the President and Congress with a further incentive to achieve deficit reduction through the regular budget process.

A. The Snapshot

Twice each fiscal year, in August and October, the Directors of CBO and OMB take a "snapshot" of (1) spending and tax laws, and (2) economic, demographic, and other estimating factors. Together, Federal laws and estimating factors are used to project total outlays, revenues, and deficit-the budget base.

The August snapshot is preliminary. Although the Directors make resulting budget and sequestration calculations (as do GAO and the President), spending is not canceled as a result of that snapshot; spending is merely deferred until the results of the October snapshot are official. Thus the August snapshot and calculations are primarily a warning. If the calculations show an excess deficit, Congress and the President may be spurred to move quickly on deficit-reduction bills. The Senate may choose to use the special procedures described in Part I.

The budget picture is frozen on the date of the final snapshot. The Directors do not account for any legislation enacted after the snapshot; they do not consider any new economic or demographic data obtained after the snapshot.

For fiscal 1986 there was only one snapshot, on January 10. There will be no further snapshots and calculations for fiscal 1986. For fiscal 1987-1991, the final snapshot date occurs just before October 5 (i.e., just a few days after the start of the fiscal year). B. The Budget Base

The Directors calculate the budget base by using the Federal laws and estimating factors that were frozen in place on the snapshot date. The calculations employ the following rules:

1. Only enacted law is considered. The Directors do not attempt to anticipate the outcome of legislation still working its way through Congress. Enacted entitlement law, including any required COLA, is projected at the full estimated cost.

2. The Directors assume the expiration of tax laws and direct spending laws (such as entitlements) that are scheduled to expire during the fiscal year in question.4

3. If a 12-month appropriation for a discretionary program has not been enacted, the Directors must use the dollar amount provided for the program in the prior fiscal year. Although a full-year continuing appropriation is counted, a temporary continuing appropriation is not considered for the purpose of the budget base.

The Act does not elaborate on the meaning of "prior appropriation." It is expected that the previous year's funding level would include regular appropriations, supplementals, rescissions, and (starting with fiscal 1987) sequestrations.

4. In estimating outlays, the Directors do not consider any deferrals reported pursuant to the Impoundment Control Act.

5. The Directors do not alter their economic or technical estimating factors between the August and October snapshots. Therefore,

* The Act specifies that, notwithstanding the general rule, excise taxes deposited into trust funds are not assumed to expire, and CCC crop price supports are not assumed to expire.

changes in the budget base result only from newly enacted law or newly promulgated regulations.

C. Exemptions

Some programs are completely or partially exempt from sequestration, and some outlays associated with nonexempt programs are excluded from the calculations. Before beginning the sequestration calculations, the Directors remove exempt outlays from the budget base, leaving the "sequestration base.” All figures shown below are from the Directors report of January 15. The Comptroller General's report of January 21 made only minor changes.

There are four types of exemptions created by the Act:

1. Completely Exempt Programs. Other than their Federal administrative costs, the following programs are completely exempt. For fiscal 1986 these programs total more than $435 billion.

• Net Interest;

Social Security retirement and disability;

• Railroad Retirement Tier I (the Social Security equivalent); • Veterans Compensation and Pensions;

• State Unemployment Compensation;

Earned Income Tax Credit;

Selected "Low-Income" programs: AFDC, SSI, Food Stamps,
Child Nutrition, WIC, and Medicaid;

• Federal power administrations: TVA, BPA, WAPA, SWAPA, SEAPA, and APA;

● Postal Service Fund (but not the Federal subsidy);

• Accounts paying claims against the U.S., including Claims, Judgments, and Relief Acts; Defense Claims; Payments to Copyright Owners; Eastern Indian Land Claims; Vietnam and USS Pueblo POW Claims; and Soldiers and Airmen's Home Claims;

Constitutionally protected salaries: Compensation of the President, and Salaries of Article III Judges.

● Non-U.S. funds of three types: Foreign Military Sales Trust Fund; activities from private bequests, donations, or voluntary contributions; and appropriations for D.C. (but not the Federal subsidy);

• Payments from one Federal account to another, since these do not constitute Federal outlays;

A few minor technical exemptions.

2. Partially protected programs. The following programs are subject to limited sequestration; although they may be cut, the cuts are limited as described below. For fiscal 1986 these programs total $135 billion.

