The Bottom Line

October 22, 2014

The Center for American Progress' Katherine Blakeley and Lawrence Korb recently issued a report recommending how lawmakers should wind down war spending, known as Overseas Contingency Operations (OCO), as U.S. involvement in Afghanistan wanes. OCO has become a headache for budget enforcement because, unlike base defense spending, it is not capped and so it has been used to avoid the discretionary spending caps.

Making matters worse, the continuing resolution funding the government for the first two-and-a-half months of FY 2015 continued OCO spending at last year's levels, $26 billion above the Administration's request (at an annualized rate). Congress should address this issue during the lame duck session by making prudent use of the OCO designation in any government funding bill to limit spending to war needs and codify criteria for use of the OCO designation in the defense authorization bill.

Blakeley and Korb make five main recommendations:

    • Keep OCO funds tied to the costs of war
    • Stop using OCO funds as a ‘safety valve’ for the base defense budget
    • Do not make OCO a permanent emergency fund
    • Exercise authorizing and oversight authority for military action
    • Have the tough conversations about defense resources and trade-offs
October 22, 2014

Year after year, Senator Tom Coburn (R-OK) refuses to simply give lip service to "wasteful government spending" and has instead called out controversial government spending by name. Today, his office published the fifth annual edition of his Wastebook, detailing 100 examples of what he describes as "stupid spending," totaling almost $25 billion. The Wastebook looks at little-used government programs, unusual research projects funded by government grants, and tax breaks given to companies to compile these examples.

As Senator Coburn explained,

This report, the fifth annual Wastebook, gives a snapshot of just a fraction of the countless frivolous projects the government funded in the past twelve months with borrowed money and your tax dollars. Every year taxpayers, regardless of their personal political leanings, raise their eyebrows and shake their heads in disbelief at how billions of dollars that could be been better spent—or not spent at all—were squandered. Then they ask, “but what are you doing about it?”

Some of the spending examples highlighted in his report are:

  • Paid vacations for bureaucrats gone wild—$19 million: Many situations that would cause private-sector employers to fire their employees instead results in federal employees going on “administrative leave.”  Most of these situations can be described as personnel matters such as criminal investigations, misconduct and security concerns.  GAO estimates that the paid leave costs the government about $19 million.
  • Pentagon to spend $1 billion to destroy $16 billion in unneeded ammunition—$1 billion: The Pentagon is spending a billion dollars to destroy $16 billion in excessive purchases of military-grade ammunition. The amount of surplus ammunition is now so large that the cost of destroying it will equal the full years’ salary for over 54,000 Army privates.  How the military came to purchase so much ammunition it didn’t need was uncovered in a 2014 Government Accountability Office (GAO) investigation.
  • FAA upgrades low traffic airport serving high-end ski resort—$18 million: The Federal Aviation Administration awarded $18 million dollars for a construction project at an airport that serves a ski and golf resort in Idaho.  There are on average four daily commercial flights leaving the airport. Construction was to include “comfortable chairs and a fireplace.”
  • DOD sends 16 planes to the scrap heap for $32,000$468 million: After spending over $468 million on a fleet of 20 planes that were supposed to be the backbone of the Afghan Air Force’s air transport mission, the Defense Department scrapped 16 of those planes as opposed to selling or dispatching them for their purpose.
  • Watching grass grow$10,000: The Interior Department's U.S. Fish and Wildlife Service is spending $10,000 to watch how fast grass grows in Florida after its been pulled out plug by plug and “painstakingly document how fast it returns."
  • Spouses stab voodoo dolls more often when “hangry”$331,000: A National Science Foundation grant provided money to research the phenomenon of being “hangry,” in which a subject is angered because of a lack of food.  Spouses with lower levels of blood sugar were more likely to harm the voodoo doll representing their significant other.
October 21, 2014

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

Adler Figure 1

October 21, 2014
Yes, the Deficit Is Smaller. But That Wasn’t the Main Problem.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

Some influential people would have you believe that with the deficit shrinking our fiscal problems are behind us. Nobel Prize winner Paul Krugman recently wondered why the fiscally responsible crowd wasn’t celebrating the news that the deficit was down to $483 billion. The White House has been touting the recent two-thirds decline as a major accomplishment.

