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At the end of each session of Congress, the Congressional Budget Office (CBO) issues a final sequestration report, as required by the Balanced Budget and Emergency Deficit Control Act of 1985. This report reflects all legislation enacted through the end of the first session of the 107th Congress.

For fiscal year 2001, discretionary budget authority and outlays (as estimated by CBO for purposes of the Deficit Control Act) fell below the caps for the category of overall discretionary spending.⁽¹⁾ Outlays for both the highway and mass transit categories exceeded their respective limits. The Deficit Control Act requires that the excess outlays for those transportation categories be assigned to the overall discretionary category. Because that excess can be accommodated under the cap on overall discretionary outlays, there is no breach of that cap for 2001.

Estimated spending for 2002 resulting from legislative action to date is within the adjusted caps. In the overall discretionary category, enacted budget authority remains at its limit, and projected outlays are below their ceiling. Estimated outlays for highways and mass transit are equal to their caps, and budget authority and outlays for the new conservation category are slightly below their limits.

Legislation enacted through the end of the first session of the 107th Congress that affects mandatory spending or revenues reduced the surplus in 2001 by an estimated $76.4 billion and the projected surplus in 2002 by $52.7 billion. Those reductions will not trigger a pay-as-you-go (PAYGO) sequestration, however, because the Department of Defense and Emergency Supplemental Appropriations for Recovery from and Response to Terrorist Attacks on the United States Act, 2002 (Public Law 107-117) instructed the Office of Management and Budget (OMB) to change the PAYGO balances for 2001 and 2002 to zero.
 

Overview of Sequestration Procedures

The Deficit Control Act created two mechanisms to govern federal spending, both enforced through sequestration (a cancellation of budgetary resources). Section 251 established limits on the spending provided through the annual appropriation process. If estimated discretionary spending exceeds those limits, the act prescribes a sequestration to eliminate the excess. Section 252 established a PAYGO scorecard to record the projected five-year budgetary effects of each piece of legislation that affects mandatory spending or revenues. If such legislation is estimated to result in a net reduction in the surplus (or increase in the deficit), the act calls for mandatory programs (other than those specifically exempt) to be cut by enough to offset that change in the surplus (or deficit).

Section 251 of the Deficit Control Act will expire on September 30, the end of fiscal year 2002, and the system of discretionary spending caps will no longer be in effect. For section 252, September 30 will be the last day for which the estimated budgetary effects of mandatory spending or revenue legislation will be recorded on the PAYGO scorecard. However, any balances remaining for 2003 through 2006 that reduce the surplus (or increase the deficit) could lead to a PAYGO sequestration through 2006.
 

Discretionary Sequestration Report

The caps on discretionary spending apply to four categories in 2002: overall discretionary, highways, mass transit, and conservation. (The last category is a new one created by the Department of the Interior and Related Agencies Appropriations Act, 2001). The limits on highway and mass transit spending apply only to outlays; caps for the overall discretionary and conservation categories cover both budget authority and outlays.⁽²⁾

Adjustments to the Discretionary Spending Limits

Since CBO published its sequestration update report in August 2001, the estimated caps on discretionary spending have changed for three reasons: because of differences between the estimates in that report and in OMB's update report (also published in August), newly enacted spending limits for 2002, and increased spending in several areas (as specified by the Deficit Control Act), including emergency funding enacted since August. Together, those changes raise the 2001 caps to $660.8 billion for budget authority and $652.1 billion for outlays. (As enacted in the Budget Enforcement Act of 1997, the limits for 2001 were originally $537.2 billion for budget authority and $564.3 billion for outlays.) The adjusted caps for 2002 total $706.0 billion for budget authority and $728.0 billion for outlays (see Table 1).
 

Differences Between CBO's and OMB's Update Reports. Because OMB's estimates serve as the official basis for determining whether a sequestration is required, CBO first changes its estimates of the caps that appeared in its most recent sequestration report to match the figures in the equivalent OMB report. As a result, CBO has raised its estimates of the limits on overall discretionary outlays for 2001 and 2002 from the amounts shown in its August sequestration update report.

The $2,885 million increase to the outlay limit for 2001 reflects OMB's use of the special outlay allowance (a provision of the Deficit Control Act that allows a cap increase of 0.5 percent if total discretionary outlays surpass their limit but new budget authority does not exceed its cap). In August, CBO estimated that using the allowance was unnecessary. In addition, minor technical differences between the two agencies in estimating outlays for certain emergency appropriations have caused CBO to raise its estimate of the outlay cap for 2002 by $21 million.

CBO's and OMB's figures for the highway, mass transit, and conservation limits were identical in August, so no such modifications to those caps are necessary.

Newly Enacted Spending Limits for 2002. The limits on discretionary spending for 2002 were originally established in the Budget Enforcement Act of 1997 (which amended the Deficit Control Act). That law set the cap on overall discretionary budget authority for 2002 at $551.1 billion and the cap on overall discretionary outlays at $560.8 billion. In December 2001, legislation raised those limits to $681.4 billion for budget authority and $670.2 billion for outlays.⁽³⁾

In 2002, for the first time, separate caps exist for spending on conservation programs. Legislators appropriated budget authority for that category equal to its cap, but the estimated outlays from that budget authority exceeded their original limit. To avoid a sequestration, the same legislation that increased the limits on overall discretionary spending also raised the cap on conservation outlays by $241 million.