● COLA programs, also known as Automatic Spending Increases (ASI), may have their COLAs reduced or frozen but their benefit base in protected, that is, the COLAS may not become negative. For 1986 their COLAS were frozen: on average, the lost COLAS would have been 3.12 percent. Nine-tenths of these savings came from Federal Civil Service and Military Retirement. The protected base for these programs totals almost $48 billion in 1986.

Special Rule programs may be cut by specified, limited percentages or amounts.

Guaranteed Student Loans may be cut only by (1) increasing the student's origination fee (up-front premium) by one-half of one percentage point, and (2) decreasing the lender's "Special Allowance Factor" by four-tenths of one percentage point. These changes apply only for one year. They apply only to loans originated during the fiscal year but after the sequestration order.

Foster Care and Adoption Assistance payments to the States may be cut only to the extent that they would have increased in order to match benefit increases legislated by the States. Five health programs may be cut by no more than one percent in fiscal 1986 and no more than two percent in fiscal 19871991, relative to whatever their costs otherwise would have been absent sequestration. The programs are Medicare,5 Veterans Medical Care, Indian Health, Migrant Health, and Community Health. For fiscal 1986 this special rule effectively protects almost $83 billion.

Insurance and Guaranteed Loan Programs may have their new activities subject to sequestration, but costs associated with insurance claims or with loan defaults are exempt. The Act identifies 46 such programs. In general, these programs support themselves through premiums, so that their net Federal cost is

near zero.

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3. Prior-year outlays from otherwise nonexempt programs. Although these programs are subject to across-the-board sequestration, their prior-year outlays generally are not part of the calculations. Just about $100 billion in defense outlays, and a nearly identical amount in nondefense outlays, are thus excluded from the sequestration calculations. However, new funds for the programs in question are completely available for sequestration.

Specifically, for nondefense programs the Act removes from the calculations all outlays resulting from budgetary resources that were provided in prior fiscal years. Only new budgetary resources are sequesterable, and only the resulting "new" outlays are included in the calculations.

For defense programs the Act removes from the calculations all outlays resulting from obligated budgetary resources that were provided in prior fiscal years. However, unobligated balances of prior appropriations are subject to sequestration, so the outlays estimated to flow therefrom are part of the calculations.

4. Offsetting receipts. These receipts are nontax income of the U.S. deposited in the Treasury's General Fund, and are accounted as "negative spending." An example is the income generated by Outer Continental Shelf Rents and Royalties. The Act exempts such income from sequestration calculations, since sequestration is intended to cut spending, not to increase user fees or speed up auction schedules.

Medicare cuts come only from a reduction in payments for covered services. Therefore, premiums and deductibles, program eligibility, and the types of services that are covered are not altered. For fiscal 1986, payments made after March 1 are reduced by one percent.

In their January 15, sequestration report, the Directors agreed that the Act should have specified that interest payments to the Washington Metropolitan Area Transit Authority (WMATA) were in this category. However, the Act did not specifically do so, and the Directors did not agree whether such payments are exempt under its terms. On January 21 the Comptroller General ruled that the payments are exempt.

2 As discussed under "Defense Flexibility," most Military Personnel accounts were protected in fiscal 1986.

* The Act includes a special rule for the CCC farm price support program. In general, this program is subject to across-the-board sequestration, by the same percentage reduction that applies to all other nonexempt, non-COLA, non "special rule", nondefense programs. The Act specifies that each type of crop must be cut by the same percentage, and that the cuts apply to the crop year beginning after a sequestration order has gone into effect.

As with many other defense and nondefense programs, sequestration would produce some outlay savings in the first year and some in subsequent years. In fact, CBO estimates that $7.5 billion in fiscal 1987 savings will result from fiscal 1986 sequestration.

Unlike its treatment of other programs, however, the Act specifies that second-year CCC savings shall be accounted as though they occurred in the first year. Thus, $409 million in estimated fiscal 1987 outlay savings have been counted as though they would occur in fiscal 1986. Since they will not, the fiscal 1986 outlay savings in the Directors' estimate from sequestration is $11.3 billion rather than $11.7 billion. This summary will use the $11.7 billion figure.

For consistency, therefore, the fiscal 1987 CCC budget base of $9.5 billion (which produces the $409 million in fiscal 1987 savings) is shown as though it were part of the fiscal 1986 budget base. Thus, the actual fiscal 1986 nondefense budget base of $105.2 billion is shown here as $114.8 billion.