MEMORANDUM October 4, 2012 To: Senator Bernard Sanders Attention: Warren Gunnels From: D. Andrew Austin, Analyst in Economic Policy, 7-6552 Bill Heniff Jr., Analyst in Congress and Legislative Procedures, 7-8646 Subject: H.R. 1848, the One Percent Spending Reduction Act of 2011 This memorandum is in response to your request for information on H.R. 1848, the One Percent Spending Reduction Act of 2011, introduced by Representative Connie Mack on May 11, 2011.1 Specifically, you were interested in a summary of the legislation and its potential effect on Medicare and Social Security spending. The One Percent Spending Reduction Act of 2011, if enacted, would establish statutory caps on federal outlays, and enforce those caps through a sequestration process. It proposes to amend the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, 2 U.S.C. 900-922) by adding a new section 253A to establish outlay caps for each fiscal year beginning in FY2012. Total federal outlays, less net interest payments, would be capped at about $3,348 billion ($3,382 billion less one percent) for FY20122, and then reduced by an additional one percent each year through FY2017. Beginning in FY2018 and in each fiscal year thereafter, total federal outlays, including net interest payments, would be capped at 18 percent of gross domestic product (GDP). The outlay caps would be enforced primarily through a sequestration process.3 Sequestration is the largely across-the-board cancellation of budgetary resources (i.e., across-the-board spending cuts).4 Generally, no later than 45 calendar days after the beginning of each fiscal year, a sequestration of budgetary resources would be required to eliminate any "excess outlay amount."5 The excess outlay amount would be the amount by which total, presumably projected, federal outlays exceed the outlay cap for a fiscal year. H.R. 1848 would require OMB to issue preview and final sequestration reports, on August 15 and October 31 1 An identical bill (S. 1316) was introduced in the Senate by Senator Michael Enzi on June 30, 2011. As provided in the legislative text of H.R. 1848. 3 The legislation would also create a point of order in the House and Senate against any legislation that would cause outlays to exceed the outlay cap for the current fiscal year (Section 3(c) of H.R. 1848 amends the Congressional Budget Act by adding a new Section 316). A waiver of the point of order would require an affirmative vote of two-thirds in both chambers. 4 "Budgetary resources" include new budget authority, unobligated balances, and obligation limitations. 5 If legislation that would cause outlays to exceed the outlay cap in a fiscal year is enacted after November 15 (i.e., 45 days after the beginning of the fiscal year), the excess outlay amount for the following year would be increased by an equivalent amount. That is, budget resources in the following year would be reduced by the excess amount. 2 Congressional Research Service 7-5700 www.crs.gov Congressional Research Service 2 of each fiscal year, respectively, containing specific information related to the outlay caps, including any required outlay reductions.6 Preliminary calculations of the budgetary effects of H.R. 1848 using the most recent current-law baseline projections by the Congressional Budget Office (CBO) are presented in Table 1. H.R. 1848 would require a sequestration of budgetary resources to achieve outlay reductions of a total of $5.8 trillion over the FY2013-FY2022 period, ranging from a low of $21 billion in FY2013 to a high of $1,057 billion in FY2022.7 For the period FY2013-FY2017, the outlay cap is calculated to exclude net interest payments. For FY2018 and later years, the outlay cap includes net interest payments. Provisions of H.R. 1848 do not appear to affect provisions of the Budget Control Act of 2011 (BCA, P.L. 112-25). Thus, the reductions noted above would occur in addition to savings achieved by the BCA, relative to previous spending trends. Table 1. Preliminary Estimates of Outlay Caps, Projected Outlays, and Difference In billions of dollars Outlay Capa 2012 3,348 3,342 220 3,563 3,342 6 2013 3,315 3,336 218 3,554 3,336 -21 2014 3,282 3,368 227 3,595 3,368 -86 2015 3,249 3,509 244 3,754 3,509 -261 2016 3,216 3,719 284 4,003 3,719 -503 2017 3,184 3,852 354 4,206 3,852 -668 2018 3,739 3,991 416 4,407 4,407 -668 2019 3,917 4,211 470 4,681 4,681 -764 2020 4,093 4,420 512 4,932 4,932 -839 2021 4,269 4,642 541 5,183 5,183 -913 2022 4,451 4,939 570 5,509 5,509 -1,057 Fiscal Year Net Interest Total Outlays Projected Outlays Subject to Cap Difference Between Outlay Cap and Projected Outlays Noninterest Outlays Source: CRS analysis of H.R. 1848, as introduced, and calculations based on outlay projections in CBO, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, Table 1-1, p. 2. Notes: The calculations are based on the most recent current-law CBO projections; these projections are likely to change based on legislative changes to existing law and budgetary and technical revisions. For FY2012-FY2017, the outlay caps exclude net interest payments. For FY2018-FY2022, the outlay caps include net interest payments. 