August 23, 2014

WEEKLY REPORT: July 22, 2008

WEEKLY REPORT: July 22, 2008
FY '09 Appropriations Bills Remain Stalled, but Action on Defense Spending Possible Congress Overrides President's Veto of Medicare Bill Collapse in Fannie and Freddie Stocks Adds Momentum to Housing-Mortgage Relief Bill Eliminating Earmarks May be Good Public Policy, But it won't Pay for More Tax Cuts or Solve the Fiscal Crisis Tax Extenders, AMT Relief Remain Mired in Clash over Offsets

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Budget Process: Step-by-Step

Week of July 21: Senate Appropriations Committee action on Defense; Interior-Environment; Legislative Branch; and 2nd FY '08 Supplemental / Stimulus Bill

July 23: House may take up the housing - mortgage relief bill (H.R. 3221) including the Administration proposal to backstop Fannie Mae and Freddie Mac

FY '09 Appropriations Bills Remain Stalled, but Action on Defense Spending Possible

By late July, the House of Representatives would typically have completed action on most of the 12 regular appropriations bills that fund the departments of government.

However, as reflected in the chart below, neither the House nor the Senate have brought a single appropriations bill to the Floor--and the House lags well behind the Senate in Committee action (with 9 full committee markups in the Senate compared to only 5 in the House Committee).

The one bill that may see Floor action before Congress adjourns in September is the Defense Appropriations Bill. Last week Speaker Nancy Pelosi (D-CA) said "I know the Defense bill, appropriations bill, will be passed" and Senate Majority Leader Harry Reid (D-NV) concurred.

This reflects a couple factors:

--First, President Bush has threatened to veto any appropriations bills that exceed his request, and Democrats--as reflected in the Budget Resolution--have called for nearly $25 billion more than the President requested. If Democrats wait until after the presidential election to make FY '09 funding decisions, they may be working with a Democratic President. As reported by Congressional Quarterly, Senate Majority Leader Harry Reid (D-NV) said recently, "I hope we would do a continuing resolution until after Sen. Obama becomes President."

--In addition, House Republicans have been attempting to amend appropriations bills with off-shore oil drilling amendments, opposed by many Democrats. On June 26, House Appropriations Chairman David Obey (D-WI) suspended markup of the Labor-HHS appropriations bill when Republicans attempted to amend the bill with unrelated oil drilling language.

Despite the unlikelihood of Floor action this fall, non-defense appropriations action at the Senate committee level has been proceeding -- which will facilitate final action on '09 bills after the election. Senate Appropriations Chairman Robert C. Byrd (D-WV) has signaled his intent to complete all committee action before the August recess.

[Click on the blue links for information on each appropriations bill.]


Latest House Committee
Action
House
Floor Action
Latest Senate Committee
Action
Senate
Floor Action
Conference
Action; President
Agriculture Subcomm: 6/19  
Full Comm: 7/17  
 
Commerce-Justice-Science      
Defense**          
Energy-Water      
Financial Services      
Homeland Security      
Interior-Environment        
Labor-HHS-Education      
Legislative Branch        
Military Construction-VA      
State-Foreign Operations      
Transportation-HUD      

**War funding for the first part of FY '09 was provided in the FY '08 Supplemental Appropriations Bill.

Click here for additional details on status of appropriations bills.

Background on Appropriations.--The 12 annual appropriations bills provide funds for all of the discretionary programs, projects, and activities of the Federal government. In total, the 12 appropriations bills allocate about $1 trillion of discretionary spending -- one-third of the $3 trillion Federal budget.

(The other $2 billion consists of entitlement programs-- the largest being Social Security, Medicare, and Medicaid--as well as interest payments on the Federal debt and other "mandatory spending.")

The total amount of funding available for the annual appropriations bills is determined by the Congressional Budget Resolution. The House and Senate completed action June 5th on S.Con.Res. 70, the Congressional Budget Resolution for FY 2009 (the fiscal year beginning October 1, 2008).

Following adoption of the Budget Resolution, the House and Senate Budget Committees provided to their respective Appropriations Committees a lump-sum discretionary spending allocation (called a "302(a) allocation"). The total allocation for FY '09 was approximately $1,013 billion --about $21 billion higher than the President's $992 billion request ($24.5 billion more than the President's request when advance appropriations and special adjustments for enforcement initiatives are included).

After receiving their respective 302(a) allocations, the House and Senate Appropriations Committees allocated total discretionary spending among their 12 respective subcommittees. These suballocations are called "302(b) allocations" and determine how much funding authority is available for programs under the jurisdiction of each subcommittee.