The irony should not be lost on anyone: Both Mr. Krugman and the White House have long argued–correctly–that short-term deficits were not the problem and that reducing them too much too fast would harm the economy.

While the massive deficits of recent years were startling, they were never the country’s key fiscal problem.

Deficits, which grew more than 750% from 2007 to 2009, were a symptom of the near-calamitous economic crisis in which revenues plunged and automatic spending kicked in. Much of the growth in the federal deficit was a sign of just how bad the economy was. But deficits were also a partial cure for our economic woes in that the automatic stabilizers and the additional spending in the 2009 stimulus (for all its flaws) stopped the economic tailspin from becoming far worse.

October 21, 2014

Fraud -- along with the closely related waste and abuse -- is too often cited as a big factor affecting our high deficits, even though  this is not the case. Nonetheless, rooting it out can be a non-controversial path to marginally reduce spending and to help assure Americans that their taxes are not being wasted. A new CBO report discusses anti-fraud efforts in federal health care programs and how they are accounted for in the agency's scoring of costs and savings in legislation.

There are a number of agencies and mechanisms tasked with reducing fraud in health care programs. The Center for Medicare and Medicaid Services (CMS), of course, is the main one. But there is also the Health and Human Services Inspector General, the Department of Justice, and the Health Care Fraud and Abuse Control (HCFAC) program, a dedicated fund for pursuing fraud that has both a mandatory and a discretionary appropriation.

Despite this anti-fraud efforts, significant improper payments (a broader category than fraud) of $65 billion in health care still exist, at least some of which is fraud. CBO discusses a number of different strategies to reduce it, including increasing anti-fraud funding, allowing new authority for agencies to pursue fraud, shifting funds to activities expected to provide higher returns, and increasing penalties.

In terms of the first strategy, based on previous efforts, CBO assumes that an additional dollar of HCFAC spending yields $1.50 of savings (see the table below for an example). The Budget Control Act allowed for adjustments to the discretionary spending caps for HCFAC totaling $3 billion in additional funding, providing estimated savings of $3.7 billion. (The ratio is less than 1.5 to 1 in this case since it takes time for the savings to materialize). Notably, however, these net savings cannot be used for budget enforcement like pay-as-you-go rules because of their uncertain nature.

October 20, 2014
Barrow is 'brave'

Alan Simpson and Erskine Bowles are the former chairs of the Simpson-Bowles Fiscal Commission and members of the Committee for a Responsible Federal Budget. They co-wrote an op-ed in the Statesboro Herald.

Our nation needs to get its fiscal house in order, and to do so citizens must fully demand leaders who are willing to put partisan differences aside and come together to present the American people with honest solutions and consensus proposals that put the national interest ahead of special interests. That is why we were so disheartened to learn that John Barrow is being criticized for his support of a budget based on the plan recommended in 2010 by a bipartisan majority of the National Commission on Fiscal Responsibility and Reform which we co-chaired (Simpson-Bowles Commission).

The Simpson-Bowles plan is a comprehensive, tough-minded and pragmatic approach to attacking our national debt and ensuring that Social Security is fiscally sound for future generations.

Because it seeks to tackle the hard problems, it came under savage attack from partisan interests from both ends of the spectrum.

October 17, 2014

With FY 2014 officially in the book, it’s time to look back at how spending and revenues have changed since the FY 2009’s highest nominal deficit of all time (and 5th highest as a percentage of GDP since 1930).  

The FY2014 budget deficit totaled $483 billion with $3.02 trillion of revenue and $3.50 trillion of spending. This deficit was nearly 30 percent below the FY2013 deficit and 66 percent below its 2009 peak. In FY 2009, the budget deficit was $1.41 trillion with $2.11 trillion in revenue and $3.52 trillion of spending.

