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United States Government Accountability Office: 
GAO: 

Report to the Chairman, Committee on the Budget, House of 
Representatives: 

May 2014: 

2013 Sequestration: 

Selected Federal Agencies Reduced Some Services and Investments, While 
Taking Short-Term Actions to Mitigate Effects: 

GAO-14-452: 

GAO Highlights: 

Highlights of GAO-14-452, a report to the Chairman, Committee on the 
Budget, House of Representatives. 

Why GAO Did This Study: 

On March 1, 2013 the President ordered a sequestration of $85.3 
billion across federal government accounts. Final appropriations 
enacted on March 26, 2013 reduced this amount to $80.5 billion. Under 
current law, a sequestration of direct spending will occur through 
fiscal year 2024 and another sequestration of discretionary 
appropriations could occur in any fiscal year through 2021. 

GAO was asked to evaluate how agencies prepared for and implemented 
sequestration in fiscal year 2013. GAO's March 2014 report broadly 
examined fiscal year 2013 sequestration at 23 large federal agencies. 
This report examines in greater depth: (1) the effects of fiscal year 
2013 sequestration on the operations, performance, or services to the 
public for selected components within federal agencies; and (2) how
those selected components planned for and implemented the fiscal year
2013 sequestration. 

GAO reviewed programs and activities operated by four components of
federal agencies: CBP, CMS, OESE, and PIH. GAO selected these case 
studies based on factors such as the share of total sequestered funds 
and level of direct services provided to the public. GAO also 
incorporated findings from a November 2013 report that addressed 
similar objectives for select operations at DOD. GAO's case study
selections account for about 77 percent of the total defense funding
sequestered and 36 percent of the total nondefense funding sequestered 
in fiscal year 2013. 

What GAO Found: 

Fiscal year 2013 sequestration reduced funding to selected components of
federal agencies and their program partners—-such as state and local
governments-—that assist in carrying out agency missions. As a result, 
the selected components and their partners reduced or delayed some 
services to the public and operations in 2013. For example: 

* Public housing authorities reported providing rental assistance to 
about 41,000 fewer very low-income households compared to 2012-—a 2.2 
percent reduction-—because the authorities received less program 
funding from the Department of Housing and Urban Development's Office 
of Public and Indian Housing (PIH). 

* The Department of Health and Human Services' Centers for Medicare &
Medicaid Services (CMS) reported reducing the frequency of surveys to
determine quality of care and compliance with federal standards at
psychiatric hospitals from once every three years to once every four 
to five years and specialized organ transplant centers from once every 
three years to once every four to six years. 

* The Department of Homeland Security's U.S. Customs and Border
Protection (CBP) reported that sequestration reductions did not leave 
them with sufficient funds to provide the overtime necessary to fully 
staff inspection booths which resulted in increased average wait times 
for international passengers. From fiscal years 2012 to 2013, wait 
times increased from 19.7 minutes to 22.8 minutes at one airport and 
from 20.9 minutes to 26.8 minutes at another. 

* School districts GAO spoke with reported that reduced funding from the
Department of Education's Office of Elementary and Secondary Education
(OESE) resulted in less resources for specialists providing extra 
instruction to students and an increase in the average number of 
students per elementary school class. For example, one district 
reported an average increase of two or three students per elementary 
school class from the prior school year. 

* The Department of Defense (DOD) reported that canceled or limited 
military training and readiness activities could increase the number 
of nondeployable units, decrease surge capacity to meet additional 
requirements with ready forces, and lead to skills gaps. 

In some cases, program partners reported increasing reliance on other 
federal, state, and local funding sources, where available, to 
mitigate sequestration's effects on their services to the public. 
Certain state agencies reported that they relied on additional state 
funds to inspect and investigate health care facilities on behalf of 
CMS. However, in other cases, program partners reported that
reductions in other funding sources magnified sequestration's effects 
on services to the public. For example, officials at 7 school 
districts that receive federal education grants reported that 
sequestration compounded prior-year reductions in state funding. 

However, GAO found in some cases the effects of sequestration could 
not be isolated from the effects of other changes in funding. For 
example: 

* The effects of the 2 percent sequestration of Medicare payments are 
difficult to quantify due to the challenge of isolating the effects of 
sequestration from other factors that increased or decreased payments 
to providers, as well as possible changes in provider behavior to 
compensate for the sequestration reductions. 

* It is difficult to isolate the specific effects of sequestration on 
Title I school districts because Title I funding typically makes up a 
small portion of the school district's total funding compared to state 
and local sources. A district's Title I formula allocation could also 
be reduced as a result of factors other than sequestration. 

GAO found that sequestration planning and implementation varied among 
the selected components. In some cases, agencies directed components' 
efforts, while in others components provided guidance and set 
priorities for program offices. Consistent with GAO's March 2014 
report, officials from all federal agency components reported that 
uncertainty regarding the timing and amount of sequestration and 
technical questions about how to apply sequestration to certain 
complex accounts presented challenges for planning and implementation. 

For example: 

* CMS officials had difficulty determining all of the types of 
provider payments that would need to be cut and which funding was 
subject to special sequestration rules. 

* According to CBP budget officials, applying sequestration to fee-based
accounts was more difficult than applying sequestration to other 
accounts. 

In addition, uncertainty surrounding the timing and amount of 
sequestration limited some components' ability to substantively 
communicate with program partners and recipients, making it difficult 
for partners to plan and execute their budgets during the fiscal year. 
For example, recipients of Indian Housing Block grants from PIH did 
not receive the full amount of funds until several months into the 
calendar year. 

Components that had initiated efficiency efforts prior to 
sequestration reported that they were better positioned to plan for 
and implement sequestration in fiscal year 2013. For example, CMS 
officials reported that savings from a 2011 initiative to improve the 
efficiency of its facility inspections helped the component plan for 
and implement sequestration. 

In reviewing how agencies implemented sequestration, GAO also selected 
five programs, projects, and activities (PPAs) from each of the four 
nondefense case study components based on the specific programs or 
activities reviewed within each component and other factors and found 
that components complied with the provision in the Balanced Budget and 
Emergency Deficit Control Act of 1985 that specifies how PPAs should 
be identified for the purpose of sequestration. 

In cases where officials had some discretion in implementing 
sequestration reductions, components reported that they sought to 
protect higher priority activities, either by using funding 
flexibilities or modifying or canceling contracts or other ongoing 
activities. For example, within DOD, the military services sought
to protect training requirements for deployed and next-to-deploy 
forces by canceling or limiting training for forces not preparing to 
deploy in fiscal year 2014. 

However, for some programs, officials reported having limited options to
implement sequestration. For example, some of the case study components'
largest programs—-such as HUD's Housing Choice Voucher Program and
Education's Title I grants-—are based on eligibility formulas and the 
funds are disbursed to program partners to provide services to the 
public. As a result, these program partners had to identify specific 
actions-—such as limiting the number of housing vouchers issued and 
increasing classroom size-—to absorb the reductions and mitigate their 
effects on the public. 

What GAO Recommends: 

GAO is not making new recommendations in this report. 

We provided a draft of this product to the selected case study 
agencies and the Office of Management and Budget (OMB) for comment. 
DHS, Education, HHS, and HUD provided technical comments that were 
incorporated, as appropriate. OMB did not provide comments. 

View [hyperlink, http://www.gao.gov/products/GAO-14-452]. For more 
information, contact Michelle Sager at (202) 512-6806 or 
sagerm@gao.gov or Edda Emmanuelli Perez at (202) 512-2853 or
emmanuellipereze@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Sequestration Reduced Selected Federal Components' Services to the 
Public and Increased Some Partners' and Recipients' Reliance on Other 
Funding Sources: 

Federal Components' Sequestration Planning and Implementation Efforts 
Varied and Were Hindered by Uncertainty and Other Challenges: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Fiscal Year 2013 Sequestration at U.S. Customs and Border 
Protection: 

Appendix II: Fiscal Year 2013 Sequestration at the Centers for 
Medicare & Medicaid Services: 

Appendix III: Fiscal Year 2013 Sequestration at the Office of 
Elementary and Secondary Education: 

Appendix IV: Fiscal Year 2013 Sequestration at the Office of Public 
and Indian Housing: 

Appendix V: Objectives, Scope, and Methodology: 

Appendix VI: Glossary of Budget Terms: 

Appendix VII: U.S. Customs and Border Protection Organization Chart 
and Fiscal Year 2013 Funding Levels: 

Appendix VIII: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Four Case Studies of Fiscal Year 2013 Sequestration: 

Table 2: U.S. Customs and Border Protection's Anticipated Funding 
Reductions in Fiscal Year 2013: 

Table 3: Reductions Considered, as of January 2013, by U.S. Customs 
and Border Protection to Meet Sequestration Requirements: 

Table 4: Overview of Selected Centers for Medicare & Medicaid Services 
(CMS) Activities: 

Table 5: Overview of Selected Grant Programs Administered by OESE: 

Table 6: Allocations of Title I Grant Funding for Fiscal Year 2013 by 
District Poverty Rate: 

Table 7: Overview of Selected Public and Indian Housing Programs: 

Table 8: Overview of Select Programs, Projects, and Activities Traced 
to Source: 

Table 9: Names of GAO Staff Contributing to Information on Selected 
Components: 

Figures: 

Figure 1: U.S. Customs and Border Protection Mission and Fiscal Year 
2013 Sequestered Funding: 

Figure 2: U.S. Customs and Border Protection Organization Chart and 
Fiscal Year 2013 Funding Levels: 

Figure 3: Office of Field Operations COPRA Overtime Expenditures 
during Fiscal Year 2013: 

Figure 4: Centers for Medicare & Medicaid Services Mission and Fiscal 
Year 2013 Sequestered Funding: 

Figure 5: Timeline of CMS Actions Related to Sequestration of Medicare 
Payments and Survey and Certification: 

Figure 6: Office of Elementary and Secondary Education Mission and 
Fiscal Year 2013 Sequestered Funding: 

Figure 7: Percentage of Federally Connected Children in Districts 
Receiving Impact Aid Nationwide in Fiscal Year 2013: 

Figure 8: Office of Public and Indian Housing Mission and Fiscal Year 
2013 Sequestered Funding: 

Figure 9: Number of Households That Received Rental Assistance in the 
Housing Choice Voucher Program, January 2011 to December 2013: 

Abbreviations: 

AUO: Administratively Uncontrollable Overtime: 

BBEDCA: Balanced Budget and Emergency Deficit Control Act of 1985: 

BCA: Budget Control Act of 2011: 

BWPMO: Balanced Workforce Program Management Office: 

CBP: U.S. Customs and Border Protection: 

CCSQ: Center for Clinical Standards and Quality: 

CHIP: Children's Health Insurance Program: 

CLIA: clinical laboratory improvement amendments: 

CMS: Centers for Medicare & Medicaid Services: 

COPRA: Customs Officer Pay Reform Act: 

CR: continuing resolution: 

DHS: Department of Homeland Security: 

DOD: Department of Defense: 

Education: Department of Education: 

ESEA: Elementary and Secondary Education Act of 1965: 

FEPA: Federal Employees Pay Act: 

FTE: full-time equivalent: 

HCFAC: Health Care Fraud and Abuse Control: 

HHS: Department of Health and Human Services: 

HUD: Department of Housing and Urban Development: 

IHBG: Indian Housing Block Grant: 

IT: information technology: 

Joint Committee: Joint Select Committee on Deficit Reduction: 

LEA: local education agency: 

MAC: Medicare Administrative Contractors: 

Medi-Medi: Medicaid Data Match Project: 

NAHASDA: Native American Housing Assistance and Self-Determination Act 
of 1996: 

NAFIS: National Association of Federally Impacted Schools: 

OA: Office of Administration: 

OESE: Office of Elementary and Secondary Education: 

OFM: Office of Financial Management: 

OFO: Office of Field Operations: 

OMB: Office of Management and Budget: 

ONAP: Office of Native American Programs: 

PACE: Program of All-inclusive Care for the Elderly: 

PIH: Office of Public and Indian Housing: 

PHA: public housing authorities PPA programs, projects, and activities: 

PPACA: Patient Protection and Affordable Care Act: 

SFF: special focus facility: 

SMI: Federal Supplementary Medical Insurance: 

TDHE: tribally designated housing entities: 

USBP: U.S. Border Patrol: 

Voucher: Housing Choice Voucher program: 

ZPIC: Zone Program Integrity Contractor: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

May 28, 2014: 

The Honorable Paul Ryan: 
Chairman: 
Committee on the Budget: 
House of Representatives: 

Dear Mr. Chairman: 

In our recent report that broadly examined fiscal year 2013 
sequestration at 23 of 24 Chief Financial Officers Act agencies, 
[Footnote 1] we found that the automatic, across-the-board 
cancellation of budgetary resources had a wide range of effects on 
federal agency operations and services to the public. Agencies 
reported that sequestration reduced assistance for education, housing, 
and nutrition, as well as grants for health and science research and 
development. Agencies also reported delaying investments such as 
information technology and facilities projects. Some federal agencies 
also reported backlogs and delays as a result of personnel actions, 
such as limiting hiring and furloughing employees. 

This was the first sequestration in more than two decades. The 
President ordered the sequestration on March 1, 2013--5 months into 
the fiscal year--to achieve $85.3 billion in reductions across federal 
government accounts and their subunits, known as programs, projects, 
and activities (PPA). Subsequently, on March 26, 2013, Congress and 
the President enacted the Consolidated and Further Continuing 
Appropriations Act, 2013, which reduced the amount of reductions 
agencies were required to achieve to $80.5 billion. The uncertainty 
over the timing and amount of sequestration as well as how to apply 
sequestration to complex programs made it particularly challenging for 
federal agencies to plan and implement the cuts. Under current law, a 
sequestration of direct spending, including Medicare payments, will 
occur through fiscal year 2024 and another sequestration of 
discretionary appropriations could occur in any fiscal year through 
2021. 

You asked that we evaluate how agencies prepared for and implemented 
sequestration for fiscal year 2013. This report, which builds on our 
March report, examines in greater depth: (1) the effects of fiscal 
year 2013 sequestration on the operations, performance, and services 
to the public for selected components within federal agencies; 
[Footnote 2] and (2) how those selected components planned and 
prepared for and implemented fiscal year 2013 sequestration. 

To achieve these objectives, we selected six components within federal 
agencies for case study review. In these case studies, we sought to 
cover a significant share of the sequestered funding, as well as 
programs with a high level of public interaction. We also sought to 
cover a range of federal missions and the different program delivery 
tools the federal government uses to achieve its missions, such as 
grants, vouchers, contracts, and direct services. Based on these 
criteria, we selected the following components: 

* the Department of Defense's (DOD) Operation and Maintenance accounts; 

* DOD's Procurement accounts; 

* the Department of Education's (Education) Office of Elementary and 
Secondary Education (OESE); 

* the Department of Health and Human Services' (HHS) Centers for 
Medicare & Medicaid Services (CMS); 

* the Department of Homeland Security's (DHS) U.S. Customs and Border 
Protection (CBP); and: 

* the Department of Housing and Urban Development's (HUD) Office of 
Public and Indian Housing (PIH). 

Together, our case study selections account for about 77 percent of 
the total defense funding and 36 percent of the total nondefense 
funding that the President ordered to be sequestered on March 1, 2013. 
[Footnote 3] We reported on our review of DOD's Operation and 
Maintenance and Procurement accounts along with our review of DOD's 
Research, Development, Test, and Evaluation account separately in 
November 2013.[Footnote 4] We used the results of that work to inform 
our overall findings for this report. This report provides the results 
of the four remaining case studies, which are reported in appendixes I 
through IV. Within these four nondefense case studies, we selected a 
limited number of programs, activities, or offices for more in-depth 
data gathering and analysis. Table 1 provides an overview of the four 
case studies presented in this report and the programs and activities 
within these components selected for more in-depth review. We selected 
these programs and activities based on the size of their budget, level 
of interaction with the public, the availability of measurable 
estimates of the effects of sequestration, and other factors. For 
details on how we selected programs and activities within individual 
case study components, see appendixes I through IV. 

Table 1: Four Case Studies of Fiscal Year 2013 Sequestration: 

Department and component: Department of Homeland Security, U.S. 
Customs and Border Protection (CBP); 
Overview and selected programs and activities: Our CBP case study 
focuses on the Office of Field Operations (OFO), U.S. Border Patrol 
(USBP), and certain user fees. CBP officers are responsible for 
securing the border at U.S. ports of entry, while Border Patrol agents 
are responsible for securing the border between ports of entry. We 
also examined CBP fees for customs inspection, including inspection of 
air passengers and commercial vessel passengers arriving at U.S. ports 
of entry. 

Department and component: Department of Health and Human Services, 
Centers for Medicare & Medicaid Services (CMS); 
Overview and selected programs and activities: The CMS case study 
focuses on Medicare payments, Medicare Administrative Contractors 
(MAC), CMS program integrity, survey and certification including 
clinical laboratory improvement amendments surveys, personnel funds, 
and state insurance exchange grants. Medicare pays health care 
providers and plans for services provided to beneficiaries--primarily 
individuals age 65 and older and certain individuals with 
disabilities. CMS uses MACs to process Medicare claims, enroll health 
care providers in the Medicare program, and conduct certain program 
integrity activities, among other functions. CMS program integrity 
aims to reduce fraud in CMS programs and is supported by Health Care 
Fraud and Abuse Control funding. CMS, through contracts with states, 
also oversees inspections of facilities that participate in Medicare 
and Medicaid to ensure safety and compliance with federal standards. 
Affordable insurance exchange grants are awarded to states to 
implement insurance exchanges for health care reform. If a state does 
not elect to operate an exchange or is not certified or approved to 
operate one, HHS is to operate the exchange in that state. 

Department and component: Department of Education, Office of 
Elementary and Secondary Education (OESE); 
Overview and selected programs and activities: The OESE case study 
focuses on two formula grant programs administered under the 
Elementary and Secondary Education Act of 1965, as amended: Title I 
and Impact Aid. Formula grants are distributed using defined formulas. 
In the case of Title I and Impact Aid, the grant formulas are 
established by statute. Title I funds are provided through state 
educational agencies to local educational agencies with high 
concentrations of students from low-income families. Impact Aid grants 
assist school districts that have lost property tax revenue due to the 
presence of tax-exempt federal property or that have experienced 
increased expenditures due to the enrollment of federally-connected 
children, such as children with parents in the military and children 
living on Indian lands. Impact Aid funds are awarded directly to 
school districts. 

Department and component: Department of Housing and Urban Development, 
Office of Public and Indian Housing (PIH); 
Overview and selected programs and activities: The PIH case study 
focuses on the following programs: 
* The Housing Choice Voucher (voucher) Program subsidizes private-
market rents for low-income households with a subsidy that generally 
equals the difference between the unit's rent and 30 percent of the 
household's income; 
* The Public Housing Operating Fund provides subsidies to public 
housing authorities (PHA) to operate and maintain public housing; 
* The Indian Housing Block Grant (IHBG) Program provides formula 
grants to federally-recognized Indian tribes or their tribally 
designated housing entity for a range of affordable housing activities. 

Source: GAO analysis of agency information. 

[End of table] 

To assess the effects of sequestration on the selected components, as 
well as how they planned for and implemented sequestration, we 
reviewed documents obtained during our agency-level review,[Footnote 
5] including a list of sequestered PPAs, total discretionary and 
mandatory funding levels, and total amount sequestered. We also 
reviewed additional agency documents and analyzed budget and financial 
data for fiscal year 2013. We asked agencies to identify the source of 
any information provided and a description of any known limitations or 
purposes for which the data being provided should not be used. In 
addition, we interviewed agency officials from each component, 
including officials in budget and management offices as well as 
officials in program offices. We asked agency officials to isolate the 
effects of sequestration from other factors such as operating under a 
continuing resolution (CR) and the rescissions enacted in the 
Consolidated and Further Continuing Appropriations Act, 2013, to the 
degree possible. We recognize that these other factors could also 
contribute to budget uncertainty and affect components' operations, 
performance, and services to the public. We also interviewed program 
partners that help carry out some of the selected components' missions 
by providing services to recipients of federal funding or the general 
public. Program partners for the four selected components include 
state, local, and tribal governments, school districts, and others. We 
also interviewed certain recipients of component support and services 
or their representatives. Appendixes I through IV describe how we 
selected these recipients or representatives. 

We reviewed supporting documents to assess the reasonableness of 
components' estimates of the effects of sequestration on operations, 
performance, and services to the public. Specifically, we reviewed the 
data and methodology used to calculate these estimates, and we 
reported the estimates when they met our evidentiary standards. In 
some cases we found it appropriate to report agency estimates, as long 
as we also included significant contextual information and information 
about limitations regarding the estimates. We did not assess the 
appropriateness of actions agencies or components took to implement 
sequestration. 

In reviewing how agencies implemented sequestration, we also examined 
the extent to which selected components identified PPAs in accordance 
with the criteria set out in section 256(k)(2) of the Balanced Budget 
and Emergency Deficit Control Act of 1985 (BBEDCA), as amended. We 
reviewed a purposeful sample of five PPAs from each of the four 
nondefense components discussed in this report. We traced each of the 
selected PPAs back to the applicable source and conducted follow-up 
interviews with agency officials to further understand how the agency 
or component made its determination, as needed. Because we used a 
nonrandom, purposeful sample, the results of our analysis of the 
selected PPAs cannot be generalized to other PPAs within the component 
or department or to the federal government as a whole. 

We conducted our work from April 2013 to May 2014 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. For additional details on 
our scope and methodology, see appendix V. 

Background: 

The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) 
established sequestration to enforce discretionary spending limits and 
control the deficit. In August 2011, Congress and the President 
enacted the Budget Control Act of 2011 (BCA), amending BBEDCA. 
[Footnote 6] Among other things, the BCA established the Joint Select 
Committee on Deficit Reduction (Joint Committee), which was tasked 
with proposing legislation to reduce the deficit by $1.2 trillion or 
more through fiscal year 2021. The absence of such legislation 
triggered the sequestration process in section 251A of BBEDCA, known 
as the Joint Committee sequestration, which is the subject of this 
report.[Footnote 7] During fiscal year 2013, several laws changed the 
timing and amount of sequestration. As a result of those changes, the 
President ultimately ordered a sequestration on March 1, 2013, to 
achieve $85.3 billion in budget reductions. Consistent with BBEDCA, 
the Office of Management and Budget (OMB) calculated the following 
percentage sequestration reductions based on the funding level set by 
the CR in effect at that time: 

* 7.9 percent for defense direct spending, 

* 7.8 percent for defense discretionary spending, 

* 5.1 percent for nondefense direct spending--other than Medicare 
payments and certain health programs, which are limited to 2 percent 
under BBEDCA, and: 

* 5 percent for nondefense discretionary spending.[Footnote 8] 

BBEDCA required that the sequestration reductions ordered on March 1, 
2013, be applied uniformly, across the board, to nonexempt accounts 
and their sub-units, known as PPAs.[Footnote 9] BBEDCA provides that 
PPAs are identified by appropriation acts or accompanying reports for 
the relevant fiscal year or, for accounts not included in 
appropriation acts, with reference to the most recently submitted 
President's budget. On March 26, 2013, Congress and the President 
enacted the Consolidated and Further Continuing Appropriations Act, 
[Footnote 10] which provided full-year appropriations to federal 
agencies and had the effect of reducing the sequestered amount for 
fiscal year 2013 from $85.3 billion to $80.5 billion.[Footnote 11] The 
final sequestered amount for fiscal year 2013 is dependent on total 
sequestered amounts for programs that are funded by permanent 
indefinite budget authority, such as entitlement programs like 
Medicare payments where obligations depend on the number of eligible 
beneficiaries receiving benefits.[Footnote 12] 

Our March 2014 report found that one of the ways agencies responded to 
sequestration was by using funding flexibilities to mitigate the 
effects of sequestration where available. These funding flexibilities 
include reprogramming and transferring funds and using unobligated 
balances. Reprogramming is the shifting of funds from one program 
activity to another within an appropriation account for purposes other 
than those contemplated at the time of appropriation, while 
transferring is the shifting of funds between appropriation accounts. 
[Footnote 13] Unobligated balances that remain legally available from 
prior year appropriations could provide agencies with funding 
flexibility to respond to sequestration.[Footnote 14] If a multiyear 
or no-year appropriation is not fully obligated by the end of the 
fiscal year, the unobligated balance may be carried forward into the 
next fiscal year and may remain available for obligation.[Footnote 15] 

Looking forward, agencies face the prospect of ongoing budget 
constraints as well as the possibility of future sequestrations. 
BBEDCA established discretionary spending limits for both defense and 
nondefense discretionary appropriations for fiscal years 2014 through 
2021. If either defense or nondefense discretionary appropriations 
exceed the limit, sequestration would occur 15 days after the end of 
the next congressional session. The fiscal year 2014 discretionary 
appropriations enacted on January 17, 2014, did not exceed defense or 
nondefense spending limits, and therefore did not trigger a 
sequestration of discretionary appropriations. Nonexempt direct 
spending, including Medicare payments, will continue to be sequestered 
automatically for fiscal years 2014 through 2024, as it was in fiscal 
year 2013.[Footnote 16] 

Sequestration Reduced Selected Federal Components' Services to the 
Public and Increased Some Partners' and Recipients' Reliance on Other 
Funding Sources: 

The selected components and their partners reduced or delayed some 
services to the public and operations in 2013 as a result of 
sequestration. For example, components of federal agencies reported 
that their actions included the following: 

* Due in part to personnel actions taken in response to sequestration, 
international passenger wait times for CBP inspections increased at 
some airports, and CBP delayed some air cargo inspections. For 
example, CBP officials reported that sequestration reductions did not 
leave them with sufficient funds to provide the overtime necessary to 
fully staff inspection booths, which resulted in increased average 
wait time for international passengers. From fiscal years 2012 to 
2013, wait times increased from 19.7 minutes to 22.8 minutes at one 
airport and from 20.9 minutes to 26.8 minutes at another. Meanwhile, 
officials at one CBP field office stated that in some instances, 
officers could not inspect all cargo in the queue during their normal 
shift, which meant that some cargo was not inspected until the next 
shift began, which delayed the release of cargo for shipment. 

* CMS reduced the frequency of certain medical facility inspections. 
For example, to implement sequestration reductions, CMS reported 
reducing the frequency of surveys to determine the quality of care and 
compliance with federal standards at psychiatric hospitals from once 
every 3 years to once every 4 to 5 years. Surveys of specialized organ 
transplant centers were reduced from once every 3 years to once every 
4 to 6 years. We do not know the effect of the reduced oversight on 
patient safety or the quality of care provided by the health care 
facilities. 

* Impact Aid and Title I school districts reduced some services to 
students. For example, three of the Impact Aid districts reported 
having to increase class sizes. Officials from one of the districts 
specifically reported an average increase of two or three students per 
elementary school class from the prior school year. Meanwhile, 
officials from one district that received Title I funding told us that 
the loss of funding contributed to the decision to reduce the number 
of reading and math specialists who provide extra instruction to 
students and assist teachers in improving their teaching methods. 

* PIH reduced funding for the Housing Choice Voucher program. As a 
result, the number of very low-income households receiving rental 
housing assistance through the program at the end of calendar year 
2013 declined by about 41,000 (2.2 percent) compared to the end of 
calendar year 2012 primarily due to sequestration. 