The Senate Appropriations Committee approved its 302(b) subcommittee allocations on June 19. The House Appropriations Committee approved its suballocations the week of June 24. The following table compares the subcommittee allocations with the President's request.

(discretionary budget authority allocated to appropriations subcommittees)

Subcommittee
Allocations
'08 Enacted

President's
'09 Request

Senate FY'09
Appropriations
Allocations

House FY
'09 Allocations
Senate Allocation
Compared to President
Defense (w/o war funding)
459
492
488
488
-4.0
Homeland Security
38
40
42
42
+ 2.5
Military Con-Veterans Affairs
64
69
73
73
+ 3.7
State-Foreign Ops
33
38
37
37
- 1.6





 
Nondefense Domestic Discretionary:




 
Agriculture
18
19
20.4
20.6
+1.8
Commerce-Justice-Science
52
54
58
57
+4.2
Energy-Water
31
31
33
33
+1.9
Financial Services-General Govt
21
22
23
22
+0.5
Interior-Environment
27
26
28
28
+2.0
Labor-Health-Education
145
145
153
153
+7.8
Legislative Branch
4
4.8
4.4
4.4
- 0.4
Transportation-Housing
49
51
53
55
+2.7
Subtotal - Nondefense Domestic:
347
352
373
373
+21





 
Total Discretionary
940
992
1,013
1,013
+21*

*($24.5 billion more than the President's request when advance appropriations and special adjustments for enforcement initiatives are included.)

Congress Overrides President's Veto of Medicare Bill

The Congress last week voted to override the President's veto of HR 6331, a bill to nullify automatic cuts in Medicare payments to physicians. The House voted to override the President 383-41, followed by a Senate override vote of 70-26.

The new law nullifies a cut of 10.6%, scheduled to occur this month due to a provision in the Balanced Budget Act of 1997. Supporters of the bill believe that a significant number of physicians would refuse to accept new Medicare patients if the cut in physician payments had gone into effect.

Many congressional Republicans initially opposed the bill because it offsets the bill's cost by cutting payments to privately run ("Medicare Advantage") plans. Many Democrats believe the private plans receive too much government support, while many Republicans believe the private sector managed care plans will reduce overall Medicare costs (though that has not yet been the experience).

Background.--The 1997 Balanced Budget Act set up a cost control mechanism called the "sustainable growth rate" (SGR) to trigger automatic reductions in physician reimbursements if payments exceed a benchmark level. The idea was to rein in out-of-control increases in Medicare payments to physicians and allow a growth rate that is "sustainable" from a budgetary perspective.

However, after the first automatic cut went into effect in 2002, physicians successfully lobbied for a reversal of the cuts. And since then, each time the SGR mechanism would have triggered a cut, Congress has nullified the cuts and substituted a modest increase--as it did again in this legislation.

The more time that passes without an SGR adjustment, the automatic cuts required by the 1997 law grow larger and more unrealistic.

From a fiscal perspective, legislation of this type--which annually tinkers around the edges of the Medicare program--reflects an ongoing stalemate between Democrats and Republicans over how to rein in the rapid growth of Medicare costs. The rapid growth of Medicare is being driven by overall increases in health care costs, with health spending increasing 1/3 faster than the economy as a whole. In addition, the retirement of the baby boomers, which began this year, is accelerating the rapid growth of Medicare.

President's Veto Message

Collapse in Fannie and Freddie Stocks Adds Momentum to Housing-Mortgage Relief Bill

Backgound--Fannie Mae, Freddie Mac, and the Federal Budget

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are congressionally chartered--but shareholder owned--financial institutions created to establish and maintain a secondary mortgage market. Fannie and Freddie support the residential home mortgage market by purchasing mortgages from lenders, who then use the proceeds to make more loans available to homebuyers. This eliminates regional differences in mortgage rates and draws financing from around the world.

Fannie and Freddie raise capital for the purchases by: (1) issuing bonds; and (2) "securitization" which involves bundling similar mortgages together and reselling them as securities.

According to the Congressional Research Service, "the biggest advantage that Fannie Mae and Freddie Mac enjoy over other private companies is the presumption on the part of investors that, were the enterprises to fall into dire financial straits, the government would bail them out" -- and that is what the Administration is now proposing.

In response to the recent precipitous decline in Fannie and Freddie stocks, Treasury Secretary Paulson has proposed legislation to: (1) increase the companies' line of credit with the Treasury; and (2) allow the Treasury to buy stock in the companies. Since the Treasury is already operating "in the red" -- borrowing substantial sums from around the world in order to finance Federal government operations -- this proposal to backstop Fannie and Freddie could result in raising the public debt even further--essentially shifting the financial burden to subsequent generations.