Annual deficits have fallen substantially over the past five years, largely due to rapid increases in revenue (mostly from the economic recovery), the reversal of one-time spending during the financial crisis, small decreases in defense spending, and slow growth in other areas. This temporary improvement in our nation's short-term finances, while likely too quick for the struggling economy, comes as nominal spending is only about $15 billion lower (though it has declined sizably as a percent of GDP).

Between that time, health care and Social Security spending have grown significantly due to natural upward pressure, aging of the population, and to a lesser extent, the coverage expansions in the Affordable Care Act. Interest spending is also higher as a result of the huge increase in debt since 2009. Meanwhile, discretionary and other mandatory spending are down from fading stimulus, the economic recovery, and legislated deficit reduction like the sequester.


October 17, 2014

In response to the release of final FY 2014 deficit numbers, Tax Policy Center's Howard Gleckman writes that this year's outcome just returns the budget to "fiscal normalcy" -- and only temporarily. Although the deficit has fallen significantly in recent years, this year's budget is largely in line with the averages of recent decades.

In 2014, federal tax receipts reached 17.5 percent of GDP, a level unseen since 2007, just before the economy cratered. That’s only slightly higher than the 40-year average of about 17.4 percent of GDP.


The story is similar on the spending side. In 2009, federal outlays topped out at 24.4 percent of GDP. By the fiscal year just ended, they had declined to 20.3 percent, a shade below the 40-year spending average of 20.5 percent.

October 16, 2014

We noted in our discussion of the final Monthly Treasury Statement for 2014 that the deficit has fallen by two-thirds since 2009 after rising by nearly nine-fold between 2007 and 2009. However, much of this decline was already expected as a result of a recovering economy and unwinding stimulus, so another way to look at what's happened with the budget in the last five years is how the projected 2014 deficit has changed since 2009.

For this analysis, we use the August 2009 Congressional Budget Office (CBO) baseline as a starting point, since it was the first CBO update after the passage of the 2009 stimulus and when CBO and other economic forecasters were getting a better grasp at how deep the recession actually was. That baseline showed a projected 2014 deficit of $558 billion, $75 billion higher than the actual deficit of $483 billion. Notably, however, the projected deficit excluded the effects of the 2001/2003 tax cuts set to expire after 2010, even though it was widely expected that most or all of them would eventually be extended permanently. Also notable is that debt-to-GDP was only projected to be 66 percent of GDP in 2014 compared to the actual 74 percent; debt ended up being higher due to worse-than-expected economic performance, the aforementioned tax cut extensions, and further short-term stimulus.


If you incorporate the presumption that all of the 2001/2003/2010 tax cuts would be extended into CBO's 2009 projections, then this year's official deficit was $375 billion lower than projected. $220 billion of that decline stems from changing economic and technical assumptions (including the $25 billion drop in the deficit since CBO's August 2014 update), and legislation prompted the remaining $155 billion reduction in 2014's deficit (primarily through discretionary spending cuts, the fiscal cliff deal, and the Affordable Care Act). Perhaps surprising at first blush is that changes to economic projections actually contributed $70 billion to the declining 2014 deficit, even though in 2009 CBO expected GDP to have reached its potential by now and unemployment to average 5 percent for the year. A slower than expected recovery, however, has also led to interest rates remaining extremely low, saving the government significantly on debt service costs.

October 16, 2014

Medicare Part D costs have leveled off in recent years as pharmaceutical innovation has slowed and a number of blockbuster drugs lost patent protection, but a new wave of expensive specialty drugs threatens to revitalize cost growth. To help control the high prices of unique drugs paid for by Part D, Richard Frank and Joseph Newhouse recommend an innovative approach to apply binding arbitration as a fallback to price-setting negotiations.

The authors argue that policymakers overestimated the negotiating power that prescription drug plans (PDPs) would hold in setting prices when they created Part D through the Medicare Modernization Act (MMA) of 2003. Price negotiation in Part D proves most difficult for unique drugs, or those without any direct substitute. Setting prices too low for important, clinically unique drugs could harm future research and development as pharmaceutical companies could lose vital capital to continue incentivizing such research and development.