* DOD reduced military training and readiness activities, such as 
canceling or limiting training, which the agency reported could 
increase the number of non-deployable units, decrease surge capacity 
to meet additional requirements with ready forces, and lead to skills 
gaps. 

In some instances, the effects of sequestration compounded other 
reductions in federal, state, and local funding sources. 
Representatives of a medical provider association have reported that 
the 2 percent reductions to Medicare payments required by 
sequestration compounded other reductions in payments. Payment 
reductions can result from the annual rate setting process for 
providers or specific legislative actions. Further, all of the seven 
Title I and Impact Aid school districts we spoke to told us that cuts 
to state funding in prior years had already reduced their budgets, 
which were further cut as a result of sequestration. In other cases, 
program partners supplied resources, where available, to mitigate the 
effects of sequestration. Officials at certain state survey agencies 
that we spoke to, which carry out health care facility safety 
inspections and investigations on behalf of CMS, said they would use 
additional state funds when necessary to compensate for lower federal 
funding levels and complete high-priority inspections.[Footnote 17] 
Similarly, some PHAs used funding reserves accumulated from prior 
years to avoid terminating housing vouchers. In addition, officials at 
one of the four PHAs we interviewed told us their local government 
provided funding for public housing--which it does not usually do--to 
mitigate the effects of sequestration. 

However, we found that in some cases the effects of sequestration were 
unknown because it is difficult to isolate the effects for some 
programs and activities that receive funding from multiple sources. 
For example, the effects of the 2 percent sequestration of Medicare 
payments are difficult to quantify due to difficulty in isolating the 
effects of sequestration from other factors that increased or 
decreased payments to providers, as well as possible changes in 
provider behavior to compensate for the sequestration reductions. 
Similarly, it is difficult to isolate the specific effects of 
sequestration on Title I school districts because Title I funding 
typically makes up a small portion of the school district's total 
funding compared to state and local sources. In addition, because of 
the statutory formula for Title I, a reduced Title I allocation could 
be a result of factors other than sequestration, such as decreases in 
the formula count of children or reduced state per pupil expenditures. 

Federal Components' Sequestration Planning and Implementation Efforts 
Varied and Were Hindered by Uncertainty and Other Challenges: 

Planning for sequestration varied among the selected federal 
components. Some planning efforts were more centralized and occurred 
primarily at the agency level. For example, OESE and PIH largely 
followed sequestration plans set by Education and HUD, respectively. 
By contrast, CMS planned for sequestration primarily at the component 
level by identifying certain activities as spending priorities, in 
consultation with the HHS budget office. CBP headquarters generally 
managed planning for the required budgetary reductions and delegated 
implementation decisions affecting operations to program offices. 

In some cases where sequestration planning primarily occurred at the 
component level, technical questions posed challenges. CMS faced 
technical challenges in applying sequestration in accordance with the 
law and changing budget parameters. Specifically, CMS had difficulty 
determining all of the types of provider payments that would need to 
be cut and which funding was subject to special sequestration rules. 
Similarly, CBP budget officials told us that applying sequestration to 
fee accounts was more difficult than other accounts due to uncertainty 
over whether fee accounts would be exempt from sequestration, as well 
as uncertainty about how to apply sequestration cuts to fee accounts. 

Our March 2014 report similarly found that many agencies faced 
challenges in applying sequestration to certain programs, such as 
those funded through user fees and trust funds.[Footnote 18] We made 
two recommendations that could help alleviate some of the uncertainty 
for potential future sequestrations. Specifically, we recommended that 
OMB document and make publicly available its decisions regarding how 
sequestration was implemented and issue guidance directing agencies to 
formally document the decisions and principles used to implement 
sequestration for potential future application. OMB agreed with our 
recommendation and plans to publish its criteria used for making 
determinations about how sequestration was implemented in its guidance 
to agencies, OMB Circular No. A-11, Preparation, Submission, and 
Execution of the Budget, but did not specify when this guidance would 
be available. 

In addition, uncertainty surrounding the timing and amount of 
sequestration limited the components' ability to provide substantive 
communication to its program partners and recipients. For example, CMS 
officials told us that, because sequestration took effect late in the 
fiscal year, it was difficult to provide timely communication to state 
survey agencies that would allow them to adequately plan their 
budgets. Recipients of PIH Indian Housing Block grants told us that 
uncertainty surrounding the fiscal year 2013 federal budget process 
presented challenges because they did not receive the full amount of 
their grants from HUD until several months into the calendar year. 
These findings are consistent with our March 2014 report, which found 
that uncertainty over if and when sequestration would occur limited 
agencies' communication with stakeholders. 

To implement sequestration, federal agencies and components had to 
analyze each budget account separately to determine its PPAs in 
accordance with section 256(k)(2) of BBEDCA. Section 256(k)(2) of 
BBEDCA provides that PPAs shall be identified within the appropriation 
act or accompanying report for the relevant fiscal year covering the 
budget account, or for accounts not included in appropriations acts, 
as delineated within the most recently submitted President's Budget. 
We reviewed a purposeful, nonrandom sample of five PPAs from each of 
the four nondefense components. We found that agencies complied with 
the criteria set forth in section 256(k)(2) in identifying each of the 
PPAs in our sample. 

In some cases, certain program characteristics limited the actions 
available to components for implementing sequestration. Officials from 
OESE and PIH told us that they had few options for implementing 
sequestration because some of their largest programs are based on 
eligibility formulas--established by law in some cases--or the funds 
are disbursed to program partners to fund various services to the 
public. As a result, the component could only achieve the required 
spending reductions by reducing the amount of the funds distributed to 
eligible partners or recipients. Partners and recipients therefore had 
reduced federal funds available for services. For example, eligibility 
criteria and formulas for allocating Title I grant funds are 
established by law and sequestration generally reduced the grant 
amounts that states and eligible school districts would have received 
absent sequestration.[Footnote 19] Similarly, CMS had little 
flexibility in applying sequestration cuts to Medicare payments 
because, with few exceptions, under BBEDCA all types of Medicare 
payments were subject to the 2 percent sequestration. Therefore, 
Medicare fee-for-service providers and Medicare Advantage and 
prescription drug plans had to absorb the reduction.[Footnote 20] In 
addition, some agencies had legal mandates that constrained their 
implementation options. For example, CBP is required to maintain a 
certain number of Border Patrol agents, which limited available 
personnel actions.[Footnote 21] 

In cases where officials did have some discretion in applying 
sequestration reductions, components reported that they had to make 
trade-offs to protect higher priority activities in their resource 
allocation decisions. For example, the Border Patrol did not apply the 
required reductions evenly across sectors because operational demands 
were higher in some sectors than others. Further, CMS chose to 
maintain funding for implementation of the federal health insurance 
exchanges despite the reductions. Similarly, within DOD, the military 
services sought to protect training requirements for deployed and next-
to-deploy forces. To do this, DOD took actions such as canceling or 
limiting training for forces not preparing to deploy in fiscal year 
2014. Furthermore, similar to our March 2014 report, case study 
components implemented sequestration cuts by, for example, reducing 
training and travel, reducing program management and support services, 
and rescoping or delaying grants. 

Previously initiated efficiency efforts helped components absorb some 
of the required reductions. For example, CBP was better positioned for 
sequestration, according to officials, due to efficiencies implemented 
over the past several years in response to declining budgets. 
Similarly, according to CMS officials, an initiative to improve the 
efficiency of its facility inspections that began in 2011 helped CMS 
plan for the fiscal year 2013 sequestration. 

Consistent with our March 2014 report, we found that actions 
components took to mitigate the effects of sequestration on mission 
priorities will not be available to the same extent, if at all, in 
future years. Specifically, CBP officials told us that it will be more 
difficult to implement sequestration in future years without adverse 
effects on their missions because actions taken in fiscal year 2013--
such as reducing funding for equipment and fuel--will be difficult to 
replicate. CMS officials also told us that future cuts would be more 
difficult to implement because, for example, carryover balances may 
not be available to the same extent in future years. Similarly, DOD 
used portions of available unobligated balances from prior years to 
mitigate fiscal year 2013 sequestration reductions, but the agency may 
have lower prior year unobligated balances available to rely on in 
future years. Further, in some cases program partners, such as 
tribally designated housing entities and PHAs, used funding carried 
over from the previous year or their own reserve funds, but they may 
have fewer of these funds available in future fiscal years. 

Concluding Observations: 

Sequestration reduced funding for the partners and recipients that 
carry out federal programs, affecting services to the public and 
federal agency operations. These case studies illustrate how some 
spending reductions at the federal level ultimately reduced funding 
for program partners operating at the local level, which resulted in 
effects such as less frequent inspections of certain medical 
facilities; fewer households receiving housing vouchers; and reduced 
services for students in some school districts. In addition, these 
case studies provide further evidence that the uncertainty surrounding 
the timing and amount of sequestration hampered communication with 
program partners and recipients. This uncertainty limited the 
abilities of states, tribes, and other partners to effectively plan to 
manage their operations with limited resources. OMB's implementation 
of the recommendations in our March 2014 report would facilitate 
agencies' planning and implementation for a potential future 
sequestration by documenting federal agencies' and OMB's decisions and 
principles for planning for and implementing sequestration. Publicly 
available documentation would allow agencies and their program 
partners and recipients to build institutional knowledge that could 
better position them to implement a potential future sequestration. 

Some cost-savings strategies used by components and their program 
partners--such as deferring maintenance for schools, public housing 
units, and Border Patrol vehicles--cannot be continued indefinitely. 
There is a limit to agencies' ability to achieve efficiencies and 
budget reductions by deferring or reducing funding for lower priority 
activities and agencies have limited authority to reprioritize many 
activities. As we previously reported, implementing future budget 
reductions will likely require Congress and the executive branch to 
reexamine how agencies carry out their missions. 

Agency Comments and Our Evaluation: 

We provided a draft of this product to the Secretaries of DHS, 
Education, HHS, and HUD, and the Director, OMB for comment. DHS, 
Education, HHS, and HUD provided technical comments that were 
incorporated, as appropriate. OMB did not provide comments. 

We are sending copies of this report to DHS, Education, HHS, HUD, OMB, 
and other interested parties. In addition, the report will be 
available at no charge on GAO's website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact Michelle Sager at (202) 512-6806 or sagerm@gao.gov or Edda 
Emmanuelli Perez at (202) 512-2853 or emmanuellipereze@gao.gov. 
Contact points for our work at individual agencies are shown 
appendixes I through IV of this report. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. 

Sincerely yours, 

Signed by: 

Michelle Sager: 
Director, Strategic Issues: 

Signed by: 

Edda Emmanuelli Perez: 
Managing Associate General Counsel: 

[End of section] 

Appendix I: Fiscal Year 2013 Sequestration at U.S. Customs and Border 
Protection: 

Mission and Budget Overview: 

Figure 1: U.S. Customs and Border Protection Mission and Fiscal Year 
2013 Sequestered Funding: 

[Refer to PDF for image: pie-chart and associated information] 

U.S. Customs and Border Protection (CBP): 
CBP, within the Department of Homeland Security (DHS), is responsible 
for securing U.S. borders and facilitating legal travel and trade. 
Specifically, officers from CBP's Office of Field Operations (OFO) are 
responsible for securing the border at U.S. ports of entry, including 
processing immigration documentation of passengers and pedestrians and 
inspecting vehicles and cargo. Agents within the U.S. Border Patrol 
(USBP) are responsible for enforcing immigration laws in between the 
ports of entry and at checkpoints located inside the U.S. border by 
detecting, interdicting, and apprehending those who attempt to 
illegally enter or smuggle people or contraband. 

To help support the costs of some of its operations, CBP also collects 
user fees for, among other things, air passenger customs inspections 
and commercial vessel passenger customs inspections. 

Fiscal Year 2013 funding prior to sequestration: $11.9 billion; 
Sequestered: $575.7 million; 
Post-sequestration funding: $11.3 billion. 

Sources: GAO analysis of CBP information; Josh Denmark, CBP (image). 

[End of figure] 

CBP, a component of DHS, is the largest uniformed law enforcement 
agency in the United States, with approximately 21,400 Border Patrol 
agents patrolling between the nation's ports of entry and more than 
21,000 CBP officers stationed at airports, seaports, and ports of 
entry on land nationwide.[Footnote 22] We focused our analysis on two 
CBP offices--the U.S. Border Patrol (USBP) and the Office of Field 
Operations (OFO)--and one fee account within CBP's budget, the COBRA 
fee account, which among other things, the government levies for air 
and commercial vessel passenger customs inspections.[Footnote 23] We 
selected these two offices and the COBRA fee account based on the 
magnitude of their respective budgets and sequestration's effects, as 
well as the degree to which their activities provide a service to the 
public, among other things. Within USBP, we interviewed officials from 
4 of the office's 20 sectors--Blaine sector, Washington; Rio Grande 
Valley sector, Texas; Yuma sector, Arizona; and San Diego sector, 
California--which were selected based on factors such as location, 
size, and workload.[Footnote 24] Within OFO, we interviewed officials 
from 6 of the office's 20 field offices--Los Angeles, California; 
Chicago, Illinois; Houston, Texas; Detroit, Michigan; New York, New 
York; and San Diego, California--which were selected based on factors 
such as location, size, number and type of ports of entry, and volume 
of cargo and passengers processed.[Footnote 25] While information we 
obtained from these locations cannot be generalized to all sectors and 
field offices, the visits provided us with insights into the planning, 
implementation, and effects of sequestration. In addition, we 
interviewed officials from the Airports Council International-North 
America, Airlines for America, the American Association of State 
Highway and Transportation Officials, and the American Trucking 
Associations to gain various industry perspectives on sequestration's 
effects on industry in fiscal year 2013, as well as perspectives on 
CBP's planning for and implementation of sequestration. We assessed 
the reliability of data related to CBP's budget, transfer and 
reprogramming actions, enforcement actions, miles driven by USBP 
personnel, air passenger wait times, allocation of overtime, and 
sector budgetary reductions. Specifically, we questioned knowledgeable 
agency officials, reviewed documentation, and examined the data for 
obvious errors or inconsistencies. We determined that the data 
collected from CBP for this review were sufficiently reliable for the 
purposes used in this report. 

CBP's priority mission is to prevent terrorists and terrorist weapons 
from entering the United States and to ensure the security of U.S. 
borders and ports of entry while also facilitating legitimate travel 
and trade. Figure 2 illustrates CBP's organization and funding levels 
during fiscal year 2013 for USBP, OFO, and the COBRA fee account (see 
also Appendix VII). 

Figure 2: U.S. Customs and Border Protection Organization Chart and 
Fiscal Year 2013 Funding Levels: 

[Refer to PDF for image: interactive graphic] 

Move mouse over blue highlighted organizations for more information. 
See appendix VII for noninteractive version. 

Source: GAO. 

[End of figure] 

Sequestration Cuts Had Short-Term and May Have Long-Term Effects on 
CBP's Services to the Public, Operations, and Workforce: 

CBP headquarters, Border Patrol sector, and OFO field office officials 
cited effects resulting from sequestration in three areas: (1) 
services to the public, (2) operations, and, (3) CBP's workforce. 
[Footnote 26] 

Services to the public: OFO officials from the Houston, Los Angeles, 
and New York field offices cited effects on cargo operations resulting 
from sequestration. Specifically, to ensure that international air 
passenger wait times were kept to a minimum in fiscal year 2013, these 
three field offices chose to shift officers who typically inspected 
cargo to the air passenger environment.[Footnote 27] According to 
officials from the Los Angeles field office, this shift in resources, 
compounded by reductions in overtime, led to some delays in air cargo 
inspections. Officials from this field office stated that in some 
instances, officers could not inspect all cargo in the queue during 
their normal shift. As a result, some cargo was not inspected until 
the next shift began, delaying the release of cargo for shipment. 

Further, from fiscal year 2012 to fiscal year 2013, some domestic 
airports experienced an increase in international passenger wait 
times. For example, OFO reported that at Logan International Airport 
in Boston, Massachusetts, the average wait time increased from 19.7 
minutes in fiscal year 2012 to 22.8 minutes in fiscal year 2013. 
During the same time frame, at Dallas Fort Worth International 
Airport, the average wait time increased from 20.9 minutes to 26.8 
minutes, as reported by OFO. According to OFO headquarters officials, 
staff typically work overtime to meet the need imposed by an increase 
in travelers during daily peak arrival times, as well as outside of 
normal business hours. OFO uses two types of overtime to compensate 
its employees for additional hours worked. The first type, COPRA 
overtime, instituted by the Customs Officer Pay Reform Act, is 
available for CBP officers and agricultural specialists and provides 
an hourly rate of pay that is equal to two times the hourly rate of 
the basic pay of the officer.[Footnote 28] The second type, known as 
FEPA because it was instituted by the Federal Employees Pay Act, 
applies to all other positions in OFO (about 20 percent of the 
workforce, according to OFO).[Footnote 29] According to officials from 
the Airports Council International-North America, wait times had been 
a persistent issue over the last several years. OFO headquarters 
officials explained that sequestration reduced funding available to 
pay overtime necessary to fully staff inspection booths, which 
resulted in these increased wait times. 

Side bar: 

Administratively Uncontrollable Overtime: 

Agencies are authorized by 5 C.F.R § 550.151 to pay AUO annually to an 
employee in a position in which the hours or duty cannot be controlled 
administratively and which requires substantial amounts of irregular 
or occasional overtime work, with the employee generally being 
responsible for recognizing, without supervision, circumstances that 
require the employee to remain on duty. 

AUO pay is calculated as a percentage of an employee's base pay and 
can range from not less than 10 percent to no more than 25 percent. 
AUO is base pay for purposes of retirement, including Thrift Savings 
Plan contributions and life insurance. The rate of AUO authorized for 
a position is based on the average number of irregular or occasional 
overtime hours worked per week. 

Source: GAO analysis of AUO regulations and policies. 

[End of side bar] 

Operations: According to USBP officials, sequestration affected 
agents' ability to patrol remote borders because it resulted in 
reduced funding for overtime, among other things. USBP officials 
stated that Border Patrol agents typically need to work beyond their 8-
hour shifts and claim overtime for the additional hours they spend on 
duty.[Footnote 30] 

Border Patrol agents often earn administratively uncontrollable 
overtime (AUO) for these additional work hours, according to USBP 
officials. USBP reported that at the end of fiscal year 2013, AUO 
expenditures within USBP were about $5 million lower than the amount 
included in CBP's original financial plan for fiscal year 2013. 
[Footnote 31] According to CBP budget officials, this expenditure 
reduction was in addition to other planned reductions to AUO and other 
overtime expenditures over the last few fiscal years. According to 
officials from 2 of the 4 Border Patrol sectors we interviewed, the 
reductions to AUO affected their ability to perform certain mission-
critical activities, such as apprehending individuals attempting to 
enter the United States illegally. Specifically, according to sector 
officials, as a result of the reduction in AUO agents were unable to 
routinely patrol outlying border areas because of the length of time 
it takes to reach these areas. For example, officials from the Yuma 
sector in Arizona stated that it is about a 45 minute drive from Yuma 
to its San Luis station. Yuma officials stated that when an agent 
arrives at this station, the agent that he or she is relieving may 
already be 1 hour into AUO. Other stations within the Yuma sector are 
more than 3 hours away from Yuma sector headquarters, requiring 
significant use of AUO, according to sector officials.[Footnote 32] 

Likewise, USBP reported that a reduction to its vehicle maintenance, 
repair, and fuel funding resulted in agents traveling less frequently 
to remote sector locations, which led to reported effects on CBP's 
operations.[Footnote 33] In fiscal year 2013, 14 of CBP's 20 sectors 
reported a decrease in miles driven compared with miles driven in 
fiscal year 2012. For example, the Yuma sector reported about 13.27 
million miles driven in fiscal year 2013 compared with about 19.80 
million miles driven in fiscal year 2012; the Grand Forks sector in 
North Dakota reported about 2.4 million miles driven in fiscal year 
2013 compared with about 3 million miles in fiscal year 2012. Yuma 
officials we spoke with stated that they discontinued the use of 
vehicles in need of repairs to reduce fleet-related costs in fiscal 
year 2013. Yuma officials stated that, as a result, their sector went 
from 90 percent vehicle availability before sequestration to 70 to 80 
percent availability afterwards, thus limiting the number of miles 
patrolled. Officials from the Blaine sector stated that they placed 
two agents per vehicle to reduce fuel usage, which affected the miles 
of border patrolled in a given day. Blaine officials stated that they 
could not patrol one of their distant zones with optimal frequency as 
a result of the reductions to fuel. 

Effective March 1, 2013, USBP also suspended home-to-work vehicle 
authorizations for all employees with the exception of canine units 
and resident agents. This action had the effect of requiring some 
agents to travel from their homes to their assigned duty stations 
before traveling out to the field.[Footnote 34] According to Border 
Patrol sector officials we interviewed, this also had an effect on 
staffing and operations because home-to-work authorizations allow 
personnel to use a government vehicle for official purposes, which may 
include travel between the individual's residence and various 
locations required for the performance of field work.[Footnote 35] 
Between March and June 2013, 9 sectors reported to Border Patrol 
headquarters that these reductions had led to delays in agents' 
response times. For example, the Big Bend sector reported that an 
agent was delayed in arriving at a scene and subsequently county 
officials were required to release 10 subjects believed to be 
illegally in the United States. 

Documentation provided by OFO indicated that, in fiscal year 2013, OFO 
experienced a reduction in some enforcement actions at ports of entry, 
such as those related to the inspection of cargo and, seizures of 
inbound ammunition and drugs.[Footnote 36] For example, between April 
and July 2013, OFO reported that inspections of regulated cargo 
declined by about 21 percent, inbound ammunition seized decreased by 
about 79 percent, fraudulent documents intercepted at ports of entry 
decreased by about 15 percent, and heroin confiscations decreased by 
about 21 percent.[Footnote 37] For example, Chicago field office 
officials stated that to prioritize the processing of people and goods 
and keep air passenger wait times down, as directed by OFO 
headquarters, the office limited its enforcement efforts in fiscal 
year 2013. Chicago officials expressed concern regarding potential 
long-term effects of declining enforcement efforts; their field office 
conducted fewer contraband exams per month, as well as passenger 
interviews, and outbound currency seizures during fiscal year 2013. 
According to Chicago field office officials, Chicago O'Hare 
International Airport experienced a 6 percent increase in arriving 
passenger volume in fiscal year 2013, so they would have expected 
these enforcement numbers to increase, not decrease. 

CBP workforce: As of April 1, 2013, CBP suspended all nonmandatory 
training as a result of sequestration.[Footnote 38] Between March and 
June 2013, 6 Border Patrol sectors reported the cancellation of 
training classes ranging in topics from hazardous materials operations 
to employee supervision. Border Patrol and OFO officials we spoke with 
expressed concern regarding the effects of this canceled training on 
employees' skill sets. Officials from the Blaine sector stated that 
nonmandatory training is essential to their workforce. For instance, 
Blaine sector officials stated that nonmandatory training classes that 
were canceled in fiscal year 2013 provided valuable skills, such as 
training in high-speed pursuit, leadership, weapons of mass effect, 
and incident command system. Officials from the Rio Grande Valley 
sector stated that some specialty training, such as canine training, 
was also canceled in fiscal year 2013 as a result of limited travel 
funding for their agents. 

Border Patrol and OFO officials--those in headquarters and in the 
field---also expressed concern regarding the effect of sequestration 
on employee morale. As a result of CBP hiring restrictions for 
positions other than agents and officers, officials from the Rio 
Grande Valley and San Diego sectors stated that agents were asked to 
perform administrative tasks, outside of their scope of 
responsibility.[Footnote 39] Officials from the Chicago, Los Angeles, 
and New York field offices stated that employee morale was affected as 
a result of asking officers and support staff to do more with fewer 
resources, including performing duties typically completed by mission 
support staff.[Footnote 40] 

CBP Headquarters Centrally Managed Planning for Sequestration and 
Delegated Many Implementation Decisions Affecting Operations to 
Program Offices: 

According to CBP budget officials, CBP was better positioned to plan 
for and address further budget reductions in fiscal year 2013 because 
prior to sequestration it had taken efforts aimed at reducing costs 
and streamlining operations. As it became more certain sequestration 
would occur, CBP's headquarters initiated planning as the reductions 
necessary to comply with sequestration evolved. After the 
sequestration order, CBP headquarters generally managed budgetary 
reductions and delegated implementation decisions affecting operations 
to program offices. According to CBP headquarters officials, it would 
be challenging for CBP to replicate some of these actions in future 
years depending on the levels of and conditions on any future funding. 

Cost Efficiency Efforts Implemented Prior to Sequestration Helped 
Absorb Some Budget Reductions: 

According to CBP officials, cost savings measures implemented prior to 
sequestration helped the component address reductions resulting from 
sequestration. For example, prior to sequestration, CBP implemented or 
expanded initiatives, such as Automated Passport Control and trusted 
traveler programs, to expedite screening procedures at ports of entry. 
[Footnote 41] OFO and air travel association officials stated that the 
implementation of Automated Passport Control had an effect on 
efficiently processing international air passengers at airports and 
managing wait times. In addition, CBP took steps prior to 
sequestration to reduce spending, such as limiting hiring and reducing 
operating expenses. Specifically, beginning in July 2012, CBP 
restricted non-agent/officer hiring and filled open positions only 
from within CBP. In addition, individual sectors and field offices 
took steps to operate more efficiently in fiscal year 2013 and beyond. 
For example, in August 2011 the Rio Grande Valley sector partnered 
with CBP's Office of Air and Marine to institute a bulk fuel program 
that, according to this sector, saved CBP an average of approximately 
$1,200 per month through reduced fuel costs.[Footnote 42] In addition, 
officials at OFO's Chicago field office stated that they chose to 
reduce overtime usage by about one-third from February through May 
2013, prior to the sequestration order, to ensure that the Chicago 
field office would have enough funding to cover overtime costs in the 
peak summer travel period. 

CBP's Headquarters Initiated Planning as the Reductions Necessary to 
Comply with Sequestration Evolved: 

According to CBP budget officials, CBP headquarters began to plan for 
sequestration in November 2012 and led planning efforts across CBP's 
program offices by providing the offices with estimated funding 
reductions that they could use to prepare for sequestration. CBP 
adapted its sequestration plan as its anticipated reductions changed 
prior to and after the March 1, 2013, sequestration order. Table 2 
provides a timeline of the anticipated sequestration reductions prior 
to and during fiscal year 2013. 

Table 2: U.S. Customs and Border Protection's Anticipated Funding 
Reductions in Fiscal Year 2013: 

Date: September 14, 2012; 
Anticipated funding reduction: $955 million. 

Date: February 19, 2013; 
Anticipated funding reduction: $754 million. 

Date: March 1, 2013; 
Anticipated funding reduction: $595 million. 

Date: March 27, 2013; 
Anticipated funding reduction: $601 million. 

Date: April 29, 2013; 
Anticipated funding reduction: $576 million. 

Source: GAO analysis of CBP budget data. 

