June 26, 2017

WEEKLY REPORT: July 29, 2008

WEEKLY REPORT: July 29, 2008
Housing legislation boosts debt ceiling to $10.6 trillion Amid Worries About Fannie and Freddie, Congress Passes Sweeping Housing Bill FY '09 Appropriations Bills Remain Stalled, but Action on Defense Spending Possible Baucus Introduces new Tax Extenders, AMT Bill; Floor Action Possible This Week Administration Projects '09 Deficit Nearing $500 Billion


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Budget Process: Step-by-Step

July 29: House Rules Committee meets to consider rules for debate of the Mil Con-VA Appropriations (the first '09 Appropriations bill brought to the Floor

July 30: House Appropriations Defense Subcommittee to mark-up FY '09 Defense Appropriations bill

July 30: Possible Senate cloture vote on Tax Extenders Bill (see article below)

Housing legislation boosts debt ceiling to $10.6 trillion

The housing and mortgage relief bill that passed Congress last week, and is on its way to an expected presidential signature, contains a little noticed increase in the statutory limit on the public debt to $10.6 trillion.

Last week's "quiet" increase in the debt ceiling is unusual, particularly with the debt ceiling shooting past $10 trillion for the first time. Typically, this type of negative fiscal milestone would generate considerable debate about our nation's unsustainable fiscal policies.

Background on the debt ceiling:

Federal law contains a statutory limit on the public debt commonly called the "debt ceiling." The debt ceiling places a technical limit on Gross Federal Debt -- which is the sum of: (1) Debt Held by the Public; and (2) Debt Held by Government Trust Funds.

Debt Held by the Public refers to funds borrowed by the Treasury from individuals as well as state, local, and foreign governments to cover budget shortfalls.

Debt Held by Government Accounts refers to securities issued to government trust funds--such as the Social Security Trust Funds--that are required by law to invest their surpluses in Federal securities.

While one might assume that a mechanism called the "statutory limit on the public debt" serves as a form of budgetary restraint, as a practical matter the debt ceiling does not restrain Federal borrowing. Rather, it simply reflects the amount of debt that has accumulated as a consequence of fiscal policy decisions.

In actuality, Congress will always raise the "debt ceiling" to whatever amount is needed to pay the government's bills and redeem Treasury securities. Allowing the Treasury to default is never a viable option.

A statutory limit on the public debt has been in effect since 1940, when "debt subject to limit" stood at $43 billion. The debt ceiling reached $269 billion by the end of World War II and then declined to $250 billion during the postwar boom. It surpassed $500 billion in 1975 and $1 trillion in 1982. Since the early 1980s, the debt ceiling has increased rapidly to $2 trillion in 1986, $3 trillion in 1990, $4 trillion in 1993, $5 trillion in 1996, $6 trillion in 2002, $7 trillion in 2004, $8 trillion in 2006, and now $10.6 trillion in 2008.

(For a short time--fiscal years 1998-2001--debt held by the public decreased due to budget surpluses.)

Since increases in the statutory limit on the Federal debt must occur in order to fulfill the financial obligations of the United States, the debt ceiling is more of a political instrument than a fiscal instrument. It provides a backdrop for congressional debate about fiscal policy -- even though the financial necessity of passing the debt ceiling increase is never in doubt.

It is instructive that last week's increase in the debt ceiling was handled quietly. Few Members of Congress are ready, in the midst of an a critical election season, to address the major changes in health policy, tax policy, and entitlement programs that are required to bring skyrocketing deficits under control.

Amid Worries About Fannie and Freddie, Congress Passes Sweeping Housing Bill

Amid worries about the stability of Fannie Mae and Freddie Mac, Congress moved quickly last week to complete action on a comprehensive housing bill (HR 3221). The measure easily passed the House last Wednesday by a vote of 272-152, with nearly all Democrats and about one quarter of Republicans supporting the measure.

The Senate passed the measure Saturday morning by a vote of 72-13.

Major provisions of the bill -- titled the American Housing Rescue and Foreclosure Prevention Act of 2008 -- include the following:

1. In order to shore up confidence in Fannie Mae and Freddie Mac, the bill gives the Treasury Secretary authority to increase the line of credit available to both entities for the next 18 months; and gives the Treasury Department emergency authority (through Dec. 31, 2009) to purchase stock in Fannie and Freddie.

In estimating the cost of these provision, the Congressional Budget Office reviewed various scenarios. CBO noted "a significant chance--probably better than 50 percent--that the proposed new Treasury authority would not be used before it expired at the end of December 2009." CBO also acknowledged the possibility that the costs to the Treasury could be considerable--as high as $100 billion. However, on balance, "taking into account the probability of various possible outcomes," CBO estimated a Federal cost of $25 billion over fiscal years 2009 and 2010.

