The United States faces unprecedented spending problems due to decades of political neglect, which has produced a nearly $18 trillion national debt and long-term liabilities of over $70 trillion. Such historic fiscal crises are the direct result of the federal government promising and spending too much of the people’s money beyond what they collect in revenue. These problems cannot be marginalized or sugarcoated, but in the meantime, the government must carry out basic functions. Any budget that is passed must balance these needs.
Purpose of the Deal
As the government shutdown in October came to a close, a provision in the final agreement tasked a bicameral conference to agree on a federal budget. The original concept was to finalize topline funding levels in discretionary spending for FY2014. When Congress passes a budget, they are focused only on areas of spending they directly control (discretionary), and thus any deal was never going to affect major debt drivers (mandatory). The sole purpose of any agreement was to determine how much money the Pentagon and other federal agencies could spend for one year.
Despite political controversies that surrounded the process, the budget conference could not have addressed larger issues such as Social Security, Medicare, Medicaid, the Affordable Care Act, tax reform, economic growth, or immigration. Similarly, the separate defense authorization bill offered a greater chance to address military spending policy in depth.
The objective was to pass a budget that would give fiscal clarity to Congress, and certainty to the business community that the federal government can balance a checkbook. It’s hard to remember the last time we had a federal budget because of all the gridlock, but it is important. Federal agencies need to know how much they can spend, who they need to contract and open bids to, and what services they can provide as tasked by Congress. A major purpose of the budget conference is to ensure stability.
However, because the 2011 Budget Control Act placed spending caps and sequester cuts on the discretionary budget, the conference had to decide if they should maintain or change those rules. Conservative defense hawks had concerns about the “too fast too soon” Pentagon cuts, and progressives hated, even more, cuts to public investment programs.
Sequestration has been the most effective rule in decades to control federal spending because it mandates cuts and slows growth over ten years, but the sequester was undoubtedly imperfect and did not address large mandatory spending drivers. If, as some including Representative Ryan claimed, that the sequester could be replaced with more substantive spending reform, losing it in the deal might have been acceptable. However, chances of that situation actually happening were next to zero, so the fact that Ryan-Murray spent far more than sequester levels is worthy of serious critique.
What’s in the Deal
The agreement has two main features: provide budget certainty and give short-term sequester “relief.” The deal secures these arrangements for two years:
- Topline Budget levels set for FY2014 at $1.012 and FY2015 at $1.014
- $63 billion or 28% of sequester will be rescinded
- $85 billion in new revenues and spending cuts will offset sequester relief
- Provides an extra $23 billion in deficit reduction
The BCA set funding levels for FY2014 at $967 billion, which is $45 billion less than the bipartisan deal. The FY2015 topline is $18 billion above the BCA level. The ultimate effect of changing both topline numbers is to increase spending authorization by $63 billion for two years. However, actual appropriations and total outlays could be less than the authorization amount, meaning the topline figures operate as discretionary spending ceilings.
The deal increases FY2014 non-defense spending from $468 billion to $492 billion, and then slowly grows to $493 billion by 2016. On the Defense side, sequester relief increases from $518 billion to around $520 billion. Defense spending would rise modestly to $523 billion by 2016. This means that for two years, all discretionary funding will be held to almost identical levels. Spending cuts are always preferred to slower spending growth, but at least there is spending control contained within this deal.
The value of budget certainty over spending cuts today will vary among policy analysts; however, the major components of this deal were how to offset the increased spending levels. Following is a breakdown of specific provisions in the agreement by their effect on revenue or spending.
1. Federal employee pension fee: Workers hired during 2013 will contribute 3.1% from their paychecks as opposed to .8% for those hired before. In addition, all new hires after this year will contribute 4.4% to their federal pensions.
2. New TSA fees for post 9/11 security measures: User fees for air travelers will increase to a flat one-way rate and establish a new $5.60 cap for an individual passenger.
3. Pension Benefit Guarantee Corporation fee: Raises fees that corporations and other private entities pay to the federal government to guarantee pension benefits for their employees.
