The Overseas Contingency Operations (OCO) designation has often been used to circumvent spending limits, and the budget resolution released by House Budget Committee Chairman Tom Price (R-GA) is no exception.
The budget goes beyond what the Bipartisan Budget Act of 2015 already did to explicitly rely on OCO to backfill the normal defense budget. Even more troubling, the budget appears to greenlight Fiscal Year 2017 appropriations that would underfund true war-related spending needs, setting the stage for a supplemental appropriations request next year to cover the shortfall.
Because the statutory limits on discretionary spending are automatically increased by the amount of spending designated as OCO spending, it is effectively exempted from spending limits. The OCO designation creates a loophole to circumvent discretionary spending limits when regular funding in the base defense budget is designated as OCO.
For many years, this loophole was used in small ways, with Congress providing slightly less than the administration requested for OCO needs and funding some items in the base defense budget through OCO to keep total spending in line with the administration’s request.
The bipartisan budget agreement last year relied on a much larger and more blatant use of the OCO gimmick to backfill both the defense and non-defense budget. The agreement called for OCO spending of $74 billion in Fiscal Years 2016 and 2017, $15 billion more than the President’s request for OCO in FY 2016. The increased spending above the caps was divided evenly between defense and international affairs function, effectively freeing up room to backfill the defense and non-defense appropriations by $7.5 billion in each of those years.
The President requested $74 billion for OCO for FY 2017, with $10 billion split equally to backfill non-war defense and international spending and the remainder for legitimate OCO needs. The budget resolution released by Chairman Price sets OCO spending at $74 billion, but supporting materials explicitly assume $23 billion of the OCO allocation is used to backfill regular defense needs. By increasing the amount of normal defense funding provided through the OCO designation while keeping the same total amount for OCO, the budget is effectively underfunding true OCO needs requested by the Defense Department by $18 billion.
The Bipartisan Budget Act of 2015, signed into law earlier this week, is fully offset over the next ten years, according to the scoring conventions of the Congressional Budget Office. However, we showed that the deal truly offsets only half its cost if you include interest costs and exclude the savings from several budgetary gimmicks. This blog explains the five gimmicks used in the deal.
The Bipartisan Budget Act of 2015 is now the law of the land. While the law does not necessarily prevent a government shutdown, it does raise the sequester-level discretionary spending caps to provide for eventual full funding of the government. In addition, it utilizes (and possibly expands) the war spending gimmick.
The novelty of Overseas Contingency Operations (OCO) funding in the budget deal is that it allows OCO to be used as a slush fund for nondefense discretionary spending via the State and Foreign Operations appropriations bill. When appropriators write up an omnibus appropriations package, they could conceivably shortchange the State and Foreign Operations bill, subject to budget caps, by about $8 billion while increasing the unoffset and uncapped OCO funding to the full level provided in the budget deal – about $15 billion – thus backfilling State and Foreign Operations. By doing this, it frees up room under the nondefense discretionary spending caps for other nondefense spending. Appropriators would be able to spread about $8 billion over the other subcommittee allocations. For the first time, OCO could seemingly become a slush fund for both the Department of Defense and the rest of the nondefense budget. For more on the FY 2016 appropriations process, see our appropriations watch.
So how did we get here? The section of the budget deal on OCO sets amounts of it for both defense and international nondefense spending for both Fiscal Years (FY) 2016 and 2017 at $58.8 billion for defense and $14.9 billion for international nondefense. Last year’s $74 billion in OCO was divided roughly by $65 billion for defense and $9 billion for international nondefense. Relative to the baseline, which assumes FY 2015 levels adjusted for inflation, the $58.8 billion for defense, if appropriated, wouldn't increase spending, but the $14.8 billion for international nondefense would do so by roughly $5 billion in one year.
Congressman Scott Rigell (R-VA) released a plan today we might like even better than our own Sequester Offset Solutions (SOS) plan. Congressman Rigell's America First Act would permanently replace about three-quarters of the sequester-level cuts with a combination of mandatory spending cuts, Medicare reforms, limits on tax expenditures, and the savings and revenue from the adoption of the chained CPI. All told, it would reduce the debt by about $135 billion after a decade and according to our estimate nearly $2.5 trillion over twenty years.
Rigell's Plan would raise discretionary caps by about $630 billion over ten years and repeal $135 billion in mandatory sequester cuts, for a total cost of $765 billion. He would more than offset these costs with $820 billion of savings – including $620 billion from spending (and user fees) and $200 billion from tax revenue. He would also save $125 billion over ten years from Social Security, reducing the shortfall by approximately 15 percent.