Under Congress' PAYGO rules, the estimated cost of $25 billion would normally have to be offset, but Congress chose to waive the rules--and instead required that the authority only be available if the Secretary of the Treasury declares an "emergency."

It should also be noted that if the emergency Treasury authority is used, the practical impact would be to raise the public debt--essentially shifting the financial burden to subsequent generations.

2. Create a new independent agency (the Federal Housing Finance Agency) to regulate Fannie and Freddie through minimum capital requirements, limiting the size of portfolios, and limiting executive pay.

3. Permanently increases the cap on mortgages Fannie and Freddie can purchase (known as the "conforming loan limit") to the lesser of $625,000 or 115% of an area's median home price.

4. Authorizes $300 billion in Federal Housing Administration (FHA) loan guarantees through FY 2011 to help at-risk borrowers restructure high-cost loans with rapidly rising payments for more affordable mortgages backed by FHA. (As home prices have fallen, many borrowers now owe more than their homes are worth, making it impossible to refinance variable rate mortgages.) Lenders participating in this program would voluntarily accept a write-down in exchange for a Federal loan guarantee.

(Context: The cost to the Treasury is not $300 billion, as many media reports have suggested. These are Federal loan guarantees, which means that private lenders provide the loans and a cost accrues to the Federal government only when a default occurs.)

5. Creates a $7500 refundable tax credit for first-time homebuyers (that would have to be repaid over 15 years).

6. Creates a standard deduction for property taxes for non-itemizers ($500 for single filers and $1000 for joint.)

7. Authorizes an additional $11 billion in tax-exempt housing bonds to finance new mortgages and low-income housing.

8. Pays for the above tax provisions with new IRS reporting requirements, and delaying a rule regarding allocation of interest by multinationals.

9. Provides $3.9 billion in grants to state and local governments to purchase and rehabilitate abandoned and foreclosed homes. (The Administration had earlier threated to veto the bill over this provision, arguing it was a bailout for lenders who foreclosed on properties. Democrats argue it would stabilize urban neighborhoods.)

10. Increases the statutory limit on the public debt from $9.8 trillion to $10.6 trillion (discussed in the previous article).

Background--Fannie Mae, Freddie Mac, and the Federal Budget

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are congressionally chartered--but shareholder owned--financial institutions created to establish and maintain a secondary mortgage market. Fannie and Freddie support the residential home mortgage market by purchasing mortgages from lenders, who then use the proceeds to make more loans available to homebuyers. This eliminates regional disparities in mortgage rates and draws financing from around the world.

Fannie and Freddie raise capital for the purchases by: (1) issuing bonds; and (2) "securitization" which involves bundling similar mortgages together and reselling them as securities.

According to the Congressional Research Service, "the biggest advantage that Fannie Mae and Freddie Mac enjoy over other private companies is the presumption on the part of investors that, were the enterprises to fall into dire financial straits, the government would bail them out" -- an advantage reflected by this legislation.

CBO: Cost Estimate of H.R. 3221, the Housing Bill
JCT: Revenue Estimates of Tax Provisions in the Housing Bill
JCT: Explanation of Tax Provisions

CBO: Cost of Administration's Proposal to Authorize Assistance for Freddie and Fannie

FY '09 Appropriations Bills Remain Stalled, but Action on Defense Spending Possible

By late July, the House of Representatives would typically have completed action on most of the 12 regular appropriations bills that fund the departments of government.

However, as reflected in the chart below, as of last week neither the House nor the Senate had brought a single appropriations bill to the Floor--and the House lags well behind the Senate in Committee action (with 9 full committee markups in the Senate compared to only 5 in the House Committee).

The first bill to be acted on by the House will be the Mil Con-VA bill scheduled for Floor action this week.

Another bill that may see Floor action before Congress adjourns in September is the Defense Appropriations Bill. Recently, House Speaker Nancy Pelosi (D-CA) said "I know the Defense bill, appropriations bill, will be passed" and Senate Majority Leader Harry Reid (D-NV) concurred.

This reflects a couple factors:

--First, President Bush has threatened to veto any appropriations bills that exceed his request, and Democrats--as reflected in the Budget Resolution--have called for nearly $25 billion more than the President requested. If Democrats wait until after the presidential election to make FY '09 funding decisions, they may be working with a Democratic President. As reported by Congressional Quarterly, Senate Majority Leader Harry Reid (D-NV) said recently, "I hope we would do a continuing resolution until after Sen. Obama becomes President."