6 If a sequestration preview report projects an excess outlay amount, the Budget Committees of the House and Senate may report a resolution directing committees to change existing law to eliminate such excess outlay amount. No other provision related to such a resolution is provided in H.R. 1848. 7 CBO projections are included in Table 1-1 of CBO, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, August 2012, p. 2; available at http://www.cbo.gov/publication/43539. 9 In addition, under H.R. 1848, the Office of Management and Budget (OMB) would be responsible for making any determinations and calculations required to implement the legislation, if enacted. In particular, sequester calculations would be based on OMB projections of outlays. Congressional Research Service a. 3 For FY2013-FY2017, the outlay caps reflect a one-percent reduction from the previous year, beginning with the specified amount for FY2012. For FY2018-FY2022, the outlay caps reflect 18 percent of GDP, as projected by CBO. These calculations, as noted above, are based on current-law CBO projections. Current-law projections differ from current policy projections. For instance, current-law projections reflect the budgetary effects of expiring provisions that Federal Reserve Chairman Ben Bernanke called the fiscal cliff. Current policy projections, however, assume that those provisions would not expire. In addition, the current CBO current-law projections include an extrapolation of currently enacted levels of war funding (Overseas Contingency Operations, OCO). Thus, these projections are likely to change based on legislative changes to existing law and budgetary and technical revisions.9 H.R. 1848 specifies how the reductions would be applied, by reference primarily to Section 253 of the BBEDCA. Generally, Section 253 requires that each budget account is reduced by a uniform percent to achieve the required reductions in outlays. In addition, two provisions of Section 253 appear to be particularly significant. First, under Section 253, the reductions are divided equally between defense and nondefense accounts.10 For example, based on the preliminary estimates presented in Table 1, for FY2013, about $10.5 billion of the estimated required reductions would be achieved through spending cuts in defense accounts, and about $10.5 billion would be achieved through spending cuts in nondefense accounts. Such equal division of the reductions arguably becomes more significant, particularly for defense spending, as the total amount of the estimated required reductions increases. In particular, for FY2022, based again on the preliminary estimates presented in Table 1, defense spending would be cut by $529 billion; CBO projects defense outlays of $746 billon in FY2022.11 The second significant provision of Section 253 is a two-percent limit on reductions for the Medicare patient care outlays.12 That is, even if the required sequestration would require a uniform percent reduction exceeding two percent, such as five percent, to achieve the necessary outlay savings, cuts to the Medicare patient care outlays would not exceed two percent by statute. In addition to the two-percent limit for Medicare reductions specified in Section 253, H.R. 1848 provides that only payments for net interest (budget function 900) would be exempt from any sequestration. Under current sequestration rules, certain accounts, programs, and activities are exempt from any sequestration (Section 255 of the BBEDCA), and certain other accounts, programs, and activities are subject to special sequestration rules (Section 256 of the BBEDCA). These exemptions and special rules would not apply under this act. You were interested in the potential effects on Medicare and Social Security spending if H.R. 1848 were to become law. Table 2 presents preliminary estimates of the required reductions for Medicare and Social Security, based on the sequestration rules specified by H.R. 1848, as described above, and current outlay 10 Budget accounts are classified by budget function. For a brief description of the budget functional categories, see CRS Report 98-280, Functional Categories of the Federal Budget. For further information, see Government Accountability Office, Budget Function Classifications: Origins, Trends, and Implications for Current Uses, GAO/AIMD-98-67, February 1998. 11 In addition, CBO projects that defense outlays will represent about 13 percent of total outlays in FY2022. That is, in FY2022, half of the estimated required reductions would be applied to only about 13 percent of federal outlays. CBO projections of defense outlays are included in Table 1-3 of CBO, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, pp. 14-15. 