February 2011

Spotlight on the States: Florida

This week, our Spotlight on the States series heads down south to beautiful and sunny Florida, a state that has faced its share of budget woes. The state currently faces a $3.6 billion budget deficit (five percent of their 2010 budget) and has an unemployment rate of 12 percent, the third-highest in the country behind Nevada and California.

In an effort to get Florida's government "back to its core functions", as he put it, Gov. Rick Scott (R) recently proposed a budget that he described as “Florida’s first jobs budget”. His proposed budget totals $65.9 billion and is a mixture of both spending cuts and tax cuts. The spending cuts total $4.6 billion (compared to last year's budget) and the tax cuts total $4.1 billion over the next 2 years.

The following are the 4 agencies with the largest cuts to their funding (compared to last year's budget):

 

Largest Budget Cuts
Savings
Education $3.3 billion
Community Affairs $668 million
Justice Administration $490 million
Transportation $442 million

 

As you can see, a large bulk of the current year's cuts (slightly above 75 percent) come from Education. It's also important to note that while many departments will see significant cuts to their funding, some agencies' funding was increased; for example, the Agency for Health Care Administration's funding increased by $1.2 billion.  

Other highlights of the proposal include:

  • $1.98 billion in savings from "Operational and Programmatic Efficiencies"
  • Medicaid Reform that uses a federal waiver to transfer recipients into privately-run programs
  • Elimination of approximately 8,700 jobs state-wide (1,600 of those eliminations are within the Department of Corrections)
  • Reduction of corporate tax rate from 5.5 percent to 3 percent over next two years, with complete elimination by 2018
  • Reduction of property taxes by $1.4 billion over two years
  • $800 million towards “workforce innovation” (“economic development projects and incentives that promote job creation”)
  • A move to biennial budgeting

In his presentation of the budget proposal on February 7, Gov. Scott laid out his philosophy:

“Cutting taxes is essential to economic prosperity. We will be the best place in the world to live, work and play...So join me today as we set an example for the nation that you can in fact shrink government, return tax dollars to their rightful owners and create an atmosphere that creates new and better paying jobs.”

Florida lawmakers of both parties complained that the Governor's budget was "skimpy" on details, and some questioned the reasoning behind certain proposals. State Rep. Jose Diaz (R) expressed concern that all of the job cuts contained in the Governor's budget might not be justified by the amount of dollar savings they produce, and Rep. Kelli Stargel (R) said that renamed and revised budget categories made it difficult to tell "how the math adds up". State Senate Democratic leader Nan Rich contended that "the tentacles of this budget will reach the most vulnerable people in our state", and House Democratic leader Ron Saunder warned that the budget "would further stagnate Florida's economy and threaten public safety". There are also reports of some Floridians around the state planning protests of the budget proposal, as well as a group of teachers in Jacksonville protesting the cuts to education.

Others have come out in support of Gov. Scott's budget. Many Republicans, including those in the State House and Senate leadership, have praised the proposal for its focus on cutting spending and lowering taxes. House Speaker Dean Cannon (R) said, "The first and highest priorities of the Florida House are to cut government spending and not raise taxes. I am grateful that Governor Scott shares these goals."

Gov. Scott made headlines again recently when he refused $2.4 billion from the federal government that was supposed to fund a high-speed rail line connecting Tampa to Orlando, because of concerns with potential costs to the state and that ridership would not pay for the line's operating costs. Both Democrats and Republicans criticized Gov. Scott's decision to reject the money, and the Palm Beach Post reported that US Senator Bill Nelson (D-FL) is looking for ways to build the rail project without state government involvement.

The deadline for approving Florida's budget is April 30, and debate is sure to get interesting as the state legislature convenes in March.

‘Line’ Items: Of Brinkmanship and Statesmanship Edition

Shutting Down Versus Sitting Down – Congress returns to Washington this week after lawmakers spent last week back home. Just before leaving town the House of Representatives passed legislation funding the federal government for the rest of this fiscal year that slashes spending by about $60 billion compared to current levels. The steep cuts pushed through by House leaders drew a veto threat from President Obama, though that won’t be necessary as the bill stands no chance of making it past the Senate. The leadership there is countering with a proposal to cut spending by about $8.5 billion, which is not enough for those running the House. The political posturing will bring Washington to the brink of a government shutdown as the continuing resolution (CR) currently funding the government expires on Friday, March 4. Although a temporary CR will likely avert a shutdown this week, the two sides are not close to a final resolution. Meanwhile, a bipartisan group of senators is taking a decidedly different approach to confronting our fiscal challenges, sitting down together at the negotiating table towards a comprehensive fiscal plan based on the recommendations of the White House Fiscal Commission. And there was some awards show Sunday night too.

