The Pending Automatic Budget Cuts
How the Two “Sequestrations” Would Work
 Security is a broader category than defense. In addition to most of the defense function, the security category includes veterans, international affairs, and homeland security.
 See OMB Report Pursuant to the Sequestration Transparency Act of 2012, September 24, 2012, at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/stareport.pdf.
 Because CBO now assumes lower interest rates than the BCA drafters assumed in 2011, CBO would likely estimate that the Supercommittee sequestration would actually reduce interest payments by about $135 billion through 2021.
 The National Defense function includes all the military programs of the Department of Defense as well as the nuclear weapons and clean-up activities of the Department of Energy and some other activities that are classified as National Defense, such as a portion of the FBI, the Department of Homeland Security, and the Coast Guard.
 All mandatory defense funding, except $679 million, is exempt from sequestration. The three largest examples of non-exempt funding are administrative costs of commissaries financed by surcharge collections, the national defense stockpile transaction fund, and administrative expenses of the Energy Employees Occupational Illness Compensation Fund (which is administered by the Department of Energy).
 Under the law, the President has the option to exempt none, some, or all funding for military personnel from a coming sequestration or to reduce the percentage cut applicable to military personnel, if he announces his decision by the applicable date (in this case, August 10, 2012). Exempting this funding results in an increase in the sequestration of other defense accounts, since the total dollar amount of the required defense reduction is not altered by a presidential decision on personnel funding. This is the only discretion granted to the executive under the sequestration law. For 2013, President Obama chose to completely exempt military personnel from sequestration.
 Under the BCA, the defense cap (which was $546 billion) was the figure used in this step of the calculation. Because ATRA reconfigured the BCA’s 2013 caps on discretionary funding to apply to security and non-security funding rather than to defense and non-defense funding, an applicable defense cap for this purpose no longer exists. Therefore, ATRA also created an allocation target to serve this purpose, and set it at the $544 billion figure shown in Table 3. As a result, this figure is not the cap that applies to discretionary funding for this year. Rather, this figure exists only for the purpose of starting the allocation calculations for the supercommittee sequestration, which is why we call it an “allocation target.” In later years, however, the corresponding figure will remain the statutory cap on defense funding (or, as applicable, the cap on non-defense discretionary funding), as required by the BCA.
 The September OMB report (cited in footnote 2) shows $580.1 billion in sequestrable defense funding rather than the $555.6 billion we show here. However, OMB’s estimates were required to be based on a hypothetical freeze-level CR defined in the Sequestration Transparency Act, while our estimates are based on CBO’s scoring of the actual CR now in effect plus CBO scoring of supplemental Sandy funding. The largest difference is that war funding in the 2013 CR is well below the 2012 freeze level.
 A special rule in the sequestration law provides that the Medicare sequestration starts the first full month after the order is issued and continues for 12 months; the $11.1 billion figure thus represents the 12-month savings in Medicare. See Appendix 2.
 The Budget Control Act is drafted as a portion of the Balanced Budget and Emergency Deficit Control of Act of 1985 (BBEDCA, also known as Gramm-Rudman-Hollings), which contains a list of exemptions in section 255 and a list of special rules in section 256. Therefore, these exemptions and special rules generally apply to this supercommittee sequestration, just as they have applied to all laws since 1985 containing a sequestration mechanism. These two sections of BBEDCA were most recently updated by the Statutory Pay-As-You-Go Act of 2010, and were not altered by the Budget Control Act or ATRA.
 For non-defense appropriations, “new funding” means new budget authority provided for 2013, including advance appropriations enacted in prior years that first become available for obligation in 2013. The term does not include unobligated balances carried over from prior years.
 Program integrity funding refers to the fact that the BCA allows the discretionary caps to be adjusted upward by a limited amount to the extent that Congress increases funding for the Social Security Administration to review disability cases and for the Department of Health and Human Services to fight Medicare fraud. This extra program integrity funding more than pays for itself by generating savings in disability and Medicare payments.