[End of table] 

According to officials from CBP's Offices of Administration and 
Program Development, in November, 2012, they developed a planned 
budget using CBP's enacted fiscal year 2012 budget with a reduction of 
8.2 percent from each discretionary program, project, and activity 
(PPA), and 7.6 percent for each direct spending PPA.[Footnote 43] CBP 
budget officials stated that in late November 2012 they provided this 
tentative budget to the program offices and asked them to provide 
actions to meet these reductions, assuming funds could not be 
transferred or reprogrammed.[Footnote 44] According to officials from 
CBP's Office of Program Development, they instructed program offices 
to look for cuts to less critical areas first and focus on preserving 
personnel by implementing furloughs only if necessary. 

Program offices provided CBP headquarters with their proposed cuts by 
December 5, 2012, according to CBP headquarters officials. Some 
offices identified specific cuts to non-personnel areas, while others 
considered reductions to overtime or proposed furlough days. According 
to CBP budget officials, they worked with program offices that 
anticipated heavy employee furloughs to identify other options for 
achieving reductions. Although CBP ultimately mitigated the need to 
furlough employees in fiscal year 2013, CBP budget officials stated 
that furloughs were difficult to avoid given the initial estimates for 
the sequestered funding and projected full year budget authority. A 
major factor is that payroll-related costs consume a large percentage 
of CBP's available funding; for example, OFO's payroll expenses 
comprise more than 90 percent of its funds. According to DHS's and 
CBP's early sequestration and budget authority assumptions, OFO 
anticipated the equivalent of nearly 50 furlough days. 

The sequestration amount changed in January 2013 when the anticipated 
percentage reductions were revised to 5 percent. At this point, CBP's 
internal preparations for potential reductions revealed that 
significant changes were likely to occur. See table 3 for CBP's 
considered reductions to meet sequestration, as of January 2013. 

Table 3: Reductions Considered, as of January 2013, by U.S. Customs 
and Border Protection to Meet Sequestration Requirements: 

Area: Overtime and premium pay; 
Amount of considered reduction: $288 million. 

Area: Contract support and services; 
Amount of considered reduction: $85 million. 

Area: Training; 
Amount of considered reduction: $25 million. 

Area: Relocation compensation and travel; 
Amount of considered reduction: $23 million. 

Area: Home-to-work and fuel, maintenance, and repair for regular 
vehicle operations; 
Amount of considered reduction: $21 million. 

Area: Facilities-related contracts or services; 
Amount of considered reduction: $21 million. 

Area: Initiatives; 
Amount of considered reduction: $13 million. 

Area: Equipment and supplies; 
Amount of considered reduction: $9 million. 

Area: Furlough days; 
Amount of considered reduction: 18 days[A]. 

Source: GAO analysis of CBP data. 

Notes: These considered reductions do not reflect any subsequent 
transfer or reprogramming actions that CBP took later in the fiscal 
year. 

[A] CBP mitigated the need to furlough any of its employees in fiscal 
year 2013. 

[End of table] 

In January 2013, the Office of Management and Budget (OMB) issued a 
memorandum directing agencies to intensify efforts to prepare for 
sequestration; however, sequestration reductions were not finalized 
and it remained unclear whether certain accounts would be exempt, 
according to CBP budget officials.[Footnote 45] On February 21, 2013, 
the CBP Deputy Commissioner provided guidance on planning, with 
guiding principles of protecting critical missions, mitigating the 
disruption to employees, and maintaining operations and programs. This 
guidance specified that sequestration cuts, through furloughs and 
reductions to overtime, could decrease the number of equivalent work 
hours by more than 5,000 Border Patrol agents and 2,750 CBP officers. 
[Footnote 46] After receiving this guidance, Border Patrol and OFO 
headquarters provided planning priorities for sequestration to sectors 
and field offices. According to Border Patrol headquarters officials, 
sectors communicated their sequestration implementation plans with 
Border Patrol headquarters and worked with them to find appropriate 
reductions. Some sectors identified sector-specific areas that were 
most mission-critical to maintain during sequestration, including 
health and safety for agents and detainees, as well as maintaining 
control of the border between ports of entry. 

OFO field offices had discretion to determine specific reductions 
within the field office budgets and to prioritize their own actions, 
in consultation with OFO headquarters. According to OFO headquarters 
officials, they asked the field offices to outline port contingency 
plans in the event of severe reductions and to identify possible 
results and effects, including those related to public services. Field 
offices provided this information to OFO headquarters, which 
consolidated them into a formal memorandum that was distributed back 
to the field offices on February 26, 2013. The memorandum instructed 
field offices to focus on preserving essential services--such as the 
clearing of goods and persons--and to consider reductions to lower 
priority spending and operational activities--such as secondary 
training and enforcement activities, respectively. 

The effect of sequestration on specific fee accounts remained 
uncertain as of January 2013, according to CBP budget officials. 
Budget officials stated that fee accounts, such as the COBRA fee 
account, play an integral role in CBP's planning and budget process 
because they reimburse CBP's Salaries and Expenses account for certain 
expenses, such as overtime pay for CBP officers, that comprises about 
30 percent of that account. According to CBP budget officials, they 
had a better understanding of their plans for sequestration with 
respect to fee accounts by late February 2013, but officials still 
needed additional clarification on how the cuts would be applied. 
Although OMB issued official guidance based upon input received from 
agencies in the summer of 2012, CBP remained uncertain about how this 
guidance would be applied to each of the unique fee accounts that it 
relied upon to fund its operations until August 2013. Ultimately, OMB 
determined that sequestration would be applied to the amount of fees 
collected and that, for COBRA fees, the funds would be available in 
future years. 

CBP Headquarters Generally Managed Reductions and Delegated 
Implementation Decisions Affecting Operations to Program Offices: 

CBP headquarters coordinated the components' reductions in funding and 
implemented some component-wide actions to meet sequestration; CBP's 
program offices had the flexibility to determine many implementation 
decisions. USBP's implementation of sequestration reductions varied 
among its sectors based on mission needs. Similarly, OFO's reductions 
varied across its field offices. Because of the complexity of CBP's 
fee accounts, reductions to the COBRA fee account remained unclear 
until late in fiscal year 2013. 

CBP Headquarters Coordinated Funding Reductions and Implemented Some 
CBP-Wide Actions: 

Although the final sequestration reduction of 5 percent was lower than 
the initial 8.2 percent reduction estimated by OMB, CBP budget 
officials reported that it was challenging to absorb this reduction in 
the last half of the fiscal year. Budget officials specifically 
mentioned that implementing sequestration was difficult because of the 
large percentage of CBP's available funding dedicated to payroll--
about 70 percent, or $8 billion. On the basis of its anticipated 
funding and sequestration reductions, CBP began to issue notices to 
all employees beginning on March 7, 2013, that they may be furloughed. 
[Footnote 47] Though sequestration went into effect on March 1, the 
amount of CBP's anticipated reductions and resulting actions evolved 
over the course of the fiscal year. For example, although CBP issued 
furlough notices in early March 2013, the component subsequently 
mitigated the need for furlough days as a result of reprogramming, 
transfers, and increased funding available to CBP through the 
enactment of the Consolidated and Further Continuing Appropriations 
Act, 2013.[Footnote 48] Transfers included $36 million from other CBP 
accounts and $24 million from other DHS components to CBP's Salaries 
and Expenses account. At the recommendation of the House Committee on 
Appropriations, CBP transferred an additional $7 million in 
unobligated balances from its 2011 and 2012 Border Security Fencing 
Infrastructure and Technology accounts to its Salaries and Expenses 
account. These unobligated balances had been set aside for emerging 
requirements and pilot programs, but were used instead, along with a 
transfer from the DHS Office of Intelligence and Operations account, 
to maintain minimum numbers of Border Patrol agents and CBP officers. 

To meet the remaining reductions required by sequestration, CBP 
reported that it implemented the following actions: 

* suspended the hiring of operational and mission support staff from 
outside of CBP: 

* minimized travel to only that which was mission critical; 

* reduced temporary duty station assignments; 

* reduced retention, recruitment, and relocation expenditures; 

* canceled the remaining nonmandatory training classes scheduled in 
fiscal year 2013; 

* delayed or reduced the scope of certain contracts; and: 

* deferred the replacement of over 800 motor vehicles, increasing 
these affected vehicles' lifecycle by a minimum of 1 year. 

USBP Implemented Cuts to Sectors Relative to Mission Needs: 

USBP reported that reductions varied across its sectors relative to 
mission needs in an effort to implement sequestration with limited 
effects on personnel. For example, as of May 2013 CBP's budget office 
estimated that the post-sequestration non-payroll reduction to the 
Yuma sector was 23 percent, whereas the estimated nonpayroll reduction 
to the Spokane sector was about 9 percent.[Footnote 49] To provide 
additional funds to sectors with increased mission requirements, USBP 
redirected funds away from one or two sectors that were able to 
operate on less than they had originally received, according to USBP 
officials. According to USBP officials, some sectors made significant 
cuts in the first and second quarters of fiscal year 2013 in 
anticipation of a possible sequestration. The funding for these 
sectors was redirected to other sectors later in the fiscal year. 
According to USBP officials, it was challenging to implement 
sequestration without affecting employees because salary and benefits 
for USBP represent 93 percent of total budget authority. 

USBP initially anticipated discontinuing its agents' use of AUO; 
however, USBP ultimately chose to reduce non-pay expenditures and 
maintain existing overtime and premium pay reductions, resulting in a 
cost avoidance of about $5 million to AUO in fiscal year 
2013.[Footnote 50] According to USBP, it closely managed, monitored, 
and updated overtime projections each pay period so the reduction 
efforts were successful and in July 2013, USBP determined it would 
continue its agents' use of AUO.[Footnote 51] Border Patrol 
headquarters and sector officials stated that the reductions to AUO 
were challenging to implement because of the unpredictability of 
patrolling the border and the need for agents to frequently work 
beyond their 8-hour shifts to complete their duties. In addition to 
overtime reductions, USBP made reductions in nonpayroll expenditures, 
such as vehicle fleet fuel, maintenance, and acquisition. USBP also 
reduced a large detainee transportation contract, as well as 
specialized and supplemental training. Officials from the Blaine 
sector explained that to reduce costs in fiscal year 2013, they 
delayed necessary repairs on some vehicles, and used other modes of 
transportation such as snow mobiles, bicycles, and motorcycles to the 
extent possible. These officials stated, however, that eventually 
their sector will need to repair its aging vehicles and purchase new 
ones to maintain operations. 

OFO Reductions Varied Across Its Field Offices: 

Similar to USBP's implementation of sequestration, reductions within 
OFO varied across its field offices. OFO determined specific 
reductions to each field office based on factors such as travel and 
trade facilitation, seasonality, and wait time data. Overall, 
according to OFO headquarters officials, field offices made reductions 
to the following: overtime for administrative personnel, CBP officers, 
and agriculture specialists; travel; and training, among other areas. 
In some field offices, management shifted uniformed officers from 
cargo processing to passenger processing and vice versa to minimize 
wait times because of limited overtime funding. As OFO approached the 
end of the fiscal year, it determined that additional overtime hours--
for both FEPA and COPRA overtime--would be required to fulfill 
operational needs such as processing people and goods at ports of 
entry. In August 2013, OFO reprogrammed $623,019 that was available as 
a result of CBP's hiring pause in fiscal year 2013 to fund additional 
FEPA overtime.[Footnote 52] In addition, OFO was able to make 
additional COPRA overtime funds available to each field office during 
the peak summer travel season, which resulted in additional hours 
officers could inspect passengers and cargo. OFO's actual expenditures 
on overtime for its officers and agriculture specialists at the end of 
fiscal year 2013 exceeded its initial planned overtime budget. Figure 
3 illustrates the fluctuations in COPRA overtime expenditures for OFO 
in fiscal year 2013. 

Figure 3: Office of Field Operations COPRA Overtime Expenditures 
during Fiscal Year 2013: 

[Refer to PDF for image: horizontal bar graph] 

Planned expenditures (as of October 2, 2012): $206.5 million; 
Planned expenditures (as of February 9, 2013): $181 million; 
Actual expenditures (as of September 30, 2013): $217.8 million. 

Source: GAO analysis of CBP data. 

Note: This figure reflects reductions in COPRA overtime, instituted by 
the Customs Officer Pay Reform Act, which is available to CBP officers 
and agricultural specialists. FEPA overtime is not included in this 
figure. 

[End of figure] 

COBRA Fee Account Reductions Remained Unclear Until Late in Fiscal 
Year 2013: 

According to CBP budget officials, it was complicated to apply 
sequestration to fee accounts, including the COBRA fee account. Though 
OMB issued guidance in the summer of 2012, CBP budget officials stated 
that CBP remained uncertain about how this guidance would be applied 
to its fee accounts, including the COBRA fee account, until August 
2013. For instance, CBP budget officials stated there was uncertainty 
about which fees were exempt from sequestration. According to CBP 
budget officials, OMB determined that the sequestration percentage 
reduction would be applied to fiscal year 2013 collected fees, and for 
the COBRA account, OMB determined that the sequestered funds would be 
available in fiscal year 2014. In fiscal year 2013, CBP collected 
about $647 million for the COBRA fee account.[Footnote 53] 

In September 2013, CBP budget officials stated that for fee accounts 
where the sequestered funds would be made available in the following 
fiscal year and not permanently reduced, the sequestered balances 
would be apportioned to CBP for use, that is, reimbursement of the 
Salaries and Expenses account, in the first quarter of fiscal year 
2014. However, CBP was not apportioned the sequestered COBRA fee 
balances until December 2013. CBP's budget office reported that the 
delayed availability of the sequestered COBRA fees created financial 
challenges for CBP during the first 2 months of fiscal year 2014. As a 
result of the delay, CBP was unable to reimburse certain costs in the 
Salaries and Expenses account, which delayed some procurement actions 
until the COBRA fee balances were apportioned. 

Actions Taken to Implement Sequestration in Fiscal Year 2013 Would Be 
Difficult to Replicate in Future Years: 

According to CBP officials, some of the actions taken in fiscal year 
2013 to address sequestration would be difficult or impossible to 
replicate in future fiscal years to address additional budget cuts. 
[Footnote 54] For example, CBP Office of Administration and Office of 
Program Development officials expressed concern over USBP's ability to 
sustain nonpay cuts taken in fiscal year 2013 such as those related to 
equipment and fuel. Further, CBP's transfer and reprogramming actions 
were key to its ability to mitigate furloughs in fiscal year 2013; 
however, CBP budget officials stated that, depending on the levels of 
and conditions on any future funding, such actions may not be possible 
in future years to absorb additional reductions in funding.[Footnote 
55] Nevertheless, according to CBP Office of Administration and Office 
of Program Development officials, CBP is in a better position to 
respond to possible future budget cuts as a result of its planning and 
implementation of the fiscal year 2013 sequestration. In addition, CBP 
officials noted some lessons learned from implementing sequestration 
in fiscal year 2013. For example, while planning and implementing 
sequestration, CBP maintained open communication internally, which CBP 
officials credited as a factor to the success in planning for 
sequestration. Border Patrol sector and OFO field office officials 
highlighted the importance of communication in planning for the fiscal 
year 2013 sequestration. Within OFO, field office officials said 
coordination internally and with stakeholders was an important aspect 
of their sequestration planning.[Footnote 56] 

GAO Contact: 

For additional information, contact David C. Maurer at (202) 512-9627 
or maurerd@gao.gov. 

[End of section] 

Appendix II: Fiscal Year 2013 Sequestration at the Centers for 
Medicare & Medicaid Services: 

Mission and Budget Overview: 

Figure 4: Centers for Medicare & Medicaid Services Mission and Fiscal 
Year 2013 Sequestered Funding: 

[Refer to PDF for image: pie-chart and associated information] 

Centers for Medicare & Medicaid Services (CMS): 

CMS, an operating division within the Department of Health and Human 
Services (HHS), administers and oversees programs and activities 
designed to provide health care coverage and promote quality health 
care for Americans. 

CMS administers the largest federal health care program, Medicare, and 
oversees administration of Medicaid and the Children's Health 
Insurance Program (CHIP). Medicare provides health insurance for 
individuals age 65 and older, certain individuals with disabilities, 
and those with end-stage renal disease, while Medicaid and CHIP are 
joint federal-state health care programs for certain low-income 
individuals. CMS also has responsibility to implement consumer 
protections and health insurance provisions of the Patient Protection 
and Affordable Care Act, including implementation of health care 
insurance exchanges. In addition, CMS manages oversight and program 
integrity efforts for all of these programs, as well as various other 
initiatives. 

Fiscal year 2013 funding prior to sequestration: $880.5 billion[A]; 
Sequestered[B]: $11.7 billion; 
Post-sequestration funding: $868.8 billion. 

Sources: GAO analysis of CMS information; PhotoDisc (image). 

[A] Funding prior to sequestration as reported by CMS. 

[B] Estimated sequestered amount as of March 1, 2013. Actual amount 
sequestered will depend on Medicare claims submitted for the fiscal 
year 2013 Medicare sequestration period which ended March 31, 2014. 

[End of figure] 

Direct spending primarily for Medicare, Medicaid, and CHIP entitlement 
benefits accounted for most of CMS's funding in fiscal year 2013 and 
Medicare benefits were the largest of those costs. Medicare is 
expected to provide health insurance coverage to more than 50 million 
individuals in fiscal year 2014.[Footnote 57] Due to its size, 
complexity, and susceptibility to mismanagement and improper payments, 
Medicare has been on our high-risk list since 1990.[Footnote 58] 
Medicare payments to providers and plans were sequestered under 
special rules at a rate of 2 percent.[Footnote 59] By law, the 
Medicaid and CHIP programs were exempt from sequestration.[Footnote 
60] Sequestration also reduced direct spending for grants to states to 
establish affordable insurance exchanges, certain Medicare program 
integrity activities, certain other initiatives, and some 
administrative activities, though these amounts were small compared to 
benefit payments. The majority of CMS's funding for management and 
oversight of the three health insurance programs and other activities 
was subject to the discretionary nondefense sequestration percentage 
in fiscal year 2013. CMS exercises most of its budgetary decision 
making through management of programs, projects, and activities (PPA) 
in the discretionary program management account.[Footnote 61] 

To examine how CMS prepared for and implemented sequestration and the 
effects of sequestration on CMS's operations, performance, and 
services to the public, we collected information from CMS's Office of 
Financial Management, which is responsible for developing the 
operating division's budget and leading sequestration planning and 
implementation, as well as from program offices and centers that 
administer aspects of seven case study activities we chose for 
examination--Medicare payments, state insurance exchange grants, 
Medicare Administrative Contractors (MAC), federal administration, 
Medicare provider survey and certification, clinical laboratory 
improvement amendments (CLIA) surveys, and CMS program integrity. To 
assess the reliability of data related to budget and program outcomes 
(provided by CMS) we reviewed information from knowledgeable officials 
and relevant documentation and compared budgetary information to 
published data, as appropriate. We determined that the data were 
sufficiently reliable for the purposes used in this report. We chose 
Medicare payments because they were sequestered at a special rate of 2 
percent and accounted for 96 percent of CMS's estimated sequestered 
funds. We chose the other activities because they represented the 
variety of CMS's functions funded by discretionary and direct spending 
that were subject to sequestration. Specifically, we reviewed Medicare 
fee-for-service operations carried out by MACs because they administer 
Medicare payments and these contracts typically consume large portions 
of CMS's discretionary funding. We chose federal administration 
because CMS funds the majority of its staff through this PPA and chose 
CMS program integrity because Medicare is on our high-risk list. 
Medicare provider survey and certification and CLIA surveys are 
relevant because of the influence of these surveys on patient safety. 
(See table 4 for more information on selected activities.) We 
interviewed officials from a purposeful sample of Medicare 
contractors--two MACs and a Zone Program Integrity Contractor (ZPIC)--
and state survey agencies to obtain information on CMS's planning and 
implementation of sequestration, as well as effects on the operating 
division's fee-for-service operations, CMS program integrity 
activities, and state survey and certification oversight activities. 
We chose contractors responsible for large portions of Medicare 
business in geographically varied states identified as having a high 
potential for Medicare fraud. We chose 5 of the 52 state survey 
agencies for each state, the District of Columbia, and Puerto Rico 
based on variation in geographic location and population--Connecticut, 
Florida, Ohio, Utah, and West Virginia. In addition, to gain Medicare 
providers' perspectives regarding sequestration of Medicare payments, 
we interviewed two provider associations. Results from our interviews 
with CMS contractors, state survey agencies, and provider associations 
cannot be generalized to other CMS program partners. 

Table 4: Overview of Selected Centers for Medicare & Medicaid Services 
(CMS) Activities: 

Selected activities: Medicare payments; 
Overview: Medicare is the federal program that helps pay for health 
care services for individuals age 65 years and older, certain 
individuals with disabilities, and those with end-stage renal 
disease[B]; 
Funding type[A]: Direct spending; 
Fiscal year 2013 sequestration: 
Estimated funding prior to sequestration: $564.9 billion[C]; 
Estimated sequestered amount: $11.3 billion. 

Selected activities: State affordable insurance exchange grants; 
Overview: The Patient Protection and Affordable Care Act (PPACA) 
required the federal government to assist states in preparing to set 
up health insurance exchanges. To do so, PPACA established affordable 
insurance exchange grants. The Department of Health and Human Services 
was authorized to award multiple grants to states from 2010 through 
2014[D]; 
Funding type[A]: Direct spending; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $628 million[E]; 
Sequestered amount: $44 million. 

Selected activities: Medicare Administrative Contractors (MAC); 
Overview: CMS uses MACs to process Medicare fee-for-service claims, 
enroll health care providers in the Medicare program, and conduct 
certain program integrity activities, among other functions; 
Funding type[A]: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $873 million[F]; 
Sequestered amount: $24 million. 

Selected activities: Federal administration; 
Overview: The majority of CMS's expenses for staff and operating 
expenses for routine activities are funded through federal 
administration[G]; 
Funding type[A]: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $771 million[H]; 
Sequestered amount: $39 million. 

Selected activities: Survey and certification; 
Overview: To ensure that health care facilities participating in 
Medicare and Medicaid--including nursing homes, hospitals, dialysis 
facilities, and home health agencies--provide quality care in a safe 
environment in accordance with federal standards, CMS contracts with 
state survey agencies to conduct periodic inspections, known as 
surveys, investigate complaints, and initiate enforcement actions 
against facilities that fail to comply with federal standards. CMS 
also contracts with national vendors to carry out certain specialized 
surveys and support activities; 
Funding type[A]: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $374 million[I]; 
Sequestered amount: $19 million. 

Selected activities: Clinical laboratory improvement amendments (CLIA); 
Overview: The CMS office responsible for survey and certification 
activities also manages the CLIA program, which is funded entirely by 
user fees. Under CLIA, state survey agencies conduct inspections of 
clinical laboratories; 
Funding type[A]: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $43 million; 
Sequestered amount: $2 million. 

Selected activities: CMS program integrity; 
Overview: CMS uses a variety of contractors to perform program 
integrity activities, such as provider audits and prepayment and 
postpayment review of Medicare claims[J]; 
Funding type[A]: Discretionary and direct spending; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $1.1 billion[K]; 
Sequestered amount: $25 million. 

Source: GAO analysis of CMS information. 

[A] Discretionary appropriations are budgetary resources provided in 
appropriations acts. Direct spending, often referred to as mandatory 
spending, consists of budgetary resources provided by entitlement 
authority and laws other than appropriations acts. 

[B] Subject to special sequestration rules, Medicare payments were 
sequestered at 2 percent, including fee-for-service payments to 
providers (Parts A and B), as well as payments to Medicare Advantage 
and prescription drug plans (Parts C and D)--private plans that CMS 
contracts with to provide services to enrolled beneficiaries. 
Qualified individual premiums, Medicare Part D low income subsidies, 
and Part D catastrophic subsidies were exempt from sequestration. 

[C] Funding and sequestered amounts reflect estimates from the Office 
of Management and Budget (OMB) baseline as reported in its March 1, 
2013 report. CMS will not know its final sequestered amount until the 
fiscal year 2013 reduction of Medicare payments ends on March 31, 
2014, and CMS has reconciled final Medicare payments from April 2013 
through March 2014. Funding for Medicare payments is provided through 
trust fund accounts through three CMS programs, projects, and 
activities (PPA)--Federal Hospital Insurance Trust Fund, Federal 
Supplementary Medical Insurance (SMI) Trust Fund, and the Medicare 
Prescription Drug Account of the SMI Trust Fund, according to CMS. 

[D] Pub. L. No. 111-148, § 1311(a), 124 Stat. 119, 173 (2010) 
(codified at 42 U.S.C. § 18031(a)). If a state does not elect to 
operate an exchange or is not certified or approved to operate one, 
HHS will operate the exchange in that state. See Pub. L. No. 111-148, 
§ 1321(c), 124 Stat. 186 (codified at 42 U.S.C. § 18041(c)). To 
establish the federally operated exchanges, CMS reported that it 
aggregated funding from several sources including $300 million from 
its discretionary program management account in fiscal year 2012. 

[E] CMS awarded a total of $2.1 billion in grants in fiscal year 2013, 
but only the amount estimated to be available for obligation after 
March 1, 2013 based on OMB's baseline--$628 million--was subject to 
sequestration, according to CMS. Sequestration also reduced another 
PPA of administrative costs associated with these grants by $2 
million. The estimated OMB baseline established in its March 1 report 
for both PPAs in this account was $868 million. 

[F] Medicare fee-for-service contracting operations are primarily 
funded through CMS's program operations PPA within its discretionary 
program management account. Funding and sequestered amount reflect 
actual spending for this activity as reported by CMS. The amount 
sequestered from the entire program operations PPA was $134 million. 

[G] The federal administration PPA within CMS's discretionary program 
management account is the primary source of funding for staff salaries 
and benefits; however, other accounts also provide funding to hire 
employees for specific purposes. 

[H] Funding and sequestered amount represent amounts enacted in the 
Consolidated and Further Continuing Appropriations Act, 2013 (Pub. L. 
No. 113-6, 127 Stat. 198) as reported by CMS. The sequestrable base 
and reduction amounts that CMS calculated based on the annualized 
amount set out in the continuing resolution in effect as of March 1, 
2013, were slightly higher ($778 million). 

[I] Funding and sequestered amount represent amounts enacted in the 
Consolidated and Further Continuing Appropriations Act, 2013 as 
reported by CMS. The sequestrable base and reduction amounts that CMS 
calculated based on the annualized amount set out in the continuing 
resolution in effect as of March 1, 2013, were slightly higher ($378 
million). 

[J] To carry out Medicare program integrity activities, CMS uses 
several contractors, two of which include (1) the MACs that process 
and pay claims and are responsible for taking actions to reduce 
payment errors in their jurisdictions; and (2) Zone Program Integrity 
Contractors (ZPIC) that investigate potential fraud, which can result 
in referrals to law enforcement or administrative actions. 

[K] CMS program integrity activities are funded from the Health Care 
Fraud and Abuse Control (HCFAC) account through PPAs funded by direct 
spending and discretionary appropriations. Certain direct spending for 
Medicare program integrity was sequestered at 2 percent, of which only 
amounts obligated after April 1, 2013 were subject to sequestration. 
Funding and sequestered amount represent mandatory apportionments and 
amounts enacted in the Consolidated and Further Continuing 
Appropriations Act, 2013 for CMS activities as reported by CMS. The 
reported amounts do not include HCFAC funding for other agencies 
including the HHS Office of Inspector General or the Department of 
Justice. The sequestrable base and reduction amounts that CMS 
calculated based on the OMB baseline and annualized amount set out in 
the continuing resolution in effect as of March 1, 2013, were higher. 