To achieve these savings, Rigell's plan focusses largely on slowing the unsustainable growth of federal health spending. His plan includes over $450 billion of health savings. About one-third of this comes from beneficiary-oriented changes such as modernizing cost-sharing, restricting Medigap coverage, encouraging the use of generic drugs, and increasing means-tested Medicare premiums. Another half of the savings come from providers, where his plan would bundle payments for post-acute care, reduce hospital payments for medical education, equalize payments for services performed in different settings, reduce reimbursements for bad debts, and "rebase" nearly all payments to post-sequester levels.
The $165 billion of remaining spending reductions in the Rigell plan come from a variety of sources, many of which we recommend in our Sequester Offset Solutions (SOS) plan. For example, his plan would index various user fees to inflation, increase federal employee retirement contributions, increase PBGC premiums, and adopt the chained CPI for other spending, among other changes.
The Senate Appropriations Committee earlier this week posted a draft bill that would extend government funding until December 11 and avert a government shutdown. Unfortunately, it also uses the war spending account as a budget gimmick to provide a backdoor increase in defense spending above budget caps. There are no offsets for the additional spending.
The draft did contain language removing funding from Planned Parenthood, which drew a veto threat from the President, but that version did not receive the 60 votes necessary to proceed in the Senate. Press reports indicate that the same continuing resolution (CR) without the section defunding Planned Parenthood will be voted on Monday.
Regardless of the politics on Planned Parenthood, the bill sets regular discretionary levels at the previously-approved levels of $1.017 trillion. It does so by taking the spending levels for Fiscal Year (FY) 2015, which totaled $1.022 trillion after certain one-time savings in the FY 2015 appropriations bills are excluded, and applied a reduction of 0.5 percent (of which about 0.2 percent was an across-the-board reduction and the remaining is from net reductions fromcuts reffered to as "anomalies"). Colloquially, "the sequester" is back in full effect; the sequester refers to the reduced discretionary spending caps mandated after the 2011 "Super Committee" failed to produce savings.
On October 1, lawmakers will have to pass new appropriations or a continuing resolution, or the government will shut down for the second time in two years. This is one part of the four-part "gathering storm" that lawmakers face over the remainder of the year. One of the sticking points in funding the government is the return of the sequester-level spending caps, which will essentially hold FY 2016 spending to the previous year's level. Both parties have proposed higher spending levels, but have done so in different ways. To show a way around the impasse, CRFB has released the Sequester Offset Solutions (SOS) plan, which provides $300 billion of sequester relief that is fully offset.
The SOS plan consists of four parts:
- Sequester Relief: The plan repeals about half of the sequester over the next two years, then allows the spending caps to grow with inflation after 2017. This provides $300 billion of sequester relief in total with smaller amounts of relief over time.
- Offsets for Two-Year Relief: To offset the $90 billion cost of the two-year sequester relief, the plan outlines $110 billion of savings split roughly equally between policies that build off the 2013 Ryan-Murray deal and targeted mandatory program savings and receipts from the President's budget. The savings are slightly higher than the cost to account for the interest costs associated with the upfront relief.
A recent press report (paywall) indicates that Republicans may be looking to pay for increased defense spending next year by promising defense cuts starting in 2022. This type of approach to sequester-level cap replacement is at best disingenuous and at worst a blatant gimmick.
The report suggests the possibility of sequester relief in Fiscal Years 2016 and 2017 paid for with extended and lowered caps from 2022 to 2025. Although the press report didn’t specify how this sort of trade off would work, there are three basic possibilities:
The first would be to offset cap increases in 2016 and 2017 by extending the spending caps beyond 2021 below the level the Congressional Budget Office (CBO) assumes (the 2021 cap adjusted for inflation). While this could be technically argued as a legitimate offset, there is little reason to believe that Congress would reduce discretionary spending below an extension of the sequester-level caps in future years when they want to raise those sequester-level caps today. This would be the budgetary version of Wimpy's “I’ll gladly pay you Tuesday for a hamburger today.”
The other two possibilities would rely on an even more blatant gimmick by claiming savings relative to an artificially-inflated baseline. One of these approaches would involve using the President’s budget assumption that discretionary spending bounces back to pre-sequester levels after 2021 and claim savings relative to that baseline.
Before Congress leaves for August, they must pass a transportation bill extending highway programs and transferring additional money into the Highway Trust Fund. The House posted a revised version of their transportation bill yesterday, which continues to responsibly offset the transfer to the Highway Trust Fund but adds in two deficit-financed tax cuts for veterans. The bill is expected to be voted on today, and Senate Majority Leader Mitch McConnell (R-KY) says the Senate will consider the bill after it is passed by the House.
The previous House bill used a variety of programs to pay for transferring $8.1 billion into the Highway Trust Fund, projected to be enough to continue current highway spending for five months, and presumably, allow Congress to continue negotiations over highway spending when they return in September. The revised bill keeps the same transportation section, although it only extends programs for three months, rather than five. Highway programs would need to be reauthorized by October 29, but Congress would likely be able to pass another extension through December without transferring additional money into the Highway Trust Fund.