Standing Off – On Friday, the House Appropriations Committee unveiled a two-week CR that reduces spending by around $4 billion. The cuts come from earmark funding and areas the president identified for reductions or elimination in his budget. The House will vote on it as early as Tuesday, which will put the ball in the Senate’s court to either accept it or face blame for causing a government shutdown. While it appears that the temporary measure has the support to pass both chambers, it only buys a little extra time for Congress. Although lawmakers agree that they want to avoid a shutdown, the parties are still far apart on how extensively spending should be cut.

Standing Up and Standing Apart – The nation’s governors presented a unified front in calling for Washington to avoid a federal government shutdown (and the loss of federal funds), yet they diverge on approaches to their own state budgets. We are following how the states are dealing with their fiscal challenges in our Spotlight of the States blog series. The budget showdown in Madison, Wisconsin continues to make the one in Washington, DC look tame.

Standing By – As the fighting over spending for Fiscal 2011 drags on, the FY 2012 budget awaits action. Appropriators on both sides of Capitol Hill will get started this week with hearings examining the budget requests of various departments and agencies (see partial schedule below).

Senate Reviews State of Play on Tax Reform – This week the Senate Finance Committee will kick off a year-long series of hearings exploring tax reform. The first hearing on Tuesday – “How Did We Get Here? Changes in the Law and Tax Environment Since the Tax Reform Act of 1986” – will look at how a plethora of tax breaks crept back into the tax code (and made it more complex) after the last major reform. CRFB has ideas for reforming these tax expenditures here.

In Need of a “King’s Speech” – The Oscar victory of the movie “The King’s Speech” underscores the need for such a moment now for this country. We are in need of a leader who can spell out the fiscal challenges ahead and show us a way through.

Will Debt Cause a “Black Swan” Event? – Black swans were once thought to be nonexistent, until they were discovered in Australia. Long before the movie, many have been on the lookout for the next Black Swan event – an unforeseen, high-impact episode that could change the world. Some fear that such an event could derail the global economy and more than a few believe that mounting debt could somehow trigger such an occurrence. The ongoing European debt dilemma provides fodder for such a view. This week Portugal will continue its attempts to avoid an EU bailout with a simultaneous bond buyback and Treasury bill sale.

Key Upcoming Dates

February 28 – Commerce Department releases January consumer spending data.

March 1 – House of Representatives may vote on a two-week continuing resolution (CR) to fund the federal government.

March 1 – House Appropriations Commerce, Justice, Science, and Related Agencies Subcommittee hearing on the FY 2012 Budget Request for the Department of Justice with Attorney General Eric Holder at 9 am.

March 1 – Senate Finance Committee hearing on "How Did We Get Here? Changes in the Law and Tax Environment since the Tax Reform Act of 1986" at 10 am.

March 1 – House Appropriations Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Subcommittee hearing on the FY 2012 Budget Request for the Department of Agriculture with Secretary of Agriculture Tom Vilsack at 10 am.

March 1 – House Appropriations Financial Services and General Government Subcommittee hearing on the FY 2012 Budget Request for the Internal Revenue Service with IRS Commissioner Douglas Shulman at 10 am.

March 1 – Senate Banking, Housing & Urban Affairs Committee hearing on the Semiannual Humphrey-Hawkins Monetary Policy Report to Congress with Federal Reserve Chairman Ben Bernanke, 10 am.

March 1 – Senate Environment and Public Works Committee hearing on the FY 2012 Budget Request for the Federal Highway Administration with Transportation Secretary Ray LaHood at 10 am.

March 1 – Senate Appropriations Defense Subcommittee hearing on “The Impacts of a Long-Term Continuing Resolution on the Department of Defense and the Fiscal Year 2012 Budget Request” at 10:30 am.

March 1 – House Appropriations State, Foreign Operations, and Related Programs Subcommittee hearing on the FY 2012 Budget Request for the Department of State and Foreign Operations, with Secretary of State Hilary Clinton, 2 pm.

March 1 – Senate Commerce, Science and Transportation Committee hearing on the FY 2012 Budget Request for the Department of Transportation, with Transportation Secretary Ray LaHood, 2:30 pm.

March 1 – Institute for Supply Management manufacturing index for February released.

March 2 – Senate Foreign Relations Committee hearing on “National Security & Foreign Policy Priorities in the FY 2012 International Affairs Budget” with Secretary of State Hilary Clinton at 9:30 am.

March 2 – Senate Energy and Natural Resources Committee hearing on the FY 2012 Budget Request for the Department of Interior, with Secretary of the Interior Ken Salazar, 10 am.

March 2 – Senate Budget Committee hearing on the FY 2012 Budget Request for the Department of Energy, with Energy Secretary Steven Chu, 10 am.