Frank and Newhouse offer a solution that incorporates binding arbitration into price setting for unique drugs. In their proposal, binding arbitration would take effect only after the government and manufacturer cannot come to an agreement, thereby encouraging the two parties to reach a negotiated settlement.

October 15, 2014

With the Treasury Department's year-end Monthly Treasury Statement having been released, we have revised last week's report today showing what the 2014 totals mean for the budget. The FY 2014 budget deficit totaled $483 billion, according to Treasury's statement. Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

Source: CBO

Last week the Congressional Budget Office (CBO) projected the FY 2014 budget deficit at $486 billion.  While the CBO works closely with Treasury to come up with their estimates, CBO's report was preliminary. Treasury's statement, which is considered final, shows revenues and outlays in FY 2014 that were $8 billion and $5 billion higher, respectively, than CBO's estimates. The result is a FY 2014 deficit of $483 billion, which is $3 billion lower than last week's CBO projection.

October 15, 2014

Republicans and Democrats do not agree on much, but both parties are talking about business tax reform that is "revenue-neutral," raising the same amount of money as the current tax code. But "revenue-neutral" can mean drastically different things, depending on which baseline policymakers choose to use. Discussing budget baselines might put most people to sleep, but the choice could mean an extra trillion dollars added to the debt over the next ten years.

Playing Baseline Games

Much of the disagreement over which baseline to use focuses on tax extenders, a set of mostly business tax breaks that expired in 2013. These breaks expire every year or two, and Congress routinely extends almost all of them. The Senate Finance Committee has a bill that would extend nearly all of them for two years, at a cost of $85 billion. Yet if all those provisions are extended year after year, the total ten-year cost would be almost $700 billion. Although Congress will likely deal with the extenders before the end of the year, their fate could set the parameters for future tax reform efforts.

Unfortunately, House Budget Chairman Paul Ryan (R-WI) is proposing to lower the bar for revenue-neutrality. He recently suggested policymakers should make some of the tax extenders permanent during the lame duck session, arguing that they do not need to be paid for and should add to the debt (which makes their costs disappear from the budget process and from needing to be offset in a revenue-neutral tax reform). If these were made a permanent part of the tax code, a future "revenue-neutral tax reform" would raise $700 billion less than before. Essentially, he is suggesting that this Congress lock in lower revenue levels – and higher debt – to make it easier for the next Congress to pass tax reform that they can claim is revenue-neutral.

October 14, 2014

The 340B Drug Pricing Program, enacted in 1992, gives hospitals and other providers serving disproportionately low-income populations the ability to buy outpatient prescription drugs at large discounts. It has come under increased scrutiny lately, though, as more and more people have questioned whether the program is actually fulfilling its purpose.

Criticism of the program has ramped up recently with charges that some hospitals are raking in large profits by taking the discounts from manufacturers and instead selling the drugs through hospital-affiliated clinics to higher-income/insured patients at the price the insurer pays. With eligibility for the 340B program determined based on a hospital's inpatient population, critics charge that this creates an incentive to serve more people in off-site outpatient settings located in wealthier areas. Hospitals deny this claim, saying that the program has served its intended purpose -- either the drugs are provided to vulnerable patients or the money is spent on expanding low-income access to care.

A new study published in Health Affairs by Rena Conti and Peter Bach examined characteristics of hospitals that participate in 340B and sided with the critics. They looked at those hospitals that also received Disproportionate Share Hospital (DSH) payments and saw how their communities changed over time. The number of 340B DSH hospitals has increased steadily since 340B's inception; however, the authors note a sizeable uptick in the growth rate of not only those hospitals but also of hospital-affiliated clinics starting in 2003. The number of clinics increased even more dramatically after 2010 when the Affordable Care Act expanded the types of providers that could qualify for 340B.

