They’re Back! Congress Likely To Pass Short Term Budget Deal

Congress comes back after Labor Day and its 535 lawmakers will face one of the most convoluted legislative tangles in recent memory. While there is no clear endgame yet, all parties know what must be done and — roughly — by what time.

Up first is the resolution of disapproval for the administration’s Iranian nuclear deal, which must be considered by September 17. Rumors are that House leaders intend to move the resolution concurrently with the defense policy bill (NDAA), which is essentially complete after House and Senate Armed Services Committee conference negotiations this summer.

Next up after these two major items will come a spending bill of some kind so the federal government does not shut down. A one-month (maybe longer) Continuing Resolution (CR) to prevent a government shutdown on October 1 is the most likely path.

Once a short-term CR is — presumably — out of the way, the budget endgame will begin to take shape. There will most likely be a deal to lift the Budget Control Act caps, but the final spending bill will not be in the model of Ryan-Murray, nor will it led by Budget Committees leadership. This new omnibus appropriations deal will actually lift defense and non-defense discretionary caps higher than they would have risen otherwise—essentially meeting the President’s requested levels and the Republican-passed budget for defense.

The main challenges to a bipartisan budget deal will be the necessity of addressing both the expiration of the highway spending reauthorization — November 1 — and the non-negotiable debt ceiling increase — sometime between mid-November and early December.

Potent political issues include immigration, Export-Import Bank reauthorization and efforts to defund Planned Parenthood also threaten to intrude, particularly as Republican presidential candidates look to make an impression on voters. Still, in the end, the Defense Department will come out better after these bills threaten to collide in a fireball explosion than a standalone fix like Ryan-Murray 2.0.

GOP Hopes to Link Iran & NDAA Bills; Will Dare President to Veto Both

The Iran deal must be accepted or rejected by Congress before September 17th. Congressional Democrats appear poised to not only cement a veto-proof majority, but to muster 41 Senate Democrats to filibuster the deal and save President Obama the embarrassment of vetoing opposition to his flagship foreign policy legacy. This is smart because House leadership is keen to have the president veto both the congressional Iran resolution and the military’s annual policy bill—which he has threatened to do previously—to demonstrate to voters his inverted priorities.

Now that there appears to be enough votes to allow President Obama to save face, talk of formal rejection of the deal has quickly waned. Still, a bipartisan collection of members of Congress has begun to discuss new sanctions against Iran, led by Congressman Ed Royce (R-Calif.) and Senators Mark Kirk (R-Ill.), Lindsey Graham (R-SC), and Bob Menendez (R-NJ).

Following an ambitious plan to pass the NDAA before the just-ended August recess, the Senate and House are now tidying up the final details of their conference report. The remaining issues are all within reach of a quick compromise: changes to the Army Field Manual; plans to close Guantanamo Bay; and modest pharmacy co-payment fee increases.

Plan to Adjust BCA: “Flatten and Extend” … And Increase Deficit

GOP leaders have yet to officially start laying out the broad contours of any year-end budget deal, but the most likely option is neither new nor surprising—except in how much it might actually raise the legal spending caps set by the amended BCA legislation.

Defense hawks in the House are floating a trio of plans to raise defense and non-defense discretionary caps for the next two years.

The main plan being discussed with the House and Senate GOP leadership is generous to defense—essentially matching the military’s request and the GOP budget. This plan would add $68 billion to the Defense Department’s topline over two years, and increase non-defense discretionary spending by $60 billion; a 1.1:1 ratio of defense-to-non-defense spending growth in 2016 and ’17.

To pay for this two-year increase in discretionary spending, some of these same members are proposing to extend the Budget Control Act through 2025 and impose offsetting discretionary spending cuts from 2021 to 2025. Over the full term of this 10-year plan, defense loses $19 billion and non-defense drops by $37 billion to stay in balance. This option is easily the most attractive to Democrats, as the total cuts over the decade are one defense dollar per two non-defense dollars. The first spending cuts begin in fiscal 2021.

As in any “Washington math” solution, a chunk of the near-term increase will have to be debt-financed, increasing the deficit for at least the first two years. The assumption—and hope—is that a new president and Congress in 2017 might be able to finally rid both Congress and the country of sequestration entirely.

Any budget deal to raise the caps and fund the government for 2016 must rely on Democratic votes to pass, just as the Medicare “Doc Fix” did earlier this year and as will be the case with a “clean” debt ceiling increase this winter.

