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The Good, The Bad, and The Gimmicks: How the Senate Plans to "Cut" Nearly $40 Billion in Future Spending While Saddling Taxpayers with New Burdens

by Demian Brady / /

A new "sheriff" was recently seen roaming the streets of Washington, one that left town in 1997 and has been in hiding like an outlaw until his return as the enforcer of fiscal discipline. Although his absolute power is mild and meek compared to the past, many advocacy groups looking for a fistful of federal dollars – any which way they can – are running scared that spending restraint may strengthen and restore order to a place that has begun to resemble the Wild West in recent years.

For the first time in eight years, Congress is on the verge of actually using the budget process to slow rather than expand the growth of government outlays. However, as we have seen all too often in Washington, even legislation that is billed as "spending restraint" does not necessarily live up to the definition many Americans apply to that phrase. In the coming days the Senate will consider a package of proposals that, while taking a slice out of future spending, will also lead to billions of dollars in new spending. With apologies to Clint Eastwood, the following is an analysis of the various provisions contained in S. 1932, the Deficit Reduction Omnibus Reconciliation Act of 2005.

The Good

  • The bill achieves savings in mandatory programs amounting to a net of nearly $40 billion over the next five years. This is a modest step toward restoring fiscal discipline in Washington.
  • All direct and countercyclical farm program payments would be reduced by 2.5 percent through 2010, for a savings of $1.296 billion over five years.
  • This legislation imposes a penalty on farmers who forfeit sugar pledged as collateral instead of redeeming the loan by the end of the term, thus acting as a disincentive to this practice.
  • S. 1932 tightens the acreage enrollment in the Conservation Reserve Program in order to reduce spending by $640 million over five years; plenty of programs already pay farmers not to grow food.
  • A small portion of the Arctic National Wildlife Refuge would be open to oil and gas drilling.
  • The bill raises premiums for defined benefit retirement plans insured by the federal Pension Benefit Guarantee Corporation (PBGC). Although the resulting $6.7 billion in offsetting receipts is not a "cut" per se, NTUF has long argued that PBGC provides a net taxpayer subsidy of billions of dollars annually to corporations that chronically underfund their defined benefit plans. This is a minor step toward reducing that subsidy.
  • S. 1932 contains several provisions to reduce fraud, waste, and abuse in the Medicaid program. Most of the $403 million in savings result from a clause that makes it easier for states to avoid overpayments to Medicaid recipients who also have private health insurance.
  • The bill provides for $11.9 billion over five years in Medicare savings by eliminating risk adjustment payments to Medicare Advantage programs, and eliminating the Medicare Advantage Regional Stabilization Fund.

The Bad

  • The total reductions contained in S. 1932 (nearly $40 billion) pale in comparison to previous reconciliation packages.

Table 1. Total Savings in Recent Reconciliation Acts

Act

5-Year Total Savings

5-Year Total Savings Adjusted for Inflation

Omnibus Budget Reconciliation Act of 1990

$75 billion

$114 billion

Omnibus Budget Reconciliation Act of 1993

$77 billion

$106 billion

Balanced Budget Act of 1995

$249 billion

$325 billion

Balanced Budget Act of 1997 and Taxpayer Relief Act of 1997

$107 billion

$133 billion

  • The President's Fiscal Year 2006 Budget forecast that spending over the FY 2006-FY 2010 period will total $13.893 trillion. The cuts in this bill would trim just under three-tenths of one percent from the federal budget over the next five years. The plan is supposed to take effect beginning in FY 2006, which actually commenced a month ago on October 1. (Yes, the government is again late in passing its own budget.)
  • A few years into this five-year plan, Congress could change its mind and restore the spending that is slated for reduction. In 1997 Congress announced a five-year strategy to cut the budget by $107 billion. But by 1998, lawmakers had resorted to passing "emergency appropriations bills," the main ones being for farm subsidies.
  • The legislation lifts the Federal Deposit Insurance Corporation cap on Individual Retirement Accounts from $100,000 to $250,000, and allows future inflationary adjustments on the insurable cap for other types of accounts. This could increase the size and risk of taxpayer liabilities.
  • The original bill contains new spending – adding up to $33.5 billion – that undermines the level of savings in the bill. Among the 40 spending provisions in the bill:
    • An extension of the Dairy Market Loss Payments at a cost of $998 million over five years;
    • An item directing the Secretary of Commerce to spend up to $3 billion on inducing the 15 percent or so of TV viewers with analog programming to make the switch to digital service;
    • A sum of $116 million over five years to convert low-power television and television translator stations to digital technology; and,
    • An earmark ordering the Secretary of Commerce to spend $15 million annually in spectrum auction proceeds for Essential Air Service. Apparently, if television viewers in Bismarck can't receive over-the-air TV broadcasts, taxpayers should provide subsidies for live entertainment to come to them.
The Gimmicks
  • The reductions in countercyclical crop payments to farmers do not apply to payments made in 2011 and subsequent crop years. Thus, the modest savings found in this bill are temporary at best.
  • The bill includes a "savings" of $1.088 billion by reducing the advance direct payments of loans that certain farmers are eligible to receive. But this provision merely shifts the timing of payments and does not affect the total value of funds a farmer would receive. To the degree that benefits are reduced now, later payments will be higher. The Congressional Budget Office reports that some payments will be shifted beyond 2015.
  • A few programs are switched in status from mandatory to discretionary spending. The bill reports a reduction of $270 million over five years by reclassifying a grant program from the Federal Housing Administration as subject to appropriation instead of a direct spending program. Normally, taking programs off "auto pilot" is helpful to taxpayers, but the bill goes on to authorize appropriation over the first three years at the same level of funding. It is doubtful that Congress will fail to maintain this funding in later years.
  • The bill reports $72.496 billion in savings over five years, however a significant portion (49.5 percent) of these savings are from user fees and offsetting receipts. While some of these changes may bring financial stability to various federal programs, they do not reduce the overall size and burden of the federal government.
    • $15.075 billion (20.8 percent of the total) will be collected in offsetting receipts from changes to the formulas for borrower interest rates and lender yields under the federal student loan program. Ultimately, students will be paying higher interest on their education loans.
    • $10 billion (13.8 percent) will be collected from the auction of digital spectrum.
    • $6.736 billion (9.3 percent) will be collected in offsetting receipts through an increase in the premiums for pension plans through the Pension Benefits Guarantee Corporation. As mentioned above, while this reform is important to the overall future financial picture, it does not constitute an actual reduction of mandatory spending.
    • $2.501 billion (3.4 percent) will be netted in offsetting receipts from oil and gas leasing in the Arctic National Wildlife Refuge.
    • $1.563 billion (2.2 percent) will be collected in offsetting receipts through increased lender fees in the direct student loan program, increased fees for certain visas, premiums for bank deposit insurance, and FCC licenses.

Conclusion

It has been a tough fight in the Senate to reach the levels of savings contained in S. 1932. In a perfect world, enforcing budget restraint would not so closely resemble running the gauntlet. Already, some Senators looking for a few dollars more are offering amendments for additional spending in this bill before its final vote. Will fiscal conservatives call their bluff, or will taxpayers be left on heartbreak ridge?


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