October 10, 2014

With the FY 2014 deficit continuing a trend of falling deficits over the past few years, some commentators have argued that budget hawks are inconsistent in not breaking out the champagne when they were so concerned with the high deficits of 2009-2012. In reality, we have consistently expressed our concern about the long-term budget outlook while acknowledging that the large deficits of that time were both a product of and necessary to respond to the Great Recession. In fact, one of our reports from July 2009 that is used as an example of panic about short-term deficits actually said quite the opposite (in bold italics no less):

The answer is to continue with stimulus policies as necessary, but, in order to regain the country’s fiscal credibility, to promptly develop and announce a plan to reduce the deficit and close the long-term fiscal gap. This plan would be implemented as soon as the economy is strong enough to absorb it.

We talked about developing a plan in the short term but not implementing it until economic conditions improved enough to warrant doing so. We did not recommend implementing the deficit reduction in the short term.

Nor did we focus on short-term deficits in releases or analyses of CBO ten-year baselines. We always called attention to the long-term path of deficits and debt and called for deficit reduction to focus on the structural imbalance that existed in the absence of economic weakness.

Examples are abound.

October 10, 2014

During the recent slowdown in Medicare spending, the prescription drug portion of the program, Part D, has been the lead actor in the story. The unexpectedly slow growth of prescription drug costs has made Part D cost much less than anticipated. But a new CBO working paper by Andrew Stocking, James Baumgardner, Melinda Buntin, and Anna Cook shows how Part D costs could be further controlled by improving the design of Medicare Part D's Low-Income Subsidy (LIS).

For background, the LIS helps people below 150 percent of the federal poverty line (FPL) afford the costs associated with Part D prescription drug plans. For those with income below 135 percent of the FPL, the LIS covers all premiums as long as the beneficiary chooses a plan that costs below the region's benchmark (ranging between about $20 and $40 per month in 2014), pays the entire deductible, and leaves minimal co-pays for drugs (for those between 135 and 150 percent of the FPL, the LIS covers a portion of each of these items). If LIS beneficiaries choose a plan with a premium above the benchmark, they pay the difference. If a plan that costs below the benchmark in one year moves above the benchmark in the next, Medicare automatically re-assigns beneficiaries to a plan below the benchmark unless they actively choose to stay with the plan or had proactively chosen their Part D plan originally.

The working paper looks at the difference in responses to competitive pressures from LIS and non-LIS beneficiaries and plans. Not surprisingly, LIS beneficiaries tend to be in less expensive plans because of the automatic assignment to plans at or below the benchmark; 87 percent of LIS beneficiaries are in a plan that is within 50 percent of the least expensive plan in the region, compared to two-thirds of non-LIS beneficiaries. But the authors note that plans catering to LIS beneficiaries tend to increase their premiums in the next year if they fall below the benchmark, since they have little incentive to have lower premiums once they are below; plans are estimated to raise monthly premiums by between $6.90 and $9.70 if they fell $10 below the benchmark in the previous year. Furthermore, the addition of a new plan sponsor into a region is estimated to lower plan bids by 0.5-0.8% for non-LIS plans, but only 0-0.2% for LIS plans.

October 9, 2014

While explaining why deficits have fallen from their historically large peak in 2009, we noted the main source of this tumble is a 43 percent rise in revenue. This increase came largely from the recovering economy, but also from legislated tax increases and the expiration of some temporary tax provisions. However, those provisions may be coming back soon and lead to a significantly greater increase in the deficit next year than projected under current law.

As CBO pointed out, the expiration of bonus depreciation played a large part in revenue increase:

Taxable profits were boosted in large part by the expiration at the end of December 2013 of various tax provisions, most significantly the rules that allowed firms with large amounts of investment to expense—that is, immediately deduct from taxable income—50 percent of their investment in equipment.

In our paper analyzing the Fiscal Year 2014 budget results, we pointed out that the decrease in the deficit was a temporary phenomenon and deficits would start increasing again after next year. If Congress were to extend expired tax breaks, it would both magnify the decline in the deficit in 2014 and prevent the deficit from declining in 2015.

