THE SEQUESTER:

MECHANICS AND IMPACT

WHAT WELL LOOK AT

Background
The broader budget picture

Mechanics and Impact

What is a sequester? How does the sequester work?

Where do the cuts come from and what are the percentages?
What will the impact of these cuts be? What important issues relating to execution of the sequester are still pending and causing uncertainty? How will the cuts affect particular domestic programs?

Outlook
Current political situation where does it go from here?

The Broader Budget Picture

FY 2012 BUDGET

Medicare + Medicaid 21%

Social Security 21%

Non-Defense Discretionary 17% Defense Discretionary 19%

Other Mandatory 15% Interest 7%

ABSENT REFORMS, DEBT IS SET TO SKYROCKET IN THE COMING DECADES

200%

150%

Debt breaches 100% of GDP in 2031

% of GDP

100%

50%

0% 1973

1983

1993

2003

2013

2023

2033

2043

2053

Note: The BPC Alternative Baseline assumes current law except that: 1) funding for combat operations overseas winds down; 2) Medicare physician payments are frozen at 2013 levels (doc fix); 3) the sequester is waived; 4) expiring tax provisions are extended as they have been in the past; and 5) aid for Hurricane Sandy is not extrapolated for future years.
Sources: Congressional Budget Office (February 2013) and Bipartisan Policy Center extrapolations

HEALTH CARE COSTS ARE THE PRIMARY DRIVER OF THE DEBT

12%

10%

Health Care Spending

8%

% of GDP

6%

Social Security
Discretionary Spending (Defense and Non-Defense) Other Mandatory Programs (e.g., federal pensions, unemployment compensation)
2022 2032 2042 2052

4%

2%

0% 2012

Sources: Congressional Budget Offices Alternative Fiscal Scenario (February 2013), additionally assuming that troops overseas decline to 45,000 by 2015 and that Hurricane Sandy funding is not allocated in future years; Bipartisan Policy Center extrapolations

REVENUE UNDER CURRENT POLICIES SIMPLY WILL NOT BE ENOUGH

Revenues Averaged 20% of GDP When the Budget Was Balanced

22

21
20 %of GDP 19 18 17 16 15

and that Was Before the Baby Boomers Arrived

20.6% 19.9% 19.8%

19.5%

(projected)

Fiscal Cliff Deal

18.9%

1998

1999

2000

2001

2013-2023 Average

Fiscal years

Source: Congressional Budget Office Alternative Fiscal Scenario (August 2012)

DISCRETIONARY SPENDING HAS ALREADY BEEN RESTRAINED

BCA Caps Achieved Similar Level of Cuts to Domenici-Rivlin

$1,400 $1,350 Discretionary Budget Authority ($B) $1,300 $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 2012

2010 CBO Baseline

Budget Control Act Caps Domenici-Rivlin

Sequestration

2013

2014

2015

2016 Fiscal Years

2017

2018

2019

2020

Note: Total discretionary budget authority (depicted above) includes funding for overseas combat operations, which has declined since 2011 and is scheduled to decline further over the coming years.
Source: Congressional Budget Office, BPC estimates

THE FISCAL CLIFF DEAL

Patched / extended / delayed most policies

Alternative Minimum Tax Permanently patched Unemployment Insurance Expanded benefits temporarily extended Bush Tax Cuts Mostly permanently extended Doc Fix Temporarily extended Tax Extenders Temporarily extended Sequester - Delayed

Will hurt economic growth in 2013

Payroll tax cut expired

Only small impact on long-run debt problem

THE FISCAL CLIFF DEAL - DETAILS

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Expiration of Bush Tax Cuts for upper-income individuals

Cutoff set at $450,000 Also raised revenues by phasing out exemptions and deductions at the top

Sequester delayed until March 1

Delay was paid for with combination of other spending cuts and revenue increases

CONTINUING RESOLUTION

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Continuing Resolution for Fiscal Year 2013 (which started October 1, 2012) expires on March 27

If no new appropriations are passed before that point, the government will shut down
This is what happened multiple times in the 1990s

What Is a Sequester?

WHAT IS A SEQUESTER?

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Automatic reduction to federal government spending for a given fiscal year Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985
Phil Gramm: It was never the objective of [GRH] to trigger the sequester; the objective of [GRH] was to have the threat of the sequester force compromise and action. 80s and 90s sequesters were rarely carried out, but pushed Congress to achieve fiscal goals in 90s

How Does the Sequester Work?

BREAKING DOWN THE SEQUESTER

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DIFFICULTIES IN IMPLEMENTATION OF FY 2013 SEQUESTER What is unique about FY 2013?

Cuts occur in the middle of the fiscal year. Discretionary cuts occur no matter what Congress appropriates. Sequester cuts happen at program-project-activity (PPA) level. But many departments dont define what a PPA is.