March 2 – Senate Appropriations Homeland Security Subcommittee hearing on the FY 2012 Budget Request for the Department of Homeland Security, with DHS Secretary Janet Napolitano, 10 am.

March 2 – House Appropriations Defense Subcommittee hearing on the FY 2012 Budget Request for the Depart of Defense with Defense Secretary Robert Gates and Joint Chiefs of Staff Chairman Admiral Michael Mullen at 10 am.

March 2 – House Committee on Financial Services hearing on the Semiannual Humphrey-Hawkins Monetary Policy Report to Congress with Federal Reserve Chairman Ben Bernanke, 10 am.

March 2 – Senate Appropriations State, Foreign Operations Subcommittee hearing on the FY 2012 Budget Request for the Department of State and Foreign Operations, with Secretary of State Hilary Clinton, 2 pm.

March 2 – House Appropriations Homeland Security Subcommittee hearing on the FY 2012 Budget Request for the Department of Homeland Security, with DHS Secretary Janet Napolitano, 2 pm.

March 2 – Senate Environment and Public Works Committee hearing on the FY 2012 Budget Request for the Environmental Protection Agency with EPA Administrator Lisa Jackson at 2:30 pm.

March 2 – The Federal Reserve releases its latest Beige Book on regional economic conditions.

March 3 – House Appropriations Interior, Environment, and Related Agencies Subcommittee hearing on the FY 2012 Budget Request for the Environmental protection Agency, with EPA Administrator Lisa Jackson, 9:30 am.

March 3 – House Appropriations Commerce, Justice, Science, and Related Agencies Subcommittee hearing on the FY 2012 Budget Request for NASA, with NASA Administrator Charles Bolden, Jr., 10 am.

March 3 – Senate Budget Committee hearing on the FY 2012 Budget Request for the Department of Transportation, with Transportation Secretary Ray LaHood, 10 am.

March 3 – Senate Appropriations Transportation/HUD Subcommittee hearing on the FY 2012 Budget Request for the Department of Housing and Urban Development, with HUD Secretary Shaun Donovan, 10 am.

March 3 – House Natural Resources Committee hearing on the FY 2012 Budget Request for the Department of the Interior, with Interior Secretary Ken Salazar, 10 am. March 3 – House Homeland Security Committee hearing on the FY 2012 Budget Request for the Department of Homeland Security, with DHS Secretary Janet Napolitano, 10 am.

March 3 – Senate Appropriations Legislative Branch Subcommittee hearing on the FY 2012 Budget Request for Architect of the Capitol and the Office of Compliance, 2:30 pm.

March 3 – Weekly unemployment claims data released by the Department of Labor.

March 3 – Final estimate on 4th Quarter 2011 Productivity from Labor Department.

March 4 – February report on the employment situation from the Labor Department.

March 4 – The current continuing resolution (CR) funding government operations expires. Congress must adopt spending bills funding the federal government for the rest of FY 2011 by then or pass another stopgap measure.

March 10 – CRFB event - "The Human Side of the Fiscal Crisis"

April 5 - May 31 – Period in which Treasury Secretary Geithner says the U.S. will likely reach the debt ceiling.

Short-Term CR Looking More Likely

UPDATE 3/1: House passes two-week CR by vote of 335-91. Senate Majority Leader Harry Reid (D-NV) says that the bill will be taken up in the Senate and is likely to be passed within the next 48 hours.

With the current CR for FY 2011 coming to an end March 4, both parties in Congress are issuing short term plans to avoid a government shutdown, or at least to have political cover in case the government is shuttered.

After House Republicans passed their $61 billion spending cut budget last week, Senate Democrats offered a 30-day CR at current levels, which was shot down immediately by Republicans in the House. Now, two more plans are being considered. House Republicans unveiled a short-term two-week CR to fund the government, which would include $4 billion in cuts over that period. This is pro-rated to be consistent with the $61 billion spending cut bill for remainder of the fiscal year, although it only includes a select portion of cuts from the larger plan.

At the same time, Senate Democrats have also been working on a seven-month spending bill to fund the government for the remainder of the fiscal year. Although the exact amount of funding is still unknown, it is reported to represent a compromise solution, including some of the $15 billion in discretionary terminations and reductions from President Obama's FY 2012 budget -- only bumped up into FY 2011 -- and the $8.5 billion in earmark funding that has also been looked at by Republicans.

