On August 2, 2011, President Obama signed into law S 365, the Budget Control Act of 2011 (Act), as Public Law 112-25. The Act, the product of months of highly partisan political wrangling, raises the nation’s debt limit and sets out required federal deficit reduction measures covering fiscal years 2012 through 2021. The U.S. Treasury set August 2nd as a deadline for raising the debt limit; absent that, the United States would have, for the first time in history, defaulted on its financial obligations. The result of such a default could have resulted in catastrophic consequences to the U.S. and world economies.
The measure is of enormous and long-term importance to tribal governments and others as it places very restrictive spending cap requirements on Congress, and while Congress will fill in the details, those limits are legally binding. Virtually every legislative proposal will have to pass the test of its impact on spending and the deficit. Ultimately the spending reductions can be met through the account-by- account work of the appropriations committees and/or by changes in entitlement program statutes and/or tax laws, and failing that, by across-the-board sequestration of funds. The Act is specific about time lines for implementation actions. The remainder of 2011 will be consumed by congressional activity surrounding the implementation of this Act.
Debt Limit Increase. The debt limit is immediately increased by $900 billion; a second needed increase of $1.2 to $1.5 trillion is authorized, thus relieving the Administration from having to deal with another debt limit legislative battle until 2013.
Spending Cuts. Two rounds of spending cuts will take place. For round one, the spending cuts occur in the form of caps on discretionary appropriations over the next 10 years. However, the key point to keep in mind is the reductions provided by these caps are defined in terms of a reduction from what FY 2011 levels plus inflation would be for that year. In other words, the Congressional Budget Office (CBO) using FY 2011enacted levels, created a baseline through 2021 which factored in inflation. The budget Control Act provides caps on appropriations that actually increase each year but do so at a rate that is less than this CBO baseline. In this manner, the actual caps increase but real spending power declines producing the $935 billion in cuts in projected spending over the next 10 years. For FYs 2012 and 2013 there are separate spending caps for security (Defense, Homeland Security, Veterans Affairs, National Nuclear Security Administration, Intelligence Community Management Account, State Department, and International Assistance) and non-security programs, so that funding cannot be moved from one category to the other. The House-passed FY 2012 Budget Resolution (H. Con. Res. 34) would have required an additional $24 billion in cuts for discretionary programs than does PL 112-25. While the House Appropriations Committee has approved most of its bills for FY 2012 it is likely that the final numbers, due to the higher FY 2012 caps in PL 112-25, will be increased. For instance, the Environmental Protection Agency took an enormous FY 2012 hit in the House Appropriations Committee bill but may see some reprieve, and the House Agriculture Committee members are now feeling that they may have some leeway for a higher cost farm bill reauthorization than originally thought.
Round two of deficit reduction is to be enacted by the end of 2011 and will total an additional $1.5 trillion over the period FY 2012-2021. The details of that will be worked out by a newly created congressional committee (see below) or by across-the-board sequestration.
The spending caps do not apply to the wars in Iraq and Afghanistan. In addition, the caps can be adjusted to account for emergencies and disaster relief.
Joint Select Committee on Deficit Reduction (Joint Committee). The Act requires the House and Senate leadership to appoint a 12-person committee made up of members of Congress to develop a plan to reduce the deficit by an additional $1.5 trillion over the round one reduction. The House Speaker, House Minority Leader, Senate Majority Leader, and Senate Minority Leader will each appoint three persons to the Joint Committee. The appointments to the Joint Committee are to be made within 14 days of enactment, and, as expected, there is great anticipation about who will be appointed. There are the following specific deadlines:
October 14, 2011 – House and Senate committees may submit recommendations to the Joint Committee regarding proposals for budget cuts, entitlement reform and/or tax reform. It is likely that some of the most ardent lobbying will be from the congressional committees who possess a lot of knowledge and have a territorial interest.
November 23, 2011 – Deadline for the Joint Committee to send to Congress its recommendations, including any legislative language necessary to implement its recommendations – this could include amendments to entitlement and tax statutes. Everything is on the table. The Act requires that the proposal be made available to the public quickly after its transmission to Congress. The proposal will be introduced (by request) as a bill. Congressional committees are not able to change the proposal; the purpose of referral of various parts of the Joint Committee bill to the normal committees of jurisdiction is apparently to ensure that the members understand the proposal and decide whether they want to vote for the final bill. There is an expedited schedule for committees reporting out their sections of the bill, and if they fail to do so, any member of the committee may ask that it be discharged and sent to the floor.
December 23, 2011 – Deadline for the House and Senate to approve the Committee’s proposal. There is an expedited procedure for consideration of the proposal, including time limits on debate and thus no filibuster will be allowed. In addition, no amendments will be allowed.
Possible Sequestration. If Congress does not approve the Joint Committee’s bill and/or if the President vetoes the bill and Congress cannot override the veto, an automatic across-the-board sequestration of federal agency funding will occur. The sequestration would be evenly divided between the Defense Department and the rest of the federal budget. This provision was promoted largely by Democrats in an effort to ensure that the opposition to such a big Defense Department cut would compel members to support the Joint Committee bill. Should the sequestration occur it would be up to the agencies to allocate the reduction among their programs and activities.
Some programs are exempted from the sequestration including child nutrition programs; Child Care Block Grant entitlement funds; Commodity Supplemental Food Program; Family Support Funds; Pell Grants; Grants to States for Medicaid; Foster Care and Adoption; Supplemental Security Income; Social Security; the Temporary Assistance for Needy Families (TANF) program and the TANF Contingency Fund. Among other exempted programs are some veterans programs, appropriations designated as “emergency”, unemployment insurance and civilian and military retirement. Medicare would be limited to a two percent provider reduction (benefits would be exempted).
Pell Grants. The Act provides a total of $17 billion for FYs 2012 and 2013 to supplement Pell grants, with the cost being offset by eliminating the Stafford interest subsidy for graduate and professional students and incentive subsidies for repayment of federal student loans. This would not apply to students in programs leading to a degree or certificate or to programs required by states for teacher certification.
Balanced Budget Constitutional Amendment. The Act requires the House and Senate to vote on a balanced budget amendment to the Constitution between October 1, 2011, and December 31, 2011. Following congressional approval, the amendment would be submitted to the states for ratification.
We attach a Congressional Budget Office (CBO) chart showing projected annual savings relative the FY 2011 baseline.
The next several months will be exceptionally busy in Congress as the Budget Control Act provisions are implemented and as various interests attempt to influence the outcome. Please let us know if we may provide additional information or assistance regarding the Budget Control Act.