 Some Medicare costs, such as the low-income subsidy for the prescriptions drug benefit, are exempt from sequestration. Also, about $1 billion of mandatory Medicare funding for administrative costs is subject to across-the-board sequestration rather than being limited to 2 percent. For simplicity this analysis refers to a “2 percent limit on Medicare sequestration” but the calculations account for the portion of Medicare that is completely exempt and the portion that is subject to across-the-board sequestration.
 As explained in footnote 7, this $499 billion is not a cap on NDD funding in 2013; because of ATRA’s reconfiguration of the 2013 discretionary caps, the actual cap applies to non-security funding. The $499 billion figure exists only for the purpose of allocating the non-defense sequestration between discretionary and mandatory funding for the supercommittee sequestration, which is why we call it an “allocation target.”
 For obscure legal reasons, the 2 percent limit on the cut to funding for health centers and the Indian Health Service applies to mandatory funding for those programs but not discretionary funding for those programs for purposes of the supercommittee sequestration. Under a supercommittee sequestration, discretionary funding for those programs is cut by the standard non-defense discretionary percentage, which we estimate at 5.1 percent. However, for purposes of the cap sequestration discussed in Part 2 of this analysis, the 2 percent limit would apply to discretionary funding for those programs, shown in Table 5, if the nonsecurity cut were greater than 2 percent rather than the 0.3 percent we estimate.
 Technically, war, program integrity, disaster, and emergency funding are not outside the BCA caps but rather trigger an automatic upward adjustment in the caps. The distinction between disaster and emergency funding is unimportant in a legal sense, but the BCA provides for upward adjustments both for disaster funding (within limits) and emergency funding (with no specified limits).
 As one of its savings provisions, the CR carried forward a 2012 rescission of $0.4 billion in mandatory funds provided by the Affordable Care Act; because this action is taken in the CR, CBO originally scored the savings as helping the CR comply with the discretionary caps. ATRA then rescinded those funds, however, so OMB and CBO no longer score the CR as containing that $0.4 billion in savings.
 The first exception is the treatment of discretionary funding for the special health programs, health centers and the Indian Health Service. As explained in footnote 15, the cut to discretionary funding for the programs is limited to 2 percent under a cap sequestration but not so limited under a supercommittee sequestration. Since we estimate the cap sequestration of non-security funding to be only 0.3 percent, however, the 2 percent limitation applicable to these programs has no effect in this case.
In addition, the administrative expenses of the Supplemental Security Income (SSI) program are exempt from the Supercommittee sequestration, as shown in Table 4, but are subject to sequestration for purposes of enforcing the discretionary caps.
 OMB will re-estimate the amount of mandatory savings from sequestration — for example, the amount estimated to be saved by the 2 percent cut in Medicare reimbursement rates — when it submits its budget each year. While these estimates are unlikely to change much from year to year from those shown in Table 6 (which are CBO’s current projections), any change in estimated mandatory savings will necessarily produce an offsetting change in the size of the reduction in the non-defense discretionary cap, since the total amount of non-defense savings each year must equal $54.7 billion.
 The 2 percent limit on the sequestration of certain mandatory health funding and the special treatment of student loans will also continue to apply in the outyears, as they do in 2013 and as described in Table 4.
 The President and Congress chose to offset this $24 billion reduction in the size of the 2013 sequestration, and so included in ATRA $12 billion in other spending cuts and $12 billion in revenue from a timing shift that moves up tax receipts on certain retirement accounts. ATRA also delayed the cut from January 2 to March 1, 2013.
 See Part 2 of the main body of this report for a discussion of the defense and security distinction in the context of the BCA caps.
 Most funding in the Sandy supplemental appropriations bill was designated by Congress as either disaster or emergency funding and so is effectively exempt from the caps.
 A similar rule applies for sequestration of farm price support payments, which are cut for each crop-year that starts after March 1 and so will spill over into fiscal year 2014, but will all be attributed to the fiscal year 2013 target.