In the face of ever increasing budget deficits, in 1985 Congress enacted the Balanced Budget and Emergency Deficit Control Act. This Act is known as Gramm-Rudman-Hollings -- named after the Senate authors of the original bill (Senators Phil Gramm of Texas, Warren Rudman of New Hampshire, and Ernest F. Hollings of South Carolina).
Gramm-Rudman-Hollings established "maximum deficit amounts". If the deficit exceeded these statutory limits, the President was required to issue a sequester order that would reduce all non-exempt spending by a uniform percentage. Gramm-Rudman-Hollings also made a number of changes to the congressional budget process to enforce maximum deficit amounts and to strengthen congressional budget enforcement procedures. The most significant change was to increase the margin necessary to waive certain points of order from a simple majority vote to a three-fifths margin in the Senate.
In July of 1986 in Bowsher v. Synar, (478 U.S. 714, 1986) the Supreme Court held that the provision of Gramm-Rudman-Hollings which vested certain powers in the General Accounting Office violated the separation of powers doctrine of the Constitution. This was due to the Office's (a both creature of Congress) role in implementing sequester orders. The Court found it unacceptable from a constitutional perspective for Congress to vest in a congressional entity a duty of the executive branch -- the responsibility for executing a law. In 1987, Congress enacted the Balanced Budget and Emergency Deficit Control Reaffirmation Act which corrected the constitutional flaw in Gramm-Rudman-Hollings by assigning all the sequester responsibilities to the Office of Management and Budget (OMB). OMB is part of the executive branch. The 1987 Act also extended the system of deficit limits through fiscal year 1992.
It was not long, however, before Congress realized that despite Gramm-Rudman-Hollings procedures, the deficit continued to increase. In the spring of 1990, it became clear that the deficit was going to exceed the Gramm-Rudman's maximum deficit limit by nearly $100 billion. Later that year, OMB estimated that a sequester of $85 billion would be necessary to eliminate this excess deficit amount. Because Congress had exempted most of the budget from the sequester process, such a sequester order was going to require a 32 percent reduction in defense programs and a 35 percent reduction in non-defense programs. To respond to growing deficits, President Bush and the congressional leadership agreed to convene negotiations on the budget in May of 1990. Six months later, President Bush signed into law the Omnibus Budget Reconciliation Act of 1990, which represented the budget agreement negotiated between the Bush Administration and Congress.
Budget Enforcement Act of 1990 (BEA) (2 U.S.C. 900) -- Title XIII of P.L. 101-508 significantly amended the laws pertaining to the budget process, including the Congressional Budget Act and the Balanced Budget and Emergency Deficit Control Act. The BEA constrains direct spending through the pay-as-you-go (PAYGO) requirement for all legislation affecting direct spending and receipts. Under PAYGO, all enacted legislation affecting direct spending or receipts must, in total, be deficit neutral or reduce the deficit every year through 1995. Deficit neutrality is enforced by sequester. The Office of Management and Budget is required to issue sequestration update reports on August 20 of each year for discretionary spending, PAYGO legislation, and the deficit.
Title XIII of this reconciliation act, the Budget Enforcement Act, constituted the enforcement provisions of the agreement. The 1990 Budget Enforcement Act (BEA) effectively replaced the Gramm-Rudman-Hollings system of deficit limits with two independent enforcement regimens: caps on discretionary spending and a pay-as-you-go requirement for direct spending and revenue legislation. The BEA also provided for enforcement by both the congressional and executive branch of the discretionary caps and the pay-as-you-go requirement. The spending disciplines of the BEA were extended in the 1993 Reconciliation legislation through the end of fiscal year 1998.Pay as you go and sequestration under the BEA requires the OMB to also enforce a "pay-as-you-go" requirement which has a similar effect as the Senate's point of order: Congress is required to "pay for" any changes to programs which result in an increase in direct spending, or in this case risk a sequester. If OMB estimates that the sum of all direct spending and revenue legislation enacted since 1990 will result in a net increase in the deficit for the fiscal year, then the President is required to issue a sequester order reducing all non-exempt direct spending accounts by a uniform percentage in order to eliminate the net deficit increase. Most direct spending is either exempt from a sequester order or operates under special rules that minimize the reduction that can be made in direct spending. Social Security is exempt from a pay-as-you-go sequester and Medicare cannot be reduced by more than 4 percent
Source: U. S. Senate, http://www.senate.gov/~budget/republican/reference/cliff_notes/cliffc2.htm.