CBO: Cost of Administration's Proposal to Authorize Federal Financial Assistance for Freddie and Fannie

Pending Housing-Mortgage Relief Legislation

The legislative plan is to make the Administration proposal part of the pending housing-mortgage relief legislation (HR 3221), which the Senate sent back to the House earlier this month. The bipartisan (Dodd-Shelby) housing relief bill is aimed at helping borrowers avoid foreclosure by expanding the Federal Housing Administration's loan guarantee authority. The legislation would also overhaul the regulation of Fannie Mae and Freddie Mac.

While completion of the bill has strong support in the House and Senate, opponents have attempted to characterize the expanded FHA authority as a "$300 billion bailout" for bad mortgage decisions. However, this is not a direct loan program; it is a loan guarantee program designed to encourage private lenders to refinance mortgage loans (under strict Federal requirements) to help homeowners avoid foreclosure. The projected Federal cost of the FHA program accrues only to the small percentage of loans that end in default.

Despite strong bipartisan support for the bill, the Administration had earlier threatened a veto due to expanded FHA loan guarantee authority and new block grant funding for states to purchase and rehab foreclosed properties. However, Administration opposition appears to be softening in light of strong bipartisan support on the Hill and the need to restore investor confidence in Fannie and Freddie. Last week, Treasury Secretary Paulson said, "We appreciate Congress' important efforts to complete legislation that will promote confidence in these companies."

Paulson Statement
Senate Banking Committee Summary of Dodd-Shelby Housing Bill
CBO Cost Estimate
Statement of Administration Policy on Senate bill

Key issues in ongoing negotiations include:

--Concerns about a Federal bailout of Fannie Mae and Freddie Mac (which are private corporations).

--The Senate's proposal to use a new Affordable Housing Trust Fund to pay for an expansion of Federal mortgage guarantees. House Financial Services Chairman Barney Frank (D-MA) strongly opposes this use of Trust Fund resources.

--The Senate's proposed "net operating loss carryback" provision that would provide tax relief to homebuilders, real estate companies, and financial institutions hit by the downturn in the housing market. House Democrats have raised concerns about the $25 billion 3-year cost of the "NOL" provision.

Outlook: House-Senate negotiations are being conducted by bouncing the legislation back and forth, rather than through a House-Senate conference. This helps congressional leaders to guage support for various changes. Given the rate of foreclosures and the recent nose-dive in Fannie and Freddie stock, completion of the bill is likely prior to the August recess.

Following is a brief comparison of the Senate Banking Committee and House-passed measures:

HOUSING BILLS Senate Amendment House Passed (HR 3221)
$300 billion expansion of FHA's loan insurance programs aimed at helping borrowers avoid foreclosure
FHA would provide up to $300 billion in new loan guarantees to help borrowers refinance existing mortgages. Participating lenders would voluntarily accept a write-down in exchange for a Federal loan guarantee. Loans could not exceed 90% of appraised value and would have to be fixed rate. Costs would be offset from the new Affordable Housing Trust Fund (see below).
Similar to Senate bill, except the legislation would not allow Trust Fund assets to offset the costs of the refinancing program. Also, the House FHA program would last through 2013, while the Senate program would end in 2011.
New Affordable Housing
Trust Fund
Would be funded by Fannie, Freddie and Home Loan Banks and is intended to build and repair
1.5 million low-cost homes.
House Chairman Barney Frank opposes using Trust Fund revenues to underwrite the FHA program.

Regulation of
Fannie Mae and
Freddie Mac


A single Federal regulator would establish minimum capital requirements and limit the size of portfolios.
Background: Fannie Mae and Freddie Mac are government chartered corporations, with private shareholders. They operate with implied, but not explicit, government backing.
Similar to Senate, although the House bill would not begin the new Federal regulation for 6 months
Maximum Conforming Loans (which is the cap on the size of mortgages Fannie and Freddie can buy)
$625,000 in high cost areas.
125% of median home price or $729,750, whichever is less.
Aid for State and Local Governments to purchase, renovate, and sell foreclosed housing Nearly $4 billion in Community Development Block Grants for states and local governments to purchase and rehabilitate foreclosed properties. No similar grants, but in a separate bill the House would authorize HUD to make $15 billion in loans to States for housing authorities and nonprofits to purchase, renovate, and sell foreclosed housing. See HR 5818

Tax Incentives for
First-time
Homebuyers

Includes a refundable tax credit up $8000 for first-time homebuyers and an additional standard deduction for state and local property taxes. Cost: $14.5 billion, with all but $2.4 billion offset.
Includes $11 billion in tax breaks

 

Eliminating Earmarks May be Good Public Policy, But it won't Pay for More Tax Cuts or Solve the Fiscal Crisis

CRS recently released a report on earmarks in FY 2008. They found that total appropriations earmarks in FY 2008 amounted to approximately $29 billion--which is less than one percent of the Federal budget. By comparison, the deficit for FY 2008 is expected to exceed $400 billion. This data reveals that every earmark -- good or bad -- could be eliminated from the Federal budget and barely a dent would be made in growing Federal deficits.

