February 26, 2007

CONGRESS FACING ACTION ON WAR SUPPLEMENTAL AND '08 BUDGET

The next five weeks of congressional session, before Congress adjourns for the Easter Recess, will see intense budget activity on: (1) the FY'07 War Supplemental ; and (2) drafting the FY'08 Budget Resolution.

WAR SUPPLEMENTAL:  The war supplemental, transmitted to Congress along with the '08 Budget on February 5th, requests an additional $99.6 billion for the current year, including $93.4 billion for the Pentagon.  In addition to appropriating most of the war funding for the current fiscal year, House Defense Appropriations Subcommittee Chairman Murtha could use the vehicle to attempt to rein in the President's surge strategy.

FY'08 BUDGET RESOLUTION:  The House and Senate Budget Committees will draft their respective Budget Resolutions in mid-March based on:

• a review of the President's FY'08 requests (CBO will release in early March their "Analysis of the President's Budgetary Proposals for Fiscal Year 2008" using their own set of economic assumptions and estimating techniques—usually referred to as CBO's "re-estimate of the President's Budget");

• testimony received from senior Administration officials on the President's policy proposals;
  
• "views and estimates" received from the other committees of Congress on programs under their respective jurisdictions;  and
• testimony received from a broad range of interest groups and policy analysts.

House Budget Chairman John Spratt (D-SC) and Senate Budget Chairman Kent Conrad (D-ND) face a difficult task crafting this year's Congressional Budget Resolution because, like the President, they have committed to producing a "balanced budget by 2012," despite the following hurdles:

• CBO's more conservative economic assumptions project lower revenue collections than the President's Office of Management and Budget ($155 billion lower in 2012 alone).

• Democrats have criticized the President for not including a "fix" to the Alternative Minimum Tax which could cost $318 billion by 2012. (It is estimated that the AMT will impact 26.5 million taxpayers in 2008, up from 4 million in 2006, absent reforms that go beyond the Administration's proposed one-year AMT patch for tax year 2007).  The new PAYGO rule in the House raises the bar even higher since the costs of the AMT fix will need to be fully offset. (See our Budget Backgrounder on the resumption of PAYGO budgeting.)
• Democrats are unlikely to accept the President's very tight limits on total non-defense discretionary spending: 
• President's proposed discretionary outlays for FY '08 through '12 (in billions of dollars):

       FY'08: $1,113.8
       FY'09: $1,098.5
       FY'10: $1,056.2
       FY'11: $1,044.7
       FY'12: $1,038.8

• Over 5 years, non-defense discretionary spending would drop from 17.6% of the budget in 2008 to 15.2% of the budget in 2012, and from 3.5% of GDP to 2.8% of GDP.


• Democrats will be under intense political pressure to reject, at least in part, the President's proposed cuts in Medicare and Medicaid benefits .
• While the President's Budget does not request any war funding beyond mid-2009, Senate Budget Chairman Conrad requested from CBO (and may feel compelled to use, at least to some degree) war funding projections for the next 10 years under two different scenarios . Assuming deployed troops are reduced to 30,000 by 2010, the CBO projects 5-year war funding needs that are $116 billion higher than requested by the President.  Assuming a slower reduction in troop levels to 75,000 by 2013, CBO projects 5-year war funding needs $357 billion higher than requested by the President.  

CBO War Funding Letter to Chairman Conrad

On the flip side, Democrats' task will be eased if they decide not to extend (or to extend in a scaled back form) the 2001 and 2003 tax cuts that expire at the end of 2010.

CBO RELEASES BUDGET OPTIONS REPORT:

CBO Budget Options Books

FY'08 BUDGET PROCESS: STEP-BY-STEP™

• Week of February 26:  House and Senate Authorizing Committees and Appropriations Subcommittees continue hearings on the President's Budget requests for FY'08 and begin work on  "views and estimates" for transmittal to the Budget Committees.

• February 27: Senate Appropriations Full Committee hearing on FY 2007 Supplemental (Defense Secretary Gates and Secretary of State Rice)

• February 28: FED Chairman Bernanke at House Budget Committee.