However, a consensus is emerging that the Senate will take up and likely pass the two-week CR developed in the House. That bill includes $1.24 billion in cuts achieved by terminating eight programs, all of which had been identified as terminations and reductions in the President's FY 2012 budget. These include election assistance grants, broadband loan subsidies, the Smithsonian Legacy Fund, four Department of Education programs, and additional spending for the Highway General Fund. Additionally, $2.7 billion would be saved by rescinding money designated in earmarks in the previous CR, passed in December. This is an interesting development because previous attempts to eliminate earmarks have been criticized for not doing anything to reduce spending. This would actually strip the previous bill of funding by the amount of earmarks designated for rescission.

The House is expected to consider and pass this legislation tomorrow. Then it will be sent to the Senate. Republicans in the House have sent a clear message that they expect this bill to be passed unamended to preserve the amount of cuts they have identified. Senate Democrats have signaled that this may be acceptable. A spokesman for Senate majority leader Harry Reid issued a statement, where he said:

"We are encouraged to hear that Republicans are abandoning their demands for extreme measures like cuts to border security, cancer research and food safety inspectors and instead moving closer to Democrats’ position that we should cut government spending in a smart, responsible way that targets waste and excess while keeping our economy growing.

“The plan Republicans are floating today sounds like a modified version of what Democrats were talking about. We’re glad they think it’s a good idea, but we should keep our focus on what we need to do to cut spending and keep our economy growing in the long-term. If we need a little more time to agree on a responsible path forward, we should pass a short-term CR for no longer than the next month. But the ‘my way or the highway’ approach Republicans have been taking in the past only signals a desire for a government shutdown that our country can’t afford. We hope this is a sign that they have abandoned it and will work with Democrats moving forward.”

Overall, these developments are positive, in that they may avert a government shutdown. However, this only reinforces how broken our budget process is. So far, FY 2011 has had no budget -- just funding at 2010 levels -- and now a portion or all of the rest of the year will be funded by a series of new, short-term CRs. All of these budget debates have occurred while the FY 2012 budget and our longer-term fiscal challenges (including tax and entitlement reform) should be taking top priority. Something must be done to fix this process, such as acting on the recommendations of the Peterson-Pew Commission on Budget Reform's report, Getting Back in the Black.

We hope for an increased level of bipartisan cooperation, as both sides will need to work together to tackle all of these pressing issues and get control of our unsustainable budget projections.

CNN MONEY EXCLUSIVE: Spending Cuts Aren't Enough. It's Time to Fix the Budget.

In her latest commentary for CNN Money, CRFB president Maya MacGuineas talks about the House Republicans' latest spending proposals, how they could affect the budget and the economy, and the need for more fundamental budget reform.

Click here to read the full article.

 

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Panel Discusses Prospects of Government Shutdown

On Friday, a panel discussion between Democratic and Republican staff directors of the House Budget Committee and CRFB president Maya MacGuineas focused on current budget negotiations and the likelihood of a government shutdown next week after the current CR expires on Friday March 4. Maya MacGuineas argued that lawmakers likely will not have time to agree on a solution in time to avoid a government shutdown.

Unfortunately, the video of the discussion is not able to be embedded, but you can check it out at C-SPAN here.

The 2011 Funding Level Debate Continues

Update: CBO released an estimate of H.R. 1 on Friday, Feb 25, puting total base discretionary budget authority at $1,026 billion. The table below has been updated. Additionally, Senate Democrats are working on a seven month spending package that reportedly would cut earmarks and use some of the President's proposed terminations and reductions for FY 2012.

As we get closer and closer to the March 4th expiration of the current continuing resolution (CR), lawmakers will either have to decide on funding levels for the remaining 7 months of the fiscal year or pass another short-term extenion--or, of course, risk a government shutdown. As we commented on earlier in the week, the House passed a spending package for the remainder of the year early Saturday morning, cutting funding by roughly $100 billion below the President's request and about $60 billion below the current CR. But given strong disgreements from congressional Democrats and the White House over these spending levels and the brief amount of time that lawmakers have until March 4 arrives, it doesn't look they'll be able to agree on a full spending package in time.

In light of this, Senate Democrats have called for continuing current funding levels in the short-term to give lawmakers more time to negotiate spending levels for the rest of the fiscal year. Recognizing that their spending package passed on Saturday will likely not get through the Senate or White House at this point, House Republicans have begun working on a short two week spending bill that would cut $4 billion off of the current CR--a prorated amount of cuts for two weeks based on the $61 billion spending cut package (based on enacted 2010 levels) passed on Saturday.

FY 2011 Funding Annual Budget Authority (billions) Amount Below CR Level
Amount Below President's Budget
President's 2011 Budget Request $1,128  -$41 $0
CR Funding Level* $1,087 $0 $41

House Passed Bill: H.R. 1

(and Short-Term Extension)

$1,026

$61

(Short-Term Extension: $4 billion)

$102

*Roughly equal to 2011 CR level of $1,091 billion.