[End of table] 

Sequestration Affected Some CMS Activities, but Effects of the 2 
Percent Reduction to Medicare Payments and Cuts to Other Activities 
Are Difficult to Quantify: 

Spending reductions required by sequestration had effects on some CMS 
activities, such as Medicare beneficiary outreach, in fiscal year 
2013. However, the effects of reductions to some activities, such as 
Medicare payments, are difficult to quantify in part because they are 
difficult to isolate from other changes that took place in fiscal year 
2013. 

Sequestration Affected Some Survey and Certification Activities and 
Beneficiary Outreach Activities: 

Survey and Certification: 

CMS actions taken to implement sequestration reductions affected the 
frequency of certain surveys and affected certain state survey 
agencies' budgets in fiscal year 2013. Specifically, officials from 
the Center for Clinical Standards and Quality (CCSQ), which is 
responsible for federal oversight of survey and certification, made 
policy changes that meant certain Medicare participating medical 
facilities were inspected less frequently.[Footnote 62] CMS officials 
told us that they made these policy changes to ensure that state 
survey agencies were able to complete statutorily required surveys. 
[Footnote 63] Except for frequency requirements that are mandated in 
statute, CMS establishes survey frequencies for other facility types 
based on available funding. For example, to implement sequester 
reductions, CMS officials reported that CMS reduced the frequency of 
psychiatric hospital surveys it conducts through a national contractor 
from once every 3 years to once every 4 to 5 years, which officials 
said freed funding for other activities.[Footnote 64] In a memorandum 
issued April 5, 2013, CMS instructed state survey agencies on how to 
prioritize their workloads in response to sequestration.[Footnote 65] 
For example, to cut down states' workload, the operating division 
moved specialized organ transplant center surveys from states to a 
national contractor and reduced the frequency of these surveys from 
once every 3 years to once every 4 to 6 years. CMS also instructed 
states not to add nursing homes to the special focus facility (SFF) 
program in their state when an existing SFF nursing home has graduated 
from the program or has been terminated from Medicare participation. 
SFF nursing homes are poorly performing nursing homes within each 
state that are subject to two on-site surveys per year instead of one 
survey. As a result of the instruction not to replace SFF nursing 
homes, the number of such homes nationwide decreased from 152 when 
sequestration began to 62 as of March 2014, according to CMS 
officials. By reducing national contracts and support services, CMS 
limited the sequestration reduction of states' Medicare provider 
survey and inspection funding, known as Medicare allocations, to an 
average of 3.2 percent rather than imposing the full reduction on 
states, according to officials. We do not know the effect of the 
reduced oversight from state survey agencies and national contractors 
on patient safety or the quality of care provided by the health care 
facilities. 

Several state survey agency officials that we spoke to reported that, 
because they had little time to adjust their staffing and budget plans 
after CMS established their fiscal year 2013 Medicare allocations, the 
state survey agencies used state funds to mitigate some of the effects 
of reduced federal allocations. Specifically, officials from four of 
the five state survey agencies we spoke to said they needed more than 
the amount of their initial federal allocations in fiscal year 2013 
and would use state funds to cover the difference.[Footnote 66] For 
example, officials from one state survey agency told us it needed more 
than the amount allocated for survey activities. The officials said 
the state survey agency moved state funds originally intended for 
other health-related activities to avoid staff reductions that would 
have affected its ability to complete the statutorily required 
surveys.[Footnote 67] Officials from another state survey agency told 
us that as a direct result of sequestration reductions, 2013 was the 
first year the state needed more than the amount allocated to it by 
CMS.[Footnote 68] CMS reported that 15 of the 33 state survey agencies 
that had finalized their fiscal year 2013 expenditures as of March 
2014 had spent all of their federal allocations and requested 
supplemental funding for fiscal year 2013, compared to 7 supplemental 
requests from those same 33 states in 2012.[Footnote 69] As of March 
2014, CMS could not determine how much funding would be available for 
redistribution. A reduction in funds available to CMS for 
redistribution could create additional pressure for states in 
allocating their own funds to cover survey and certification 
activities. For example, two states told us they would have to cut 
licensure activities funded solely by the state if CMS could not 
provide the supplemental funds to reimburse the state for funds used 
to complete required activities. 

The state officials we spoke to reported that they were able to 
complete the highest priority surveys and complaint investigations by 
spending a combination of their federal allocations and state funding. 
However, two reported difficulty carrying out all of their surveys 
with the amounts available. For example, officials from one state said 
they could not complete needed revisit surveys that serve to verify 
that a facility has corrected serious deficiencies. While CMS 
considers these activities a lower priority, they are still an 
important activity to ensure patient safety. 

Beneficiary Outreach: 

As a direct result of cuts made to implement sequestration reductions 
to discretionary funding in fiscal year 2013, call wait times 
increased for 1-800-MEDICARE, a toll-free customer service line for 
Medicare beneficiaries to make inquiries about Medicare.[Footnote 70] 
Specifically, CMS cut funding to the 1-800-MEDICARE contractor, which 
reduced the number of customer service representatives available to 
answer calls. According to CMS, before sequestration callers waited 
about 2 minutes for their call to be answered. In the months after 
sequestration, average wait times increased to 5 and 6 minutes. 

Effects of Sequestration Are Difficult to Quantify for Some CMS 
Activities: 

In some cases, the immediate and longer term effects of sequestration 
reductions on CMS's operations and services to the public are hard to 
quantify because of the difficulty isolating the effects of 
sequestration from other factors. As a result, CMS officials told us 
that CMS was not able to routinely monitor the effects of 
sequestration. 

Medicare Payments to Providers and Plans: 

Savings from the 2 percent sequestration reduction of Medicare 
payments and the effects of the cuts on overall Medicare spending, as 
well as Medicare providers, plans, and beneficiaries are unknown. The 
total amount of sequestered Medicare payments for fiscal year 2013 are 
not known because providers have up to 12 months to submit claims. CMS 
officials reported that $3.3 billion had been sequestered from $167 
billion in prospective payments to Medicare Advantage and prescription 
drug plans from April 2013 through March 2014. The total amount of 
sequestered funds will likely differ from the estimated $11.3 billion 
that the Office of Management and Budget (OMB) provided in its fiscal 
year 2013 sequestration report.[Footnote 71] As noted in the 
background of this report, OMB's estimates for programs that are 
funded by permanent indefinite budget authority, including Medicare 
payments, were based on estimated outlays for fiscal years 2013 and 
2014. Final payments for fiscal year 2013 will depend on the actual 
numbers and types of services used by beneficiaries during the 
sequestration period. Research examining the effects of previous 
Medicare payment cuts suggests that providers may attempt to offset 
cuts by providing more services or more expensive services. As a 
result, the cuts may not produce the expected Medicare savings. 
[Footnote 72] 

In addition, it is not possible to isolate the effect that the payment 
reductions had on providers' revenues in fiscal year 2013 because 
payments to Medicare providers were affected by a number of factors, 
such as increases or decreases resulting from the annual rate-setting 
process[Footnote 73] and the implementation of certain statutory 
provisions affecting payments.[Footnote 74] Similarly, it is not 
possible to attribute any changes in provider participation in the 
Medicare fee-for-service program or plan participation in the Medicare 
Advantage or prescription drug programs in 2014 directly to 
sequestration reductions. Although CMS officials and provider 
association representatives that we spoke to agreed that isolating the 
effects of the 2 percent Medicare payment reductions is difficult, 
provider associations reported that the reductions will be detrimental 
to providers because they exacerbated other budgetary pressures, 
particularly for providers that rely on Medicare payments for large 
portions of their revenues. For example, some hospitals have reported 
that the Medicare sequestration was one of several negative factors 
affecting hospital revenues that resulted in layoffs, decreased 
services, and delays in infrastructure investments in fiscal year 
2013. A physician association reported that although the isolated 
effects on physicians from the first year of sequestration of Medicare 
payments are not detectable, the effects will likely be greater as 
cuts continue in future years and physicians face smaller Medicare 
payment increases and additional responsibilities associated with 
Medicare participation.[Footnote 75] Based on anecdotes of physicians' 
reactions to previous payment reductions, the association officials 
predicted that sequestration could contribute to shifts in physician 
practice away from specialties with a high proportion of Medicare 
patients relative to patients with other forms of payment. However, 
they noted that it is difficult to single out actions directly 
responding to sequestration. How these potential changes in provider 
behavior could influence Medicare beneficiaries' access to health care 
remains to be seen. 

Beneficiaries were partially shielded from the payment reductions made 
as a result of sequestration. The law did not allow Medicare 
participating providers to pass on the payment reductions to 
beneficiaries. All coinsurance and deductible amounts remained the 
same for beneficiaries. However, beneficiaries would have been 
financially liable for any increased cost sharing resulting from 
providers who provided more services, or more expensive services, to 
offset the sequestration cuts. Beneficiaries who use nonparticipating 
providers and receive payments directly from CMS in order to reimburse 
the provider did see those payments reduced, which required these 
beneficiaries to pay more.[Footnote 76] A small proportion of 
practicing Medicare physicians are nonparticipating.[Footnote 77] 

Fewer New Initiatives: 

Sequestration resulted in fewer funds for new initiatives, according 
to CMS officials, but the effects on operations and services to the 
public will not be known until future years, if at all. Budget 
officials explained that in most years CMS funds new initiatives after 
core activities have been funded, but in fiscal year 2013 few or no 
programs had funds available for new initiatives because of 
sequestration. For example, CCSQ officials, who are responsible for 
survey and certification, told us they could not continue efficiency 
initiatives that had saved money in prior years because they did not 
have funds to pay for the upfront activities involved.[Footnote 78] 
CCSQ also delayed a project to collect nursing home staffing data 
planned for fiscal year 2013 that was required but not separately 
funded by the Patient Protection and Affordable Care Act (PPACA). 
[Footnote 79] To meet discretionary spending limits for program 
operations, CMS cut $15 million from its information technology (IT) 
funding which delayed several system enhancements. However, it is 
difficult to quantify the forgone benefit of unfunded initiatives. For 
example, it is hard to predict the amount of savings CMS could have 
achieved from eliminating IT redundancies had IT system enhancements 
occurred. Moreover, budget officials said they could not identify all 
of the initiatives that CMS will not initiate as a result of funding 
reductions because program offices may have stopped bringing forward 
budget requests for new activities due to known budgetary constraints. 

CMS Staffing: 

The effect of sequestration on CMS's staffing and operations is 
unclear because CMS has multiple sources of budget authority that may 
support payroll and benefits. CMS's total full-time equivalents (FTE) 
increased from 5,926 at the beginning of fiscal year 2013 to 5,959 at 
the end of the year due in part to targeted hiring for activities 
related to increased responsibilities, including aspects of health 
care reform with funding provided by PPACA. For example, PPACA 
appropriated $10 billion for activities associated with CMS's Center 
for Medicare and Medicaid Innovation over 9 years that supported 67 
additional FTEs in fiscal year 2013.[Footnote 80] However, CMS lost 
120 FTEs funded through its primary salaries and benefits PPA--the 
federal administration PPA--and could not fill another 299 vacancies 
as a result of a hiring freeze it implemented to achieve sequestration 
reductions without requiring furloughs.[Footnote 81] CMS staff funded 
through this PPA carry out the majority of CMS activities, including 
implementation of the federal health insurance exchanges in 2013. CMS 
officials said that, in general, CMS offices are experiencing 
difficulties in terms of staff doing more work with fewer resources. 
The reduced staff and inability to hire new staff throughout the 
fiscal year to address increasing workload had a negative effect on 
operational time frames, according to officials. For example, CMS 
officials reported that CMS processing times for providers seeking 
certification for participating in the Medicare program increased from 
between 1 and 4 weeks to up to 6 months due to the hiring freeze. 

CMS Sought to Limit Effects of Sequestration on Priority Areas, but 
Implementation Options Varied by Funding Structure: 

CMS Sought to Limit Effect of Sequestration on Priority Areas: 

To plan for reductions of CMS's discretionary funding, CMS's Office of 
Financial Management (OFM), in consultation with the CMS Administrator 
and HHS budget office, identified high-level priority areas to protect 
from budget cuts. For example, one spending priority identified by the 
operating division for 2013 was federal health insurance exchange 
implementation in those states not electing to operate an exchange or 
not certified or approved to operate one. When sequestration occurred, 
CMS determined that it would not cut funding planned for this 
activity, including from within its discretionary program management 
account.[Footnote 82] CMS also prioritized funding for Medicare fee-
for-service appeals because, officials said, cuts to these activities 
could delay their contractors' ability to address appeals and result 
in increased costs in future years.[Footnote 83] Officials said 
funding for the durable medical equipment competitive bidding program 
was also prioritized because CMS attributed savings to the program. 
[Footnote 84] 

Funding Structures and Prior Year Preparations Influenced 
Sequestration Implementation: 

CMS officials reported that their options for implementing 
sequestration reductions varied by the type of funding--discretionary 
versus direct spending--and application of sequestration rules. 
According to HHS officials and CMS officials from the Center for 
Medicare, CMS had no flexibility in implementing the Medicare payment 
reductions because, with limited exceptions, all payments had to be 
sequestered and sequestration rules dictated the formula, timing, and 
limitations on how CMS was to implement the reductions. Officials also 
reported having to reduce by 7 percent grants made to states after 
March 1 to establish health insurance exchanges in accordance with 
OMB's sequestration guidance for programs with permanent indefinite 
budget authority.[Footnote 85] In fiscal year 2013, CMS awarded such 
grants to 25 states and the District of Columbia, but only those 
amounts obligated after March 1, 2013 were subject to sequestration, 
according to officials. Because sequestration began in the middle of 
the year, officials told us that CMS had to achieve the required 
reductions for state exchange grants by applying sequestration to the 
amounts obligated in the remaining months of the fiscal year, 
requiring it to reduce each grant made after March 1 by 7 percent from 
the expected amount.[Footnote 86] Additionally, because the state 
insurance grants are structured as the only activity within their PPA, 
CMS could not reallocate the sequester reductions to other activities 
in order to spare the grants from the reductions. 

In contrast, CMS officials told us the operating division had 
flexibility to implement reductions within the large PPAs contained in 
the discretionary program management account. In particular, they said 
that this funding structure provided flexibility within the program 
operations PPA to move funds around the many activities funded by the 
PPA, including Medicare fee-for-service claims processing by MACs, 
contractor administration, federal implementation of health insurance 
exchanges, provider education, beneficiary outreach, and many other 
initiatives. For instance, MAC funding through the program operations 
PPA was reduced by 2.4 percent.[Footnote 87] This reduction ended up 
having had no effect on MAC operations because CMS needed less funding 
than expected in fiscal year 2013 for transition costs for new MACs 
and the awarding of two MAC contracts scheduled for the end of fiscal 
year 2013 was delayed until fiscal year 2014 for reasons other than 
sequestration.[Footnote 88] The two MACs we spoke to confirmed that 
sequestration had no effect on their contracts or ability to carry out 
any activities in their statements of work.[Footnote 89] 

CMS also reported using carryover funds to mitigate the effects of 
sequestration reductions when available. Through direct spending, 
funds are available to the Medicare integrity program within the 
Health Care Fraud and Abuse Control (HCFAC) account without fiscal 
year limitation, which may result in funds remaining available for 
obligation during the next fiscal year. According to officials, CMS 
had enough carryover funds from fiscal year 2012 program integrity 
activities to offset $13 million in discretionary fiscal year 2013 
sequestration reductions in HCFAC funding for CMS, which minimized the 
effect on a medical review support contractor, Part D data analysis, 
and Medicaid and CHIP Business Information Solution project that were 
slated to lose funding due to sequestration.[Footnote 90] CMS also 
used no-year funding remaining available for the Medicare-Medicaid 
Data Match Project (Medi-Medi)[Footnote 91] to offset sequestration 
reductions of the program's fiscal year 2013 funding. According to 
officials, available carryover balances also mitigated the reduction 
of an estimated $2.2 million to CLIA surveys.[Footnote 92] State 
survey agencies with which we spoke confirmed there were no reductions 
to their CLIA activities. 

CMS officials noted, however, it is possible that carryover funds will 
not be available in future years to offset funding reductions to the 
extent they were in fiscal year 2013. For example, officials reported 
having used up much of the funding available from prior years for 
Medicare program integrity. 

In addition to using carryover funds, certain offices told us that 
prior year initiatives helped them respond to the sequestration 
reductions. Officials in the Center for Medicare began considering how 
to implement specific percentage reductions to payments for Medicare 
fee-for-service claims as early as 2008 in response to proposals for 
Medicare cost reductions. They increased their preparation for 
sequestration of payments in late 2011. Officials said that these 
early preparations helped the center implement payment reductions 
quickly through the various contractors that maintain their payment 
systems when sequestration occurred. In addition, CCSQ officials told 
us that, beginning in 2011, officials started a broad-based initiative 
to improve the efficiency and effectiveness in survey processes as 
they recognized a significant gap between an increasing workload and 
the funding amount typically allocated for survey and certification 
activity. This initiative, including corresponding outreach to state 
survey agencies, helped CCSQ plan for sequestration in fiscal year 
2013. 

Complexity of CMS Programs and Timing of Sequestration Presented 
Challenges for CMS and Stakeholder Planning and Implementation: 

CMS officials said that it was difficult and time consuming to 
determine how to apply sequestration pursuant to the law and within 
changing budgetary parameters. In particular, CMS had difficulty 
determining all of the types of Medicare provider payments subject to 
sequestration and which Medicare funding was subject to special 
sequestration rules. For example, CMS officials initially thought that 
subsidies for the Program of All-inclusive Care for the Elderly (PACE) 
were exempt from sequestration, like certain Medicare low-income 
subsidy payments.[Footnote 93] Upon further discussion with OMB late 
in the planning process, CMS determined that these payments were not 
exempt and adjusted the plan payments accordingly. Officials said the 
adjustments accounted for a very small amount of PACE funding. The 
timing of sequestration and changing budgetary parameters also delayed 
CMS's ability to make final planning decisions. For example, CMS based 
its initial sequestration planning decisions on the annualized amount 
set out in the continuing resolution in effect at the time 
sequestration was ordered. After the Consolidated and Further 
Continuing Appropriations Act, 2013,[Footnote 94] which provided a 
lower discretionary appropriation base than CMS used to calculate the 
sequestration reductions, CMS officials said they had to determine how 
to absorb the same amount of reductions, which then represented a 
larger portion of the appropriation, in the remainder of the fiscal 
year. 

The timing of sequestration and related CMS guidance created 
uncertainty for some stakeholders. For example, CCSQ officials told us 
that they strive to limit uncertainty for states so the states can 
plan their budget adequately. This was difficult in fiscal year 2013 
because sequestration took effect in March, which effectively doubled 
the percentage cut because it all had to be taken in the second half 
of the fiscal year. On April 5, 2013, CMS issued a memorandum 
informing states about sequestration reductions and actions states 
should take to implement the cuts. Although officials from several 
state survey agencies we spoke to described the timing of CMS's 
communication regarding sequestration as the best it could have been, 
they still faced challenges adjusting their budgets. For example, one 
state survey agency told us it received official notice of its 
allocation amount in May 2013, which left the state very little time 
to plan for absorbing the cut by the end of the fiscal year in 
September 2013. CMS informed providers and plans about the Medicare 
payment reductions following the sequestration order in March. In 
early May CMS issued additional guidance to Medicare Advantage and 
prescription drug plans regarding the application of reductions for 
various plan types. In this communication, CMS noted, for example, 
that the agency is prohibited from interfering in payment arrangements 
between plans and providers who contract with them. A hospital 
representative reported anecdotally that the timing of sequestration 
and CMS's official communication to providers limited hospitals' time 
to plan adequately for the reduced payments. In addition, hospital and 
physician representatives said that CMS's guidance regarding payment 
reductions was not sufficient for them to understand how cuts were 
applied without additional clarification. See figure 5 for information 
on CMS actions related to Medicare payments and survey and 
certification. 

Figure 5: Timeline of CMS Actions Related to Sequestration of Medicare 
Payments and Survey and Certification: 

[Refer to PDF for image: timeline] 

2011: 

CMS Actions Related to Medicare Payment Reductions: 
Beginning in 2011: Begins preparing contractors for implementing 
payment reductions. 

2012: 

CMS Actions Related to Survey and Certification Reductions: 
August 2012: Notifies state survey agencies of projected fiscal year 
2013 federal Medicare allocations. 

2013: 

October 1, 2012: Beginning of fiscal year 2013. 

March 1, 2013: Sequestration ordered. 

CMS Actions Related to Medicare Payment Reductions: 
March 8, 2013: Notifies Medicare providers of mandatory payment 
reductions for Medicare fee-for-service (Medicare Parts A and B). 

CMS Actions Related to Medicare Payment Reductions: 
March 22, 2013: Notifies Medicare Advantage and prescription drug 
plans (Medicare Parts C and D) of mandatory reductions to Medicare 
payments. 

March 26, 2013: Consolidated and Further Continuing Appropriations 
Act, 2013 enacted. Provided full-year appropriations for federal 
agencies. 

CMS Actions Related to Medicare Payment Reductions: 
April 1, 2013: Begins reducing Medicare payments by 2 percent for 
claims with dates-of-service or dates-of-discharge as well as 
enrollment periods beginning on or continuing after this date. 

CMS Actions Related to Survey and Certification Reductions: 
April 5, 2013: Notifies state survey agencies of sequestration and 
provides priority adjustments to states' operations to accommodate 
sequestration. 

CMS Actions Related to Medicare Payment Reductions: 
May 1, 2013: Provides clarification to Medicare Advantage and 
prescription drug plans regarding reductions to Medicare payments. 

CMS Actions Related to Survey and Certification Reductions: 
May 3, 2013: Notifies state survey agencies of final fiscal year 2013 
federal Medicare allocations. 

September 30, 2013: End of fiscal year 2013. 

2014: 

CMS Actions Related to Survey and Certification Reductions: 
Beginning October 2013 – March 31, 2014: 
States reconcile fiscal year 2013 budgets and submit final 
expenditures and requests for supplemental funding to CMS. 

CMS determines availability of supplemental funds after this date. 

CMS Actions Related to Medicare Payment Reductions: 
March 31, 2014: Fiscal year 2013 sequestration of Medicare payments 
ends. 

Source: GAO analysis of legislation and information from the Centers 
for Medicare & Medicaid Services (CMS). 

[End of figure] 

GAO Contact: 

For additional information, contact Kathleen King at (202) 512-7114 or 
kingk@gao.gov. 

[End of section] 

Appendix III: Fiscal Year 2013 Sequestration at the Office of 
Elementary and Secondary Education: 

Mission and Budget Overview: 

Figure 6: Office of Elementary and Secondary Education Mission and 
Fiscal Year 2013 Sequestered Funding: 

[Refer to PDF for image: pie-chart and related information] 

Office of Elementary and Secondary Education (OESE): 
OESE is responsible for directing, coordinating, and recommending 
policy for programs designed to: 

* assist states and school districts with improving the achievement of 
preschool, elementary, and secondary school students; 

* help ensure that all children, particularly those with high needs, 
have equal access to services leading to improvement in academic 
achievement; 

* foster educational improvement at the state and local levels; and; 

* provide financial assistance to districts whose local revenues are 
affected by federal activities. 

Fiscal year 2013 funding prior to sequestration: $22.0 billion; 
Sequestered: $1.1 billion; 
Post-sequestration funding: $20.9 billion. 

Sources: GAO analysis of Education information; PhotoDisc (image). 

Note: Dollar amounts do not add to $22 billion due to rounding. 

[End of figure] 

A range of programs fall under the purview of OESE, including academic 
improvement and teacher quality programs, early learning programs, 
school support programs, and student achievement and school 
accountability programs. Many of these programs are authorized by the 
Elementary and Secondary Education Act of 1965 (ESEA),[Footnote 95] as 
amended, and programs primarily fund grants to state educational 
agencies or local educational agencies (LEA) nationwide.[Footnote 96] 
Through these programs, federal funds are either distributed to grant 
recipients based on a predetermined formula, referred to as formula 
grant programs, or awarded on a competitive basis. 

To address our research objectives, we identified and reviewed 
relevant agency documents and budget data for fiscal years 2012 and 
2013 and conducted interviews with Education officials to corroborate 
the information provided. Among the programs administered by OESE, we 
selected two grant programs--Title I and Impact Aid--to determine how 
sequestration affected these programs and to collect more in-depth 
information related to our research objectives. These two programs 
accounted for about 72 percent of OESE fiscal year 2013 funding prior 
to sequestration and provide numerous grants to states and LEAs. See 
Table 5 for an overview of the two selected grant programs. 

Table 5: Overview of Selected Grant Programs Administered by OESE: 

Selected programs: Title I; 
Overview: Title I, authorized under Title I, part A of the Elementary 
and Secondary Education Act of 1965 (ESEA), as amended, is a formula 
grant program that provides funding, through states, to LEAs to expand 
and improve educational programs in schools with high concentrations 
of students from low-income families; 
Federal funds are allocated to LEAs through four statutory formulas. 
The formula for basic Title I grants is generally based on the number 
of children from families below the poverty level who reside in each 
LEA, and how much the state spends per pupil on education, among other 
factors. Title I funds are provided to states, which distribute funds 
to LEAs; 
Funding type: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $14.5 billion; 
Sequestered amount: $756 million. 

Selected programs: Impact Aid; 
Overview: Impact Aid, authorized under Title VIII of the ESEA, is a 
formula grant program that provides assistance to local school 
districts that are affected by federal activities. Impact Aid grants 
assist school districts that have lost property tax revenue due to the 
presence of tax-exempt federal property (section 8002) or that have 
experienced increased expenditures due to the enrollment of federally 
connected children (section 8003).[A] Section 8003 provides assistance 
to districts with concentrations of children residing on Indian lands, 
military bases, low-rent housing properties, or other federal 
properties, as well as concentrations of children who have parents on 
active duty in the uniformed services but who do not live on federal 
property. Funds are awarded directly to school districts in accordance 
with a formula specified in the ESEA. The section 8003 formula for 
allocating funds is generally based on the numbers and types of 
federally connected children in the district, and other factors. In 
addition to these basic support payment grants, Impact Aid also 
includes additional grants, such as those that support construction 
and repair of school buildings in districts serving high percentages 
of certain federally connected children as well as grants that provide 
additional support to districts that educate federally connected 
students with disabilities; 
Funding type: Discretionary; 
Fiscal year 2013 sequestration: 
Funding prior to sequestration: $1.3 billion[B]; 
Sequestered amount: $67.5 million. 

Source: GAO analysis of agency documents and budget data. 

[A] Federally connected children include children who (a) live on 
federal property with a parent employed on federal property within the 
district or with a parent who is an accredited foreign military 
officer; (b) live on federal property and have a parent on active duty 
in the uniformed services; (c) reside on Indian lands; (d) do not live 
on federal property but have a parent on active duty in the uniformed 
services or a parent who is an accredited foreign military officer; 
(e) reside in low-rent housing; (f) reside on federal property but do 
not fit into the other categories; or (g) do not reside on federal 
property but have a parent employed on federal property situated in 
the same state as the district. 20 U.S.C. § 7703(a)(1). 