• March 1: Senate Intelligence Committee hearing on FY'07 war supplemental.

• March 1: Senate Finance Committee hearing on Medicare physician payments  (a major budget issue this year is whether to override an automatic cut in Medicare physician payments that will go into effect in '08 without legislative action).

• March 1: Senate Budget Committee hearing on the defense budget.

• Early March: CBO releases its Analysis of the President's Budgetary Proposals for Fiscal Year 2008.

• March 7:  House Appropriations Committee markup of FY 2007 Supplemental Appropriations.

• March 12: House Budget Committee markup of FY 2008 Budget Resolution. 

Context: The Budget Resolution is a concurrent resolution of the Congress that establishes a general framework for subsequent congressional action on spending and revenue bills. It does not require presidential signature and does not become law.  A Budget Resolution includes four standard components and two optional components.  Standard in all budget resolutions are the following:

1. Budget totals;
2. Total spending allocated among budget functions;
3. Allocation of spending among the congressional committees (by jurisdiction); and
4. Budget enforcement provisions.

Optional Budget Resolution components (though very important when they are used) are:

5. Budget Reconciliation instructions (that place entitlement and tax changes on a filibuster-proof legislative fast-track); and
6. Reserve Funds (that automatically adjust budget totals and committee allocations to accommodate new spending, provided the costs are fully offset elsewhere in the budget).

SCHIP FUNDING KEY ISSUE FOR GOVERNORS

Governors' Letter

SCHIP was established in 1997 to help states provide health coverage to uninsured children who are not eligible for Medicaid. At the time of its enactment, the Congress appropriated $40 billion for a 10-year period, making it the largest Federal expansion of health coverage since the passage of Medicaid in 1965.            

SCHIP provides health coverage to children in families whose incomes are low, but somewhat higher than Medicaid's very tight income eligibility limits. Generally, SCHIP covers children in families up to 200% of the Federal Poverty Level (FPL), though some states select upper eligibility limits above or below 200%. The program operates like Medicaid, with joint Federal-state funding and state administration of the program. However, the Federal reimbursement rate for SCHIP is somewhat higher than in the Medicaid program, ranging from 65% to 83% (compared to Medicaid's 50% to 77%). 

SCHIP is not an individual entitlement like Medicaid. Rather, it is an appropriated grant program under which states are entitled each year to a certain percentage of appropriated SCHIP funds. SCHIP funds are apportioned among the states using a formula.       

The legislation authorizing the SCHIP program will expire at the end of FY 2007. 

OMB DIRECTIVE ON '07 EARMARKS:

Before Congress left for the President's Day recess, the Senate completed action on H.J.Res. 20, the FY'07 Funding Resolution, and the resolution was signed into law by the President on Thursday, February 15th (P.L. 110-5).  Following through on a December announcement by Appropriations Chairmen Byrd and Obey, section 112 of the resolution states: "Any language specifying an earmark in a committee report or statement of managers accompanying an appropriations Act for fiscal year 2006 shall have no legal effect with respect to funds appropriated" in the resolution. 

While committee report language by definition has no legal effect, it has nevertheless been the longstanding practice of agencies to diligently implement the earmarks in report language because of the clear expectation of congressional appropriators that the non-statutory earmarks be fully implemented.  Section 112 of the funding resolution is therefore intended to make clear to agencies the appropriators' intent that during FY'07, contrary to usual practice, agencies are not expected to heed the dictates of report language earmarks.         

OMB wasted no time instructing agencies to ignore '07 report language earmarks. The same day the President signed the bill (February 15th), OMB Director Portman issued a memorandum to all departments and agencies directing that "unless a project or activity is specifically identified in statutory text, agencies should not obligate funds on the basis of earmarks contained in Congressional reports or documents, or other written or oral communications regarding earmarks…(and) no oral or written communication concerning earmarks shall supersede statutory criteria, competitive awards, or merit-based decision-making…."

OMB Memorandum