4. Extends Customs fee collection: Extends merchandise processing fee and the Customs’ Office collection authority into 2023, which is beyond an original 2021 expiration.
5. Farmer conservation fee: Establishes a new fee owners of private lands must pay to the U.S. Department of Agriculture for providing public conservation assistance.
6. Modify student loan rules: Eliminates non-government guaranty agencies’ shares in retaining outstanding loans, and increases the share returned to the federal government. In addition, there is a reduction in maximum fee that an agency can charge borrowers to cover the administrative costs.
New Spending Cuts
1. Extends the sequester: The BCA mandated sequester will continue through FY2023 with savings derived from an additional 2% reduction in Medicare spending.
2. Slows veteran cost of living adjustment: Retired veterans under the age of 62 will incur reduced cost of living adjustment rate (COLA) equal to inflation minus one percent. Once a retired veteran reaches 62 their COLA resumes at the normal statutory rate.
3. Mandates use of TOP: States are now required to use the Treasury Offsets Program (TOP) to recover overpayments across federal spending programs such as unemployment insurance. Currently, this system is optional for states.
4. Strengthen Medicaid third party liability: States can delay paying certain Medicaid claims as well as other provisions when a third party would be responsible. This provision also allows states to better recover payments from liability settlements.
5. Restricts access to the Death Master File: The DMF has been used by crooks and cheats over the years to rake in fraudulent Social Security and Medicare claims. This provision toughens accessibility to the DMF to prevent fraud and abuse.
6. Change mineral leasing agreements: Reduces federal payments to states that were traditionally reimbursed for leasing on federal lands, and makes states pick up more management costs for mineral leases.
7. Resource Royalty Changes: Amends the rules that determine the amount of interest paid on overpayments of oil and gas royalties from federal leases.
8. Caps contractor reimbursement: Government contractors now have a much reduced reimbursement cap of $487,000 from the previous $800,000 level .
9. Cancels unobligated balances: The Forfeiture Funds in both the Justice and Treasury departments will be eliminated. Also, unobligated balances in the Strategic Petroleum Reserve are rescinded as is their authority to acquire oil using royalty-in-kind payments from companies that develop oil and gas resources under federal leases.
10. Changes EITC benefits: Far more information will be available to the Treasury department in determining earned income tax credits to inmates, which will increase revenues and lower benefit payments in that program.
11. Repeals research spending: Eliminates direct spending provisions in a 2005 energy research bill through 2014.
12. Ends mandatory payments to student loan providers: Through 2019, nonprofit organizations that service student loans would no longer receive federal payments. The loans would still need to be serviced; however, which means that for every mandatory cut in this area the government will need new and equal discretionary appropriations.
13. Add a “self-plus-one” option for federal health plans: Both active and retired federal workers could enroll in a two-person plan within the Federal Employees Health Benefits (FEHB) program. This would be in addition to the current self-plus family option. For couples without dependent children cost on the system would be lower.
The above revenue and spending changes all affect mandatory spending categories. Every dollar in sequester relief comes from the discretionary side and is being offset by savings in parts of the budget responsible for driving most of the national debt. While these offsets are minor in comparison to big-ticket entitlement problems, they are a good start to tackling “autopilot” spending.
What’s Not in the Deal
Since the purpose of the agreement was narrow and never intended to fix every fiscal problem in America’s checkbook, it shouldn’t be surprising that certain programs were exempt from the discussion. Below is a brief analysis of what still needs to be done with the nation’s major spending hurdles going into the New Year:
Federal Health Programs
As the main culprit for the government shutdown, it’s not too shocking that the Affordable Care Act was left outside of budget negotiations. It’s certainly getting its day in the court of public opinion, and thus probably on its own track when it comes to reform. However, federal health programs represent the fastest growing and soon the most expensive portion of the federal budget.