As we've said before, the focus on domestic discretionary spending is too narrow. We will need comprehensive entitlement and tax reform too if we are to achieve fiscal sustainability. But discretionary cuts--and, more importantly, caps with enforcement mechanisms--can be a great way to start tackling future deficits, provided that we cut spending responsibly to give agencies, people, and the economy sufficient time to adjust.

MY VIEW: Barry Anderson

As the impacts of the economic recession continue to fade, serious debate on the direction of fiscal policy is finally beginning with very different views on the timing and size of near-term budget cuts leading the way.  The President and his supporters are generally arguing to postpone cuts--or at least minimize them--until the economy picks up more steam.  Congressional Republicans argue that we already have far too much debt and that spending should be cut now with even more cuts in the years ahead.  Some have even suggested that the precarious nature of State and local government finances argues for new Federal assistance for them. Whatever the merits of these positions, shouldn’t we at least be informed of how much we have already spent to mitigate the impacts of the recession and most importantly how much remains to be spent?

To address these and other questions concerning potential fiscal policies, an accurate estimate of the size and timing of all of the Government’s efforts to mitigate the impacts of the recession should be available. There are four different kinds of efforts: stimulus bills passed explicitly as a result the recession; so-called automatic stabilizers, programs that without the need for new legislation automatically increase spending or cut taxes for those impacted by the recession; increases in discretionary spending that occur, at least in part, in response to the recession; and, financial stabilization efforts, actions taken by the Federal Government in support of the housing and financial markets. However, because of the complexity, timing, and form of the various Government actions, frequently only estimates of the size of the big 2009 and 2010 stimulus bills have been cited.

A recent estimate, using data from the Congressional Budget Office (CBO), put the size of the Government responses to the recession, other than the financial stabilization programs, to be about $3.4 trillion over the 2008-2012 period. (See "How Big were the Government Responses to the Recession?", published by the Hoover Institution’s Working Group on Economic Policy, by clicking here) Of this total, $1.35 trillion, or 40%, was for spending programs; the remainder for tax cuts. Importantly, more than half ($1.75 trillion or 52%) of these responses have not yet taken place but will impact the economy in fiscal years 2011 and 2012.

In addition to these sums, the Government committed more than $10 trillion to assist the housing and financial sectors, although the Government’s actual spending was much less than its commitments, and its net spending after loan repayments and the sales of equity shares that it had acquired will be even less. However, the wide variety of financial stabilization efforts can’t be added to the other spending and tax cut efforts as commitments (especially net commitments over time) are measured in a different manner than spending or tax cuts, and the size of some commitments were unlimited or unknown. Nevertheless, it is appropriate to describe the size of the Federal Government’s responses to the economic recession as including both the more than $3 trillion in spending and tax cuts and the commitments for more than $10 trillion in various financial stabilization programs.

Although all of these efforts could be classified as attempts to help mitigate the impacts of the recession, it would not be accurate to describe all of them as providing an economic stimulus. Indeed, the underlying rationale for many of the programs, even for some programs included in the stimulus bills, may have been to address other policy purposes, including: an opportunity to achieve broad social policy objectives unrelated to the recession; or an opportunity to achieve narrower policy objectives such as delivering benefits to specific classes of recipients or to specific geographic areas.  Although the CBO data does not generally identify underlying program rationale, the fact that at least some of the $1.75 trillion yet to be spent was not intended to provide an economic stimulus should also be taken into account in the debate over the size and timing of budget cuts. 

Barry Anderson is the former head of the Budgeting and Public Expenditures Division in the Organization for Economic Cooperation and Development (OECD) in Paris. Prior to joining OECD, Mr. Anderson was a budget advisor at the International Monetary Fund. Before joining the IMF, Mr. Anderson served in various positions dealing with federal budgeting in the United States Federal Government, most recently as the deputy director and then the acting director of the Congressional Budget Office. He has also been a member of the Federal Accounting Standards Advisory Board, and has taught courses on the U.S. budget process for GeorgeWashingtonUniversity and the Office of Personnel Management.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.

Clever Accounting in the 2012 Budget

Last week, the White House released the President’s FY 2012 budget proposal. There's tons of stuff to sift through in the budget, and we now turn your attention to a piece written by one of our New America Foundation colleagues, Jason Delisle, focusing on one of the many gimmicks used in this year’s budget (check out our analysis to learn about some other gimmicks and "magic asterisks").

So you (and we) don’t have to, Jason likes to spend his time looking into arcane federal education budget issues. In this case he’s writing about a provision of the Federal Credit Reform Act of 1990 that enables budget scorekeepers to create the illusion that by creating a new federal lending program, with the admittedly laudable goal of increasing low-income students’ access to higher education, the federal government actually can appear to reap a profit.