Since the 2014 fiscal year is over and these tax extenders have not been extended yet, the 2014 deficit would not change even if the provisions are made retroactive to the beginning of the year as planned. The revenue loss from the 2014 tax cuts will show up in 2015 when companies and individuals file their taxes for 2014 and have lower tax payments or receive refunds as a result of the retroactively extended tax breaks. The same thing happened with bonus depreciation in FY 2010, when it registered very little cost because it was not extended until near the end of the fiscal year. In either case, the federal government loses the full amount of revenue from the tax break, but in the following year.

October 8, 2014

With the Congressional Budget Office's (CBO) year-end Monthly Budget Review having been released, we published a report today showing what the 2014 totals mean for the budget.  The FY 2014 budget deficit totaled $486 billion, according to CBO’s estimates (official numbers will come from the Treasury Department on Friday). Although this is nearly 30 percent below the FY 2013 deficit and two-thirds below the 2009 peak, the country remains on an unsustainable fiscal path.

October 8, 2014

With today's release of the Congressional Budget Office's (CBO) final Monthly Budget Review for Fiscal Year (FY) 2014, many will be focused on the final 2014 deficit, but it also shows that Medicare clocked its fourth-lowest annual growth rate in history, at just 2.7 percent.

We have been closely following the unusually slow growth of Medicare throughout this year, and also documenting the program's "underlying" growth rate, or what growth would be with temporary or phased-in legislative cuts removed from the calculation*. Dechipering this underlying growth rate should provide a truer picture of the magnitude of Medicare's cost slowdown.

Interestingly (though not surprisingly), the three years with slower growth than this year -- 1998, 1999, and 2013 -- coincided with similar temporary or phased-in cuts.

For 2014, Medicare's underlying growth rate ended up at 4.9 percent, roughly one percentage point faster than both economic and beneficiary growth. Therefore, even removing these temporary effects, Medicare still grew slower than general inflation on a per beneficiary basis.

October 7, 2014

It is no secret that the 113th Congress has had little success reaching agreement on major policy changes, so its lackluster results on a report card from The National Coalition on Health Care (NCHC), grading lawmakers in the health care arena, should come as little surprise.

NCHC even graded on a curve by looking only at three areas where it initially saw promising prospects for bipartisan cooperation: modernizing physician payments/repealing the Sustainable Growth Rate (SGR) formula, increasing price and quality transparency, and strengthening Medicare by making it more efficient. NCHC handed out a D+ for strengthening Medicare, failed Congress on transparency, and gave it an incomplete on SGR repeal and physician payment reform, subject to revision based on what happens in the lame duck session after the November elections.

SGR Repeal/Physician Payment Reform

Arguably the area with the most immediate prospects for action is permanent SGR repeal and replacement. As we discussed a few weeks ago, some lawmakers are targeting the lame duck session to repeal the SGR in order to capitalize on the progress they've made during this congressional session, even though the current "doc fix" does not expire until April. There is a bipartisan framework to replace the SGR with a system to encourage physicians to participate in alternative payment models, moving Medicare away from fee-for-service reimbursement. However, lawmakers have not agreed on offsets for the bill, which could cost between $150 billion and $200 billion over ten years. The partisan bills that saw the light of day were not encouraging.

NCHC gave lawmakers an incomplete on this category but said it would give them an F if there was no further action. We also will give them an F if they pass a permanent doc fix without legitimate offsets.

Quality and Price Transparency

October 7, 2014

The national debt is currently twice the historical average, and will grow unsustainably until Congress makes responsible changes. Voters should be able to know how their candidates would take on this challenge. The Concord Coalition has published a list of helpful questions to help voters engage with candidates and learn their stances on these important issues.

As Concord explains:

Voters should expect candidates for federal office this fall to explain how they intend to deal with the huge challenges ahead. These include some problems that must be addressed in the very near future.

This is no time for vague rhetoric and petty partisan jabs; voters should insist on credible solutions -- the more specific, the better. Some of those solutions won’t be easy because the problems go far beyond the “waste, fraud and abuse” we hear about so frequently in campaign speeches.

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