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Across-the-board cuts difficult for many PPAs:

Accounts that are nearly all personnel costs, like those for Border Patrol Agents Large procurement or construction projects

Sequester will produce unintended costs

Higher per-unit procurement costs Increased future costs for delayed procurement Increased unemployment insurance

Where Do the Cuts Come From and What Are the Percentages?

FY 2013 SEQUESTER BREAKDOWN (IN BILLIONS)

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Total FY 2013 Cut = $85.3 Billion

Medicare $11.1 Other Mandatory $5.2

Defense Discretionary* $42.7

Non-Defense Discretionary $26.4

* Roughly $50 million of the cut attributed to defense discretionary is actually taken from defense mandatory programs. Sources: Office of Management and Budget, Congressional Budget Office, and Bipartisan Policy Center Calculations

MOST FY 2013 SEQUESTER CUTS FALL ON THE SMALLEST PIECES OF THE BUDGET

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Mandatory $2,120B Domestic Discretionary* $600B Cuts $16B Cuts $26B 31% of Sequester Non-Defense 50%

Tax Expenditures $1,340B Defense Discretionary* $700B Cuts $43B 50% of Sequester Defense 50%

*These amounts include all discretionary budgetary resources for the duration of FY 2013, not solely the non-exempt monies that are subject to sequester. Defense discretionary funds include unobligated balances from prior years, which are subject to sequester. Roughly $50 million of the defense cuts actually come from mandatory programs, not discretionary funds. Note: Numbers may not add due to rounding.
Sources: BPC Calculations, Congressional Budget Office, Donald Marron and Tax Policy Center using data from the Office of Management and Budget and Treasury

EXEMPTIONS

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Most mandatory spending and some non-defense discretionary (NDD) programs are exempt from the sequester
Since the absolute dollar cuts required - $42.5 billion to each of defense and domestic are explicit in the law, these exemptions mean heavier cuts elsewhere

Mandatory Exemptions

NDD Exemptions Pell grants Social Security Department of Veterans Affairs Medicaid programs Food stamps (SNAP) Transportation programs paid for by the Highway Trust Fund Medicare annual cuts are limited to 2% and are made Cuts to Indian health and migrant to provider payments and health centers are capped at 2% plans

HOW MUCH WILL THE FY 2013 SEQUESTER CUT?

Dollar Cut (Billions)

Non-Defense Discretionary Medicare Other Mandatory Defense Discretionary Mandatory $42.7 $26.4 $11.2 $5.1 $42.7 $42.6 $0.1

Annual % Cut

7-Month % Cuta

5.2% 2% 5.3%

8% 2% 8%

7.8%b 7.8%

13% 13.5%

Note: Percentage cuts are calculated from the total amount of non-exempt resources in each category. a. This assumes that funds are obligated or spent roughly proportionally throughout the fiscal year. This will vary by agency and category of spending. Because the sequester occurs five months into the fiscal year, these cuts must be made only from the remaining funds, resulting in larger percentage reductions. b. The defense discretionary percentage reduction depends on the amount of unobligated balances from prior years remaining on March 1, 2013, which cannot be known with certainty at this time

PERCENTAGE CUTS

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Impossible to know precise percentage cuts to individual programs and line items in the budget
There are pending issues that prevent certainty in this type of forecast

IMPORTANT: Implementation ultimately up to OMB

What are some of the impacts?

FY 2013 SEQUESTER CUTS WILL DAMAGE ECONOMIC GROWTH 5% 4% 3% 2% 1% 0%

Average GDP Growth in Recoveries from Recessions Since WWII Projected 2013 GDP Growth

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Projected Growth Lost Due to Sequestration

Note: Historic recovery growth was calculated by averaging growth from the four years following each recession since WWII (up to 2001), excluding years in which the country quickly experienced another recession. This selection of years is meant to represent what a modest to strong recovery has looked like in the past. Source: BPC calculations based on St. Louis Federal Reserve data (FRED II) and Congressional Budget Office projections and economic multipliers

THE SEQUESTER WOULD COST THE ECONOMY OVER 1 MILLION JOBS IN 2013 & 2014

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4,000,000

3,000,000

2,000,000

1,000,000

Projected Jobs Lost in 2013 & 2014 if FY13 Sequester Takes Effect Projected Jobs Added* in 2013 & 2014 Net Jobs Added in 2013 & 2014 if FY13 Sequester Takes Effect

-1,000,000

-2,000,000
*The projection for jobs added averages the first five months of job growth in 2012 165,000 jobs/month and assumes that level of growth continues through the end of 2014. Sources: BPC calculations based on Bureau of Labor Statistics data and Congressional Budget Office projections and economic multipliers

