The budget agreement between Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI) that was announced earlier this week and passed the House of Representatives with a strong bipartisan vote (332-94) last night is a step forward for the budget process. Reaching agreement on a plan – officially titled the Bipartisan Budget Act of 2013 – that does away with a portion of the destructive sequester is a win for bipartisanship in a town that’s had too little of it lately. However, all agree that the plan does not address the major drivers of our long-term debt.
Agreement between Republicans and Democrats on discretionary spending levels is a positive sign. With defense and domestic levels agreed to for Fiscal Year (FY) 2015 as well, appropriators can begin their work on appropriations bills in order to complete them by October 1, 2014. This would represent a much-needed return to “regular order.” Such a deal also gives policymakers some breathing room to address the nation’s larger fiscal challenges.1
The bipartisan nature of the budget agreement is to be lauded, but it leaves most of the sequester’s cuts in place and many of the negative effects on defense readiness, domestic programs and the economy will remain. Even with the modest relaxation of the sequester caps on discretionary (annually appropriated) spending, important investment areas – such as medical research, education and defense R&D – still face significant restraint. Meanwhile, the real drivers of our long-term debt—spending on entitlements and an inefficient tax code—remain unaddressed.
Policymakers should use the period of certainty that this deal has provided to craft a comprehensive approach to rein in long-term debt and implement policies to boost the country’s anemic recovery from the Great Recession.
Under the deal passed in the House last night, total discretionary spending (defense and non-defense combined) would be set at $1,012 billion in FY 2014 and $1,013 billion in FY 2015. The FY 2014 level is between the Senate-proposed total budget authority of $1,058 billion and the House-proposed total budget authority of $967 billion. (For more information on these spending levels, see here.)
In total, the plan increases discretionary budget authority over the level of the sequester by $45 billion in FY 2014 and by $19 billion in FY 2015. In each of the two years, those increases are split evenly between defense and non-defense discretionary spending.2
The increased spending levels are more than offset by approximately $85 billion of savings in mandatory spending cuts and revenue increases, according to the Congressional Budget Office (CBO).3 When combined with roughly $8 billion in net interest costs (because the deficit-increasing provisions come in the early part of the budget window) that these policies would produce, the Murray-Ryan agreement would result in net deficit reduction of approximately $14 billion over the ten-year window.
The deficit reduction (all estimates are over the ten-year window) is accomplished through a variety of different measures:
* Includes mineral revenue payment and conservation plan fees.
** Includes reducing waste, fraud, and abuse; funding for oil and gas programs; cancelling unobligated balances; and “self plus one” in FEHBP.
Note: Totals may not sum due to rounding.
Source: Congressional Budget Office cost estimate
- Increase various fees:
- Security fees added to airline tickets, which fund the Transportation Security Administration (TSA), would be restructured to generate additional funds under the Murray-Ryan plan. Currently, airline passengers are charged a security fee of $2.50 per enplanement, meaning that someone who flies one-way from Miami to Seattle on a non-stop flight pays $2.50 in security fees, while a passenger who flies between the same two cities with a stop in Minneapolis would pay $5.00 in security fees. Under the restructured security fee in the Murray-Ryan proposal, passengers would be charged $5.60 per one-way trip. In both of the previous examples, the passenger would pay a $5.60 security fee, no matter how many stops he or she makes on the way from Miami to Seattle.
- The Pension Guaranty Benefit Corporation would increase the fees that are charged to insure private pensions.
- The collection of user fees by the Bureau of Customs and Border Protection – an authority that is scheduled to expire in 2021 – would be extended through FY 2023.
- States that receive mineral revenue payments must help defray management costs for the mineral leases that generate the revenue would be made permanent.
- The National Resources Conservation Service would be allowed to charge a fee for assistance in developing conservation plans.