[B] Although the budget numbers in the table include all Impact Aid 
funding, when we refer to Impact Aid elsewhere in this report, we will 
only be referring to the Impact Aid grants that provide funding for 
districts serving federally connected children-section 8003(b), Basic 
Support Payments (20 U.S.C. § 7703(b)). 

[End of table] 

We selected Title I because it is the largest grant program 
administered by OESE,[Footnote 97] and we selected Impact Aid because 
funding from this program could make up a significant portion of some 
eligible districts' overall funding levels.[Footnote 98] We analyzed 
data provided by Education on Title I and Impact Aid grants to 
determine the amount of program funding allocated to states and school 
districts for fiscal year 2013. To assess data reliability, we 
reviewed information previously obtained for our agency-level review; 
asked officials about the source of any information provided and a 
description of any known limitations or purposes for which the data 
being provided should not be used; and interviewed knowledgeable 
officials as needed. We determined these data to be sufficiently 
reliable for the purposes used in this report. Using grant information 
and other data, we identified grant recipients that received large 
amounts of Title I or Impact Aid funding, relied heavily on this grant 
funding, or both. We then selected a purposeful sample of seven school 
districts for interviews based on variation in the grant amounts they 
received, each districts' reliance on grant funding, and geographic 
location. Because we used a nonrandom, purposeful sample, the results 
of our analysis of the selected school districts cannot be generalized 
to other school districts nationwide. Our selected districts included 
three Title I districts located in Mississippi, Ohio, Texas; and four 
Impact Aid districts located in Arizona, South Dakota, and Texas. Two 
of the Impact Aid districts serve military children and the other two 
serve children residing on Indian lands. In addition, we interviewed 
two national associations representing states and districts receiving 
Title I and Impact Aid grants and six state Title I grant 
administrators. 

Sequestration Cuts to OESE's Funding Resulted in Some Reduced Services 
Provided by Selected School Districts and Hindered Some Administrative 
Activities: 

Cuts to Grant Funding Affected Grant Recipients in Different Ways and 
Reduced Some Services for Selected School Districts: 

Sequestration resulted in cuts of about 5 percent to Title I and 
Impact Aid grant funding that supports services to thousands of school 
districts nationwide. These sequestration cuts affected grant 
recipients in different ways and contributed to some reduced services 
to students. Title I is the largest grant program administered by 
OESE, with grants issued to over 53,000 schools in districts 
nationwide in fiscal year 2013.[Footnote 99] The program provides much 
of its total funding to districts serving high concentrations of 
students from low-income families, to provide services to help improve 
the academic achievement of students in high-poverty schools or 
students at risk of academic failure (see table 6). 

Table 6: Allocations of Title I Grant Funding for Fiscal Year 2013 by 
District Poverty Rate: 

Districts by poverty rate: 0-15%; 
Number of districts receiving Title I: 4,866; 
Total amount of Title I payments by poverty rate: $1,610,660; 
Percentage of total Title I dollars: 11.94; 
Number of eligible children by district poverty rate: 1,719,375. 

Districts by poverty rate: 15-25%; 
Number of districts receiving Title I: 4,611; 
Total amount of Title I payments by poverty rate: $3,737,959; 
Percentage of total Title I dollars: 27.21; 
Number of eligible children by district poverty rate: 3,552,850. 

Districts by poverty rate: Over 25%; 
Number of districts receiving Title I: 3,639; 
Total amount of Title I payments by poverty rate: $8,141,872; 
Percentage of total Title I dollars: 60.35; 
Number of eligible children by district poverty rate: 6,309,201. 

Source: Department of Education, fiscal year 2015 budget request. 

[End of table] 

For Impact Aid, many districts receive funding from this program--a 
little over 1,100 districts serving almost 930,000 federally connected 
students nationwide in fiscal year 2013 (see figure 7). 

Figure 7: Percentage of Federally Connected Children in Districts 
Receiving Impact Aid Nationwide in Fiscal Year 2013: 

[Refer to PDF for image: pie-chart] 

Military: 40% (374,540 students); 
Civilian: 24% (225,788); 
Low rent housing: 23% (215,795); 
Indian land: 12% (113,743). 

Source: Department of Education, fiscal year 2015 budget request. 

Notes: Percentages do not add to 100 due to rounding. 

The "military" category includes eligible children of active duty 
service members and foreign military officers living on or off federal 
property. 

The "civilian" category includes eligible children living on federal 
property with a parent who works on federal property within the 
district, eligible children living off federal property but who have a 
parent employed on federal property within the state, and children 
living on federal property but who do not fall into another category. 
See 20 U.S.C. § 7703(a)(1) for all eligibility criteria. 

[End of figure] 

Effects of sequestration on school districts varied due to the timing 
of funding disbursements to grant recipients. In general, Title I 
grant recipients felt the effects of sequestration later than 
districts that received Impact Aid grants. Specifically, the 
sequestration cuts affected Impact Aid recipients in school year 2012-
2013, while the cuts did not affect Title I recipients until school 
year 2013-2014. This is, in part, due to when Education disburses 
funding to states and school districts. Education typically disburses 
Title I grants to states, for disbursement to school districts, in 
July and October each year.[Footnote 100] Education disbursed some of 
its Title I fiscal year 2013 funding to states in October 2012, prior 
to sequestration, for school year 2012-2013. Education then applied 
the entire amount of the sequestration cuts for fiscal year 2013 to 
the next grant disbursement, in July 2013, for school year 2013-2014. 
Therefore, the sequestration cuts did not affect the October 2012 
disbursement used for the 2012-2013 school year. In contrast, 
Education disbursed a majority of the fiscal year 2013 funding for 
Impact Aid in October and November 2012, during school year 2012-2013, 
prior to sequestration, and applied the sequestration cuts to grant 
disbursements made in May 2013.[Footnote 101] According to Education 
officials, delaying the cuts from the 2013 sequestration for the 
larger state grant programs, such as Title I, enabled recipients to 
plan and may have tempered some of the negative consequences of 
sequestration. 

Another reason sequestration affected districts differently is that 
the relative importance of Title I and Impact Aid grant funding in 
districts' budgets varies greatly. School district budgets are 
generally funded by multiple sources and are determined by many 
factors, including local taxes, state government contributions, and 
other federal financial support sources. Moreover, the relative 
contribution of these resources varies among school districts. As a 
result, the effects of grant reductions from Education vary for grant 
recipients based on their respective situations, including the 
availability of other resources to fill any budget gap. While the 
receipt of Title I grants is widespread among districts, funds from 
this program generally account for a small portion of most districts' 
overall funding. Though the proportion can vary by district, for 
fiscal year 2010, the most recent year for which data are available, 
Title I made up about 3 percent of total elementary and secondary 
education funding from all sources nationwide, according to the 
National Center for Education Statistics. The extent to which 
districts rely on Impact Aid funding also varies, with one district's 
reliance as high as 88 percent of its fiscal year 2013 operating 
budget, according to Education data. 

In addition, five of the districts we contacted said that it is 
difficult to isolate the effects of sequestration cuts solely to Title 
I or Impact Aid because the districts had also experienced reductions 
to state funding and to other federal programs and activities due to 
sequestration. These various state and federal funding cuts the 
districts experienced have led to reductions in staffing levels, 
transportation, and school programs, as well as districts having to 
shift funding from other sources to support programs affected by the 
cuts, according to district officials. For example, officials from all 
of the selected districts that received Title I or Impact Aid grants 
mentioned how the districts had experienced reductions to their state 
funding prior to sequestration. In one case, district officials told 
us that, prior to sequestration, from 2010-2012, the district had to 
lay off teachers in order to balance the district's budget after the 
state cut funding to education; however, additional local tax revenue 
allowed the district to avoid further layoffs when sequestration 
occurred. Related to reductions to other federal programs and 
activities, officials from one district reported that in addition to 
Impact Aid, the district also experienced funding cuts to other 
federal programs due to sequestration such as special education, 
vocational education, Indian education, and Title I, among others. 
While this district received about 25 percent of its funding from 
Impact Aid, the other federal funding sources contributed an 
additional 23 percent to its total budget in fiscal year 2013. In 
another example, an Impact Aid district we contacted reported that the 
Department of Defense cut funding to bus routes, among other things, 
which the district was then forced to fund, placing a further strain 
on the district's budget. 

Even though sequestration cuts affected grant recipients in different 
ways and the effects are difficult to isolate, we found from our 
interviews with state officials and the seven school districts we 
contacted that cuts from sequestration had contributed to some extent 
to reductions in services to students. 

Effects on Select LEAs Receiving Title I: 

Title I funding comprised between 5 and 18 percent of the budgets of 
the three Title I districts we selected. Even though this was not a 
large percentage of the districts' budgets, cuts to Title I funding 
contributed to decisions to reduce staff positions and professional 
development opportunities, reduce or delay academic programs, and 
defer maintenance and technology upgrades, according to the officials 
we spoke with.[Footnote 102] Specifically, for the three Title I 
districts we contacted, officials provided this information: 

* One Title I district reported that cuts to Title I funding 
contributed to decisions to reduce staffing levels by not filling 
vacated positions in certain areas. Officials told us that the loss of 
funding contributed to the decision to reduce the number of reading 
and math specialists which provide extra instruction to students and 
assist teachers in improving their teaching methods. Since this 
district has a large population of low income students, officials were 
concerned that the loss of these specialists could cause students in 
need of additional tutoring to fall further behind. 

* Officials from two of the selected districts told us the funding 
reductions contributed to decisions to reduce professional development 
opportunities for their staff. Officials from one of the districts 
thought these reductions could affect teaching staff preparedness in 
advance of implementing new academic standards, which would then 
affect the instruction that the district's students received. 

* Two districts reported that Title I reductions contributed to 
decisions to reduce or delay some academic or after-school programs. 
For example, one district reported that the loss of funding 
contributed to the decision to reduce after-school programs, while 
officials from another district told us the reductions contributed to 
the decision to delay implementation of new academic programs designed 
to improve the district's academic performance. 

* All three Title I districts reported that Title I reductions 
contributed to decisions to defer maintenance and technology 
upgrades.[Footnote 103] For example, officials from the three 
districts said their district delayed technology upgrades with one 
official describing the district technology as aging. 

Effects on Select Districts Receiving Impact Aid: 

Impact Aid funding represented anywhere from 15 to 35 percent of the 
total budget of the four Impact Aid districts we selected. District 
officials told us that they had to take a number of steps to absorb 
the reductions in Impact Aid. Two of these selected districts are 
located entirely on federal lands, while federal lands made up 80 
percent of a third district, according to officials from each of the 
respective districts. As a consequence, these districts do not have a 
local tax base to mitigate the loss of federal funding. According to 
district officials, to absorb the cuts to Impact Aid in the 2012-2013 
school year they had to reduce staff positions and professional 
development opportunities, increase class sizes, reduce school 
programs, defer maintenance and technology upgrades, and reduce 
transportation. Specifically, for the four Impact Aid districts we 
contacted, officials provided this information: 

* Three districts reported that they had to reduce staffing levels, 
primarily through attrition and not filling vacated positions, 
including those for teachers and aides. Officials from one of these 
districts reported having to reduce their instructional staff 
positions by 14 full-time equivalents. Officials from these districts 
told us that they primarily reduced staffing levels by not replacing 
departing staff. 

* Four of the districts reported having to reduce professional 
development opportunities. One district official told us that, as a 
consequence, there was concern the district will be unable to support 
its teachers during a time when the official thought there were 
sizable changes in the expectations for how the teachers delivered 
instruction. 

* Three districts reported having to increase class sizes. For example 
officials from one of the districts reported increasing elementary 
school classes by an average of two or three students. 

* Three of the selected districts told us they reduced school 
programs, which included reductions to art, music, or athletic 
programs. For example, officials from one of the districts on Indian 
lands told us that they reduced the program teaching the Navajo 
language and culture--a program that is in high demand in their 
district. 

* Four districts reported needing to defer maintenance and technology 
upgrades because of sequestration. For example, officials from one 
district reported that they were only performing emergency 
maintenance. In addition, these officials reported that deferring 
maintenance on a roof at one of the high schools led to flooding in 
three of the classrooms. In another example of deferred maintenance, 
district officials from another district told us they reduced funding 
for maintenance on their large fleet of buses. These officials told us 
that they were concerned about the reductions in maintenance because 
the bus routes cover a large geographic area over sections of 
unfinished roads, which places a strain on the bus fleet. In addition 
to deferring maintenance, officials from this district also described 
deferring upgrades to the district's technology. Officials expressed 
concern over the district's ability to implement new educational 
standards and assessments without the upgrades considering that the 
new standards rely on using technology. 

* Two of the selected districts reported reducing or eliminating 
transportation routes, though for one of the districts state cuts from 
prior years also contributed to this decision. These districts also 
said that as a consequence of route reductions and eliminations, some 
students traveled further to reach their bus pickup points which, for 
one district, caused students to miss school. One district also 
reported that the district had to eliminate bus routes for students 
who attended after-school tutoring and academic enrichment programs. 

Sequestration Further Reduced OESE's Staffing Levels and Hindered Some 
Grant Administration Activities: 

Agency-wide cuts in administrative expenses due to sequestration 
resulted in reduced OESE staffing levels and required OESE to spend 
less on travel and other expenses, which OESE officials said led to 
increasing workloads for staff and reductions in some grant oversight 
activities. For example, according to OESE officials, decreases in 
hiring since 2011,[Footnote 104] which were exacerbated by 
sequestration, have led to increased workload for current staff and 
may have contributed to staff burnout. Overall, OESE lost 10 staff 
positions in fiscal year 2013, resulting in a total of 233 staff by 
the end of the fiscal year. 

OESE also reported that from fiscal year 2012 to fiscal year 2013 it 
experienced a 47 percent reduction to its travel budget,[Footnote 105] 
which affected its ability to conduct grantee oversight and technical 
assistance. For example, according to OESE officials, due to 
sequestration cuts, they had to conduct about four to five fewer on-
site compliance reviews for the Impact Aid program in fiscal year 
2013, which also reduced the amount of technical assistance that would 
have been provided to grant recipients by way of these reviews. 
Officials said that while some grant oversight and technical 
assistance can be done remotely, it is also necessary to be on the 
ground to review actual documents for compliance reviews and to build 
strong working relationships with grantees. Additionally, OESE 
officials said they offered technical assistance via webinars to 
assist grantees or grant applicants in lieu of on-site visits or 
attending technical conferences. However, officials were concerned 
that applicants may be more comfortable asking questions privately 
rather than during a webinar session with other grantees listening in 
on the conversation. As a result of these changes to OESE's delivery 
of technical assistance, officials were concerned, for example, that 
there could be an increase in late Impact Aid grant applications in 
the future, which could subject grantees to a penalty and reduce their 
funding. The reductions to the travel budget also reduced OESE's 
ability to provide general outreach, such as by presenting at 
conferences and sending staff to conferences for training, among other 
travel needs. 

Overall, OESE officials were not certain whether they could determine 
the extent to which sequestration has affected OESE's progress toward 
achieving some of its performance and priority goals because 
achievement of some goals are dependent on many factors, such as the 
actions of states or school districts, as well as budgetary resources. 
For example, one of the agency's priority goals for elementary and 
secondary education, which is supported by some OESE programs, is to 
improve learning by ensuring that more students have an effective 
teacher. Education's target goal is that a majority of states will 
have developed and adopted statewide requirements for comprehensive 
teacher and principal evaluations and support systems, and at least 
500 school districts will have implemented these evaluations and 
systems, by September 30, 2013. The agency's fiscal year 2013 Annual 
Performance Report released in March 2014 showed that while the agency 
has results for one of three metrics related to this goal,[Footnote 
106] results for the remaining two metrics were forthcoming, pending 
the release of state progress reports. Furthermore, the report cited 
challenges, which could be unrelated to federal budget constraints, 
that could hinder the achievement of this priority goal including 
districts' and states' current fiscal situation; potential changes in 
leadership; scaling up of systems in a relatively short time frame; 
and coordination among the agency's programs to ensure consistency of 
policy and communication. 

To Plan and Implement Sequestration, OESE Followed Agency-Wide 
Protocols, While Specific Grant Requirements Limited Its Flexibility 
in Allocating Grant Funds: 

In response to sequestration, OESE followed the plan set out by 
Education, which included the reductions in Education's overall 
administrative accounts and OESE's grant programs. OESE officials told 
us that planning for sequestration started at the top of the agency 
and filtered down to the agency's components. Officials told us they 
were informed about Education's budget plans in a series of meetings 
with the agency's budget office. 

Due to sequestration, officials told us OESE reduced staffing by 
limiting the hiring of new staff to replace those that departed. 
Officials told us they were required to follow a process implemented 
agency-wide for approving personnel actions in which components within 
the agency were to submit hiring plans for approval that prioritized 
proposed personnel actions along with a description of the effects of 
not fulfilling the proposed positions. The Office of Management, the 
Budget Service, and the Office of the Deputy Secretary were required 
to coordinate in approving high-priority personnel actions while also 
allowing the agency to operate within sequestration budget levels. 
OESE officials told us this meant that OESE, in some cases, replaced 
senior level staff with lower paid entry level staff in order to allow 
the agency to fill more of the vacated positions. By implementing this 
agency-wide personnel action, along with other actions to achieve 
administrative savings, Education avoided furloughs in fiscal year 
2013. 

While there were staff reductions, officials told us that OESE 
received more funding for training in fiscal year 2013 in order to 
better prepare staff for working with fewer resources. Officials 
described how OESE developed a needs assessment for individual staff 
and, then, if the assessment identified an area of need that affected 
that staff member's performance plan, OESE prioritized training to 
address that need. Overall, officials thought OESE would be stronger 
in the long run because of the commitment to training their staff. 

OESE officials said they followed certain priorities in implementing 
the sequestration cuts to grants awarded through a competitive 
process. For these grants, OESE officials said, agency regulations 
generally require components to prioritize funding of existing grants 
over new grants. As a consequence, officials overseeing these grant 
programs only awarded new grants if there were funds remaining for the 
program after all of the existing grants were funded. Officials then 
had the option to fund new grants to qualified applicants remaining 
from the previous year. Officials could also open a grant to new 
competition if there were not sufficient numbers of qualified 
applicants from the previous year or if the grant program had a new 
policy priority. Agency officials could not quantify how many fewer 
competitive grants were issued due to sequestration. By contrast, OESE 
had limited flexibility in determining how to allocate reductions to 
formula grants, such as Title I or Impact Aid, because specific 
eligibility criteria and formulas for allocating grant funds are 
established by law and Education is required to provide funds to 
grantees that meet the statutory criteria.[Footnote 107] 

As part of implementing sequestration of the Title I and Impact Aid 
programs, OESE officials said they informed grantees about 
sequestration by disseminating information on the potential reductions 
through advocacy organizations and states. According to officials, 
OESE disseminated information to grantees whenever the information 
became available through a variety of means including the National 
Association of Federally Impacted Schools (NAFIS), an advocacy 
organization representing districts receiving Impact Aid, and the 
National Council for Impacted Schools. OESE also communicated with 
state educational agencies, such as through each agency's chief state 
school officer. In addition, OESE officials disseminated information 
through Education's relevant e-mail list. As an example of how grant 
recipients were informed about sequestration, in a July 2012 letter 
Education informed the chief state school officers of the potential 
timing of the sequestration for formula grant programs to help the 
states plan for sequestration, should the reductions occur. 
Specifically, among the grants referenced, the letter informed the 
chief state school officers that districts receiving Impact Aid would 
absorb their funding cuts during the 2012-2013 school year, while for 
Title I districts sequestration would not be implemented until the 
2013-2014 school year. Both representatives from NAFIS and select 
state representatives we spoke with through the National Title I 
Association confirmed having received this communication from 
Education. The chief state school officers also provided examples of 
other communication from Education, but also noted that, while 
Education provided what information it could to help with planning, it 
was difficult to predict final funding levels due to the complexity of 
the Title I formula. 

GAO Contact: 

For additional information, contact Melissa Emrey-Arras at (617) 788-
0534 or EmreyArrasM@gao.gov. 

[End of section] 

Appendix IV: Fiscal Year 2013 Sequestration at the Office of Public 
and Indian Housing: 

Mission and Budget Overview: 

Figure 8: Office of Public and Indian Housing Mission and Fiscal Year 
2013 Sequestered Funding: 

[Refer to PDF for image: pie-chart and related information] 

Public and Indian Housing (PIH): 
PIH, within the Department of Housing and Urban Development (HUD), 
oversees and monitors a range of programs to: 

* ensure that safe, decent and affordable housing is available to 
eligible low-income families, the elderly, persons with disabilities 
and Native Americans, Alaska Natives, and Native Hawaiians; 

* create opportunities for residents' self-sufficiency and economic 
independence; 

* assure fiscal integrity by all program participants; and; 

* support mixed income developments to replace distressed public 
housing. 

PIH housing programs provide funds—-often in the form of subsidies or 
grants-—to implementing partners, such as public housing agencies 
(PHA) and tribal housing entities. 

Fiscal year 2013 funding prior to sequestration: $25.8 billion; 
Sequestered: $1.3 billion; 
Post-sequestration funding: $24.5 billion. 

Sources: GAO analysis of HUD information; Comstock (image). 

[End of figure] 

Within PIH, we selected three programs to collect more in-depth 
information related to our research objectives (see table 7). We 
selected the Housing Choice Voucher program and the Public Housing 
Operating Fund because they are the two largest programs by funding 
within PIH and serve a large number of very low-income households. We 
selected the Indian Housing Block Grant (IHBG) program because it is 
the largest program by funding within PIH primarily serving Native 
Americans. 

Table 7: Overview of Selected Public and Indian Housing Programs: 

Selected programs and activities: Housing Choice Voucher program; 
Overview: The voucher program subsidizes private-market rents for 
approximately 2 million low-income households. HUD pays landlords a 
subsidy that generally is equal to the difference between the unit's 
rent and 30 percent of the recipient household's adjusted income. HUD 
also pays an administrative fee, based on a formula, to about 2,300 
local public housing agencies (PHA) to manage the program; 
Funding type: Discretionary; 
Fiscal year 2013 funding: 
Funding prior to sequestration: $18.9 billion[A]; 
Sequestered amount: $938 million. 

Selected programs and activities: Public Housing Operating Fund; 
Overview: Through the operating fund, HUD provides subsidies for 
operating and maintaining public housing to about 3,100 PHAs, which 
administer the subsidies on HUD's behalf. The housing agencies provide 
public housing for approximately 1.1 million low-income households; 
Funding type: Discretionary; 
Fiscal year 2013 funding: 
Funding prior to sequestration: $4.3 billion[B]; 
Sequestered amount: $199 million. 

Selected programs and activities: Indian Housing Block Grant program 
(IHBG); 
Overview: Through IHBG, HUD provides formula grants to 571 eligible 
Indian tribes or their tribally-designated housing entity (TDHE) for a 
range of affordable housing activities, including housing development, 
assistance for housing developed under the program's predecessor, and 
housing services for eligible families and individuals; 
Funding type: Discretionary; 
Fiscal year 2013 funding: 
Funding prior to sequestration: $649 million; 
Sequestered amount: $33 million. 

Source: GAO analysis of HUD documents and budget data. 

[A] $253 million of the program's funding, which was for HUD-Veterans 
Affairs Supportive Housing, was exempt from sequestration. 

[B] On March 1, 2013 OMB calculated the sequestrable base and 
reduction amounts based on the annualized amount set out in the 
continuing resolution then in effect ($4.0 billion). On March 26, 
2013, the Consolidated and Further Continuing Appropriations Act, 
2013, Pub. L. No. 113-6, 127 Stat. 198, 434 (2013), was enacted, 
providing increased funding for the Public Housing Operating Fund 
($4.3 billion). This additional funding was not subject to 
sequestration. 

[End of table] 

To obtain information on the steps HUD took to plan for and implement 
sequestration, we interviewed officials from PIH, including officials 
from the Offices of Housing Voucher Programs, Public Housing Programs, 
and Native American Programs. To assess the effect of sequestration on 
the number of households served by the voucher program and the number 
of public housing units operated and to assess the effect of 
sequestration on PHA reserve levels, we analyzed HUD data from 2011 to 
2013 for these programs. We assessed the reliability of these data by 
reviewing agency data documentation, interviewing officials, and 
testing for missing values, outliers, and obvious errors. We 
determined these data to be reliable for the purposes of this report. 
To obtain information about the steps PHAs took to implement 
sequestration for the voucher program and the public housing program, 
we interviewed officials from four PHAs, two national associations of 
PHAs, and the National Low Income Housing Coalition. We selected the 
PHAs to provide diversity in size, geographic location, and use of set-
aside funding to avoid terminations in their voucher program. To 
obtain information about the steps tribes and tribally designated 
housing entities (TDHE) that receive IHBG funding took in response to 
sequestration, we interviewed officials from four tribes or TDHEs and 
two associations of tribes and TDHEs.[Footnote 108] We selected the 
first IHBG recipient in each quartile of grant funding based on fiscal 
year 2014 grant amounts.[Footnote 109] 

Sequestration Reduced the Number of Households Receiving Rental 
Assistance, Housing Agencies' Reserves, and Maintenance and Other 
Housing Services: 

The Number of Households Receiving Vouchers Declined Even As PHAs Used 
Voucher Reserves to Mitigate Effects: 

HUD data indicated that about 1.86 million very low-income households 
were receiving rental housing assistance through the Housing Choice 
Voucher program at the end of calendar year 2013, a decline of about 
41,000 (2.2 percent) compared to the end of calendar year 2012, 
primarily due to sequestration (see figure 9).[Footnote 110] HUD 
officials told us that PHAs generally reduced the number of households 
that received assistance by not re-issuing vouchers made available by 
households that left the program rather than by terminating vouchers 
of current recipients. 

Figure 9: Number of Households That Received Rental Assistance in the 
Housing Choice Voucher Program, January 2011 to December 2013: 

[Refer to PDF for image: vertical bar graph] 

2011: 

January: 1,854,490; 
February: 1,859,620; 
March: 1,861,600; 
April: 1,864,930; 
May: 1,865,090; 
June: ,866,560; 
July: 1,864,810; 
August: 1,863,670; 
September: 1,862,460; 
October: 1,863,320; 
November: 1,865,940; 
December: 1,868,260; 

2012: 

January: 1,873,440; 
February: 1,876,090; 
March: 1,876,800; 
April: 1,877,930; 
May: 1,879,210; 
June: 1,881,360; 
July: 1,880,760; 
August: 1,883,120; 
September: 1,884,010; 
October: 1,886,360; 
November: 1,890,030; 
December: 1,891,930; 

2013: 
January: 1,894,200; 
February: 1,897,060; 
Sequestration ordered; 
March: 1,894,210; 
April: 1,891,800; 
May: 1,888,600; 
June: 1,882,970; 
July: 1,876,120; 
August: 1,869,410; 
September: 1,863,580; 
October: 1,859,990; 
November: 1,856,060; 
December: 1,850,770. 

Source: GAO analysis of HUD data. 

