D. The calculations

The Directors calculate the reduction in outlays, and the sequestration of budgetary resources necessary to produce that reduction, by taking the steps listed below, in order. Where they do not agree on a common estimate, they are required to use the average.

1. The Directors calculate the excess deficit. They subtract the projected "budget base" deficit from the deficit target (the MDA). For fiscal 1986 they projected a budget base deficit of $220.5 billion. That projected deficit is $48.6 billion above the maximum deficit amount of $171.9 billion.

2. If the excess deficit is larger than the cushion, then (except in fiscal 1986) the entire excess deficit is eliminated. Thus the "required outlay reduction" equals the excess deficit. For fiscal 1986 and 1991 the cushion is zero; for fiscal 1987-1990 the cushion is $10 billion.

[NOTE: For fiscal 1986 only, sequestration is capped; only 12 of the excess deficit is eliminated, and in any case the outlay reduction may not exceed $11.7 billion."]

3. Exempt outlays are removed from the calculations.

4. Retirement COLAS are frozen, and the savings are credited against the required reduction.

5. The remaining required reduction, after subtracting the savings from freezing retirement COLAS, is divided equally between defense and nondefense accounts. Each must achieve half the remaining outlay savings.

6. The defense outlay savings are achieved by cutting sequesterable budgetary resources across the board. That is, the Directors calculate a single percentage by which defense budgetary resources must be cut in order to achieve the outlay savings required from defense programs.

The Act also grants the President three types of flexibility that, if used, would change the across-the-board nature of the defense cuts, would change the amount of budgetary resources sequestered, and could possibly change the amount of outlay savings achieved. See the discussion of Defense Flexibility.

7. The nondefense outlay savings are achieved in four steps. First, the nonretirement COLAS are frozen.10 For fiscal 1986, this step saved $45 million.

"For fiscal 1986, the excess deficit of $48.6 billion, after multiplying by12. is $28.4 billion. That is substantially greater than the cap of $11.7 billion, so fiscal 1986 sequestration is governed by the $11.7 billion cap.

The Act requires that the savings from freezing retirement and other COLAs must not be more than half of the total sequestration. Given recent inflation experience, it is unlikely that such savings would be more than $2 billion-in fiscal 1986 they are $1,039 million.

Because of the cushion, the minimum possible sequester in fiscal 1978-1990 is $10 billion. As noted, the fiscal 1986 sequester is $11.7 billion. Therefore, the only year in which a COLA freeze could save more than half of the required reduction would be fiscal 1991, and then only if the required reduction (the excess deficit) were just a few billion dollars.

"Defense" is defined to mean the National Defense functional category except for Federal Emergency Management Administration (FEMA) accounts. This category includes amounts funded in the DOD and Military Construction appropriation bills, and the nuclear weapons accounts funded in the Energy-Water Development appropriation bill.

10 As noted, the Act provides that total COLA savings may not be more than half of the excess deficit. There are three nonexempt, nonretirement COLAS: Vocational Rehabilitation basic state grants; Special Milk; and the National Wool Act.

Second, two "special rule" programs, Guaranteed Student Loans and Foster Care/Adoption Assistance, are cut the full amount allowed by the Act. For fiscal 1986 this step saved $15 million.

Third, the "special rule" health programs are cut by one percent (in fiscal 1986) or by two percent (in fiscal 1987-1991).11 For fiscal 1986 this step saved $382 million.

Finally, whatever nondefense outlay savings are still required (after taking the previous steps) are achieved by cutting sequesterable budgetary resources across the board. That is, the Directors calculate a single percentage by which nondefense budgetary resources must be cut in order to achieve the remaining outlay savings required from nondefense programs.

FISCAL 1986 SEQUESTRATION CALCULATIONS: OUTLAY SAVINGS, IN MILLIONS

This table shows the dollar amount of the fiscal 1986 required outlay savings, according to the Directors' report. It is critical to note, however, that the across-the-board sequestrations are of budgetary resources, not outlays. The Directors calculate how deeply (1) defense and (2) nondefense budgetary resources must be cut in order to produce the necessary outlay reductions.

11 The Act provides that these health cuts must not save more than is needed to reach the nondefense savings target; if they would, then the percentage is reduced (to less than 2%) in order to meet but not exceed the savings target.

A 2 percent cut in the "special rule" health programs would save less than $2 billion. As noted previously, a COLA freeze saves about $1 billion. Therefore, sequestration would have to be less than $5 billion in order for the health reduction to be less than 2 percent. Because of the $10 billion cushion, sequestration can be that small only for fiscal 1991.

