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The Congressional Budget Office (CBO) believes it is too early to predict the likelihood of a discretionary sequestration in fiscal year 1999. The legislation affecting mandatory spending and revenues that has been adopted through August 7, 1998, would not trigger a pay-as-you-go (PAYGO) sequestration.
 

Discretionary Sequestration Report

The Balanced Budget and Emergency Deficit Control Act (the Deficit Control Act) sets limits on discretionary spending and provides for across-the-board cuts--known as sequestration--if annual appropriations exceed those limits. The caps are in effect through fiscal year 2002.

Before enactment of the Transportation Equity Act for the 21st Century (TEA-21) in June, the Deficit Control Act split discretionary spending into three categories for fiscal years 1998 and 1999: defense, nondefense, and spending to reduce violent crime. Separate limits applied to budget authority and outlays in each category. For fiscal year 2000, the act combined defense and nondefense spending into a single discretionary category and retained a separate category for violent crime reduction. For fiscal years 2001 and 2002, the act folded all three types of spending into one discretionary category, so the limits would apply to total discretionary spending. (The joint explanatory statement that accompanied the conference report on the Balanced Budget Act of 1997 specified which category each appropriation account fell into.)

TEA-21 altered that structure by establishing two new caps that apply to outlays for specified highway and mass transit programs (which had been included in the nondefense caps) beginning in 1999. TEA-21 also reduced the caps on nondefense spending in 1999 and the caps on overall discretionary spending in 2000, 2001, and 2002. Because the new caps on highway and mass transit spending exceed the reductions in the other caps, the amount of discretionary outlays allowed under the Deficit Control Act was increased by a total of $15.4 billion from 1999 through 2002.

By law, the discretionary spending limits are adjusted each year to account for such things as the enactment of emergency appropriations and changes in budgetary concepts and definitions. TEA-21 added special adjustments for the transportation caps. It requires that the caps on highway spending be adjusted each year in the sequestration preview report to reflect differences between current and future estimates of the revenues that will be attributed to the Highway Trust Fund. The legislation also requires that both types of transportation caps be adjusted each year to reflect any changes in technical estimates of the outlays that will result from the TEA-21 funding levels.

Under section 1024(b) of the Line Item Veto Act, the discretionary spending caps would have been adjusted by the amount of any Presidential cancellations of discretionary budget authority and outlays that were not overturned by a Congressional disapproval bill. No line-item veto cancellations were ever reflected in the caps, however, because the Supreme Court ruled the Line Item Veto Act unconstitutional in June.

Differences Between the Limits in CBO's and OMB's Preview Reports

The Office of Management and Budget (OMB) estimates whether a sequestration is required to eliminate a breach of the discretionary spending limits. (CBO's estimates are merely advisory.) As a result, CBO uses the estimated limits in OMB's most recent sequestration report--in this case, the preview report for fiscal year 1999, published in February--as the starting point for the adjustments it is required to make in this sequestration update report for 1999.

The caps in the two agencies' preview reports differed because of differing estimates of required adjustments for changes in budgetary concepts and definitions. CBO's estimate of the adjustment in the defense discretionary category for fiscal year 1999 was lower than OMB's by $68 million in budget authority and $67 million in outlays (see Table 1). CBO's estimate of the adjustment in the nondefense discretionary category for 1999 was higher than OMB's by $254 million in budget authority and $297 million in outlays. For 2000 through 2002, CBO's estimates for the overall discretionary category were also slightly higher than OMB's.
 

Most of the differences resulted from different estimates of changes in mandatory spending contained in fiscal year 1998 appropriation acts--particularly the estimates of a provision in the 1998 Treasury and General Government Appropriations Act to permit federal employees, for a limited period of time, to switch from the Civil Service Retirement System to the Federal Employees Retirement System. Another difference occurred because OMB reestimated the cost of arrears that the United States owes to various multilateral development banks, whereas CBO did not. The two agencies also had different estimates of changes in discretionary spending contained in authorizing legislation (primarily the Balanced Budget Act of 1997).

In addition, OMB adjusted the defense and nondefense caps for 1999 to reflect the reclassification of spending for the Formerly Utilized Sites Remedial Action Program from the natural resources and environment function in the budget to the national defense function. Since that reclassification did not affect total discretionary spending, the caps on overall discretionary spending for 2000 through 2002 were not adjusted.