- Increase employee contributions to civil service pensions: Before this year, most federal employees only contributed 0.8 percent of their salaries toward their defined-benefit pensions in the Federal Employee Retirement System (FERS). Last year, policymakers passed legislation that increased this percentage for newly hired employees to 3.1 percent. Moving further in that direction, the Murray-Ryan plans would require federal employees hired after 2013 to contribute 4.4 percent of salary toward their pensions.4
- Adjust military pensions for retirees under age 62: Unlike civil service pensions, military pensions are payable to working-age retirees (as young as age 38, in the case of a servicemember who joined at age 18 and retired after 20 years of service). The Murray-Ryan agreement would reduce the cost-of-living adjustment (COLA) for working-age military retirees to inflation (the consumer price index (CPI)) minus 1 percent starting in 2015, generating savings. (A provision of the bill would ensure that the COLA could never be negative in the case of low inflation.) Once military retirees reach the age of 62, however, pension payments would bump up to a higher level, equivalent to what retirees would have received if the lower cost-of-living adjustment had never applied – this is often referred to as a “catch up.” In other words, this proposal would only reduce the growth of pension amounts for military retirees who are not yet of retirement age.5
- Extend the sequester on Medicare and other non-exempt mandatory spending: In addition to the sequester on defense and non-defense discretionary spending, the Budget Control Act of 2011 mandated an across-the-board reduction to non-exempt mandatory spending programs and a 2 percent sequester cut on Medicare payments to providers and plans. These sequesters were slated to take effect every year through FY 2021. The Murray-Ryan plan would extend those cuts for two additional years – through FY 2023. This measure is estimated to save $28 billion, with a majority coming from Medicare.
- Reduce some payments to student loan guarantors and loan servicers: Under current law, loan guaranty agencies are allowed to retain a portion of outstanding student loans when they “rehabilitate” a loan—or bring it back from default. This proposal would return the full loan to the federal government after the loan is rehabilitated. Combined with another provision, the proposed changes to student loans are projected to save $5 billion.6
- Other provisions:
- Improve waste, fraud and abuse efforts in unemployment insurance and Medicaid, and better identify those who are no longer eligible for government benefits;
- Reduce funding for oil and gas exploration programs, the Strategic Petroleum Reserve (by rescinding unobligated balances that were deposited the last time oil was released and sold), and how much interest oil and gas producers are repaid if they overpay royalties;
- Cancel the vast majority of unobligated balances in the Department of Justice’s Assets Forfeiture Fund and the Treasury’s Forfeiture Fund – both of which collect the proceeds of forfeited assets from criminal activities.
- Limit the maximum amount contractors can charge the federal government for any single employee’s compensation to $487,000 in 2014 and index it to the Employment Cost Index in future years. Agency directors would be allowed to establish “narrowly targeted” exceptions to this limit for scientists, engineers or other specialists if needed to ensure “continued access to needed skills and capabilities.” Because of a flawed indexing formula, the limit had grown dramatically in recent years to $952,308.7
- Add a new coverage option for “self plus one” for federal employees and retirees under the Federal Employee Health Benefits Program (FEHBP). Current law allows only “self” or “self-plus-family” options. Adding the new option would decrease the federal government’s contributions for those who move from “self-plus-family” into “self-plus-one,” but would increase contributions for those who remain in the “self-plus-family” pool as its average family size grows larger.8
Alex Gold contributed to this post.
1However, this legislation did not include a provision on the debt limit, leaving it as an issue that will need to be addressed early next year.
2 Because not all budget authority is spent, the actual increase in spending (i.e., outlays) from these raised caps is projected to be $62 billion over the ten-year window.
3 The only major provision in the legislation that is scored as a “revenue increase” by CBO is the increase in civil service pension contributions.
4 A few categories of newly hired federal employees – e.g., law enforcement officers, nuclear materials couriers and customs and border protection officers – currently pay 3.4 percent and foreign service employees pay 3.65 percent. This plan would also increase the contributions of newly hired workers in these areas by 1.3 percentage points.
5 Pre-funding contributions for Department of Defense (DoD) retirement funds are based on anticipated future retirement spending and are made from discretionary budget authority—so this provision will create more breathing room under DoD’s spending caps. CBO estimates that the provision will decrease discretionary budget authority that must be allocated to government pension contributions by about $8 billion during the 2014-2023 period. As long as DoD remains within the revised discretionary caps (established by the Bipartisan Budget Act), this budget authority can be allotted to other priorities. For more information on this complicated issue, please see http://crfb.org/blogs/offsetting-defense-sequester.
6 CBO notes that the other part of the student loan provisions would effectively just move approximately $3 billion of mandatory higher education funding over to the discretionary side of the budget, meaning that those funds would have to be incorporated under the revised caps that are proposed for non-defense discretionary spending in this legislation.
7 CBO did not include a cost estimate for this provision in its report.
8 CBO explains that this shift would, on average, increase federal government contributions for current employees (who are more likely to have multiple family members covered under their plans), while reducing the contributions for retirees. Importantly, since the federal government’s FEHBP contributions for retirees are classified as mandatory spending – as opposed to the contributions for current workers, which are classified as discretionary spending – this proposal would reduce mandatory spending. The additional contributions for current workers would be made out of discretionary spending, which would be capped (per the other provisions of this agreement), meaning that these contributions would need to be squeezed under the discretionary cap.