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Congressional Update - Focus on Debt Ceiling Negotiations

July 19, 2011

Negotiations on a deficit reduction package to accompany the upcoming vote to raise the debt ceiling have consumed most of the oxygen in Washington, DC over the past several weeks. After five days of meetings at the White House that yielded little substantive results but plenty of partisan rhetoric, President Obama gave House and Senate leaders time off from formal meetings on July 15 in order to return to their caucuses and figure out a concrete plan.

With only two weeks until the August 2 deadline – the date at which Treasury Secretary Timothy Geithner has repeatedly stated that the nation will begin to default on its financial obligations – the President announced late last week: “It’s decision time.” And earlier today, the so-called Gang of Six released their plan [click here] which would cut the deficit by $3.7 Trillion over 10 years with three dollars in cuts from discretionary or mandatory spending for every dollar of revenue.

In other news, the following also occurred on Capitol Hill and in the Administration:

  • The House continued its steady pace on Fiscal Year (FY) 2012 appropriations, completing floor action on the Energy and Water Development bill. At the committee level, the full Appropriations Committee completed action on the Commerce-Justice-Science and Legislative Branch bills last week – bringing the total to nine of the 12 annual bills reported out of committee thus far;
  • In the Senate, floor consideration on the upper chamber’s first appropriations bill – Military Construction-Veterans Affairs – is underway;
  • The Defense Department released its cyber security plan on July 14. The strategy was presented by William Lynn, Deputy Defense Security who said that the plan will use sensors, software and special signatures, or lines of code, that detect and stop intrusions before they affect operations. Lynn also revealed that in March, the Defense Department discovered that a foreign intelligence service had hacked into a defense contractor’s system and stolen 24,000 computer files related to a weapons system under development. Lynn did not reveal the identity of the contractor, but said that this was one of the largest known cyber attacks targeting the U.S. military and that the Pentagon was reviewing whether the weapons system needed to be redesigned; and
  • On July 18, the Financial Stability Oversight Council (FSOC) met in Washington, DC. The meeting marked almost one year since the Dodd-Frank Act became law, and members of the Council took time in their opening statements to acknowledge what they viewed as positive steps toward reform taken as a result of the legislation. The Council also approved publication of a rule that would allow it to identify which financial market utility (FMU) entities will be designated as “systemically important” and therefore be subject to risk management standards and closer scrutiny by regulators, as additional safeguards for the market. The Council approved a Notice of Proposed Rulemaking on FMUs in March.

THE OPTIONS

Throughout last week, President Obama reiterated that ideally he would like to reach a compromise on a large-scale debt reduction deal. A combination of spending cuts and revenue increases, the plan would cut $4 trillion from the federal deficit over the next decade.

However, with the release of the Gang of Six framework today, a strong bipartisan majority in the Senate has expressed support for a long-term solution that seemed unattainable as recently as last week.  The plan would cut around $3.7 Trillion from the baseline deficit over the next ten years, stabilize the publically held debt by 2014, reduce the amount of debt held by the public to 70% of GDP by 2021, and impose strong new budget enforcement mechanisms.  While many of the details are left to be legislated in the future, the framework includes a downpayment of $500 billion in cuts right away.  Of note on the tax side, the framework would eliminate the Alternative Minimum Tax and reduce marginal income tax rates.

 

 

While momentum will most likely carry the Gang’s work through the Senate, its fate in the House of Representatives is far from certain.  With more than 240 members having signed pledges not to increase taxes it is unclear how even this plan, which modifies and eliminates certain tax breaks, can get the 218 votes needed for passage. 

After the week’s negotiations made it increasingly evident that House Republicans would not accept any tax increases as part of a final package, less ambitious plans began to emerge. Notably, Senate Minority Leader Mitch McConnell (R-KY) announced the beginning stages of a contingency plan to allow the debt ceiling to be raised, should the bipartisan talks break down and the nation come closer to the risk of default on August 2. The plan would cede congressional power to the White House in a dramatic manner, by allowing the debt ceiling to be raised by President Obama without requiring accompanying spending cuts. While Congress could reject the President’s increase, it would then take a two-thirds majority vote to override an expected veto of such a rejection.

Working behind closed doors late in the week and through the weekend, McConnell and Senate Majority Leader Harry Reid (D-NV) have been ironing out the details of such a contingency plan that would be able to gain enough support in the Republican-controlled House. The plan could take agreed-upon discretionary spending cuts (likely in the neighborhood of $1.1 trillion over 10 years) and attach them to a proposal that would give the President the authority to raise the debt ceiling in three increments. To address House Republican concerns, the plan could also include the creation of a bicameral panel that would make long-term deficit reduction recommendations that would be voted on in each chamber.

The plan is expected to allow for the $2.4 trillion debt ceiling increase that would be needed to cover the nation’s debt needs through 2012.

At the same time, both chambers are expected to take symbolic votes this week on House legislation – H.R. 2560 – known as “cut, cap and balance.” The measure would cut and cap federal discretionary and mandatory spending and would only increase the debt ceiling if Congress also submits a constitutional amendment to balance the budget to the states for ratification. The measure is not expected to pass, but is a step to alleviate concern among conservative House Republicans.

POTENTIAL CUTS AND THEIR IMPACT

Even without the final details in place, specific spending cuts – particularly those that will affect the healthcare industry – are beginning to become clear. During the previous bipartisan, bicameral debt reduction talks led by Vice President Biden, the negotiators identified more than $350 billion in potential cuts to healthcare, and many lawmakers are privately stating that the situation could only get worse for hospitals and other Medicare providers.

Such provisions may include (but not be limited to) the following cuts over the next decade:

  • $100 billion in savings by reforming the way in which the federal government pays states for Medicaid coverage;
  • $14 billion in savings by reforming Medicare payments to rural hospitals;
  • $14 billion in savings by making adjustments to Medicare’s graduate medical education (GME) and indirect medical education (IME) programs;
  • $50 billion in savings by changing payments and cost-sharing for skilled nursing facilities and home health;
  • Up to $16 billion in savings by reforming Medicare payments to clinical laboratories and related cost-sharing; and
  • More than $3 billion in savings by changing the payment structure for Medicare Part B drugs.

NEXT STEPS

We continue to monitor the delicate debt ceiling situation and will bring you updates as developments occur and the process moves forward. We also continue to monitor other news from Capitol Hill. As always, please contact a member of our team if you have questions or need additional information.

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