However, the revised transportation bill also includes a new section on veterans, which refines and expands some veterans health programs, limits others, allows $3.3 billion of the Veterans Choice program to cover shortfalls within the VA health system, and enacts two small tax cuts. One of these cuts would exempt employers from counting veterans against the employer mandate, so veterans that already have access to health care will not count against the 50 employees that normally would require an employer to offer health insurance to their employees. The other tax cut allows veterans with service-connected disabilities to obtain health savings accounts, despite having medical coverage that would normally disqualify them.
|Provisions in July 28 House Transportation & Veterans Bill
|Transportation Section||$0 billion
|Transfer $8.1 billion into the Highway Trust Fund||-$8.1 billion|
|Extend current budget treatment of TSA fees from 2023 to 2025||$3.2 billion|
|Require lenders to report more information on outstanding mortgages||$1.8 billion|
|Close an estate tax loophole about the reporting of property||$1.5 billion|
|Clarify the statute of limitations on reassessing certain tax returns||$1.2 billion|
|Adjust tax-filing deadlines for businesses||$0.3 billion|
|Allow employers to transfer excess defined-benefit plan assets to retiree medical accounts and group-term life insurance||$0.2 billion|
|Equalize taxes on natural gas fuels||-$0.1 billion|
|Veterans Section||-$1.2 billion|
|Transfer funds from Veterans Choice program to cover VA shortfall||$0 billion|
|Exempt from the employer mandate servicemembers and veterans who already have health insurance||-$0.8 billion|
|Allow veterans to qualify for health savings accounts, even if they receive VA care||-$0.4 billion|
Update: The Reed amendment was rejected in floor consideration by a 46-51 vote.
The Senate is currently considering the National Defense Authorization Act (NDAA), and there are a number of issues at stake. Most notably, this bill has the potential to bring the issue of sequester relief to a head, with Senate Democrats and the White House threatening to block passage of the bill due the use of war spending (Overseas Contingency Operations, or OCO) to allow defense spending to rise above sequester levels. There are also military compensation reforms in the bill, although there is less controversy there since the White House generally supports them.
The NDAA, largely reflecting the Congressional budget resolution, would authorize defense appropriations totaling $605 billion for FY 2016, including $516 billion for regular defense spending, in line with the sequester-level caps, and $89 billion in OCO funding, which is not subject to spending caps. CBO estimates that $50 billion of this OCO funding would be used for war-related activities, with the remaining $39 billion to be explicitly used to backfill regular defense spending (actually slightly larger than the budget resolution's $38 billion slush fund). We’ve written many times about the problem with using this slush fund to get around the spending caps and how it is much more preferable to lift the spending caps and offset them with other savings as they did in 2013. Although this has been a growing trend on the margins, this year's budget and appropriations utilize this gimmick to an unprecedented degree, increasing war spending well above the President's request as opposed to past years when appropriations typically matched the request.
The Peterson Foundation's Solutions Initiative III produced five different fiscal plans that would improve the current long-term budget outlook. We have already gone over the topline numbers for the plans, but another important aspect is how they get to those numbers. Below are four takeaways from the policies that the plans propose.
Consensus on the Gas Tax
Lawmakers will have to find a way to fund the Highway Trust Fund in the next few months, and one of the possible solutions that has gained popularity with the current relatively low gas prices has been raising the gas tax. Four of the five plans - the American Action Forum (AAF) being the exception - proposed increasing the gas tax by a significant amount. The American Enterprise Institute (AEI) would increase it by 11.7 cents and index it to inflation, the Bipartisan Policy Center (BPC) would increase it by 15 cents and index it to inflation, and the Center for American Progress (CAP) and Economic Policy Institute (EPI) would increase it by an unspecified amount. AEI's and BPC's increases would fully close the trust fund shortfall through 2025. We also proposed increasing fuel taxes by 9 cents in our plan The Road to Sustainable Highway Spending.
No One Likes the Sequester
The sequester will be a big deal in the coming months when lawmakers will have to decide the level of spending for appropriations. The President's budget would repeal most of the sequester for FY 2016, while the Congressional budget would leave the sequester in place but provide backdoor sequester relief for defense through the war spending category. A notable theme in the think tanks' plans is that all of them propose some form of sequester relief, and three of them would provide sequester relief to both defense and non-defense. The only plans that left the sequester in place were AEI's for non-defense spending and EPI's for defense spending. Clearly, none of the plans were satisfied with the tight caps that the sequester prescribes, although they varied on how much to lift them (AEI stood out in particular on defense, while EPI had much, much higher non-defense caps). Although these plans do not make changes to the budget until FY 2017, their approaches can be instructive for lawmakers for FY 2016.