Make sure to go to the full article for all the details, but here’s the gist of how it works:

[A] loophole in the Federal Credit Reform Act of 1990 makes many government loan programs appear as though they both provide subsidies to borrowers and earn profits for the government. This apparent “free lunch” arises not because the government is inherently better at lending than private companies, but because the current budget rules that are used to calculate loan costs don’t factor in any cost for market risk. That is, by discounting expected loan performance at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. As a result, risky loans made at below-market rates can appear profitable, but only when the government makes them. No private lender would risk its capital to make similar loans because the risks do not justify the potential gains.

The President's Budget's Terminations, Reductions, and Savings

Last week, the White House released the President’s FY 2012 budget proposal. On Wednesday, CRFB released its analysis of the budget. Today, we take a closer look at the specific proposals found in the budget’s Terminations, Reductions, and Savings.

Every year, the President’s budget proposal includes a list of potential discretionary program cuts. These programs are those identified by the Administration as ineffective, inefficient, duplicative, low-priority, or otherwise unnecessary and are either recommended for elimination or reduced funding. In the FY 2012 budget proposal, the Administration identifies 146 such program-specific cuts totaling $15 billion, along with another $10 billion in government-wide efficiency savings and other savings.

These savings, which are measured relative to 2010 (since 2011 appropriations have not yet been passed), are meant to help meet the President’s goal of freezing non-security discretionary spending through 2015 and containing defense spending growth to the rate of inflation. These savings come on top of nearly $1 billion in already implemented administrative savings, about $5 billion from freezing federal worker cost of living increases, and $13 billion in savings identified by Secretary Gates.

The 146 discretionary terminations and reductions come from 26 different agencies, spanning the federal government. Cuts range in size, from over $2.5 billion for LIHEAP reductions and termination of production of the C-17 aircraft, to only $1 million for the elimination of the Christopher Columbus Fellowship Foundation, for example.

HHS is subject to the most cuts of any one agency, with 32 individual terminations and reductions totaling savings of almost $4.7 billion in 2012 (half from LIHEAP). Though only seven cuts apply to the Defense Department, those cuts add up to $3.5 billion – the second largest savings total from any agency.

 

 

 

 

 

Besides the $2.53 billion reduction to the Low Income Home Energy Assistance Program (LIHEAP) and the $2.5 billion termination of the C-17, some of the largest cuts came from reducing spending on water treatment grants ($1.1 billion), cutting grants to airports ($1.01 billion), reducing various Community Development and Community Service Block Grants (over $650 million), and terminating the F-35 Alternate Engine Program ($465 million).

Among the proposals include 48 terminations and reductions – totaling just under $6 billionwhich appeared in last year’s proposed terminations. Among the largest of these are the aforementioned terminations of the C-17 and the F-35 Alternate Engine, cuts to low-priority Corps of Engineers projects including Water and Wastewater Treatment Projects (almost $450 million), and reductions in regional health care facilities construction programs ($337 million). The list also contains seven recommendations totaling $746 million – proposed by the Fiscal commission, including the reductions in grants to airports, low priority construction projects, and fossil energy research and development, to name a few. (Note that this list excludes the administrative savings, federal pay freeze, and contracting reforms which also reflect commission recommendations.)

 

 

 

 

In general, Congress has rejected the majority of terminations and reductions proposed by the President. Two years ago, however, the President had about a 60 percent success rate, according to our analysis. And while his success rate for this year is still uncertain – Congress has been operating under a Continuing Resolution (CR) with no FY 2011 budget resolution or appropriations bill – the sheer size of the cuts being demanded by House Republicans will increase the likelihood of a high success rate. We hope Congress will heed this year’s recommendations, too, as every little bit of deficit reduction helps.

Spending May Diminish, but Time Definitely Is Shrinking

After four marathon sessions and hundreds of amendments the House of Representatives approved of legislation, H.R. 1, which will cut spending in the final seven months of FY 2011. However, while the course the bill traveled in the House was precarious, the rest of the path it must travel is downright impassable. Meanwhile, time is dwindling for Washington to avert a government shutdown.

Congress must pass a new continuing resolution (CR) to keep the federal government operating before the current one expires on March 4. The new House majority seized this opportunity to make good on their campaign pledge to substantially reduce federal spending. The House passed H.R. 1 in the early hours of Saturday morning. It includes $61 billion in cuts below current funding levels and would reduce spending by $100 billion below the level President Obama requested in his FY 2011 budget proposal. But the package in its current form will not be enacted. The Democratic-controlled Senate shows no willingness to support cuts of this magnitude and President Obama has already said he would veto this package if it does somehow make it off Capitol Hill.