DEFENSE SPENDING WOULD BE CUT AGAIN FROM UNPRECEDENTED LOW

Defense Discretionary Spending
5.0%

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4.5%

Historical Average (19722011) Lowest Level since WWII (1999) CBO Baseline Defense (Jan 2011) Original BCA Caps

% of GDP

4.0%

3.5%

3.0%

2.5%
Fiscal years

BCA + Full Sequester

2.0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: Congressional Budget Office Budget and Economic Outlook (January 2012)

DOMESTIC DISCRETIONARY SPENDING WOULD BE CUT TO THE BONE

Non-Defense Discretionary Spending
4.5% Historical Average (19722011) Lowest Level since 1970 % of GDP 3.5% CBO Baseline Non-Defense (Jan 2011) Original BCA Caps 2.5% BCA + Full Sequester 2.0%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Fiscal years

4.0%

3.0%

2021

Source: Congressional Budget Office Budget and Economic Outlook (January 2012)

SEQUESTER DELAYS FEDERAL DEBT REACHING 100% OF GDP BY ONLY 2 YEARS

160% 140% 120%
Public Debt as % of GDP

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BPC February 2013 Alternative Baseline

100%

80%
Debt with Sequester 60% 40% 20% 0% 2013

2018

2023

2028
Fiscal Years

2033

2038

2043

Note: The BPC Alternative Baseline assumes current law, except that: 1) funding for combat operations overseas winds down; 2) Medicare physician payments are frozen at 2013 levels (doc fix); 3) the sequester is waived; 4) expiring tax provisions are extended as they have been in the past; and 5) aid for Hurricane Sandy is not extrapolated for future years.
Sources: Congressional Budget Office (February 2013) and Bipartisan Policy Center extrapolations

Important Pending Issues

IMPORTANT PENDING ISSUES

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PPA definitions

Reprogramming & transfer authority

Apportionment

PPA DEFINITIONS

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How they are defined will have significant impact on amount of flexibility for agencies & distribution of cuts BCA states that they are defined as in appropriations bills and accompanying reports
Problem is that in many cases (i.e., for many agencies), these definitions don't currently exist Defense as example

Well...how was it done in the 1980s?

REPROGRAMMING & TRANSFER AUTHORITY

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Reprogramming = moving funds within budget account Transfer authority = moving funds between budget accounts

What are limitations on these? How much flexibility will they provide to the agencies?

APPORTIONMENT

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Office of Management and Budget (OMB) in charge of "apportioning" to agencies - i.e., telling them how much of their funding they can use in each quarter of the fiscal year

Since sequester cuts must total $85 billion in FY 2013, but not till end of year, OMB may be able to push most cuts till later in year
Gives Congress additional time to address sequester, but carries risks (both perceived and actual)

Limits on apportionment due to Antideficiency Act

HOW WILL AGENCIES BEHAVE LEADING UP TO MARCH 1?

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Might slow down obligations in order to have more flexibility

If a particular PPA has $100 million for the year, and needs to cut $7 million on March 1, better to cut that from $70 million remaining than from $58 million remaining

OMB has stated that it will instruct agencies to continue spending as usual (as if sequester were not pending) DoD seems to be spending faster than CR levels

IMPORTANT DOMESTIC PROGRAMS FACE AN 8-PERCENT CUT IN 2013 Program

Disaster Relief (including Hurricane Sandy) National Institutes of Health (NIH)

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Continuing Resolution at FY 2012 Levels ($B)

Funds Available after March 1st ($B)

8% Sequester Cut ($B)

$57.6 $30.7 $27.4 $17.8 $15.7 $11.9

$33.6 $17.9 $16.0 $10.4 $9.2 $6.9

$2.7 $1.4 $1.3 $0.8 $0.7 $0.6

Section 8 Rental Assistance Air Transportation Security and Traffic Control Primary and Secondary Education (incl. for the disadvantaged)
Special Education

Scientific Research
Disease Control Food and Drug Safety Mental Health Services

$11.8
$5.5 $3.5 $3.3

$6.9
$3.2 $2.0 $1.9

$0.6
$0.3 $0.2 $0.2

Sources: Office of Management and Budget, Bipartisan Policy Center calculations

Current Political Situation Where Does it Go From Here?

DEFICIT REDUCTION (OVER 10 YEARS)

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Approximately $1.3 trillion in spending cuts (not including interest) have been enacted since 2011
Mainly from reductions in the FY 2011 Continuing Resolution and the BCA caps These cuts are almost all from defense and domestic discretionary spending

Approximately $600 billion of revenue was enacted in the Fiscal Cliff deal

SIMPSON-BOWLES / DOMENICI-RIVLIN

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Whats missing compared to Simpson-Bowles / DomeniciRivlin?

$800 billion - $1 trillion in additional spending cuts/reforms to entitlements over the next 10 years $1 trillion $1.5 trillion in additional revenues from tax reform over the next 10 years