Conclusion: The ongoing earmark debate--while a worthwhile examination of how to allocate Federal dollars in the most productive manner--will not resolve skyrocketing deficits and debt. Responsible fiscal policy requires that the budget debate focus on the big ticket items: (1) Medicare; (2) Medicaid; (3) Social Security; and (4) tax policy.

In short, while eliminating earmarks can make better use of scarce public funds, it can not cover the multi-trillion-dollar cost of extending the tax cuts or solve our nation's growing fiscal crisis.

Tax Extenders, AMT Relief Remain Mired in Clash over Offsets

The $55 billion tax extenders and energy incentives bill--HR 6049--remains mired in a partisan disagreement over offsets. Over 10 years, the bill would spend about $27 billion on provisions to extend dozens of expired (and expiring) tax provisions. The bill also includes nearly $17 billion in energy tax incentives and about $10 billion in additional tax relief. The bill passed the House 263-160 on May 21.

House and Senate Democrats want to offset the costs of the bill as required by current PAYGO rules, while Republicans strongly disagree with the PAYGO requirement.

Republicans point out that under current congressional budget rules, extension of expiring entitlement spending programs do not require offsets (which is correct). However, Democrats point out that the repeal of PAYGO early in the Bush Administration, and the subsequent failure to pay for the 2001 and 2003 tax cuts, has led to larger deficits and trillions in new debt (which is also correct).

The current House and Senate PAYGO rules were put in place when Democrats regained the majority in 2007. They are based on the PAYGO law of the 1990s, which required that any new tax cuts need to be offset by revenue raisers (or entitlement cuts), and new entitlement spending has to be offset by spending cuts (or revenue raisers).

However, unlike the PAYGO statute of the 1990s (which was enforced through the threat of automatic entitlement cuts), the current PAYGO rules lack any statutory enforcement mechanism. Consequently, it has been difficult to enforce the current rules, which have already been waived a number of times. Most notably, last year's AMT patch was not offset.

Senate Democrats have already conceded that this year's AMT patch will not be offset, but they have joined House Democrats in their insistence that the tax extenders bill must be offset.

More specifically, the House-passed bill would pay for the extenders and tax incentives by curtailing certain offshore deferred compensation plans and delaying a tax benefit for multinational corporations.

Due to this fundamental disagreement on offsets, Senate Republicans have twice blocked consideration of the extenders bill. 41 Republican Senators (the number needed to successfully filibuster legislation) signed a letter opposing the use of any offsets for extenders or AMT relief. (The letter was signed by the party leadership, Senator John McCain (R-AZ), and all Finance Committee Republicans except for Maine Senator Olympia Snowe.) Text of the Senate Letter

In addition to placing a broad array of tax extenders and incentives in legislative limbo, the logjam is also casting doubt over when and how this year's AMT patch will be enacted. Senate Finance Chairman Baucus had hoped to attach an AMT patch to the extenders bill. Failure to extend Alternative Minimum Tax Relief through 2008 would result in the AMT boosting taxes for 21 million taxpayers.

A likely outcome is that in September an AMT patch and a few key extenders will be enacted, without offsets, by including them in the text of a continuing resolution. However, House Democrats are still pushing to pay for the AMT patch with a number of offsets, including the taxing of investment managers' income at regular income rates rather than the capital gains rate (known as the "carried interest" provision).

JCT Revenue Estimate (summarizes the bill)
JCT Description (detailed description of provisions)

President Bush has threatened to veto the bill due to the revenue raisers.

Among the Items that would be extended by the bill are:

--the R&E tax credit (usually referred to as the research and development credit)
--the option to deduct state sales taxes instead of income taxes
--the deduction for qualified tuition expenses
--tax-free distribution from IRAs to certain public charities
--the deduction for teacher classroom expenses
--the "new markets" tax credit
--15-yr straight-line cost recovery for qualified leasehold improvements
--expensing of "Brownfields" environmental remediation costs

Among the energy tax incentives are:

--$10 billion over 10 years for clean energy production incentives
--$2.7 billion over 10 years for transportation and domestic fuel security provisions
--$4.3 billion over 10 years for energy conservation and efficiency provisions