The agreement contained small reforms to Medicaid administration but left that program and Medicare virtually untouched. 2014 could prove an interesting year for federal health reform as the public better understands the consequences of the ACA. Tying Medicaid and Medicare reform into the conversation is a great opportunity to address bipartisan solutions in the following areas:
- Reimbursement reform for providers
- Modernizing beneficiary cost-sharing
- Fixing the Sustainable Growth Rate (SGR) also called the “doc-fix”
- Better coordinating care for dual-eligibles
- Incorporating President Obama’s Medicare cuts
- Eliminating Bailout language from the ACA
The Social Security program is the largest portion of the federal budget and is set to default on promised benefits to seniors within two decades. Politicians and administrators know exactly what levers to pull and buttons to push to preserve and reign in this old and neglected system. However, progress in 2014 on controlling costs in this area is highly unlikely especially with all the attention paid to health care.
Although, with government-by-crisis potentially behind us, there may be an opportunity to start fixing Social Security one piece at a time. The chance is still small, but a few bipartisan options could produce savings:
- Change the COLA to the more accurate Chained CPI
- Means test or income-relate benefit payments to wealthy Americans
- Increase the benefit formula calculation of years worked from 35 to 38
- Eliminate disincentives for the elderly to continue working
Treasury estimates that the United States will hit the debt ceiling in late winter/early spring of 2014. The government shutdown established this new window, but the fact that the country keeps hitting the limit every few months means that our deficits are not dropping fast enough to control the debt. The debt ceiling will be the most significant fiscal priority as the New Year unfolds.
Many progressives in Congress lament that the 13th extension of long-term unemployment benefits was not included in the Ryan-Murray deal. Extra spending in this area may be extended on a separate track by the end of the month, but Democrats are going to have to develop a keen argument to sustain this program. If they are successful, we should demand offset spending for every dollar UI benefits are extended.
Size and function of bureaucracy
The rollout of the ACA has sparked fierce criticism of federal bureaucratic effectiveness in its general operations, and how they contract outside help. The President intimated a need to consolidate and change the rules for federal administrators, and we should absolutely grasp at that charge. A liberal President will have more success in shrinking the actual size and operations of the various agencies than a conservative one. Major components of such a change include consolidating similar programs and responsibilities across departments, modernizing the staff to supervisor ratio, reforming pay and benefit rules, overhauling the contracting process, and instituting new accountability measures.
The Ryan-Murray agreement is a simple budget document that provides topline numbers for budget certainty over two years. Not living under quarterly continuing resolutions for a while could create stability within Congress and across government, assuming Congress finishes the appropriations process. Of course, the tradeoff was a relaxation of sequestration cuts that undermines the integrity of the mandated spending reductions. However, it’s important to remember that we are negotiating over already lowered levels, which makes sequestration partially a new baseline.
But the spending caps were relaxed by $63 billion and it is indeed worrisome that the same Congress that passed the BCA willfully undercut it. How can future Congresses be expected to abide by the cuts if the fathers of new fiscal restraint will not?
On the other hand, the relief only constitutes 28% of the sequester over the next two years with 92% of the BCA still going into effect. In addition, the deal gives Congress legitimacy in solving problems at a basic level, which secures confidence for negotiations over big ticket items later. If the legislative branch is too intensely gridlocked to even agree on funding levels, how can we have any surety in their ability to tackle Social Security and the ACA? The machine has to work before it can act, and basic government funding sets up that process. The deal could work to establish much-needed credibility in Congress to solve larger problems, and develop a sense of trust among members that they can negotiate in good faith. Moreover, the President remained outside of the deal for the entire process, thus weakening White House strength and contribution integrity later on.
The positive aspects of the deal create a tradeoff where, in an ideal world, legislators can dedicate two years on reducing spending of the major drivers of national debt. The deal allows basic functions to continue that gives some certainty to the economy. In the meantime, federal health programs, social security and retirement, the Pentagon, the safety net, and new rules to control federal spending should be on the table. With enough fiscal discipline and economic growth, the country could be in much better shape to pursue prosperity without the specter of national debt haunting each decision.