Budget Reform Proposals in the President's FY 2011 Budget

Although our initial analysis of the President's Budget focused on his ten-year budget plan, the Budget itself includes much, much more. Nestled in the many chapters of the Analytical Perspectives on arcane budget topics (much loved by budget geeks all over Washington) is a chapter that describes the Administration's proposed budget reform changes.  Overall, there were few surprises and this year's proposals mirrored the Administration FY 2010 proposals (for more information on the 2010 budget reform proposals, see the Peterson-Pew Commission on Budget Reform's policy report).  One major addition to last year's proposals is the Administration's support for a fiscal commission.

The Budget does not propose a specific form for the commission (congressional or executive) or how it should be created (by law or executive order).  And in any other year, such a proposal might go unnoticed.  But the President made this commission a key part of his budget plan, and has touted it as a way to stabilize the medium-term debt and begin addressing long-term entitlement growth. Specifically, the commission is expected to make recommendations sufficient to balance revenues with non-interest spending by 2015 -- which would mean a deficit of about 3 percent of GDP. To do this, the commission would likely have to supply policies sufficient to reduce the deficit  by roughly 1 percent of GDP.

Besides this commission, the Administration proposed a number of other process reforms. They include:
 
Statutory PAYGO:  In his FY 2010 Budget, the President proposed re-instating statutory PAYGO including a provision that would change the way OMB keeps track of the costs of legislation subject to PAYGO (averaging costs versus annual costs).  Over the course of the last year, the President and Congress agreed to reinstate PAYGO and on February 12, the President signed the legislation that included the PAYGO provisions.  The recently-enacted proposal will apply PAYGO to revenue and mandatory proposals, will exempt from PAYGO certain costly expiring provisions (see baseline discussion below), and re-create scorecards that if new legislation resulted in a net cost to the government for any fiscal year would trigger a sequestration. 

The new law mandates how OMB should record the cost of individual legislation on the PAYGO ledger and how it determines the level of offsets necessary to avoid sequestration. Under the previous statutory PAYGO, OMB recorded the estimated fiscal year annual cost of each piece of legislation on the PAYGO ledger.  The law creates two PAYGO ledgers (a five-year and a ten-year ledger) and requires OMB to record the average annual cost of the legislation's estimated ten-year cost (rather than the actual costs year by year). However, does this ten-year averaging obscure the long-term fiscal consequences of pending legislation when a particular program’s costs increase significantly in the ninth and tenth years? This out-year growth often indicates a long-term commitment to spending at the higher level—a commitment that could be obscured by ten-year averaging. The administration argues that by averaging the ten-year costs, PAYGO prevents this problem it pulls those out-year costs forward to the present, potentially triggering an immediate sequester. At the same time however, averaging can also allow illusory out-year savings to offset the early-year costs, reducing the immediate budget threat to zero if the savings were pulled forward under averaging.

Baseline Modifications: The baseline is the benchmark against which mandatory  spending and revenue legislation are assessed and is used to determine which proposed legislation must be offset under PAYGO. In general, OMB and the Congressional Budget Office (CBO) measure the budgetary effects of any new legislation against a “current law” baseline, which assumes that a law will remain in effect as currently written.  The administration shifts from a “current law” to a “current policy” baseline. (We explain the new baseline in detail here). A current-policy baseline assumes that some popular and politically sensitive programs will not be permitted to expire and that Congress and any president would extend those programs and provisions. Since the cost of enacted PAYGO legislation is compared to the baseline, any bill extending these programs and provisions would have a zero net cost and hence would not require offsets.

The Budget proposes a temporary change in the baseline that would exempt several costly proposals from the requirements of PAYGO (if they are enacted before the end of 2011).  The current policy baseline assumes that :

• the 2009 parameters of the Alternative Minimum Tax will be indexed to inflation
• the 2001 and 2003 tax cuts will not expire;
• the Medicare physician payment reductions will not take place;

Other changes to the baseline include: adjusting how the baseline accounts for federal pay increases; moving the Pell Grant program entirely to the mandatory baseline; and removing one-time emergency funding in the baseline and replacing it with a $32 billion placeholder for FY 2011.

