you-go Rules
in the Federal Budget Process.
The sequestration process may be suspended in the event of war or a period of low
economic growth. First, the sequestration procedures are suspended upon the enactment
of a declaration of war by Congress. Second, Congress may enact a joint resolution
suspending sequestration procedures whenever CBO issues a low-growth report. As
required by section 254(j) of the Deficit Control Act, a low-growth report will be issued
when OMB or CBO forecasts two consecutive quarters of negative real economic growth
during a six-quarter period, or when the Department of Commerce reports that the actual
rate of real economic growth for two consecutive quarters is less than 1%.