All of this is coming at the same time as the President's release of his FY 2012 budget, which offers some modest cuts and also includes a five-year discretionary spending freeze. Congress was not able to pass a comprehensive budget last year, which put us in our current dilemma of short term CRs. The House and Senate will have to begin work on the FY 2012 budget soon if they hope to avoid the fate of this year's budget.

First things first, though. Congress is running short on time to broker a deal that will cut spending for the rest of this year at a level acceptable in both chambers. The House CR reduces funding to a wide range of programs. The package passed by the House began with a preliminary list of cuts Appropriations Chairman Harold Rogers (R-KY) proposed two weeks ago. Under pressure from freshmen who argued that the cuts did not fulfill their campaign promise, the Appropriations Committee then added another round of significant cuts, bringing the total reductions to the goal of achieving $100 billion in savings from the President's proposed FY 2011 budget.

From there a rare open amendment process was employed to allow members to propose further cuts. The House considered over 580 amendments, with 67 of them passing, from both Democrats and Republicans. These new cuts reduced spending by an additional $620 million, most of which came from voting to eliminate the second engine for the F-35 Joint Strike Fighter ($450 million). Other amendments cut spending for the National Drug Intelligence Center, US Institute of Peace, National Endowment for the Arts, and others. Most of the amendments that passed involved blocking funding for specific initiatives, which will not reduce overall spending. The programs the House voted to block include health care reform implementation, EPA regulations, Planned Parenthood, rural broadband development, net neutrality regulation, military assistance to Chad, and others.

While the precise breakdown of the cuts in the legislation is not immediately available, it will look very similar to the cuts in the original bill before the amendments were passed. See a table of those cuts, broken down by Appropriations subcommittee, below:

 

Subcommittee                  

Funding Amount* Change from 2010 Enacted* % Change from 2010 Enacted Change from President's FY 2011 Request* % Change from President's FY 2011 Request
Agriculture $18.1 -$5.2 -22% -$5.0 -22%
Commerce, Justice, Science $52.7 -$11.6 -18% -$7.8 -13%
Defense $516.2 +$8.1 +1.6% -$14.9 -2.8%
Energy & Water $29.9 -$3.6 -11% -$5.4 -15%
Financial Services $20.4 -$3.8 -16% -$4.9 -19%
Homeland Security  $41.5 -$1.1 -2.5% -$2.2 -5%
Interior $27.8 -$4.4 -14% -$4.5 -14%
Labor, HHS $146.0 -$17.5 -11% -$24.5 -14%
Legislative $4.4 -$0.19 -4% -$0.67 -13%
Military Constr./VA $74.2 -$2.6 -3% -$1.8 -2%
State & Foreign Op. $44.9 -$3.8 -8% -$11.7 -21%
Tran., HUD $52.4 -$15.5 -23% -$16.3 -24%
Total $1,028.5 -$61.2 -5.6% -$99.7 -8.8%

* Numbers in billions of dollars.

With this bill, members of the House can say they satisfied their pledge to slash government spending. However, to date all the focus has been on discretionary spending, which represents just 12% of the overall budget. This approach is insufficient to address our unsustainable debt projections. Hopefully both sides will be willing to make compromises to achieve a comprehensive fiscal plan that includes domestic discretionary and defense cuts, entitlement reform, and reforming the tax code.

The current political theater underscores the need for revamping the budget process and setting longer-term fiscal goals to put the country on a sustainable fiscal course, as opposed to the incremental approach Congress is currently undertaking. Late last year the Peterson-Pew Commission on Budget Reform offered a set of recommendations to overhaul the process and establish enforceable goals. We hope Congress can follow the example of the bipartisan group of senators who are working on a comprehensive approach and agree on a real fiscal plan.

What Will the Budget Look like in 2021?

In our continued analysis of the President’s budget, we now move to a detailed examination of what the budget, if enacted entirely and without future changes, would look like at the end of the 10-year cycle in 2021 and how it will change from today. Under President Obama’s proposal, spending would fall over the next few years before returning to an upward path, reaching to 23.1 percent of GDP in 2021, above the historical average of less than 21 percent but below the current level of about 25.3 percent GDP in 2011.

Not only will overall levels of spending be notably different, but the composition of outlays will shift as the population ages, health care costs continue to rise, and the debt continues to grow.

 

Between now and 2021, in light of the anticipated economic recovery, spending on countercyclical programs is expected to decline substantially. As a result of this and declining war spending, non-base discretionary spending (war and stimulus spending) will fall from 6 percent of the budget today to less than 1 percent in 2021. And spending on income support -- much of which goes to unemployment and food stamps -- will fall from 8 percent of the budget to 4 percent.