12 Section 256(d) of the BBEDCA refers to "individual payments for services furnished" for Medicare Parts A (hospital insurance) and B (medical insurance), and contract payments for Parts C (Medicare Advantage) and D (drug benefit). CBO analysis of sequestration estimates that about 90% of mandatory Medicare outlays would be subject to the 2% limit for the period FY2012-FY2021. See CBO, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, September 2011, available at http://www.cbo.gov/publication/42754. Provisions of H.R. 1848 that relate to Section 256 could affect how a sequester of mandatory Medicare outlays would be implemented. Congressional Research Service 4 projections by CBO.13 As indicated in the table, half of the estimated reductions (about $2,890 billion of the $5,781 billion over the FY2013-FY2022 period) would come from nondefense accounts. For FY2013 and FY2014, the estimated uniform percent reduction is less than two percent.14 Therefore, all nondefense accounts (except net interest payments), including Medicare, would be cut by the same estimated uniform percent. For FY2015-FY2022, the estimated uniform percent exceeded two percent. Therefore, for those years, the two-percent reduction to Medicare patient care spending was first applied and then a uniform percent reduction was calculated for the remaining nondefense budget accounts. Based on such calculations using current CBO outlay projections, Medicare spending would be cut by about $211 billion, and Social Security spending would be cut by about $1,124 billion, over the FY2013-FY2022 period.15 Finally, H.R. 1848 does not expressly specify how such reductions would be implemented. That is, it is not clear how spending for Medicare and Social Security would be reduced. Under current sequestration rules (in particular Section 256(d) of the BBEDCA), Medicare spending reductions are achieved through a reduction in Medicare payments. As noted above, however, H.R. 1848 specifies that Section 256 would not apply to any sequestration under this act. We trust this information meets your needs. If you have questions or if we can be of further assistance, please do not hesitate to contact us. 13 The calculations presented in the table do not reflect any potential interaction effects between Medicare spending and premiums. CBO indicated in its estimates of the sequestration under the Budget Control Act (P.L. 112-25) that "[b]ecause the sequestration will reduce Medicare's spending, premiums for Part B (Medical Insurance) will be lower. Moreover, Medicare's prices for competitively bid services will be probably be higher." See Ibid., Box 1-1, p. 10. 14 The calculations do not reflect the maximum reductions in student loans, foster care and adoption assistance programs, and certain health programs that possibly would be required, by reference to Section 253 of the BBEDCA, to be applied prior to any reductions in other budget accounts. 15 The estimated reduction in mandatory Medicare outlays is a combination of funding subject to the 2% limit and other funding subject to a higher sequestration rate. Congressional Research Service 5 Table 2. Preliminary Estimates of Outlay Reductions Under H.R. 1848 In billions of current dollars Estimated Total Reductionsa Fiscal Year Defense Nondefense Medicare Reductionsb CBO Baseline Sequester Amount Social Security Reductions % Reduction Sequestrable Base Sequester Amount Sequester Percentage 2013 -11 -11 581 -2 -0.4% 809 -3 -0.4% 2014 -43 -43 605 -10 -1.6% 853 -13 -1.6% 2015 -130 -130 636 -15 -2.3% 900 -46 -5.2% 2016 -251 -251 693 -19 -2.8% 951 -93 -9.8% 2017 -334 -334 720 -22 -3.1% 1007 -127 -12.6% 2018 -334 -334 752 -23 -3.0% 1067 -129 -12.1% 2019 -382 -382 827 -26 -3.1% 1132 -150 -13.2% 2020 -420 -420 889 -28 -3.2% 1202 -166 -13.9% 2021 -457 -457 956 -31 -3.2% 1274 -183 -14.4% 2022 -529 -529 1064 -36 -3.4% 1350 -213 -15.7% -2,890 7,722 -211 -2.7% 10,545 -1,124 -10.7% Total (FY2013FY2022) -2,890 Source: CRS calculations based on CBO outlay projections in CBO, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022. Notes: The calculations do not reflect the reductions in student loans, foster care and adoption assistance programs, and certain health programs that possibly would be required, by reference to Section 253 of the BBEDCA, to be applied prior to any reductions in other budget accounts. Amounts are rounded to the nearest $1 million. Some items may not sum to totals due to rounding. a. H.R. 1848, by reference to Section 253 of the BBEDCA, requires that the total outlay reductions be divided equally between defense and nondefense accounts. See calculations of reductions in Table 1. b. The calculations presented in this table do not reflect any potential interaction effects between Medicare spending and premiums. Medicare patient care payments, which account for close to 90% of mandatory Medicare outlays, are limited to two percent, by reference to Section 253 of the BBEDCA. The column labeled CBO baseline shows projections for all mandatory Medicare outlays. The sequester amount reflects the both reductions of Medicare funding subject to the 2% limit and reductions of other Medicare mandatory funding. The percentage reduction is therefore an average rate. Discretionary funding for Medicare is not included.