Program integrity adjustments: Congress and the White House have occasionally agreed to special budgetary exemptions for additional discretionary spending to improve the administration of mandatory spending programs. They have argued that these improvements can result in fewer overpayments of mandatory benefits or increased tax compliance, and thus lead to savings or increased revenue for the government. Without access to additional funds, the appropriations committees have little incentive to devote discretionary resources to improving mandatory programs, which are under the jurisdiction of the authorizing committees. They also do not receive “credit” within their budget totals for these savings that they could then use for other discretionary programs. Thus, these exemptions continue even after the expiration of discretionary spending caps. The money is generally used to help rout out waste, fraud, and abuse.

The 2011 Budget includes $2.2 billion in FY 2011 and $16.2 billion over five years for SSA, IRS, HHS, and Labor to improve the administration of SSI, tax collection, Medicare/Medicaid fraud, and unemployment insurance.   The Bush Administration proposed similar adjustments, but this Administration went a step further and included the estimated fiscal savings from these adjustments in its overall budget totals, assuming $132 billion in savings over ten years. 

In addition, the Budget proposes a number of policy changes to improve the adminstration of mandatory programs and estimates that if Congress adopts these proposals, an additional $20.3 billion in savings over ten years could be acheived.

However, in order to "get credit" for the savings, the Administration and Congress would have to change how these expected savings are scored to count them. A scorekeeping rule prevents Congress and the president from claiming
potentially illusory savings in mandatory spending or revenue programs from increased program oversight activities
and then using the savings to fund other mandatory spending.

These proposals are almost identical to last year's proposals and except for the partnership fund for pilot initiatives (The 2010 budget requested $175 million and in the final bill, the fund received $37.5 million), none were adopted. Whether their fate will be different this year remains an open question.

Expedited rescission process: The Budget proposes an expedited rescission process to encourage a congressional up-or-down vote on any rescission proposals for which the president requested expedited action. Because the administration’s proposal does not include sanctions on Congress if it does not vote, the proposal technically does not require congressional action.

Pell Grants:  The Budget proposes making Pell Grants a fully mandatory program and funds the Pell Grant program at the maximum award level of $5,500.  The president’s proposal creates yet another new entitlement program that is exempt from annual congressional scrutiny while at the same time creating a major budgetary hurdle for Congress. The proposal ignores the  congressional convention that requires an increase in mandatory spending to be offset with revenue increases or cuts in other mandatory spending. While the president can offset the creation of a mandatory program by moving the resources for the current program from the discretionary side of the budget, Congress cannot, and CBO has scored the program following that convention. In order for Congress to adopt the proposal to make the Pell Grant program mandatory, it would have to find program savings or increased revenue elsewhere.

Highway Trust Fund: The Budget funds the Highway Trust Fund (HTF) at a baseline level - partially out of HTF resources and partially out of general fund appropriations without resolving any larger highway reauthorization questions that will have to be resolved in the highway reauthorization bill and has become a part of the debate on the jobs bill (follow our blog for additional analysis on this next week).

Other Reforms: In addition to the major changes described above, the Budget proposes: limiting advance appropriations at FY 2012 levels; revising the budgetary display of the IMF subscription quota; displaying the federal debt net of financial assets; and increasing enforcement to reduce improper payments.

Hint of the next budget reform debate between CBO and OMB? 

One major budgetary change that was not included in the President's budget reform proposals is how the budget counts the two large government-sponsored enterprises (Freddie Mac and Fannie Mae).  In September 2008, the federal government took conservatorship of these GSEs in September 2008 in response to growing financial losses. In response, CBO has begun to treat these two GSEs as governmental organizations and now describes them as on-budget.  And earlier this year, CBO issued a report  and its Director wrote a blog on why CBO believes these two agencies and their costs should be considered on-budget.   In contrast,  the President’s budget does not revise its treatment of GSEs. It continues to treat these GSEs as non-budgetary and records transactions between Treasury and the GSEs as cash outlays, rather than a transfer between two government agencies.