Base discretionary spending will also decline as a share of the budget, as a result of the President's five-year non-security discretionary freeze and his limits on defense spending to keep its growth in line with inflation. Because inflation grows slower than the economy -- but most mandatory programs grow faster than the economy -- base discretionary spending will decline form 37 percent of the budget today to 24 percent in 2021. The non-security portion will drop from 11 percent to 8 percent.

Social Security spending will increase as a share of the budget -- from 19 to 22 -- as the population ages and the baby boomers begin to enter retirement. Medicare spending will also grow  -- from 13 to 15 -- due to a combination of population aging and rapid health care cost growth. However, this growth is moderated substantially by the changes enacted under the Affordable Care Act (ACA). The ACA included a number of policy changes that would significantly reduce the level of Medicare spending (reduced Medicare Advantage subsidies, provider payment cuts, etc), along with one major change -- a reduction in provider payment adjustments -- which will effect the growth rate. It is important to note, though, that in 2012 and beyond the budget shows the "doc fix"--the waiving of scheduled reductions in Medicare payments to physicians--fully paid for. However, as we've commented before, the budget simply "assumes" that these costs will fully paid for after 2012 while only showing specifics on how to pay for two years of the doc fix. That's not the honest budgeting that we were hoping for. 

Yet while ACA helped to slow the growth of Medicare, it will lead to a substantial increase in health care spending for low income individuals. Today, Medicaid, SCHIP, and related programs account for 1.8 percent of GDP. This is up from 1.4 percent in 2007 due to a temporary spike resulting from the recession. But as ACA expands Medicaid and institutes new insurance subsidies, and health care cost growth (plus population aging) puts further pressure on Medicaid, means-tested health spending will grow to 2.4 percent of GDP.

And yet, this is not the fastest growing portion of the budget -- that honor goes to interest payments on our accumulating debt. As public debt climbs from about $10.9 trillion to $19 trillion by 2021 under the President's proposals, interest spending to service that debt will more than double. This trend will not subside so long as our debt continues to increase. Interest payments will continue to consume a larger and larger proportion of our budget we do not bring deficits to sustainable levels.

By themselves, entitlement spending and interest will equal 76 percent of the budget, up from 63 percent in 2011. If that's not a loss of budget flexibility, we don't know what is.

President's Budget FY 2007  FY 2011 FY 2021
  % GDP % Budget % GDP % Budget % GDP % Budget
Base Security Discretionary 3.3 16%  4.9 20% 3.6 16%
Base Non-Security Discretionary 3.3 16%  2.9 11% 1.8 8%

War and Stimulus Spending

1.2 6% 1.5 6% 0.2 1%
Sub-Total, Discretionary 7.8 
39%  9.3 37%
5.5 24%
             
Social Security 4.2 21% 4.9 19% 5.1 22%
Medicare 2.7 13% 3.2 13% 3.4 15%
Medicaid, Exchange Subsidies, and Related Spending 1.4 7% 1.8 7% 2.4 11%
Income Support* 1.0 5% 2.0 8% 1.0 4%
Other Spending 1.3 7% 2.6  10% 3. 9%
Sub-Total, Mandatory 10.6 53%  14.5 57% 14.1 61%
             
Net Interest 1.7 9% 1.4  5% 3.4  15%
             
Total 20.2 100%  25.3 100%  23.1 100%

*Estimates based OMB data for unemployment benefits, food and nutrition assistance, supplement security income, and temporary assistance to needy families.

The budget will become increasingly focused on health care spending and interest on the debt past 2021, likely crowding out other critical investments for the future such as education and infrastructure. We've got to take a hard look at all our spending (and tax) programs to get this country back on a sustainable course.

Debt Hits Post-WWII Levels

In a recent article, the Washington Post reported that federal, local, and state debt levels -- including the intergovernmental debt the government owes to itself through various trust funds --  will reach a level that hasn't been seen since immediately following WWII by year's end.

Luckily, after World War II, we were able to in part grow our way out of the debt. As the article explains, though, we face a far different situation today. It says:

But today the U.S. economy is in a polar opposite condition. The labor force is aging, U.S. manufacturing often lags behind Asian and European rivals, households are in hock up to their eyeballs, and consumer appetite for goods is tepid. In addition, inflation is tame and government spending locked into entitlement programs and debt service that will be hard or impossible to alter... Moreover, today state and municipal governments are also facing fiscal woes - another difference between now and the postwar era. State and municipal governments from Sacramento to Madison to Harrisburg have racked up about $2.4 trillion in debt, or more than 15 percent of GDP.

 Here is a look at US federal, state, and local debt levels since 1945:

Sources: Data from OMB and Federal Reserve.

Note: Data for State/Local debt is based on calendar year figures, whereas Federal and Gross debt are based on fiscal year figures.