In order to make these two calculations, the Directors must estimate three figures for each of the two program categories: (1) the base level of budgetary resources; (2) an estimate of outlays that would result from those budgetary resources in the coming fiscal year; and (3) the "remaining outlay savings" that are required to be achieved through sequestration.

Using nondefense programs in fiscal 1986 as an example, the base level of budgetary resources available for across-the-board sequestration is $244.1 billion. The level of fiscal 1986 outlays estimated to flow from those budgetary resources is $114.8 billion. (As explained in footnote 3 on p. 3, $9.5 billion of fiscal 1987 CCC payments are also included in these totals.) The budgetary resources that are not disbursed in 1986 will be spent in future years.

The relationship between budgetary resources and new (fiscal 1986) outlays is calculated account by account, based on historical spendout rates for each account. It is a cause-and-effect relationship: the $244.1 billion in budgetary resources is the sole cause of the $114.8 billion in estimated new (fiscal 1986) outlays. If Congress eliminated 100 percent of those budgetary resources, then it would have eliminated 100 percent of the new outlays. Likewise, if sequestration eliminates 10 percent of the budgetary resources, then sequestration will necessarily eliminate 10 percent of the new outlays. In other words, the percentage reduction required in budgetary resources is exactly the same as the percentage reduction required in sequesterable outlays.

Therefore, the Directors calculate the percentage reduction in sequesterable budgetary resources by dividing the required outlay reduction ($4.912 billion) by the resulting "sequesterable" outlays (114.762 billion).

In applying the percent reduction to budgetary resources, the Directors chose to round to 4.3 percent, and therefore achieve slightly more savings than required.

The principle for calculating the defense cuts is exactly the

same.

In general, the dollar amount of required across-the-board outlay reductions in defense and nondefense programs is very similar. (Without the special rule and nonretirement COLA programs, the dollar amounts would be identical.) Since the defense outlay base is significantly larger than the nondefense outlay base, the defense percentage will be significantly lower. This is shown best when a sequestration is very large, so that the effect of the special rules is minimal. For example, if fiscal 1986 sequestration had eliminated the full excess deficit of $48.6 billion, then the nondefense acrossthe-board reduction would have been 20.4 percent. The defense across-the-board reduction would have been 13.8 percent.

As discussed later, the Act grants the President some flexibility in applying the defense cuts. When used, as it was in fiscal 1986, the defense cuts are no longer across the board so the calculations may change substantially.

E. Budgetary Resources

Budgetary resources allow an agency's budget officer to incur financial obligations. Budgetary resources are the legal authority to sign binding service or procurement contracts, to hire personnel, to make grants, or to commit to any other payment required by law. Budgetary resources are most commonly measured by new budget authority (usually called "BA"). Most new budget authority is provided in annual appropriation acts. The remainder is provided automatically by substantive law, and is called "permanent budget authority" or "permanent appropriations." But, for the purposes of the Act, budgetary resources go beyond new budget authority.

The Act treats defense programs differently from nondefense programs. For defense, the sequesterable budgetary resources are (1) new budget authority, and (2) unobligated balances of prior budget authority.

For nondefense programs, there are five different types of budgetary resources that are subject to sequestration.

(1) new budget authority;

(2) gross levels of new direct loan obligations;

(3) other obligation limitations (generally, limitations on programmatic or administrative obligations from trust or revolving funds);

(4) "spending authority defined in Sec. 410(c)(2) of the Congressional Budget Act" (commonly known as "direct spending" or "backdoor spending)"; and

(5) new loan guarantee commitments.

Note that unobligated balances are not listed as budgetary resources subject to sequestration. With regard to unobligated balances, three points are worth noting. First, direct loans, other obligations subject to limitation, and backdoor spending authority are frequently financed from unobligated balances of one type or another.12 Therefore, to the extent that those three types of budgetary resources are reduced through sequestration, so are obligations from unobligated balances.

Second, the Directors have ruled that one variety of unobligated balance-offsetting collections from the public that are credited to appropriation or fund accounts-are also a type of backdoor spending authority and, therefore, are subject to sequestration.

Third, the Act subjects all Federal administrative expenses to sequestration, "notwithstanding any other provision of this title." The Directors agree that this language is all-inclusive. However, on January 21 the Comptroller General ruled that administrative expenses funded by unobligated balance of prior budget authority

12 Unobligated balances may come from: Prior appropriations of budget authority carried over into the new fiscal year; offsetting collections from the public (such as loan repayments, fees, and premiums) or from other budget accounts; and recoveries (or deobligations) of funds obligated in prior years.