--In addition, House Republicans have been attempting to amend appropriations bills with off-shore oil drilling amendments, opposed by many Democrats. On June 26, House Appropriations Chairman David Obey (D-WI) suspended markup of the Labor-HHS appropriations bill when Republicans attempted to amend the bill with unrelated oil drilling language.

Despite the unlikelihood of Floor action this fall, non-defense appropriations action at the Senate committee level has been proceeding -- which will facilitate final action on '09 bills after the election.

[Click on the blue links for information on each appropriations bill.]

Latest House Committee
Floor Action
Latest Senate Committee
Floor Action
Action; President
Agriculture Subcomm: 6/19 -- Full Comm: 7/17 -- --
Commerce-Justice-Science Full Comm: 6/25 --
Full Comm: 6/19 -- --
Defense** -- --
Energy-Water Full Comm: 6/25 -- Full Comm: 7/10 --
Financial Services Full Comm: 6/25 -- Full Comm: 7/10 --
Homeland Security Full Comm: 6/24 -- Full Comm: 6/19 --
Interior-Environment Subcomm: 6/11 -- --
Labor-HHS-Education Subcomm: 6/19
-- Full Comm: 6/26 --
Legislative Branch Subcomm: 6/23 -- --
Military Construction-VA Full Comm: 6/24 -- Full Comm: 7/17 --
State-Foreign Operations Subcomm: 7/16 -- Full Comm: 7/17 --
Transportation-HUD Subcomm: 6/20 -- Full Comm: 7/10 --

**War funding for the first part of FY '09 was provided in the FY '08 Supplemental Appropriations Bill.

Click here for additional details on status of appropriations bills.

Background on Appropriations.--The 12 annual appropriations bills provide funds for all of the discretionary programs, projects, and activities of the Federal government. In total, the 12 appropriations bills allocate about $1 trillion of discretionary spending -- one-third of the $3 trillion Federal budget.

(The other $2 trillion consists of entitlement programs-- the largest being Social Security, Medicare, and Medicaid--as well as interest payments on the Federal debt and other "mandatory spending.")

The total amount of funding available for the annual appropriations bills is determined by the Congressional Budget Resolution. The House and Senate completed action June 5th on S.Con.Res. 70, the Congressional Budget Resolution for FY 2009 (the fiscal year beginning October 1, 2008).

Following adoption of the Budget Resolution, the House and Senate Budget Committees provided to their respective Appropriations Committees a lump-sum discretionary spending allocation (called a "302(a) allocation"). The total allocation for FY '09 was approximately $1,013 billion --about $21 billion higher than the President's $992 billion request ($24.5 billion more than the President's request when advance appropriations and special adjustments for enforcement initiatives are included).

After receiving their respective 302(a) allocations, the House and Senate Appropriations Committees allocated total discretionary spending among their 12 respective subcommittees. These suballocations are called "302(b) allocations" and determine how much funding authority is available for programs under the jurisdiction of each subcommittee.

The Senate Appropriations Committee approved its 302(b) subcommittee allocations on June 19. The House Appropriations Committee approved its suballocations the week of June 24. The following table compares the subcommittee allocations with the President's request.

(discretionary budget authority allocated to appropriations subcommittees)

'08 Enacted

'09 Request

Senate FY'09

House FY
'09 Allocations
Senate Allocation
Compared to President
Defense (w/o war funding)
Homeland Security
+ 2.5
Military Con-Veterans Affairs
+ 3.7
State-Foreign Ops
- 1.6


Nondefense Domestic Discretionary:

Financial Services-General Govt
Legislative Branch
- 0.4
Subtotal - Nondefense Domestic:


Total Discretionary

*($24.5 billion more than the President's request when advance appropriations and special adjustments for enforcement initiatives are included.)

Baucus Introduces new Tax Extenders, AMT Bill; Floor Action Possible This Week

In an attempt to garner the votes necessary to break a lengthy impasse, Senate Finance Committee Chairman Max Baucus (D-MT) late last week introduced a revised "tax extenders" and energy incentives bill, including a one-year "patch" for the Alternative Minimum Tax (AMT).

The new bill, S. 3335, was placed directly on the Senate calendar -- bypassing the Finance Committee -- leaving open the possibility of Floor action prior to Congress' recess at the end of this week. A cloture vote on the bill may occur as early as July 30.

However, Senate Finance Committee Ranking Republican Charles Grassley (R-IA) has already indicated he will oppose the Baucus bill. According to BNA, Grassley said he objects to the bill because the legislation, "should not use tax increases to extend existing tax policy."