Emergency Funding Made Available Since OMB's Preview Report

As required by law, CBO has also adjusted the discretionary spending limits to reflect emergency appropriations enacted since OMB's preview report. Between March and August, the Congress enacted emergency appropriations totaling $5,448 million in 1998 budget authority. More than half of that amount ($2,832 million) was in the defense discretionary category, and the remainder ($2,616 million) was in the nondefense discretionary category. The availability of some of those appropriations is contingent on their designation by the President as emergency requirements. CBO includes such appropriations in its cap adjustments because no further action by the Congress is needed to make them available.

Outlays from those emergency appropriations total $1,012 million in fiscal year 1998, $2,007 million in 1999, $1,136 million in 2000, $853 million in 2001, and $412 million in 2002. The outlay caps for both the defense and nondefense categories for 1998 and 1999 are adjusted to reflect the emergency spending for programs in those categories. Estimated emergency outlays for those programs also result in an increase in the caps on overall discretionary spending for 2000 through 2002. In addition, an emergency appropriation for the federal-aid highway account triggers an increase in the caps on highway spending for 1999 through 2002.

CBO has also adjusted the limits on discretionary spending for contingent emergency appropriations that the President has released since the publication of OMB's preview report. That adjustment is necessary because CBO starts with the limits in OMB's previous report, and those limits (unlike CBO's) include adjustments only for such appropriations that have already been released by the President. Since February, the President has released $100 million in 1998 contingent emergency appropriations for the Low Income Home Energy Assistance Program, which CBO estimates will increase nondefense discretionary outlays by $50 million in both 1998 and 1999.

Caps on Highway and Mass Transit Spending

As noted above, TEA-21 established two new caps beginning in fiscal year 1999 that apply to outlays for specified highway and mass transit programs; it also reduced the existing caps on nondefense spending in 1999 and the caps on other discretionary spending in 2000, 2001, and 2002. The highway category does not have a cap on budget authority because all of the spending in that category is controlled by the obligation limitations set in appropriation bills, which do not count as budget authority. Although spending for mass transit is controlled by a combination of appropriations and obligation limitations (which likewise are not counted as budget authority), that category has no limit on budget authority either. In his budget for fiscal year 1999, the President proposed redefining transportation obligation limitations as budget authority for both highway and mass transit spending, but that proposal has not been carried out.
 

Pay-As-You-Go Sequestration Report

The Deficit Control Act also contains a mechanism to ensure that any legislative changes in direct spending or receipts enacted since the Budget Enforcement Act of 1997 and before 2003 do not increase the deficit. That mechanism is the PAYGO sequestration. If legislative changes enacted through the end of a session of Congress increase the deficit (or reduce a projected surplus), a PAYGO sequestration is required at the end of the session. Under the sequestration, mandatory programs (other than those specifically exempt) are cut by enough to eliminate the increase. The PAYGO discipline applies to legislation enacted through 2002, but the sequestration procedure applies through 2006 to eliminate any increase in the deficit or decrease in a projected surplus caused by that legislation.

Both CBO and OMB are required to estimate the net change in the deficit that results from direct spending or receipt legislation. As with the discretionary spending limits, however, OMB's estimates determine whether a sequestration is necessary. CBO has therefore adopted the estimated effects of legislation from OMB's preview report as the starting point for this report. In February, OMB estimated that the effect of legislation enacted between the time of the Budget Enforcement Act and December 16, 1997, resulted in an $11 million increase in the deficit (actually, a reduction in the surplus) in 1999. That estimate excludes changes resulting from legislation enacted before the Budget Enforcement Act, because the act removed all available balances from the PAYGO scorecard. In addition, legislation enacted between the time of OMB's November final sequestration report and December 16, 1997, had a favorable effect of $153 million in 1998. (The balance for 1998 in OMB's final report is not available to offset increases in mandatory spending or decreases in revenues in fiscal year 1999.)

Legislation enacted since OMB's February preview report has reduced the deficit by $598 million in 1998 and $1,114 million in 1999, according to CBO's estimates. When added to the amounts in OMB's report, the result is a favorable balance of $751 million for 1998 and $1,103 million for 1999 (see Table 2). Thus, the Congress could enact legislation increasing mandatory spending or decreasing revenues by a total of $1,854 million in 1998 and 1999 without triggering a PAYGO sequestration. Those figures include the budget year effect of all legislation on which the Congress completed action before its August recess.