Beginning of Federal Government Shutdown
All federally appropriated programs were funded only through the end of Fiscal Year (FY) 2013 (ending September 30) by the continuing resolution and appropriations bill (H.R. 933) passed in March. The Federal Government was shut down when the House of Representatives and Senate failed to reach agreement on funding for FY 2014. Under the shutdown, approximately 1.3 million “excepted” federal workers continued working with their pay delayed and approximately 800,000 “non-excepted” federal workers were furloughed. Pay for non-excepted workers was retroactively restored in the continuing resolution that ended the shutdown.
Official Start of Fiscal Year 2014 Sequester Cuts to Mandatory Spending
Across-the-board cuts to non-exempt mandatory spending went into effect at higher levels than in Fiscal Year 2013. The majority of mandatory savings from sequestration will come from the continuation of a 2-percent cut to most Medicare payments to providers and plans, which has been in effect since April 1, 2013. On October 1, cuts to other non-exempt mandatory spending programs rose to roughly 7.2 percent (from 5.1 percent in FY 2013), according to the Office of Management and Budget. In contrast to the mandatory cuts, FY 2014 sequester cuts to discretionary spending will be implemented 15 days after the end of the current congressional session, probably at some point in mid-January.
Expiration of Both the Temporary Assistance for Needy Families (TANF) Authorization and the Farm Bill Extension
TANF is a block grant program that funds a wide range of benefits and services for low-income families with children. The program was due for a long-term reauthorization in 2010; instead, it was given a series of short-term extensions through the end of Fiscal Year 2013. Funding for TANF was again extended on a short-term basis (through January 15, 2014) as part of the continuing resolution that reopened the government. The comprehensive farm bill is usually reauthorized every five years or so and addresses a broad assortment of agricultural programs, including subsidies, crop insurance, and the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. The 2012 effort to pass a new farm bill that would start in 2013 was unsuccessful, and so the previous bill from 2008 was extended as part of the “fiscal cliff” deal at the end of 2012. This extension lapsed at the end of September. Thus, the nation is currently operating without a farm bill, which will become a significant problem after January 1, 2014. A conference committee began meeting on October 30, 2013 to resolve significant differences between the House and Senate versions of the bill that were passed over the summer. The most contentious of these differences is likely to be funding for SNAP, which would be cut by $4 billion in the Senate version and by nearly $40 billion in the House version.
Continuing Appropriations Act of 2014 is Signed, Government Shutdown Ends, and Debt Limit Is Suspended
President Obama signed the Continuing Appropriations Act of 2014 into law just after midnight on October 17. This law funds the federal government (including TANF) through January 15, 2014, suspends the debt limit through February 7, 2014, and includes a minor provision requiring the Secretary of Health and Human Services to certify that there is verification of income for applicants who access health insurance subsidies established by the Affordable Care Act. The agreement to reopen the government included commitments by the leadership of the House and Senate to appoint a conference committee tasked with reaching a compromise between the House and Senate budgets for the full fiscal year, with the goal of reporting an agreement by December 13.
Conference Committee on the Budget Is Instructed to Report Back
The 29-member conference committee that was established in the wake of the Continuing Appropriations Act in October and is chaired by House Budget Committee Chairman Paul Ryan (R-WI.) and Senate Budget Committee Chairman Patty Murray (D-WA) has been instructed to report back to the full bodies by December 13. The committee is tasked with finding common ground on a budget for Fiscal Year 2014, and it may also address other tax and spending issues, including replacing some or all of the sequester cuts with alternative means of deficit reduction.
Expiration of Tax Extenders and Medicare Extenders. (Medicare Physician Payments Scheduled for 24-percent Cut.)
A number of temporary tax breaks – often called the “tax extenders” – that impact an extremely broad range of industries and individuals are scheduled to expire at the start of the New Year. These breaks range from tax deductions for classroom expenses incurred by school teachers to deductions for state and local sales tax and accelerated depreciation rules for business property on Indian reservations. They are projected to cost a total of $797.9 billion if they are all extended for every year from 2014 to 2023. The Medicare Sustainable Growth Rate (SGR) is designed to limit the aggregate growth in physician payments to that of the broader economy, but Congress has repeatedly suspended the formula’s scheduled payment cuts (the “doc fix”) and now these mandated cuts to payments have grown quite large. Absent legislative action, the SGR is set to cut approximately 24 percent from Medicare physician payment rates beginning January 1st. Other Medicare extensions have typically included an extension of the Medicare Dependent Hospital (MDH) program, higher payments for ambulance services, and a continuation of the exceptions process that provides coverage for outpatient therapy services. Other non-Medicare health extensions include the qualifying individual (QI) program (Medicare premium assistance for certain low income individuals), Transitional Medical Assistance (a temporary exception to Medicaid eligibility requirements for individuals who increase their work hours/earnings), and extension of the Medicaid and CHIP Express Lane Option.
Continuing Resolution Expires
The continuing resolution for Fiscal Year (FY) 2014 that was enacted in October will expire on January 15, and new appropriations legislation will be required in order to prevent another government shutdown. Currently, discretionary appropriations are being funded at an annualized level of $986 billion, which is a continuation of the post-sequester levels from FY 2013. For reference, the Budget Control Act cap for FY 2014 before sequestration is $1.058 trillion.
Enforcement of Fiscal Year 2014 Sequester on Discretionary Spending
The discretionary spending caps determined by the Fiscal Year 2014 sequester will automatically be enforced through across-the-board cuts of non-exempt activities, if necessary, 15 days after the end of the current session of Congress. The session is widely expected to go into recess on January 3, 2014, in which case enforcement of the discretionary sequester would occur on January 18. The continuing resolution that was passed in October funded discretionary programs at an annualized level of $986 billion. This is approximately $19 billion over the total discretionary sequester level ($967 billion) for FY 2014 – the current fiscal year. The sequester’s automatic cuts to defense and non-defense discretionary spending for this year will go into effect only if congressional appropriations exceed the respective caps specified in the Budget Control Act. If the current continuing resolution is extended for the whole of 2014, non-defense discretionary is already under its cap and would not be cut further, while non-exempt defense discretionary would face an across-the-board cut of approximately $20 billion.
Debt Limit Reinstated at Approximately $17.3 Trillion
Absent action from Congress, the debt limit will be reinstated on February 8, 2014 at approximately $17.3 trillion, reflecting roughly $600 billion in deficit spending and increased intragovernmental debt since the limit was previously reinstated on May 19, 2013. Once reinstated, the U.S. will be up against its debt limit and the Treasury will immediately begin deploying “extraordinary measures” – legal accounting maneuvers that reduce intragovernmental debt and allow the Treasury to raise a limited amount of cash – to comply with the debt limit and continue meeting all financial obligations of the federal government for an additional period of time.
Extraordinary Measures to be Exhausted
If extraordinary measures are exhausted before policymakers act to increase or suspend the debt limit, the U.S. government will be unable to meet all of its financial obligations shortly thereafter, which include Social Security benefit payments, the salaries of our men and women in the armed forces, and interest payments on the national debt. Because the federal government runs a large cash deficit in February, extraordinary measures will be exhausted much more quickly than they were during the prior debt limit event, when they lasted nearly five months. In particular, the timing and volatility of tax refunds creates significant uncertainty about exactly when the extraordinary measures will be exhausted, but the Bipartisan Policy Center currently projects that the most likely window is between late-February and mid-March of 2014.