Other Increases Specified in Law. Under the Deficit Control Act, certain appropriations--for adoption assistance, continuing disability reviews, and incentives to improve compliance with the rules of the earned income tax credit--trigger an automatic increase in the limits on overall discretionary spending. For 2002, those increases boost the caps by $599 million of budget authority and $527 million of outlays.

Recently Enacted Emergency Appropriations. CBO has also raised its estimates of the overall discretionary caps to reflect emergency appropriations enacted since the publication of OMB's sequestration update report in August. The 2001 Emergency Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks on the United States (P.L. 107-38) provided $20 billion of emergency budget authority for 2001. Because that legislation was enacted near the end of fiscal year 2001, however, the majority of the outlays will occur in 2002. As a result, the outlay cap has increased by only $131 million for 2001 but by $13.4 billion for 2002.

An additional $20 billion of emergency budget authority for 2002 was attached to this year's defense appropriation act.⁽⁴⁾ Those appropriations fund homeland security, counterterrorism activities, and aid and recovery programs. Other appropriation acts provided an additional $2 billion of emergency budget authority for 2002, mostly for the Federal Emergency Management Agency's disaster-relief efforts.⁽⁵⁾ Overall, emergency appropriations provided for 2002 added $22.2 billion to the budget authority cap and $8.6 billion to the outlay ceiling.

Compliance with the Discretionary Spending Limits

Estimated spending in 2001 for the overall discretionary category was $1,177 million below the limit on budget authority and $7,493 million below the limit on outlays (see Table 2). By contrast, outlays in the highway and mass transit categories surpassed their caps by $374 million and $353 million, respectively. The Deficit Control Act assigns outlays above the caps for the two transportation categories to the overall discretionary category; adding that $727 million to overall discretionary outlays does not result in a breach of that cap.
 

For 2002, budget authority in the overall discretionary category equals its adjusted cap, whereas outlays are $4,653 million below their adjusted limit, according to CBO's estimates (see Table 3). Outlays for highways and mass transit equal their respective limits. Conservation spending is estimated to be $2 million below its cap on budget authority and $81 million below its adjusted cap on outlays.
 

Pay-As-You-Go Sequestration Report

Both CBO and OMB estimate the annual net cost resulting from legislation that affects mandatory spending or revenues. But, as with the discretionary spending caps, OMB's estimates determine whether a sequestration is necessary. For this report, therefore, CBO has adopted the PAYGO balances shown in OMB's sequestration update report. As of August 15, 2001, OMB estimated that the PAYGO balances were $75.0 billion for 2001 and $51.7 billion for 2002 (see Table 4).
 

CBO estimates that mandatory spending or revenue legislation enacted after August 15 produced a net cost of $7.8 billion for 2001 and 2002 combined. Of that amount, the Air Transportation Safety and System Stabilization Act (P.L. 107-42) cost an estimated $3.7 billion in 2001 and $2.8 billion in 2002. However, portions of that act were designated as emergency requirements, exempting them from the PAYGO scorecard. As a result, CBO estimates that the balances on the PAYGO scorecard are $76.4 billion for 2001 and $52.7 billion for 2002.

The Deficit Control Act requires that the PAYGO balances for 2001 and 2002 be combined to determine whether a PAYGO sequestration is necessary for 2002. Although the balances for those years total an estimated $129.1 billion, the defense appropriation act for 2002 instructs OMB to change the PAYGO balance for 2001 and 2002 to zero, thereby avoiding a PAYGO sequestration.

This is not the first time that lawmakers have eliminated the PAYGO balance for 2001 and 2002. At the end of the first session of the 106th Congress, a combined balance of $11.4 billion for those years was reset to zero.⁽⁶⁾ The same legislation also excluded $10.1 billion from being counted against that balance.⁽⁷⁾ One year later, at the end of the second session of the 106th Congress, legislation removed another $10.5 billion PAYGO balance for 2001.⁽⁸⁾

1. For sequestration purposes, CBO is required to use its estimates of appropriation acts as cleared by the Congress, not actual budget authority or outlays.

2. The highway category does not have a cap on budget authority; obligation limitations (which do not count as budget authority) that are set in appropriation acts control all of its spending. A mix of appropriations and obligation limitations controls spending for mass transit, which also has no statutory cap on budget authority.

3. See division C of section 101(a)(1)(A) of the Department of Defense and Emergency Supplemental Appropriations for Recovery from and Response to Terrorist Attacks on the United States Act, 2002 (P.L. 107-117).

4. See division B of the 2002 defense appropriation act (P.L. 107-117).

5. See the Department of the Interior and Related Agencies Appropriations Act, 2002 (P.L. 107-63); the Legislative Branch Appropriations Act, 2002 (P.L. 107-68); and the Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 2002 (P.L. 107-73).

6. See section 1001(c) of An Act Making Consolidated Appropriations for the Fiscal Year Ending September 30, 2000, and for Other Purposes (P.L. 106-113).

7. See section 1001(b) of P.L. 106-113.

8. See section 2(b) of the Consolidated Appropriations Act, 2001 (P.L. 106-554).