The revised Baucus bill includes:

--$17 billion in energy tax incentives;
--$28 billion in one-year tax extenders;
--$9 billion in "additional relief";
--$54 billion in revenue offsets to pay for the above provisions;
--$5.3 billion (not offset) in disaster relief provisions; and
--$64 billion (not offset) for a one-year AMT patch

House Bill has been mired in a partisan fight over offsets

The House-passed measure (HR 6049) has been mired in a partisan disagreement over offsets. House and Senate Democrats want to offset the costs of the bill as required by current PAYGO rules, while Republicans disagree with the PAYGO requirement.

The current House and Senate PAYGO rules were put in place when Democrats regained the majority in 2007. They are based on the PAYGO law of the 1990s, which required that any new tax cuts need to be offset by revenue raisers (or entitlement cuts), and new entitlement spending has to be offset by spending cuts (or revenue raisers).

However, unlike the PAYGO statute of the 1990s (which was enforced through the threat of automatic entitlement cuts), the current PAYGO rules lack any statutory enforcement mechanism. Consequently, it has been difficult to enforce the current rules, which have already been waived a number of times. Most notably, last year's AMT patch was not offset.

Senate Democrats have already conceded that this year's AMT patch will not be offset, but they have joined House Democrats in their insistence that the tax extenders and energy incentives must be offset.

Due to this fundamental disagreement over PAYGO, Senate Republicans have twice blocked consideration of the House extenders bill. Forty-one Republican Senators (the number needed to successfully filibuster legislation) signed a letter opposing the use of any offsets for extenders or AMT relief. (The letter was signed by the party leadership, Senator John McCain (R-AZ), and all Finance Committee Republicans except for Maine Senator Olympia Snowe.) Text of the Senate Letter

In addition to placing a broad array of tax extenders and incentives in legislative limbo, the partisan logjam has also cast doubt over when and how this year's AMT patch will be enacted. Failure to extend Alternative Minimum Tax Relief through 2008 would result in the AMT boosting taxes for 21 million taxpayers.

Among the Items that would be extended by the new Baucus bill are:

--the R&E tax credit (usually referred to as the research and development credit)
--the option to deduct state and local sales taxes instead of income taxes
--the deduction for qualified tuition expenses
--tax-free distribution from IRAs to certain public charities
--the deduction for teacher classroom expenses
--the "new markets" tax credit
--15-yr straight-line cost recovery for certain business improvements
--expensing of "Brownfields" environmental remediation costs
--other provisions described in the revenue estimates below

Among the energy tax incentives in the new Baucus bill are:

--$10.6 billion over 10 years for alternative energy production incentives
--$1.8 billion over 10 years for transportation and domestic fuel security provisions
--$4.4 billion over 10 years for energy conservation and efficiency provisions
--other provisions described in the revenue estimates below

Other revenue provisions include:

--Parity in mental health and substance use disorder benefits
--Secure rural schools

Among the revenue offsets in the bill are:

--Modifying tax treatment of deferred compensation of managers of offshore hedge funds
--Delaying the implementation of interest allocation provisions affecting multinationals
--Mandate reporting by brokers for transactions involving publicly traded securities

JCT Preliminary Revenue Estimate of Baucus Bill
Committee Description of Baucus Bill (summary of provisions)
JCT Revenue Estimate of House-passed bill
JCT Description of House-passed bill

Veto threat on the House bill due to the revenue raisers

Administration Projects '09 Deficit Nearing $500 Billion

On Monday, the Administration released its Mid-Session Review -- which updates the budget estimates released in early February. The Administration projects a deficit nearing $500 billion in FY 2009 -- at the same time projecting a "balanced budget" in 2012.

Similar to the Budget released in February 2008, the near-term balanced budget projections are illusory for the following reasons:

1. The projections fail to include war funding for Iraq and Afghanistan beyond mid-2009 -- which is highly unrealistic even assuming that a withdrawal from Iraq begins next year, as well as the bipartisan expectation that resources for operations in Afghanistan will have to increase.

2. The budget assumes only a one-year (2008) "patch" for the Alternative Minimum Tax (AMT), despite widespread expectations that AMT relief is likely to be provided in each of the next 5 years.

3. The Administration projections assume unrealistic deep cuts in nondefense discretionary programs that fund infrastructure, education, public health, disaster relief.

4. The near-term projections are based, in part, on Social Security surpluses--that will decline and disappear by 2017 as the boomers retire.

Despite the unrealistic short-term projections, the Mid-Session Review more accurately highlights the long-term fiscal crisis facing the nation due to skyrocketing expenditures for Medicare, Medicaid, Social Security, and interest on the debt. Entitlement spending and interest on the debt will consume nearly all Federal revenues by 2030 without a dramatic change in fiscal policies.