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The Balanced Budget and Emergency Deficit Control Act of 1985 (the Deficit Control Act) requires the Congressional Budget Office (CBO) to issue a final sequestration report at the end of a Congressional session. This report reflects activity affecting discretionary spending and the pay-as-you-go (PAYGO) balances enacted through the end of the 106th Congress.

For fiscal year 2000, discretionary spending as estimated by the Office of Management and Budget (OMB) for purposes of the Deficit Control Act exceeded the caps on such spending by $2,359 million in budget authority and $6,763 million in outlays. Normally under the Deficit Control Act, spending enacted after June 30 in excess of that year's caps would reduce the spending limits for the following fiscal year. However, a provision in the Military Construction Appropriations Act for 2001 specifically precludes that action in this case.

CBO estimates that in the absence of further legislative action, spending for 2001 will fall within the adjusted limits for the overall discretionary category. For both the highway and mass transit categories, however, outlays will exceed their caps for 2001 (those categories have no limits on budget authority). The Deficit Control Act requires that outlays in excess of the limits for the two transportation categories--a total of $727 million for 2001--be assigned to the overall discretionary category. Because that excess can be accommodated under the adjusted cap on the overall discretionary category, no discretionary sequestration is required for 2001.

Legislation enacted through the end of the 106th Congress affecting mandatory (direct) spending or revenues has decreased the projected surplus in 2001 by $6,833 million.⁽¹⁾ It will not trigger a PAYGO sequestration, however, because the Consolidated Appropriations Act for 2001 instructs OMB to change the PAYGO balance for 2001 to zero.
 

Discretionary Sequestration Report

The Deficit Control Act limits discretionary spending in each year through 2002 and provides for sequestration (a cancellation of budgetary resources) if annual appropriations exceed those limits. For 2000, the caps applied to four categories of spending: overall discretionary, violent crime reduction, highway, and mass transit. The separate caps for violent crime reduction expired at the end of 2000, folding that spending into the overall discretionary category. The caps on highway and mass transit spending apply only to outlays; caps for the overall discretionary category cover both budget authority and outlays.⁽²⁾

Adjustments to the Spending Limits

The discretionary spending limits in this report reflect three types of adjustments made since CBO's sequestration update report (published on August 15, 2000): adjustments for differences between CBO's and OMB's estimates, for emergency funding that has been recently enacted or released, and for increased spending in several areas as specified in law.

Differences Between the Limits in CBO's and OMB's Update Reports. OMB is responsible for determining whether a sequestration is required to eliminate a breach of the discretionary spending caps; CBO's estimates are merely advisory. Therefore, before making other changes, CBO first adjusts the estimates of the caps that appeared in its most recent sequestration report to match the figures in the equivalent OMB report.

For the overall discretionary category in 2000, CBO has lowered its estimate of the cap on budget authority by $719 million and increased its estimate of the cap on outlays by $1,954 million from the amounts in its August update report (see Table 1). Most of the variance in budget authority stems from CBO's inadvertent inclusion of contingent emergency appropriations in its previous sequestration report.⁽³⁾ The gap in outlays results mostly from different estimates of when emergency funding made available in 2000 in the Military Construction Appropriations Act for 2001 and the Department of Defense Appropriations Act for 2001 will be spent. For 2001 and 2002, CBO has also made adjustments to conform with OMB's budget authority and outlay caps.
 

No adjustments were necessary to CBO's previous estimates of the highway and mass transit caps.

Recently Enacted or Released Emergency Appropriations. CBO and OMB usually adjust the caps on discretionary spending to reflect emergency appropriations that have been enacted or made available since the prior sequestration report. However, section 701 of the Foreign Operations, Export Financing, and Related Programs Appropriations Act, 2001 (Public Law 106-429) bars an adjustment in 2001 for emergency appropriations.

Bills enacted since OMB's update report nevertheless designated some appropriations as emergencies. Such designations total an estimated $8,467 million in budget authority and $4,513 million in outlays for 2001. Farmers will receive the majority of those funds; smaller amounts were allocated for fighting wildfires and for subsequent rehabilitation efforts in Western states. In accordance with P.L. 106-429, the 2001 limits were not increased for those appropriations, but CBO increased its estimate of the 2002 caps by $231 million in budget authority and $1,871 million in outlays.

Since OMB's update report, the President has released contingent emergency appropriations that were enacted before 2000. The Department of Defense received $200 million in budget authority for operation and maintenance activities; CBO estimates that the release of those funds will increase outlays by $149 million in 2001 and $40 million in 2002. Again, P.L. 106-429 prevents the caps from being adjusted in 2001 but does not restrict adjustments in 2002.

Other Increases as Specified in Law. The Foreign Operations Appropriations Act amended the Deficit Control Act to increase the caps on budget authority and outlays for 2001--adding $95,905 million and $58,562 million, respectively. P.L. 106-429 also provided for a 0.5 percent adjustment in budget authority for rounding, which adds another $3,185 million for 2001 (see Table 1).