Note: The data in the figure exclude 35 PHAs (1.5 percent of PHAs that 
administer vouchers), accounting for 12 percent of vouchers, that have 
additional flexibility in how they spend their funding through the 
Moving to Work demonstration program. Because this demonstration 
program allows them to change the proportion of funding they allocate 
to vouchers over time we cannot determine whether declines in vouchers 
for these PHAs were due to sequestration or reallocation of funding 
between programs. 

[End of figure] 

Some of the households participating in the rental assistance program 
also faced higher costs and other challenges in 2013 because some PHAs 
reacted to the sequestration cuts by increasing minimum rents, 
decreasing inspections of units, or reducing utility allowances. 
[Footnote 111] With their funding reduced, three of the PHAs we 
interviewed also reported taking steps to reduce costs they incurred 
when a household receiving rental assistance moved to an area covered 
by a different PHA or vice versa.[Footnote 112] For example, one PHA 
did not continue to provide rental assistance if a household moved to 
a higher-cost area. These PHA actions can make it more difficult for 
households to maintain their benefits when moving. 

Aggregate PHA voucher reserves decreased 46 percent from $1.3 billion 
in December 2012 to $709 million in September 2013. The reserves are 
funds these agencies have accumulated from prior appropriations and 
which they generally use to fill funding shortfalls if program 
expenses are higher than expected. PHAs used these reserves to 
mitigate some of the effect of sequestration on the number of vouchers 
they administered. However, PHA program reserves for vouchers had been 
reduced by $650 million in the aggregate in 2012 because of reductions 
in HUD's fiscal year 2012 funding.[Footnote 113] As a result of the 
reduced reserves from that action and the subsequent sequestration 
cuts in fiscal year 2013, PHAs will have reduced capacity to mitigate 
effects of any funding cuts in future years. As of the end of 
September 2013, the most recent month for which data were available, 
PHAs had on hand reserves adequate to fund an average of 0.5 months of 
voucher expenses, compared to 0.9 months in December 2012. Also by the 
end of September 2013, 165 PHAs had exhausted their reserves, compared 
with 84 PHAs in the same situation at the end of 2012. 

The Number of Public Housing Units Did Not Substantively Decrease, but 
PHA Cost-Cutting Measures Affected Families and Public Housing 
Reserves Declined: 

Although sequestration did not substantively reduce the number of 
units of public housing available, it necessitated that PHAs draw down 
on their reserves for these programs. None of the PHAs we interviewed 
told us that sequestration reduced the total number of units operated 
(either occupied or vacant). HUD data showed that the total number of 
public housing units operated declined from December 2012 to December 
2013 by about 6,000 (0.5 percent), to 1.151 million. HUD officials 
attributed this decline to the general deterioration of units due to 
funding in recent years being lower than needed to repair and maintain 
all units, which was extended and deepened by the effects of 
sequestration. 

Stakeholder groups told us that the time necessary to prepare units 
for occupancy by new residents after others vacate has increased as a 
result of cuts in spending on maintenance staff, which also led to 
lower utilization of units and fewer people served. However, HUD data 
showed that the average occupancy rate for units remained at 96 
percent throughout 2013. 

Other steps PHAs took to reduce costs in the aftermath of 
sequestration also negatively affected families residing in public 
housing. For example, two PHAs we interviewed increased the case loads 
for their staff, and two PHAs reduced their office hours, both of 
which could reduce the level of service provided to families. In 
addition, two PHAs we interviewed took longer to complete maintenance 
or repairs, and two canceled some ancillary tenant programs, both of 
which HUD officials told us could negatively affect a PHA's 
performance and scores in HUD's assessments of resident satisfaction 
and management. 

To mitigate the effects of sequestration, two PHAs reported that they 
drew down reserve funds maintained to address public housing operating 
fund shortfalls. PHAs need a reserve level equal to 4 months of 
operating expenses to obtain the highest possible score in HUD's 
assessments of PHAs' financial health. Although PHAs had $4.3 billion 
(about 8 months of total operating expenses) in such reserves as of 
the end of their fiscal year in 2012, their level of reserves 
varied.[Footnote 114] For example, 16 percent of PHAs, accounting for 
about 21 percent of units operated, had less than 4 months of 
operating expenses in reserves. Further, 3 percent of PHAs, accounting 
for 6 percent of units operated, had less than 1 month of operating 
expenses in reserves. HUD officials told us that continued funding 
cuts could cause larger declines in the number of units of public 
housing operated as some PHAs deplete their reserves. 

Data reflecting the amount of reserves PHAs held at the end of 
calendar year 2013, which would reflect the effects of sequestration, 
were not available in time for this report. Further, PHAs whose fiscal 
year ended at the end of June or September were affected in the same 
fiscal year both by sequestration as well as a $750 million reduction 
in reserves in fiscal year 2012 that resulted from a reduction in 
HUD's appropriation. This would prevent a determination of how much of 
any decline in reserves in the PHAs' fiscal year was due to 
sequestration even after the data are available. 

Carry-Over Funding and Reserves Mitigated the Effects of Sequestration 
for Some Indian Housing Block Grant Program Grantees: 

Representatives from all four of the tribes and TDHEs we interviewed 
told us that sequestration did not have a large effect on their 
activities in 2013 because the entities typically carry over some 
previous year funding or still had reserves available from the 
predecessor to the IHBG program. As a result, they were able to draw 
on these funds to offset sequestration's cuts and complete planned 
projects or activities in 2013. However, three said that sequestration 
would reduce the activities they could conduct in future years because 
they would be carrying over fewer funds at the end of fiscal year 
2013. In addition, HUD officials told us that not all tribes and TDHEs 
had carry-over funding or reserves on which they could rely. Of the 
361 tribes and TDHEs that received IHBG funding in 2013, 61 applied 
for and received interim funding from HUD prior to receiving their 
final funding, for which having no carry-over funding or reserves was 
a requirement.[Footnote 115] According to a HUD official, the number 
of tribes and TDHEs without carry-over funding or reserves was likely 
higher than 61, as not all tribes and TDHEs that were eligible for 
interim funding may have applied.[Footnote 116] 

Representatives from tribes and TDHEs told us that the federal budget 
process for fiscal year 2013 created challenges for budget planning 
because they did not know the full amount of their grants under IHBG 
until several months into the calendar year. While HUD released 
approximately $39 million in interim funding from January through May 
to tribes and TDHEs that would have exhausted their reserves and carry-
over funding, recipients did not know their final fiscal year 2013 
grant amount until May 20, 2013.[Footnote 117] By comparison, in 2012, 
HUD notified tribes and TDHEs of their final grant amount on January 
18. HUD began to provide final funding to tribes and TDHE's on June 
18, 2013. Staff from two IHBG recipients and two tribal housing 
associations told us that the funding delays created challenges or 
uncertainty. For instance, according to one association, in some cases 
construction plans were delayed or halted or construction-related 
contracts had to be renegotiated. 

Some IHBG recipients were more severely affected than others because 
sequestration reduced the portion of the IHBG grant formula that is 
based on estimated tribal needs. Under the IHBG formula, funding is 
first allocated for operating and modernizing units developed under 
the predecessor of the IHBG program, and the remaining funding is then 
allocated based on tribes' needs for additional affordable housing. 
[Footnote 118] As a result, the need-based component of the formula 
funding was reduced by 9 percent to achieve the overall reduction in 
funding due to sequestration of 5 percent. Therefore, tribes whose 
funding primarily comes from the need-based component of the formula, 
because they have proportionately fewer housing units developed under 
the predecessor of the IHBG program, received a larger cut in funding. 
Officials from one IHBG recipient we interviewed said that 
sequestration exacerbated the decrease in the need portion for their 
small tribes, which consequently limited the services they provided to 
families. 

Sequestration also contributed to HUD delaying reviews and decreasing 
services to tribes. For instance, although HUD regulations required a 
review of the formula to apportion IHBG grants by May 2012, HUD 
officials said they had not completed this review because of effects 
on the agency from lower funding in recent years, continuing 
resolutions, and sequestration cuts.[Footnote 119] HUD has begun 
taking some actions to assess the formula, including establishing an 
Allocation Formula Negotiated Rulemaking Committee and holding public 
meetings with tribes in August and September 2013. HUD officials said 
they anticipate holding another meeting in spring 2014 to continue 
negotiating the IHBG formula but do not know when the new formula will 
be completed because of the numerous steps involved in the process. 

In another example, staff from HUD's Office of Native American 
Programs (ONAP) said the general hiring freeze the agency implemented 
in response to sequestration limited the office's ability to replace 
several senior staff who retired. The staff had no estimate of when 
those vacancies would be filled. Moreover, representatives of two of 
the IHBG recipients and one tribal housing association told us of 
delays and other difficulties contacting HUD staff, which they 
attributed to turnover in ONAP and other effects of sequestration. For 
example, one tribe reported delays in receiving needed approvals on a 
new construction project from its ONAP regional office. According to 
the tribe, the delays hindered the project's progress, resulting in 
protracted timelines. 

HUD Took Personnel and Program Actions to Implement Sequestration and 
Limit Effects on Families: 

In response to the budget reductions resulting from sequestration, HUD 
planned and implemented several department-wide personnel actions that 
applied to PIH.[Footnote 120] PIH employees, along with most other HUD 
employees, were furloughed for 5 days, saving PIH about $3.5 million. 
HUD initially planned to furlough employees for 7 days, but in August 
2013 HUD reduced the number of furlough days by using funds it 
initially planned to use to reorganize its Office of Multifamily 
Housing Programs and to close 16 of its 80 field offices.[Footnote 
121] HUD also used transfers and reprogrammings between and within 
accounts to provide an additional $0.9 million for PIH to use to pay 
salaries and expenses. HUD further reduced PIH expenses for salaries, 
predominantly through a hiring freeze but also through additional 
means such as reduced overtime and monetary awards. Finally, HUD 
reduced non-salary expenses such as travel and training by $1.3 
million. 

HUD Mitigated the Effects of Reduced Rental Assistance Funding by 
Providing Public Housing Agencies with Supplemental Funding and 
Technical Assistance: 

To implement sequestration cuts for the Housing Choice Voucher 
program, HUD used a set-aside appropriation to provide supplemental 
funding to PHAs that would otherwise be required to terminate some 
families' assistance and expanded a special team that offers technical 
assistance to PHAs. HUD officials told us that because HUD determines 
funding for individual PHAs by formula, based primarily on each PHA's 
costs in the previous year, sequestration's cuts were passed directly 
to the PHAs. HUD provides PHAs with a portion of the funding for which 
they are eligible based on HUD's appropriation for the voucher 
program, which can be lower than the total formula eligibility of all 
PHAs. In 2012, HUD provided PHAs with 100 percent of their eligible 
amount. Because of sequestration, in 2013 HUD provided PHAs with 94 
percent of the funding for which they were otherwise eligible, rather 
than the 99 percent they would have received in the absence of 
sequestration. 

Because HUD did not have a final fiscal year 2013 appropriation before 
the beginning of calendar year 2013, HUD obligated funding for the 
first 3 months of 2013 at 98 percent of PHAs' funding eligibility, 
which reflected the amount of funding the program had under the 
continuing resolution that funded HUD through March 27, 2013. HUD 
officials told us that PHAs may have spent funds at the 98 percent 
level for the first few months of the year. As a result, to reduce 
their expenditures for 2013 overall to the 94 percent level, they 
likely reduced the number of vouchers they leased by the end of the 
year to an amount lower than they otherwise would have had to if they 
had known their final funding amount earlier. 

PHAs are also eligible to receive funding for administrative expenses 
based on a formula involving the number of units they lease. As with 
the program funding, PHAs receive a portion of the funding for which 
they are eligible based on HUD's appropriation for the voucher 
program. In recent years, that funding has been lower than the total 
formula eligibility of all PHAs. For example, in 2012, PHAs received 
80 percent of their administrative expenses eligibility. In 2013, 
prior to sequestration HUD expected PHAs would receive 72 percent of 
their administrative expenses eligibility, but due to sequestration 
PHAs received 69 percent of their eligibility. 

As in recent years, part of HUD's fiscal year 2013 appropriation for 
the Housing Choice Voucher program contained a set aside of $103 
million that HUD could provide to PHAs for four specified purposes. 
[Footnote 122] The appropriation act altered the purposes for which 
this funding could be used. Specifically, HUD could provide 
supplemental funding to PHAs that faced terminating some participating 
families from the rental assistance program due to insufficient funds 
(even after taking reasonable cost saving measures). HUD chose to 
prioritize this use of the set aside, and used $83 million to prevent 
terminations, which HUD officials stated was sufficient to prevent all 
terminations.[Footnote 123] To receive the supplemental funding, PHAs 
had to demonstrate that they would have had to terminate families from 
the program, immediately stop issuing new vouchers, and use all their 
reserves to fund vouchers. HUD provided the supplemental set-aside 
funding to 294 PHAs. Most PHAs we interviewed reported that the set-
aside funding was helpful, but one association of PHAs noted that 
because most of the set aside was used to prevent terminations, less 
funding was available for the other purposes that had previously 
assisted PHAs in prior years, such as providing additional funding to 
PHAs experiencing significant increases in voucher costs from 
unforeseen circumstances. 

In response to sequestration, PIH increased the number of staff (from 
6 to 13) assigned to its shortfall prevention team, which provides 
technical assistance and other support to PHAs that are at risk of 
needing to terminate families from the program. The team worked with 
staff from PIH's Financial Management Center and regional offices to 
identify PHAs at risk of having a funding shortfall, which would 
require the PHA to terminate some families from the program. The team 
then worked with the at-risk PHAs to implement cost-cutting measures 
such as immediately ceasing to issue vouchers to families on their 
waiting lists, pulling previously issued vouchers from families that 
had not yet used them and returning those families to the waiting 
list, increasing minimum rents and reducing utility allowances. PIH 
officials told us that in some cases these actions were sufficient to 
prevent PHAs from having to terminate families from the program. If 
the team determined that a PHA was still at risk of a shortfall 
despite the cost-cutting measures, the team encouraged the PHA to 
apply for set-aside funds from HUD to protect currently assisted 
families from termination. 

HUD Assisted PHAs in Implementing Significant Public Housing Funding 
Cuts by Providing Guidance and Reducing Some Administrative 
Requirements: 

HUD officials told us that the nature of the grant for operating 
public housing led to sequestration's cuts being passed directly to 
PHAs and HUD had no flexibility to decide where to make cuts. As with 
the voucher program, eligibility for funding for public housing 
operating expenses is determined by formula. PHAs receive a portion of 
the funding for which they are eligible based on HUD's appropriation 
for the public housing operating fund. The total amount of formula 
funding for PHAs for public housing operations effectively was $450 
million lower than in 2012, before accounting for sequestration, a 
decline of almost 10 percent.[Footnote 124] Sequestration reduced this 
funding by an additional $199 million, and the across-the board-
rescission reduced funding by $8.5 million, resulting in a total 
decline in formula allocations of $658 million (14 percent) relative 
to fiscal year 2012. As a result, PHAs received 82 percent of their 
formula eligibility in total for fiscal year 2013. In 2012, PHAs 
received 95 percent of their formula eligibility. 

Before sequestration, HUD funded PHAs in January and February of 2013 
at 92 percent of their public housing formula eligibility, based on 
the lower of the House and Senate versions of the appropriations bill. 
In March, HUD reduced the funding proration to 81 percent due to the 
likelihood of sequestration. After sequestration, because January and 
February funding had been provided at a level higher than the 82 
percent proration for the year, HUD provided funding for April through 
December 2013 at 79 percent of PHAs' formula eligibility. 

To assist PHAs in implementing sequestration and reducing costs, PIH 
issued documents with frequently asked questions on sequestration and 
administrative streamlining related to sequestration. For example, PIH 
notified PHAs that it was lowering the reporting frequency for energy 
efficiency reports from quarterly to annually thereafter. PIH also 
noted it would conduct fewer on-site and remote monitoring reviews, 
prioritizing PHAs with higher risk and significant problems. 

HUD officials told us they considered applying broad waivers of 
administrative requirements to assist PHAs in reducing costs, such as 
reducing the frequency of required income verifications for residents 
with fixed incomes. However, they decided that HUD did not have 
authority to change some of the requirements and for others would have 
had to go through the full regulatory rulemaking process, which 
includes a public comment period, and thus decided not to proceed with 
these actions. 

Appropriation Timing and Administrative Processes Led to Delays in 
Providing Indian Housing Block Grant Funding to Grant Recipients: 

HUD officials told us they had little flexibility in implementing 
sequestration for IHBG because funding through the program is 
determined by formula. HUD sent letters to tribes on March 12, 2013, 
notifying them of sequestration and that their funding likely would be 
reduced. However, HUD did not notify recipients of their final formula 
funding amounts until May 20, 2013, for two reasons. First, the full-
year appropriation providing funding for federal government programs 
was not enacted until March 26, 2013. Second, the processes that HUD 
must follow to finalize the IHBG grant funding formula took about 60 
days to complete. HUD sent grant agreements to most tribes on June 11, 
2013, and funds were available to tribes beginning in mid-June, 
depending on how quickly the tribes approved and returned the 
agreements. In 2012, funds were available to tribes beginning in 
February. 

GAO Contact: 

For additional information, contact Daniel Garcia-Diaz at (202) 512-
8678 or garciadiazd@gao.gov. 

[End of section] 

Appendix V: Objectives, Scope, and Methodology: 

This report examines: (1) the effects of fiscal year 2013 
sequestration on the operations, performance, and services to the 
public for selected components within federal agencies;[Footnote 125] 
and (2) how selected components planned and prepared for and 
implemented fiscal year 2013 sequestration. This report builds off of 
our previously issued report that evaluated how 23 federal agencies, 
including the Departments of Defense (DOD), Education, Health and 
Human Services (HHS), Homeland Security (DHS), and Housing and Urban 
Development (HUD), prepared for and implemented the fiscal year 2013 
sequestration at the agency level, and the effects of sequestration on 
agencies' operations, performance, and services to the public. 
[Footnote 126] 

Case Study Selection: 

To achieve these objectives, we selected six case study components 
within federal agencies for review. In selecting components, we sought 
to cover a significant share of the $85.3 billion in funds ordered for 
sequestration on March 1, 2013, including both direct spending and 
discretionary appropriations, as well as programs with a high level of 
interaction with the public. We also sought to cover a range of 
federal missions (e.g., education, health, and defense) and the 
different program delivery tools the federal government uses to 
achieve its missions, such as grants, vouchers, contracts, loans and 
loan guarantees, and direct services. Based on these criteria, which 
are discussed in more detail below, we selected the following 
components: 

* DOD's Operation and Maintenance accounts; 

* DOD's Procurement accounts; 

* DHS's U.S. Customs and Border Protection (CBP); 

* Education's Office of Elementary and Secondary Education (OESE); 

* HHS's Centers for Medicare & Medicaid Services (CMS); and: 

* HUD's Public and Indian Housing (PIH). 

We used a multistep process to select these components. First, we 
began the selection process by considering the 24 federal agencies 
identified in the Chief Financial Officers (CFO) Act of 1990, as 
amended. These agencies accounted for approximately 98 percent of the 
total sequestered funding in fiscal year 2013. They also accounted for 
the majority of federal spending in 13 of the federal government's 17 
broad mission areas, or budget functions.[Footnote 127] We excluded 
from consideration the Department of Veterans Affairs, because its 
accounts were exempt from sequestration.[Footnote 128] We excluded the 
Department of State and the Agency for International Development 
(USAID), because we determined that the effects of reductions at these 
agencies were less likely to directly affect the American public than 
reductions at the other agencies under consideration. The Department 
of State and USAID were both included in our government-wide review. 
[Footnote 129] 

We ranked the 21 remaining CFO Act agencies based on actual fiscal 
year 2012 enacted discretionary budget authority for fiscal year 2012 
and eliminated from consideration the bottom 11.[Footnote 130] Within 
the remaining 10 agencies, we identified the two components with the 
largest amount of sequestrable funds based on OMB's March 1 
calculations. To select case studies that provide broad coverage of 
government functions and potentially different degrees of centralized 
or disbursed decision making, we chose not to include two nondefense 
components from the same agency. 

We used a matrix to determine that certain criteria were satisfied. 
Specifically, we used OMB data on budget functions to ensure that we 
had a range of federal missions (e.g., education, health, and national 
defense) and OMB object class data to ensure that we had a range of 
different program delivery tools the federal government uses to 
achieve its missions.[Footnote 131] We used data from OMB's March 1 
sequestration report to ensure that the selected case study components 
represented both sequestered direct spending and discretionary 
appropriations. If multiple components met our criteria, we gave 
preference to components that were determined to have a higher impact 
on services to the public. 

Overall, these six case study components accounted for roughly $48 
billion, or more than 56 percent, of the total sequestration ordered 
on March 1, including roughly 77 percent of sequestered defense 
spending and almost 36 percent of sequestered nondefense spending. 
Results from selected case studies, however, cannot be generalized. We 
issued the results of our review of DOD's Operation and Maintenance 
and Procurement accounts along with our review of DOD's Research, 
Development, Test, and Evaluation account separately in November. 
[Footnote 132] 

Program Selection: 

Within the four nondefense components, we selected a limited number of 
programs, activities, or offices for more in-depth data gathering and 
analysis.[Footnote 133] See table 1 at the beginning of this report 
for an overview of the selected programs. We selected these programs 
based on the size of their budget, level of interaction with the 
public, the availability of measurable estimates of the effects of 
sequestration, and other factors. Similar to our criteria for 
selecting case study components, we also sought to cover a range of 
the different program delivery tools the federal government uses to 
achieve its missions, such as grants, vouchers, contracts, and direct 
services. For details on how we selected programs and activities 
within individual case study components, see appendixes I through IV. 

Data Collection and Analysis: 

To address our objectives, we reviewed documents previously obtained 
for our agency-level review, such as a list of sequestered PPAs, total 
discretionary and direct spending funding levels for fiscal year 2013, 
and total amount sequestered.[Footnote 134] We also reviewed 
reprogramming restrictions and transfer authorities identified as part 
of the information request and supporting documentation of how these 
authorities were used, if at all, in response to sequestration. In 
addition, we reviewed additional agency documents, such as operating 
and spending plans for fiscal year 2013 and illustrative examples of 
sequestration-related guidance and formal communications with 
agencies' employees, unions, and other stakeholders. 

We reviewed additional documents--provided by agency officials at the 
selected components--related to planning for and implementing 
sequestration in fiscal year 2013. These documents included guidance 
issued to internal subcomponents or to external program partners and 
recipients. We also reviewed relevant planning documentation, when 
available, demonstrating the components' analysis of alternatives for 
implementing spending reductions. We analyzed budget and financial 
data for fiscal year 2013 to identify spending reductions at the PPA 
level and documentation of reprogramming, transfer, and other funding 
actions used in response to the fiscal year 2013 sequestration. We did 
not assess the appropriateness of actions that agencies or components 
took to implement sequestration, such as transfer and reprogramming 
actions. 

We interviewed agency officials from each component, including 
officials in budget and management offices as well as officials in 
program offices. In discussing the effects of sequestration, we asked 
agency officials to isolate the effects of sequestration from other 
factors such as operating under a continuing resolution (CR) and the 
rescissions enacted in the Consolidated and Further Continuing 
Appropriations Act, 2013, to the degree possible. We recognize that 
these other factors could also contribute to budget uncertainty and 
affect component's operations, performance, and services to the 
public. For example, because CRs only provide funding until an 
agreement is reached on final appropriations, they create uncertainty 
for components about both when they will receive their final 
appropriation and what level of funding ultimately will be available. 
Our past work has shown that an agency may delay hiring or contracts 
during the CR period, potentially reducing the level of services 
agencies provide and increasing costs. 

We asked agencies to identify the source of any data provided and a 
description of any known limitations or purposes for which the data 
being provided should not be used. We reviewed agencies' supporting 
documents to assess the reasonableness of their data and any 
quantitative estimates of the effects of sequestration on agency 
operations, performance, and services to the public. Specifically, we 
reviewed the data and methodology used to calculate the estimates and 
we reported the estimates when they met our evidentiary standards. In 
some cases we found it appropriate to report agency estimates, as long 
as we also included significant contextual information and information 
about limitations regarding the estimates. In other cases, if agency 
explanations of the data and methodologies used to estimate the 
effects of sequestration indicated significant uncertainty surrounding 
the estimates, we did not report the estimates. To further assess the 
reliability of the data provided by agencies we interviewed 
knowledgeable officials as needed. We determined that the data were 
reliable for the purposes used in this report. 

To obtain further information on the effects of fiscal year 2013 
sequestration on selected components' services to the public, we 
interviewed select program partners that assist the components in 
carrying out their missions, recipients of the components' support and 
services, or their representatives. 

* For CBP, we interviewed representatives from the Airports Council 
International, Airlines for America, the American Association of State 
Highway and Transportation Officials, and the American Trucking 
Association. 

* For CMS, we interviewed officials from a purposeful sample of 
Medicare contractors--two Medicare Administrative Contractors and a 
Zone Program Integrity Contractor--and state survey agencies to obtain 
information on CMS's planning and implementation of sequestration, as 
well as effects to CMS's fee-for-service operations, CMS program 
integrity activities, and state survey and certification oversight 
activities. 

* For OESE, we interviewed officials from seven school districts that 
receive Title I or Impact Aid grants. We selected these school 
districts based on variation in the grant amounts they received, each 
district's reliance on grant funding, and geographic location. In 
addition, we interviewed two national associations representing states 
and districts receiving Title I and Impact Aid grants and six state 
Title I grant administrators. 

* For PIH, we interviewed officials from four local public housing 
agencies, which we selected based on their size, geographic location, 
and use of set-aside funding to avoid terminations in their voucher 
program, two national associations, and the National Low Income 
Housing Coalition. 

For more information on the program partners and recipients we spoke 
with and how they were selected, see appendixes I to IV. 

To examine the extent to which selected components identified their 
PPAs in accordance with the criteria set out in section 256(k)(2) of 
the Balanced Budget and Emergency Deficit Control Act of 1985, as 
amended, we reviewed a purposeful sample of five PPAs from each of the 
four nondefense components discussed in this report. In selecting 
PPAs, we sought to include some of the PPAs that fund programs and 
activities within case study components selected for more in-depth 
review. However, we also considered the source used to define the PPA, 
whether the PPA contained direct spending or discretionary 
appropriations, the types of activities the PPA supports, and 
instances in which the agency reported that a PPA was defined at the 
account level. Therefore, some of the PPAs selected do not align with 
the programs and activities selected for more in-depth review. Table 8 
provides a list of the PPAs that we reviewed. 

Table 8: Overview of Select Programs, Projects, and Activities Traced 
to Source: 

Department and bureau: Department of Homeland Security, U.S. Customs 
and Border Protection; 

Selected programs, projects, and activities: 
Border Security Inspections and Trade Facilitation; 
Border Security and Control Between Ports of Entry; 
COBRA Passenger Inspection Fee; 
Construction and Facilities Management/Facilities Construction and 
Sustainment; 
Air and Marine Operations/Salaries and Expenses. 

Department and bureau: Department of Health and Human Services, 
Centers for Medicare & Medicaid Services; 

Selected programs, projects, and activities: 
Federal Hospital Insurance Trust Fund/Benefit Payments/Hospital 
Insurance; 
Program Management/Program Operations/Other; 
Program Management/State Survey and Certification; 
Health Care Fraud and Abuse Control Account/Medicare; 
Health Care Fraud and Abuse Control Account/Medicare Integrity 
Program/Funding Subject to Special Rule. 

Department and bureau: Department of Education, Office of Elementary 
and Secondary Education; 

Selected programs, projects, and activities: 
Education for the Disadvantaged/Grants to Local Educational Agencies: 
Basic Grants; 
Education for the Disadvantaged/State Agency Programs: Migrant; 
Impact Aid/Payment for Federally Connected Children: Basic Support 
Payments; 
School Improvement Programs/Education for Native Hawaiians; 
Safe Schools and Citizenship Education/Elementary and Secondary School 
Counseling. 

Department and bureau: Department of Housing and Urban Development, 
Public and Indian Housing; 

Selected programs, projects, and activities: 
Section 8 Contract Renewals; 
Tenant Based Rental Assistance Account/Administrative Fees; 
Public Housing Operating Fund Account/Operating Subsidy; 
Native American Housing Block Grants Account/Formula Grants; 
Native American Housing Block Grants Account/Loan Guarantee Credit 
Subsidy. 

Source: GAO analysis of agency information and applicable laws. 

[End of table] 

Because we used a nonrandom, purposeful sample, the results of our 
analysis of the selected PPAs cannot be generalized to other PPAs 
within the component or department. While we assessed the extent to 
which selected components identified their PPAs in accordance with the 
criteria set out in section 256(k)(2) of BBEDCA, we did not assess 
each PPA for compliance with other sections of BBEDCA. For example, we 
did not assess the extent to which a PPA was properly characterized as 
"discretionary appropriations" or "mandatory spending" for the 
purposes of implementing sequestration. While we reviewed components' 
operating plans and other budgetary data, we did not test components' 
financial systems to determine that the component implemented 
sequestration at the PPA level as reported. 

We conducted this performance audit from April 2013 to May 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix VI: Glossary of Budget Terms: 

Appropriation: Budget authority to incur obligations and to make 
payments from the Treasury for specified purposes. An appropriation 
act is the most common means of providing appropriations; however, 
authorizing and other legislation itself may provide appropriations. 

Annual appropriation: A provision of law appropriating funds enacted 
annually to provide budget authority to incur obligations and make 
payments from the Treasury for specified purposes. 

Supplemental appropriation: A provision of law appropriating funds in 
addition to those already enacted in an annual appropriation act. 
Supplemental appropriations provide additional budget authority, 
usually in cases where the need for funds is too urgent to be 
postponed until enactment of the regular appropriation bill. 
Supplemental appropriations may sometimes include items not 
appropriated in the regular bills due to a lack of timely 
authorizations. 

Advance appropriation: Budget authority that becomes available 1 or 
more fiscal years after the fiscal year for which the appropriation 
was enacted. For example, a fiscal year 2012 appropriation could 
provide that budget authority for a specified activity would not 
become available until October 1, 2012 (the start of fiscal year 2013) 
or later. For sequestration, funding enacted as advance 
appropriations--available in fiscal year 2013--was included in the 
sequestrable base. 

Availability: Budget authority that is available for incurring new 
obligations. 

Budget account: An item for which appropriations are made in any 
appropriation act and, for items not provided for in appropriation 
acts, the term means an item for which there is a designated budget 
account identification code number in the President's budget. 

Budget authority: Authority provided by federal law to enter into 
financial obligations that will result in immediate or future outlays 
involving federal government funds. 

Duration: 

One-year appropriation: Budget authority available for obligation only 
during a specific fiscal year that expires at the end of that fiscal 
year. 

Multiyear appropriation: Budget authority available for a fixed period 
of time in excess of 1 fiscal year. This authority generally takes the 
form of 2-year, 3-year, and so forth availability but may cover 
periods that do not coincide with the start or end of a fiscal year. 

No-year appropriation: Budget authority that remains available for 
obligation for an indefinite period of time. A no-year appropriation 
is usually identified by language such as "to remain available until 
expended." 

Timing of legislative action: 

Permanent appropriation: Budget authority that is available as the 
result of previously enacted legislation and is available without 
further legislative action. Many programs with permanent 
appropriations are exempt from sequestration (see "mandatory" below). 

Determination of amount: 

Definite appropriation: Budget authority that is stated as a specified 
sum at the time the appropriation is enacted. This type of authority, 
whether in an appropriation act or other law, includes authority 
stated as "not to exceed" a specified amount. 

Indefinite appropriation: Budget authority that, at time of enactment, 
is for an unspecified amount, such as entitlement programs where 
obligations depend on the number of eligible beneficiaries receiving 
benefits. Also for fee-funded accounts in which total obligations 
depend on demand for the good or service provided by the program 
(e.g., programs funded by regulatory fees). Indefinite appropriations 
may be appropriated as all or part of the amount of proceeds from the 
sale of financial assets, the amount necessary to cover obligations 
associated with payments, the receipts from specified sources--the 
exact amount of which is determinable only at some future date--or it 
may be appropriated as "such sums as may be necessary" for a given 
purpose. For sequestration, unless otherwise specified in law, 
agencies were directed to implement sequestration for accounts with 
indefinite authority by reducing the remaining obligations from fiscal 
year 2013 sequestrable resources by a uniform percentage. 

Availability for new obligations: 

Expired budget authority: Budget authority that is no longer available 
to incur new obligations but is available for an additional 5 fiscal 
years for disbursement of obligations properly incurred during the 
budget authority's period of availability. 

Budget function: The functional classification system is a way of 
grouping budgetary resources so that all budget authority and outlays 
of on-budget and off-budget federal entities and tax expenditures can 
be presented according to the national needs being addressed. National 
needs are grouped in 17 broad areas to provide a coherent and 
comprehensive basis for analyzing and understanding the budget. 

Carryover balance (unexpended balance): The sum of the obligated and 
unobligated balances. 

Continuing resolution: An appropriation act that provides budget 
authority for federal agencies, specific activities, or both, to 
continue in operation for a specific period of time when Congress and 
the President have not completed action on the regular appropriation 
acts by the beginning of the fiscal year. 

Direct spending: Budget authority that is provided in laws other than 
appropriation acts and entitlement authority (for example, 
Supplemental Nutrition Assistance, Medicare, and veterans' pension 
programs). Direct spending, also referred to as mandatory spending, 
includes payment of interest on the public debt, and nonentitlements 
such as payments to states from Forest Service receipts. For 
sequestration, many mandatory programs are exempt. But for those that 
are not exempt, the PPAs for mandatory accounts are generally 
delineated in the President's budget for fiscal year 2013. 

Discretionary spending: Outlays from budget authority that is provided 
in, and controlled by, appropriations acts. 

Expended funds: Funds that have actually been disbursed or outlaid. 

Mandatory spending: See definition of direct spending above. 

Obligated balance (obligated funds): The amount of obligations already 
incurred for which payment has not yet been made. Technically, the 
obligated balance is the unliquidated obligations. Budget authority 
that is available for a fixed period expires at the end of its period 
of availability, but the obligated balance of the budget authority 
remains available to liquidate obligations for 5 additional fiscal 
years. At the end of the fifth fiscal year, the account is closed and 
any remaining balance is canceled. Budget authority available for an 
indefinite period may be canceled and its account closed if (1) it is 
specifically rescinded by law or (2) the head of the agency concerned 
(or the President) determines that the purposes for which the 
appropriation was made have been carried out and disbursements have 
not been made from the appropriation for 2 consecutive years. 

Obligation: An obligation is a definite commitment that creates a 
legal liability of the government for the payment of goods and 
services ordered or received, or a legal duty on the part of the 
United States that could mature into a legal liability by virtue of 
actions of another party. 

Program, Project, or Activity (PPA): An element within a budget 
account. The programs, projects, and activities as delineated in the 
appropriation act or accompanying report for the relevant fiscal year 
covering that account. For accounts not included in appropriation 
acts, PPAs are delineated in the most recently submitted President's 
budget or congressional budget justifications, specifically the 
program and financing schedules that the President provides in the 
"Detailed Budget Estimates" in the budget submission for the relevant 
fiscal year. 

Reprogramming: Reprogramming is the shifting of funds from one program 
to another within an appropriation or fund account for purposes other 
than those contemplated at the time of appropriation. The authority to 
reprogram is implicit in an agency's responsibility to manage its 
funds; no statutory authority is necessary but the agency may be 
required to notify the congressional appropriations committees, the 
authorizing committees, or both of any reprogramming action. 

Rescission: Legislation enacted by Congress that cancels budget 
authority previously enacted before the authority would otherwise 
expire. For sequestration, the Consolidated and Further Continuing 
Appropriations Act, 2013 included across-the-board rescissions, which 
were applied to full-year appropriations for fiscal year 2013 (in 
addition to the reductions required by the Joint Committee 
sequestration). 

Sequestration: In general, the permanent cancellation of budgetary 
resources under a presidential order. For fiscal year 2013, the 
uniform percentage reduction is applied to all programs, projects, and 
activities within a budget account, with some program exemptions and 
special rules. 

Spending authority: A specific form of budget authority that 
authorizes obligations and outlays using offsetting collections 
credited to an expenditure account. Spending authority is typically 
provided in authorizing laws and in some cases appropriation acts 
limit obligations. 

Transfer: The shifting of funds between accounts is called a transfer. 
An agency may not transfer funds unless it has statutory authority to 
do so. 

Unobligated balance (unobligated funds): The portion of budget 
authority that has not yet been obligated. For an appropriation 
account that is available for a fixed period, the budget authority 
expires after the period of availability ends and is no longer 
available for new obligations, but its unobligated balance remains 
available for 5 additional fiscal years for recording and adjusting 
obligations properly chargeable to the appropriations period of 
availability. For example, an expired, unobligated balance remains 
available until the account is closed to record previously unrecorded 
obligations or to make upward adjustments in previously under-recorded 
obligations (such as contract modifications properly within scope of 
the original contract). At the end of the fifth fiscal year, the 
account is closed and any remaining balance is canceled. For a no-year 
account, the unobligated balance is carried forward indefinitely until 
(1) specifically rescinded by law or (2) the head of the agency 
concerned (or the President) determines that the purposes for which 
the appropriation was made have been carried out and disbursements 
have not been made from the appropriation for 2 consecutive years. 

For more information on budget terms and concepts, see GAO, A Glossary 
of Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, 
D.C.: September 2005) (published in cooperation with the Secretary of 
the Treasury and the Directors of OMB and the Congressional Budget 
Office). 

[End of section] 

Appendix VII: U.S. Customs and Border Protection Organization Chart 
and Fiscal Year 2013 Funding Levels: 

U.S. Customs and Border Protection (CBP) Commissioner's Office: 

In fiscal year 2013, CBP employed about 60,000 employees, including 
CBP officers, Border Patrol agents, agriculture specialists, and Air 
Interdiction agents (pilots), among others. 

Office of Field Operations: 

Established geographically by region, the Office of Field Operations 
(OFO) and its respective 20 field offices around the United States 
distribute key policies and procedures to field staff. Field offices 
provide guidance to their regional ports and ensure the dissemination 
and implementation of CBP guidelines. For fiscal year 2013, OFO was 
congressionally directed to maintain 21,775 officers.[A] OFO's post-
sequestration fiscal year 2013 funding represented about 27 percent of 
CBP's fiscal year 2013 post-sequestration funding. 

[A] Explanatory Statement, Consolidated and Further Continuing 
Appropriations Act, 2013, 159 Cong. Rec. S1287, S1549 (daily ed. Mar. 
11, 2013). 

OFO Fiscal Year 2013 Discretionary Funding: 

Fiscal year 2013 funding prior to sequestration: $3.2 billion[B]: 

Sequestered amount: $156.3 million: 

Post-Sequestration funding: $3.05 billion: 

[B] According to CBP's budget office, the $3.2 billion represents 
funding for CBP's Border Security Inspections and Trade Facilitation 
Programs, Projects, and Activities (PPA). Funding for OFO comprises 
the majority of this PPA. 

CBP collects COBRA user fees for air passenger customs and vessel 
passenger customs inspections, among other things. COBRA fee 
collections fund activities involving CBP officers ensuring that all 
carriers, passengers, and their personal effects entering the U.S. are 
compliant with customs laws. According to CBP, fees, such as the COBRA 
fee, play an integral role in CBP's planning and budget process 
because they reimburse CBP's Salaries and Expenses account, for 
certain expenses, such as overtime for CBP officers, that comprise 
about 30 percent of that account. The COBRA account post-sequestration 
fiscal year 2013 funding represented about 3.5 percent of CBP's total 
fiscal year 2013 post-sequestration funding. 

COBRA Fiscal Year 2013 Direct Spending: 

Fiscal year 2013 funding prior to sequestration: $419.4 million[C]: 

Sequestered amount: $27 million: 

Post-Sequestration: $392.4 million: 

[C] This amount represents the fiscal year 2013 budget authority as 
stated in the explanatory statement accompanying the Consolidated and 
Further Continuing Appropriations Act, 2013. The OMB baseline 
established in its March 1 report for this account was $529.4 million. 

Office of Border Patrol: 

The U.S. Border Patrol (USBP) is responsible for patrolling nearly 
6,000 miles of Mexican and Canadian international land borders and 
over 2,000 miles of coastal waters surrounding the Florida Peninsula 
and the island of Puerto Rico. For fiscal year 2013, USBP was 
legislatively mandated to maintain 21,370 agents across its 20 
sectors.[D] USBP's post-sequestration fiscal year 2013 funding 
represented about 31 percent of CBP's fiscal year 2013 post-
sequestration funding. 

USBP Fiscal Year 2013 Discretionary Funding: 

Fiscal year 2013 funding prior to sequestration: $3.7 billion[E]: 

Sequestered amount: $180.7 million: 

Post-Sequestration funding: $3.52 billion: 

[D] Pub. L. No. 113-6, 127 Stat. 198, 345 (2013). 

[E] According to CBP's budget office, the $3.7 billion represents 
funding for CBP's Border Security and Control between Ports of Entry 
PPA. Funding for USBP comprises the majority of this PPA. 

[End of section] 

Appendix VIII: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Michelle Sager, Director, Strategic Issues, (202) 512-6806 or 
sagerm@gao.gov. 

Edda Emmanuelli Perez, Managing Associate General Counsel, (202) 512-
2853 or emmanuellipereze@gao.gov. 

For issues related to the Department of Housing and Urban Development: 
Daniel Garcia-Diaz, Director, Financial Markets and Community 
Investment, (202) 512-8678 or garciadiazd@gao.gov. 

For issues related to the Department of Defense: John Pendleton, 
Director, Defense Capabilities and Management, (202) 512-3489 or 
pendletonj@gao.gov, or Michael Sullivan, Director, Acquisition and 
Sourcing Management, (202) 512-4841 or sullivanm@gao.gov. 

For issues related to the Department of Education: Melissa Emrey-
Arras, Director, Education, Workforce, and Income Security, (617) 788-
0534 or emreyarrasm@gao.gov. 

For issues related to the Department of Health and Human Services: 
Kathleen King, Director, Health Care, (202) 512-7114 or kingk@gao.gov. 

For issues related to the Department of Homeland Security: David C. 
Maurer, Director, Homeland Security and Justice, (202) 512-9627 or 
maurerd@gao.gov. 

Staff Acknowledgments: 

The following staff contributed to this report: Elizabeth Curda and 
Melissa Wolf (Assistant Directors); Katherine Lenane (Assistant 
General Counsel); Thomas McCabe (Analyst-in-Charge); Margaret Adams, 
Shari Brewster, Robert Gebhart, Lauren Grossman, Donna Miller, Laurel 
Plume, Alan Rozzi, and Walter Vance. 

In addition, staff that contributed to sections of this report on 
selected agencies are listed in table 9. 

Table 9: Names of GAO Staff Contributing to Information on Selected 
Components: 

Department of Education, Office of Elementary and Secondary Education: 
George Scott (Managing Director), Gale Harris (Assistant Director), 
Susan Chin, (Analyst-in-Charge), Nora Boretti, Sarah Cornetto, Nisha 
Hazra, and David Reed. 

Department of Health and Human Services, Centers for Medicare & 
Medicaid Services: 
Lori Achman (Assistant Director), Rebecca Abela (Analyst-in-Charge), 
and George Bogart. 

Department of Homeland Security, U.S. Customs and Border Protection: 
Kathryn H. Bernet (Assistant Director), Meg Ullengren (Analyst-in-
Charge), Frances Cook, Michele Fejfar, Eric Hauswirth, Tracey King, 
and Michelle Sahlhoff. 

Department of Housing and Urban Development, Public and Indian Housing: 
Cody Goebel (Assistant Director), Ethan Wozniak, (Analyst-in-Charge), 
Rudy Chatlos, Elizabeth Jimenez, Lisa Moore, and Jessica Sandler. 

Source: GAO. 

[End of table] 

[End of section] 

Footnotes: 

[1] In March 2014 we reported on the planning, implementation, and 
effects of sequestration at 23 federal agencies. See GAO, 2013 
Sequestration: Agencies Reduced Some Services and Investments, While 
Taking Certain Actions to Mitigate Effects, [hyperlink, 
http://www.gao.gov/products/GAO-14-244] (Washington, D.C.: Mar. 6, 
2014). CFO Act agencies are those covered by the Chief Financial 
Officers Act of 1990, as amended. 31 U.S.C. § 901(b). We excluded the 
Department of Veterans Affairs from our report, because its accounts 
were exempt from sequestration. 2 U.S.C. § 905(b). 

[2] For the purposes of this report, the term "component" refers to an 
agency, bureau, or operating division (e.g., U.S. Customs and Border 
Protection) within a cabinet-level department (e.g., the Department of 
Homeland Security). When we refer to "agency," we are referring to a 
cabinet-level department or an independent agency (e.g., the 
Environmental Protection Agency). 

[3] The defense spending category consists of budgetary resources in 
the national defense budget function. In addition to the Department of 
Defense, several other agencies received funding classified under the 
national defense budget function, including the Departments of Energy 
and Homeland Security. The nondefense spending category consists of 
budgetary resources in budget functions other than national defense. 

[4] GAO, Sequestration: Observations on the Department of Defense's 
Approach in Fiscal Year 2013, [hyperlink, 
http://www.gao.gov/products/GAO-14-177R] (Washington, D.C.: Nov. 7, 
2013). 

[5] [hyperlink, http://www.gao.gov/products/GAO-14-244]. 

[6] Pub. L. No. 112-25, 125 Stat. 240 (Aug. 2, 2011). BBEDCA has been 
amended many times, including by the Budget Enforcement Act of 1990, 
the Statutory Pay-As-You-Go Act of 2010, the Budget Control Act of 
2011, the American Taxpayer Relief Act of 2012, and the Bipartisan 
Budget Act of 2013. This body of law is classified in sections 900 
through 907d in title 2 of the United States Code. 

[7] The BCA also imposed discretionary spending limits for fiscal 
years 2012 to 2021 to reduce projected spending by about $1 trillion. 
If the discretionary spending caps are not met in a given fiscal year, 
they will be enforced by an "after session sequestration" within 15 
days after the end of a congressional session. This report focuses on 
the Joint Committee sequestration. 

[8] Discretionary appropriations are budgetary resources provided in 
appropriations acts. By contrast, direct spending, often referred to 
as mandatory spending, consists of budgetary resources provided by 
entitlement authority and laws other than appropriations acts. For a 
glossary of budget terms, see appendix VI. 

[9] In April 2012, we reported on the meaning of PPA under the BCA. 
See GAO, Agency Operations: Agencies Must Continue to Comply with 
Fiscal Laws Despite the Possibility of Sequestration, [hyperlink, 
http://www.gao.gov/products/GAO-12-675T] (Washington, D.C.: Apr. 25, 
2012). 

[10] Pub. L. No. 113-6, 127 Stat. 198 (Mar. 26, 2013). The 
Consolidated and Further Continuing Appropriations Act also required 
an across-the-board cancellation of budget authority--known as a 
rescission--to eliminate any amount by which the new budget authority 
provided in the act exceeded the fiscal year 2013 discretionary 
spending limits. Accordingly, OMB calculated a rescission of 0.032 
percent for all security PPAs and 0.2 percent for all nonsecurity 
PPAs, as well as additional rescissions for specific categories of 
spending that were also required by the act. 

[11] The Consolidated and Further Continuing Appropriations Act 
reduced the amount of sequestration because BBEDCA provides for a 
reduction to the amount of sequestration for accounts funded by 
discretionary appropriations when the full-year appropriation is less 
than the annualized CR amount minus the sequestration amount. (2 
U.S.C. § 903(f)). 

[12] For programs that are funded by permanent indefinite budget 
authority, OMB calculated sequestration using estimated outlays for 
fiscal years 2013 and 2014. Further, while agencies were generally 
required to implement the cuts by the end of fiscal year 2013, 
sequestration of Medicare payments extends through March 2014. 

[13] For more information on reprogrammings and transfers, see the 
glossary of budget terms in appendix VI. 

[14] Carryover balances may consist of funds that have not been 
obligated--known as unobligated balances--or obligations for which 
payment has not been made--known as unliquidated obligations--that are 
carried forward into future fiscal years. We recently reported on 
unobligated balances, see GAO, Budget Issues: Key Questions to 
Consider When Evaluating Balances in Federal Accounts, [hyperlink, 
http://www.gao.gov/products/GAO-13-798] (Washington, D.C.: Sept. 30, 
2013). 

[15] Multiyear appropriations provide budget authority for a fixed 
period of time in excess of one year, while no-year appropriations 
provide budget authority for an indefinite period of time. 

[16] Pub. L. No. 113-82, § 1, 128 Stat. 1009 (Feb. 15, 2014). OMB has 
calculated and is to continue to calculate the annual reductions to 
nonexempt direct spending in its sequestration preview reports for 
fiscal years 2014 to 2024. 2 U.S.C. § 901a. The sequestration preview 
report must be issued the same day as the President's budget 
submission. 2 U.S.C. § 904. For fiscal year 2014, OMB calculated that 
defense direct spending will be reduced by 9.8 percent and nondefense 
direct spending will be reduced by 7.2 percent. Medicare and certain 
health programs will be reduced by 2 percent, per the limitations in 
BBEDCA. OMB, OMB Sequestration Preview Report to the President and 
Congress for Fiscal Year 2014 and OMB Report to the Congress on the 
Joint Committee Reductions for Fiscal Year 2014 (May 20, 2013). This 
corrected previous versions of the reports issued on April 10, 2013. 

[17] CMS contracts with and provides federal funding allocations to 
state survey agencies to carry out the majority of survey functions 
for facilities participating in Medicare and Medicaid. States 
generally rely on their own funds when they spend more than their 
initial federal allocations on survey activities and may be reimbursed 
when CMS redistributes Medicare funds from states that spent less than 
their allocations. 

[18] [hyperlink, http://www.gao.gov/products/GAO-14-244]. 

[19] Education officials reported that sequestration caused the fiscal 
year 2013 Title I appropriation to be less than the fiscal year 2012 
appropriation, which was a primary factor in many states and eligible 
school districts receiving fewer Title I funds than they received from 
the fiscal year 2012 appropriation. 

[20] Medicare Advantage is the private plan alternative to Medicare 
fee-for-service under which private plans provide Medicare benefits to 
enrolled beneficiaries. Medicare prescription drug plans, also 
operated by private plans, provide the Medicare Part D outpatient 
prescription drug benefit. Medicare pays Medicare Advantage and 
Medicare prescription drug plans a per enrollee amount each month. 

[21] The Consolidated and Further Continuing Appropriations Act, 2013, 
required CBP to maintain 21,370 Border Patrol agents. Pub. L. No. 113-
6, div. B, title II, 127 Stat. 198, 345 (Mar. 26, 2013). 

[22] Ports of entry are locations at which individuals and merchandise 
may seek legal entry into the United States. 

[23] The COBRA fee account is named for its authorizing legislation, 
the Consolidated Omnibus Budget Reconciliation Act of 1985. Pub. L. 
No. 99-272, 100 Stat. 82 (1986). The law provides that the fees are to 
reimburse CBP accounts for a specific set of reimbursable expenses. 19 
U.S.C. § 58c(f)(3). 

[24] USBP has divided geographic responsibility among 20 sectors. Each 
sector has a varying number of stations, with Border Patrol agents 
responsible for patrolling within defined geographic areas. 

[25] There are 20 field operations offices in the United States that 
provide centralized management oversight and operational assistance to 
329 U.S. ports of entry, among other things. At ports of entry, CBP 
enforces the federal import and export laws and regulations and 
carries out immigration policy and programs, as set forth in federal 
statutes and regulations. CBP Agricultural Specialists perform 
agriculture inspections aimed at protecting the United States from 
potential carriers of animal and plant pests or diseases that could 
cause serious damage to America's crops, livestock, pets, and the 
environment. 

[26] The Office of Administration reported that CBP met most of its 
established fiscal year 2013 Government Performance and Results Act 
performance measures. According to written responses from this office, 
the performance measures that were not met by CBP in fiscal year 2013 
were not attributed to sequestration. 

[27] CBP generally calculates air passenger wait times as the time 
interval between the arrival of the aircraft and the processing of the 
passenger by a CBP officer at the primary booth, less the passenger's 
walk time. 

[28] See 19 U.S.C. § 267; 19 C.F.R. § 24.16. 

[29] See 5 U.S.C. §§ 5542-5550b. 

[30] According to CBP budget officials, agents may claim other types 
of overtime pay, other than AUO, for hours worked beyond their 8-hour 
shifts depending on the type of duties performed during this time and 
whether the work was scheduled in advance. However, AUO is the primary 
overtime for Border Patrol agents. 

[31] In January 2014, for reasons unrelated to sequestration, DHS 
suspended AUO for certain positions, including those for full-time 
instructors and employees working in component headquarters offices, 
pending further review of AUO policies and practices. 

[32] For the purposes of this review, we did not assess whether this 
was an appropriate use of AUO. We have work underway reviewing DHS's 
administration and use of AUO and expect to report on the results of 
our work later this year. 

[33] According to CBP's Office of Administration, operational offices 
manage fuel and maintenance budgets for their vehicles. Accordingly, 
the Office of Administration was not able to provide definitive data 
to support reduced fuel and maintenance funding due to sequestration. 

[34] A resident agent is assigned to a specific Border Patrol station, 
but lives and works at an assigned location away from the station. 
According to CBP, the number of home-to-work vehicle authorizations 
across all operational offices was reduced by about 1,295 as of March 
2013. 

[35] See 31 U.S.C. § 1344. 

[36] According to documentation provided by OFO, some enforcement 
actions, such as those related to the inspections of ferries, small 
vessels, and train passengers, increased in fiscal year 2013. 

[37] We did not analyze the effects on fiscal year 2013 enforcement 
actions to determine whether sequestration was the sole or primary 
cause of these reductions. 

[38] According to a March 5, 2013 e-mail to CBP executives from CBP's 
Office of Training & Development, the office planned to resume classes 
in a prioritized manner when funding became available. 