Under the Deficit Control Act, appropriations for adoption assistance, continuing disability reviews, and initiatives to improve compliance with the rules of the earned income tax credit (EITC) trigger an adjustment in the spending limits for the overall discretionary category. In 2001, those increases are estimated to boost the caps by $615 million in budget authority and $531 million in outlays.

Compliance with the Discretionary Spending Limits

Spending recorded for 2000 in the overall discretionary category exceeded the limits estimated in this report (see Table 2). The excess--$2,359 million in budget authority and $6,763 million in outlays--came from supplemental appropriations for 2000 enacted in the Military Construction Appropriations Act for 2001 (P.L. 106-246). Pursuant to section 251(a)(5) of the Deficit Control Act, those appropriations for 2000 would have caused the 2001 caps to be reduced by the amount of the breach. However, section 5107 of P.L. 106-246 specifically prohibits that action.
 

For the overall discretionary category in 2001, budget authority and outlays are $7,717 million and $2,488 million below their respective limits, according to CBO's estimates (see Table 3). However, outlays in the highway and mass transit categories are estimated to be $374 million and $353 million above their respective caps. The Deficit Control Act assigns outlays above the caps on those two categories to the overall discretionary category. But even adding that $727 million to outlays in the overall discretionary category does not result in a breach of that cap. Therefore, no discretionary sequestration should be required for 2001.
 

New Caps for 2002

For 2002, a new discretionary spending category has been created. Section 801 of the Department of the Interior and Related Agencies Appropriations Act, 2001 (P.L. 106-291) amends the Deficit Control Act to create an overall conservation category, which is divided into six subcategories for land conservation, preservation, and infrastructure improvement (see Table 4). P.L. 106-291 limits both budget authority and outlays for the overall category but only budget authority for the subcategories. Although section 251 of the Deficit Control Act expires at the end of 2002, P.L. 106-291 specifies that these new caps extend through 2006. The overall caps on conservation spending are $1,760 million in budget authority and $1,232 million in outlays for 2002, and they increase in subsequent years. Those amounts are not carved out of the current caps but are added to the existing totals.
 

The Interior Appropriations Act contains a mechanism that attempts to ensure that the amounts it specifies are appropriated for conservation programs. It does so by modifying section 251 of the Deficit Control Act to create seven new sets of caps on discretionary spending (the overall category plus the six subcategories). If appropriations for the overall conservation category or any of its subcategories fall below their assigned limits in a given year, the difference would be added to the following year's limits for that category or subcategory.
 

Pay-As-You-Go Sequestration Report

Besides capping discretionary spending, the Deficit Control Act contains a mechanism to ensure that any legislation affecting direct spending or receipts enacted through fiscal year 2002 does not result in a net cost. If legislative changes enacted through the end of a session of Congress produce a net cost, a PAYGO sequestration is required at the end of the session. Under that type of sequestration, budgetary resources available for nonexempt mandatory programs are to be cut sufficiently to eliminate the net cost. The PAYGO discipline governs legislation enacted through 2002, but the sequestration procedure applies through 2006 to eliminate any projected decrease in the surplus caused by such legislation.

Both CBO and OMB estimate the net changes in the projected surpluses that result from direct spending or revenue legislation. But, as with the discretionary spending caps, OMB's estimates determine whether a sequestration is necessary. For this report, therefore, CBO has adopted as its starting point the estimated effects of legislation from OMB's update report.

Direct spending or revenue legislation that was enacted during the 106th Congress and is subject to PAYGO procedures decreased the surplus for 2000 by an estimated $42 million and the projected surplus for 2001 by $6,791 million (see Table 5). Roughly three-quarters of that 2001 amount can be attributed to actions taken in the Consolidated Appropriations Act, 2001.
 

Normally, when changes to mandatory spending are made in an appropriation act, the effect of those changes is initially counted as discretionary spending and is reclassified as mandatory in the following sequestration preview report. For 2001, however, section 1 of the conference report for the Consolidated Appropriations Act stated that certain costs, which total an estimated $5,076 million, be counted as part of the PAYGO balance and not as discretionary spending.⁽⁴⁾

Pursuant to the Deficit Control Act, the net costs for 2000 and 2001 are combined to determine the size of a PAYGO sequestration for 2001. Although the surplus was reduced by a total of $6,833 million, the Consolidated Appropriations Act instructs OMB to change the PAYGO balance for 2001 to zero, thereby avoiding a PAYGO sequestration.

1. That balance is composed of net reductions in the surpluses for 2000 and 2001 of $42 million and $6,791 million, respectively.

2. The highway category does not have caps on budget authority because obligation limitations (which do not count as budget authority) set in appropriation bills control all of its spending. A combination of appropriations and obligation limitations control spending for mass transit, so it has no statutory limit on budget authority either.

3. In its preview report for 2001, OMB changed the timing of its adjustments to the caps to reflect contingent emergency budget authority. As a result of that switch, CBO did not properly recognize all of the funds for contingent emergencies that were already included in the caps in OMB's preview report.

4. That amount is composed of $4,616 million in the Consolidated Appropriations Act and $460 million in the Transportation Appropriations Act.