[39] CBP was required to maintain an active duty presence of not less 
than 21,370 full-time equivalent Border Patrol agents in the 
Consolidated and Further Continuing Appropriations Act, 2013, and 
directed to maintain no less than 21,775 CBP officers in the 
explanatory statement accompanying the fiscal year 2013 appropriations 
act. Pub. L. No. 113-6, 127 Stat. 198, 345; Explanatory Statement, 
Consolidated and Further Continuing Appropriations Act, 2013, 159 
Cong. Rec. S1287, S1549 (daily ed. Mar. 11, 2013). 

[40] During fiscal year 2013, CBP suspended the hiring of operational 
and mission support staff from outside of CBP. According to officials 
from the Chicago field office, officers and specialists either 
volunteered to fill these support roles or these roles were assigned 
as collateral duties. 

[41] Automated Passport Control is an expedited CBP entry process that 
allows arriving eligible international passengers to clear customs 
more efficiently by allowing entry of passport information at a self-
service kiosk. CBP's trusted traveler programs provide expedited 
travel for pre-approved, low risk travelers through dedicated lanes 
and kiosks. We have ongoing work reviewing several of CBP's trusted 
travel programs and plan to report on the results of our work later 
this year. 

[42] CBP's Office of Air and Marine deploys the largest law 
enforcement air force in the world. In support of homeland security 
missions, the Office of Air and Marine provides aircraft, vessels, and 
crew at the request of its customers, primarily USBP, and tracks its 
ability to meet requests. 

[43] The Office of Management and Budget (OMB) produced these 
preliminary estimates as directed by the Sequestration Transparency 
Act of 2012. See Pub. L. No. 112-155, § 2, 126 Stat. 1210 (2012). 
Because a fiscal year 2013 appropriation had not been enacted, OMB 
based the estimates on the fiscal year 2012 appropriation level, as 
required. 

[44] Reprogramming is the shifting of funds within an appropriation 
account for purposes other than those contemplated at the time of 
appropriation. A transfer is the shifting of funds between 
appropriation accounts. 

[45] According to OMB officials, budget uncertainty at this point in 
the fiscal year was not specific to CBP; rather, OMB officials stated 
that most federal agencies sought additional clarification on the 
application of sequestration to their enacted 2013 appropriations. 

[46] Such a decrease in equivalent work hours would not reduce the 
number of on-board Border Patrol agents and CBP officers by 5,000 and 
2,750, respectively, and thereby result in levels below the numbers 
set in the appropriations act and the accompanying explanatory 
statement, according CBP budget officials. However, in its planning 
for sequestration CBP expressed concerns about hiring new agents to 
sustain its agent and officer levels while having to furlough 
experienced agents and officers to meet sequestration reductions. 

[47] As of March 4, 2013, CBP estimated that it would need to 
implement a component-wide furlough of up to 14 nonconsecutive work 
days for each employee. 

[48] The Consolidated and Further Continuing Appropriations Act, 2013, 
enacted on March 26, 2013, increased funding by over $253 million 
above the level that had been assumed as CBP's baseline. See Pub. L. 
No. 113-6, 127 Stat. 198. 

[49] These reductions do not reflect final end of fiscal year 2013 
expenditures. 

[50] On March 4, 2013, CBP's Director of Labor Management Relations 
notified the National Border Patrol Council of CBP's intent to 
decertify AUO beginning April 7, 2013. On March 7, 2013, the CBP 
Acting Chief Operating Officer issued a memorandum indicating that CBP 
was taking the initiative to de-authorize AUO payments to employees 
assigned to positions that were authorized to earn AUO, effective 
April 7, 2013, on an emergency basis due to sequestration. However, 
CBP did not take action pursuant to the March 4, 2013 notice or the 
March 7, 2013 memorandum. 

[51] In January 2014, for reasons unrelated to sequestration, DHS 
suspended AUO for certain positions, including those for full-time 
instructors and employees working in component headquarters offices, 
pending further review of AUO policies and practices. 

[52] This funding was intended for other than full-time hiring, but 
CBP could not bring students or temporary/seasonal workers on board 
during the hiring pause. 

[53] Fiscal year 2013 collections included $198 million that CBP 
collected pursuant to the Colombia Free Trade Agreement, which was not 
available to CBP. See Pub. L. No. 112-42, § 601, 125 Stat. 462, 495 
(2011). 

[54] Actions CBP officials identified as difficult to replicate 
include delaying construction and acquisitions and implementing 
reductions in spending for equipment and fuel. 

[55] In particular, in fiscal year 2013, DHS transferred $36 million 
from other CBP accounts and $24 million from other DHS agencies to 
CBP's Salaries and Expenses account. DHS also transferred an 
additional $11 million into CBP's Salaries and Expenses account to 
maintain 21,370 Border Patrol agents and 21,775 CBP officers. 

[56] To facilitate communication between OFO headquarters and the 
field, OFO established a Communication Action Team to track and report 
specific operational impacts of sequestration, effective March 1, 
2013. The Communication Action Team was to respond to inquiries from 
the field and disseminated policy guidance from OFO component offices, 
as needed. 

[57] Medicare consists of four parts. Parts A and B are known as 
Medicare fee-for-service and pay providers based on claims for 
services rendered. Part A covers hospital and other inpatient stays 
and Part B covers hospital outpatient, physician, and other services. 
Part C, also known as Medicare Advantage, is the private plan 
alternative to Medicare fee-for-service under which beneficiaries 
receive benefits through private health plans. Part D is the 
outpatient prescription drug benefit. Medicare pays Parts C and D 
plans a per enrollee amount. 

[58] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-13-283] (Washington, D.C.: February 
2013). 

[59] We refer to payments made to providers and plans for the 
provision of Medicare benefits as "Medicare payments" for the purposes 
of this review. The law limited sequestration reductions of Medicare 
payments to 2 percent, unlike the percentage for other direct 
spending. Consistent with BBEDCA, the Office of Management and Budget 
(OMB) calculated percentage sequestration reductions of 5.1 percent 
for nondefense direct spending other than Medicare payments and of 5 
percent for nondefense discretionary spending. Further, while agencies 
generally applied sequestration reductions to spending completed by 
the end of fiscal year 2013, reductions were applied to Medicare 
payments from April 1, 2013 through March 31, 2014. 

[60] 2 U.S.C. § 905(h). 

[61] The program management account also includes certain mandatory 
PPAs. 

[62] CMS contracts with and provides federal funding allocations to 
state survey agencies to carry out the majority of survey functions 
for facilities participating in Medicare and Medicaid. States also 
contribute funds for the benefit they derive from facility compliance 
with federal quality standards and for determining compliance with 
state licensing requirements. Home health agencies, ambulatory 
surgical centers, hospices, and hospitals can choose to be inspected 
by an accrediting organization, such as the Joint Commission, or by 
states. CMS also has national contracts to carry out federally-
directed surveys to either directly assist state survey agencies, 
substitute for state surveys in certain specialized areas (such as 
organ transplant hospitals or psychiatric hospitals), or assist CMS 
Regional Offices in conducting comparative surveys designed to check 
the accuracy and adequacy of surveys done by states. 

[63] 42 U.S.C. § 1395-3(g) (nursing home); 42 U.S.C. § 1395bbb(c) 
(home health agency). The frequency of surveys of Medicare 
participating nursing homes and home health agencies are identified in 
statute. States must survey each nursing home in their state at least 
every 15 months and, on average, all nursing homes every 12 months, 
and each home health agency at least every 36 months. 

[64] These surveys assess whether psychiatric hospitals meet special 
conditions of participation. CMS also reduced funding for other 
national contracts to implement sequestration reductions. 

[65] The memorandum included changes in addition to those described. 
See Department of Health & Human Services, Centers for Medicare & 
Medicaid Services, S&C 13-23-ALL, FY2013 Sequestration Adjustments for 
Survey & Certification (Baltimore, Md.: Apr. 5, 2013). 

[66] States generally rely on their own funds when they spend more 
than their initial federal allocations for survey activities, but may 
be reimbursed when CMS redistributes Medicare funds from states that 
spent less than their allocations. 

[67] CMS may penalize states that do not complete all of their 
workload for surveys with statutorily mandated frequencies by reducing 
the state's Medicare funding allocation for the following year. 

[68] The remaining state stated that sequestration did not affect any 
of its activities in 2013 and it did not need to use any unmatched 
state funds. 

[69] At the end of the federal fiscal year, CMS may provide 
supplemental funds to states that needed more than their initial 
federal allocations by redistributing funds from states that spent 
less than their allocations. 

[70] 1-800-MEDICARE is one of several activities CMS uses to educate 
beneficiaries so they can make informed health care decisions. 

[71] Office of Management and Budget, OMB Report to the Congress on 
the Joint Committee Sequestration for Fiscal Year 2013 (Mar. 1, 2013). 

[72] See, for example, Mireille Jacobson, Craig C. Earle, Mary Price 
and Joseph P. Newhouse, "How Medicare's Payment Cuts For Cancer 
Chemotherapy Drugs Changed Patterns of Treatment," Health Affairs, 29, 
no.7 (2010): 1391-1399. Centers for Medicare & Medicaid Services, 
Office of the Actuary, Estimated Volume-and-Intensity Response to a 
Price Change for Physicians' Services (1998). 

[73] For example, while Medicare payment rates to physicians stayed 
constant from 2012 to 2013, payment rates to home health providers 
decreased and rates for certain dialysis treatments and certain 
outpatient hospital services increased. 

[74] For example, payments to certain providers, such as hospitals 
determined to have an excess readmission rate and physical therapists 
providing certain services, were required to be reduced in fiscal year 
2013. Pub. L. No. 111-148, § 3025, 124 Stat. 173 (codified at 42 
U.S.C. § 1395ww(q)) (hospital readmissions reduction program); 
American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, 126 Stat. 
2313, 2355 (codified at 42 U.S.C. § 1395m(k)(7)) (increase in 
"reduction percentage" for certain multiple therapy services). 

[75] Under current law, the sequestration of direct spending, 
including the 2 percent reduction of Medicare payments will continue 
through 2024. See 2 U.S.C. § 901a(6)(B). 

[76] In Medicare, participating providers agree to accept the Medicare 
payment amount as payment in full and not to collect more than the 
Medicare deductible or cost-sharing amount from the beneficiary. 
Providers that choose to receive Medicare payments on a case-by-case 
basis at a lower Medicare payment amount are considered 
nonparticipating providers. Nonparticipating providers may charge up 
to 115 percent of the lower Medicare payment amount for 
nonparticipating providers. Beneficiaries are responsible for paying 
the difference between the nonparticipating provider's charge and the 
Medicare payment amount for nonparticipating providers. 

[77] As of January 2011, about 4 percent of physicians who received 
Medicare payments were nonparticipating. 

[78] For example, a prior efficiency initiative re-designed the survey 
process for dialysis centers. The survey redesign shortened the survey 
process for surveyors, thus saving money, according to CMS officials. 

[79] See Pub. L. No. 111-148, § 6106, 124 Stat. 712 (codified at 42 
U.S.C. § 1320a-7j(g)). 

[80] Pub. L. No. 111-148, 3021(f), 124 Stat.119, 394 (codified at 42 
U.S.C. § 1315a(f)). The center was established to support the 
development and testing of innovative health care payment and service 
delivery models. 

[81] Specifically, FTEs attributed to the federal administration PPA 
declined from 4,827 in March 2013 to 4,707 in October 2013, according 
to CMS. 

[82] Officials noted that Congress appropriated less than CMS 
requested to implement aspects of PPACA in fiscal year 2013 and they 
had already identified contingencies to fund the implementation when 
sequestration occurred. For example, HHS transferred funding from 
various accounts to the CMS program management account for this 
purpose. 

[83] The Medicare appeals process provides beneficiaries, providers, 
and suppliers the ability to dispute Medicare coverage and payment 
decisions. There are five levels of appeals: the first two are 
conducted by CMS contractors, the second two are carried out by other 
entities in HHS, and the fifth by Federal District Court. If CMS 
contractors are not able to decide level two appeals within 60 days, 
the appeal may be elevated to the next level. Elevation of appeals to 
higher level review and adjudication by entities outside of CMS, such 
as administrative law judges at HHS's Office of Medicare Hearings and 
Appeals, is more expensive, according to CMS officials. Medicare has 
experienced large increases in appeals in recent years. 

[84] GAO, Medicare: Review of the First Year of CMS's Durable Medical 
Equipment Competitive Bidding Program's Round 1 Rebid, [hyperlink, 
http://www.gao.gov/products/GAO-12-693] (Washington, D.C.: May 9, 
2012). 

[85] The affordable insurance exchange grants are made from an 
appropriation of "an amount necessary" to enable the Secretary of HHS 
to make awards. 42 U.S.C. § 18031(a)(1). 

[86] Sequestration also reduced another PPA of administrative costs 
associated with these grants by 5.1 percent. 

[87] MACs also receive some funding from the HCFAC account. 

[88] In fiscal year 2013, the operating division budgeted funds to 
transition to new MACs in case new contractors were selected during 
the most recent contracting round, but officials told us that because 
CMS primarily awarded contracts to existing MACs, they could use the 
transition funds to offset sequestration cuts. 

[89] The statement of work defines the activities to be carried out by 
the contractor. 

[90] Sequestration also reduced HCFAC funding for the HHS Office of 
Inspector General and the Department of Justice, according to CMS. 

[91] Medi-Medi is a joint effort between CMS and states that 
participate voluntarily to identify providers with aberrant Medicare 
and Medicaid billing patterns through analyses of claims for 
individuals with both Medicare and Medicaid coverage. 

[92] CLIA surveys, conducted by state survey agencies, certify 
clinical laboratories and are funded solely by user fees. 

[93] The PACE program serves frail, elderly individuals with the goal 
of keeping them in the community rather than long-term care 
institutions as long as medically and socially possible. Although 
three subsidies for low-income Medicare beneficiaries are exempted 
from sequestration by law--qualified individual premiums, Part D low 
income subsidies, and Part D catastrophic subsidies-PACE subsidies are 
not. See 2 U.S.C. § 906(d)(7). 

[94] Pub. L. No. 113-6, 127 Stat. 198. 

[95] Pub. L. No. 89-10, 79 Stat. 27 (codified as amended at 20 U.S.C. 
§ 6301 et seq.). 

[96] We use the terms states to refer to state educational agencies 
and we use the terms districts or school districts to refer to local 
educational agencies. 

[97] 20 U.S.C. §§ 6311-6339. Throughout this report we refer to Title 
I, Part A of ESEA, as amended as "Title I." Part A of Title I 
addresses improving basic programs operated by local educational 
agencies. 

[98] 20 U.S.C. §§ 7701-7714. 

[99] U.S. Department of Education, Accelerating Achievement and 
Ensuring Equity, Fiscal Year 2015 Budget Request (March 2014). 

[100] In Education's annual appropriation acts, the Title I program 
typically receives forward funding and an advance appropriation. 
Forward funding is budget authority that is made available for 
obligation beginning in the last quarter of the fiscal year for the 
financing of ongoing activities during the next fiscal year. An 
advance appropriation is budget authority provided in an appropriation 
act that becomes available one or more fiscal years after the fiscal 
year for which the appropriation act was enacted. For example, of the 
funding provided to carry out Title I in the Department of Education 
Appropriations Act, 2012, a certain portion was made available on July 
1, 2012 (in fiscal year 2012), and another portion was made available 
on October 1, 2012 (in fiscal year 2013). The funding that was made 
available on July 1, 2012 was forward funding and the funding that was 
made available on October 1, 2012 was an advance appropriation. This 
funding structure was carried forward for fiscal year 2013 in the 
Consolidated and Further Continuing Appropriations Act, 2013. See 
Department of Education Appropriations Act, 2012, Pub. L. No. 112-74, 
div. F, tit. III, 125 Stat. 786, 1090-1103 (2011), Consolidated and 
Further Continuing Appropriations Act, 2013, Pub. L. No. 113-6, div. 
F, § 1101(a)(4), 1102-03, 127 Stat. 198, 412-13. 

[101] Unlike Title I, Impact Aid did not receive forward funding or an 
advance appropriation in Education's appropriation acts for fiscal 
years 2012 or 2013. Funding was made available in those acts only for 
the fiscal year for which the appropriation act was enacted. According 
to agency officials, Education disbursed Impact Aid funds in 
increments during fiscal year 2013, with disbursements made in October 
and November 2012 and May 2013. 

[102] We asked school district officials to identify specifically the 
effects of sequestration. However, as previously discussed, it is 
difficult to isolate these effects due to other federal and state 
funding reductions. In addition, because of the statutory formula for 
Title I, a reduced Title I allocation could be a result of factors 
other than sequestration, such as decreases in the formula count of 
children or reduced state per pupil expenditures. 

[103] While Education officials said that Title I funds may not be 
used to directly fund some activities, such as capital improvements, 
officials from two districts said that the reductions to Title I 
grants caused them to shift available funds according to the 
districts' needs, which may have contributed to the effects district 
officials described to us. 

[104] According to Education officials, the agency had been reducing 
its administrative spending, including reductions to administrative 
spending for OESE, since it finished awarding all the funds 
appropriated under the American Recovery and Reinvestment Act of 2009 
at the end of fiscal year 2010. 

[105] According to Education officials, OESE's travel budget declined 
from $822,000 in fiscal year 2012 to $436,000 in fiscal year 2013. 

[106] U.S. Department of Education, Fiscal Year 2013 Annual 
Performance Report and Fiscal Year 2015 Annual Performance Plan (March 
2014). For one metric, the results showed that 23 states (out of a 
target of 26) had approval for evaluation system guidelines at the end 
of fiscal year 2013. 

[107] Title I allocations to districts are generally based on the 
number of students from families below the poverty level who reside in 
each LEA and how much that state spends per pupil on education, among 
other factors. Similarly, the Impact Aid statute allocates grant 
funding based on a variety of factors, including the number and type 
of federally connected children as well as how much that district 
spends per pupil on education. Other statutory provisions include 
"hold harmless" and "minimum state grant" requirements. For Title I, 
for example, the hold harmless provision requires that an eligible LEA 
receive a minimum percentage of that LEA's grant total from the 
previous year, depending on the LEA's school-age poverty rate. 20 
U.S.C. § 6332(c). The Title I minimum state grant provisions require 
that each state receive a minimum grant amount, generally expressed as 
a percentage of the total amount allocated to states, among other 
factors. See, e.g., 20 U.S.C. §§ 6333(d), 6335(e). 

[108] A TDHE is either (1) a former Indian Housing Authority that 
managed Native American housing programs under the U.S. Housing Act of 
1937 Act that continued operations to meet the requirement of the 
Native American Housing Assistance and Self-Determination Act of 1996 
(NAHASDA) or (2) a new nontribal government entity authorized by one 
or more tribes to receive grants and provide affordable housing 
assistance for Native Americans under NAHASDA. 

[109] The PHAs we selected were the Alexandria Redevelopment and 
Housing Authority, the Berkeley Housing Authority, the New York City 
Housing Authority, and the Omaha Housing Authority. The national 
associations of PHAs we selected were the Council of Large Public 
Housing Authorities and the Public Housing Authorities Directors 
Association. The tribes and TDHEs we selected were the Interior 
Regional Housing Authority, the Navajo Housing Authority, the Northern 
Circle Indian Housing Authority, and the Penobscot Indian Nation 
Housing Authority. The associations of tribes and TDHEs we selected 
were the National American Indian Housing Council and the United 
Native American Housing Association. 

[110] In March 2014, we reported that HUD estimated that the decline 
would be about 42,000, but final data were not yet available. See 
[hyperlink, http://www.gao.gov/products/GAO-14-44], 117. Very low-
income households are those with incomes at or below 50 percent of the 
area median income. HUD provides funding to PHAs on a calendar year 
basis. These figures are based on data reported by PHAs. The data 
exclude 35 PHAs (1.5 percent of PHAs that administer vouchers), 
accounting for 13 percent of vouchers leased through the Housing 
Choice Voucher program in 2013, that have additional flexibility in 
how they spend their funding through the Moving to Work demonstration 
program. Through the demonstration program, these PHAs can change the 
proportion of funding that they allocate to vouchers over time, 
meaning we cannot determine whether declines in vouchers for these 
PHAs were due to sequestration or reallocation of funding between 
programs. Some of the funding for the program could only be used for 
new special-purpose vouchers, such as vouchers for veterans or the 
disabled. Because there were 26,000 new special-purpose vouchers in 
2013, the net decline in vouchers from 2012 that were renewed in 2013 
was 67,000. 

[111] Under statute, the highest minimum rent a PHA can impose is $50. 
See 42 U.S.C. § 1437a(a)(3)(A). Statute also requires PHAs to inspect 
units when initially leased and annually, but regulations allow PHAs 
to inspect units more frequently than required. See 42 § U.S.C. 1437f 
(o)(8); 24 C.F.R. § 982.405. 

[112] In general, a household can use its rental assistance voucher 
for a unit of its choice, including one located outside the 
jurisdiction of the PHA that initially issued the voucher. The 
receiving PHA can choose whether to absorb the household and pay for 
the voucher with its own funds, or to bill the initial PHA. However, 
HUD regulations allow a PHA to deny a household to move its voucher if 
the receiving PHA will not absorb the household and the initial PHA 
lacks sufficient funding for the move. See 24 C.F.R. § 982.314. 

[113] PHA reserves for vouchers were generally reduced to about 1 
month of expenses. 

[114] PHAs report their level of reserves to HUD at the end of their 
respective fiscal years, which vary (end in different quarters). As a 
result, the amount of reserves in HUD's data represented different 
points in time for different PHAs. PHAs with a fiscal year ending in 
one of the first three quarters of 2012 may still have been depleting 
their reserves as part of a $750 million reserve offset in 2012 after 
they reported their reserves at the end of their fiscal year in 2012, 
and thus their level of reserves would have been lower than the data 
show at the end of calendar year 2012. 

[115] The number of tribes and TDHEs that received funding in 2013 is 
lower than the 571 tribes eligible to receive IHBG funding because 
some tribes choose to have the same TDHE administer their funding and 
some tribes choose not to receive IHBG funding. 

[116] Although HUD had data on carry-over funding for tribes and 
TDHEs, the agency did not have data on reserves maintained by these 
entities, which prevented a complete count. 

[117] In a letter of March 12, 2013, HUD notified tribes and TDHEs 
that their allocations would be reduced by 5 percent and that they 
would be notified at a later date as to the exact effect on their 
allocations. 

[118] The amount of IHBG funding that Indian tribes receive is based 
on two components: (1) the cost of operating and modernizing units, 
and (2) need. The need component consists of seven factors that 
include the grant recipient's American Indian/Alaskan Native 
population and the number of households within that population that 
fall in certain low-income categories. 

[119] HUD regulations required the IHBG formula to be reviewed by May 
21, 2012 to determine if a subsidy is needed to operate and maintain 
NAHASDA units or if any changes are needed in respect to funding under 
the formula's component for the cost of operating and modernizing 
units. See 24 C.F.R. § 1000.306(b). In addition, federal statute 
requires HUD to review IHBG regulations, which include regulations 
related to the IHBG formula, at least once every 7 years. See 25 
U.S.C. § 4116(b)(2)(D). This requirement was enacted on October 14, 
2008; as a result, the first review is required by October 14, 2015. 
In December 2012 HUD updated the IHBG regulations, except the portions 
related to the formula. 

[120] PIH funding for salaries and expenses was reduced from $200 
million to $190 million by sequestration, prior to transfers and 
reprogrammings. 

[121] HUD officials said they were later able to fund some of the 
field office closures in part by using $1.7 million in unobligated 
fiscal year 2012 salaries and expenses funding. 

[122] The 2011 and 2012 set-aside amounts were $150 million and $103 
million, respectively. 

[123] HUD officials told us the remaining $20 million will be used for 
other allowed purposes in fiscal year 2014. 

[124] In 2012, HUD's appropriation for the fund was $3.962 billion, 
$664 million lower than in fiscal year 2011 ($4.626 billion), but the 
appropriation also gave HUD the authority to include up to $750 
million in PHAs' excess reserves in its formula allocations, for a 
total of $4.712 billion. HUD's appropriation for the fund in the 2013 
continuing resolution of $4.262 billion reflected HUD's 2012 funding 
level plus an additional $300 million but without the authority to 
offset against excess reserves, thus resulting in a net decrease in 
HUD's formula allocations to PHAs of $450 million, before 
sequestration. 

[125] For the purposes of this report, the term "component" refers to 
an agency, bureau, or operating division within a cabinet-level 
department (e.g., the U.S. Customs and Border Protection within the 
Department of Homeland Security). When we refer to "agency," we are 
referring to a cabinet-level department or an independent agency 
(e.g., the Environmental Protection Agency). 

[126] GAO, 2013 Sequestration: Agencies Reduced Some Services and 
Investments, While Taking Certain Actions to Mitigate Effects, 
[hyperlink, http://www.gao.gov/products/GAO-14-244] (Washington, D.C.: 
Mar.6, 2014). This report covers 23 of the 24 federal agencies 
specified in the Chief Financial Officers Act. We excluded the 
Department of Veterans Affairs, because its accounts were exempt from 
sequestration. 

[127] Based on OMB data for actual obligations in fiscal year 2012. 
The budget function classification system provides a comprehensive and 
consistent means to capture federal activity and group budgetary 
resources according to mission area or "national need." These 
"national needs" are grouped into 17 broad areas for analyzing and 
understanding the budget. Three additional categories--Net Interest, 
Allowances, and Undistributed Offsetting Receipts--do not address 
specific "national needs" but are included in the budget function 
classification system so that the total of all functions sums to the 
budget totals. For more information on budget functions, see GAO, 
Federal Budget: Agency Obligations by Budget Function and Object 
Classification for Fiscal Year 2003, [hyperlink, 
http://www.gao.gov/products/GAO-04-834] (Washington, D.C.: June 25, 
2004). 

[128] 2 U.S.C. § 905(b). 

[129] [hyperlink, http://www.gao.gov/products/GAO-14-244]. 

[130] These data were used as a proxy for determining those agencies 
with the largest amount of sequestered funding, because data on the 
amount of sequestered funds by agency were not readily available in a 
format that we could analyze at the time that we began the selection 
process. Once such data were available, we compared the results of our 
analysis with the results when using the amount of sequestered funding 
by agency as calculated by OMB. We determined that our final 
selections were broadly consistent with the results when using OMB 
data on the amount sequestered and that no further adjustments were 
needed. 

[131] We excluded from consideration the five budget functions--
International Affairs (150), General Government (800), Net Interest 
(900), Allowances (920), Undistributed Offsetting Receipts (950)--
because we determined these were less likely to directly affect the 
public, or, in the cases of Undistributed Offsetting Receipts and 
Allowances, because no data for them were reported in fiscal year 
2012. The major object classes are: Personnel, Compensation, and 
Benefits (employee salaries and benefits); Contractual Services and 
Supplies (rent, services, supplies and materials); Grants and Fixed 
Charges (grants, insurance, and interest); and Acquisition of Assets 
(equipment, land and structures, investments, and loans). 

[132] GAO, Sequestration: Observations on the Department of Defense's 
Approach in Fiscal Year 2013, [hyperlink, 
http://www.gao.gov/products/GAO-14-177R] (Washington, D.C.: Nov. 7, 
2013). 

[133] For information on the scope and methodology of our review of 
select DOD components, see [hyperlink, 
http://www.gao.gov/products/GAO-14-177R]. 

[134] [hyperlink, http://www.gao.gov/products/GAO-14-244]. 

[End of section] 

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