Two other offset plans that may be used in a year-end omnibus to lift the spending caps for defense and non-defense were originally attached to the highway spending bill: a gas tax or a tax repatriation holiday. The former, floated early in the legislative session by Republican Sen. James Inhofe of Oklahoma was instituted in 1993 to fund highway work, but hasn’t been adjusted for inflation since.

The second, a tax repatriation holiday, was proposed earlier this year by Democratic Sen. Barbara Boxer of California, but was left behind during her negotiations with Senate Majority Leader Mitch McConnell for the highway funding bill that passed the Senate 65-34 on July 30th.

It is unlikely either option would be used to fund discretionary spending increases to get a budget deal. But new offsets or additional deficit spending are possible anytime that bills have to pass a Republican-controlled Congress with large Democratic support.

Budget Politics Now Include Planned Parenthood Funding

The worst possible outcome for the Defense Department is a year-long Continuing Resolution that freezes spending at last year’s levels—coincidentally, sequestration levels, too—but without authority to start new programs.

However, Senate Majority Leader McConnell is determined to prevent a second government shutdown, even at the cost of a full-year CR. A full-year CR would be disastrous for the Pentagon, leaving base discretionary defense spending at the FY 2015 level of $504 billion, or $30 billion below the president’s budget request.

Equally damaging to the loss of cash are the policy restrictions that limit the Pentagon to continue buying what it was buying with no exceptions for new starts or expansion of existing plans under a year-long spending freeze. This prospect is worrisome enough that the Pentagon’s “wish list” is already on the Hill in case this becomes a more likely outcome. The lobbying push has also begun, with Air Force Secretary Deborah Lee James recently announcing that a full-year CR would stunt 50 new programs for the Air Force alone—wreaking havoc that would ripple through defense acquisition plans for years to come.

Even though there are a majority of votes in both chambers to amend spending caps for defense and non-defense regardless of the offsets used, fights over the Ex-Im Bank and Planned Parenthood could stall or at least temporarily delay the momentum for a deal.

The House stonewalled Sen. McConnell at summer’s end, leaving town after expressly excluding a reauthorization for the Ex-Im Bank. A bipartisan coalition of Congress would like to see the bank reauthorized, which likely has to happen in the next few months before businesses begin to make long-term financing plans elsewhere. The first story about lost contracts as a result of House inaction has already been written, and more will underwrite the political case for reauthorization. But the issue remains a non-starter among House conservatives and GOP presidential candidates in the Senate.

The furor over Planned Parenthood defunding will also affect the budgetary process, with House Speaker John Boehner trying to thread the needle between GOP presidential candidates, a dug-in House conservative caucus, and staunch opposition to both in the Senate. House conservatives have guaranteed their opposition to any funding measures that includes money for Planned Parenthood, even as Boehner presses for a long-term public campaign against Planned Parenthood using congressional investigations to channel outrage after a sure-to-fail standalone bill in September.

Both the Ex-Im Bank reauthorization and Planned Parenthood questions make it more likely that GOP leadership will have to pass a year-end omnibus with Democratic support. President Obama has also issued a veto threat against any amendments to defund Planned Parenthood in the appropriations bill.

It is also possible the House Speaker will have to let the government shutdown temporarily as he did in 2013 just to prove to determined members there are simply not enough votes to sway the Senate on either issue in a shared legislative calendar roughly 43 days long between Labor Day and Christmas.

It’s Always Darkest Before the (Budget) Dawn

A full-year spending freeze is a possible outcome given the large number of wrenches that could thwart any omnibus bill with a mini-budget deal tucked inside. But a year-long CR is unlikely for three reasons.

First, there are too many high-profile, must-pass bills coming up for action at about the same time. The more that can get jammed into a massive spending bill, the easier it is to pass. While it may have individual items or riders that members do not like, there will also be plenty of sweeteners—not least of which will be a deal to lift spending caps and amend the BCA—to keep it moving.

Second, congressional votes during the “Queen of the Hill” budget resolution process earlier this year showed that defense hawks now officially outnumber fiscal hawks in both chambers within the Republican Party. In the House, a whopping 140 Republicans voted against a budget that required offsets for higher defense spending.

Finally, the 2016 presidential races are already in full swing. Most top-tier Republican candidates running for this office have called for higher defense spending—essentially eliminating sequestration entirely. Some of those same candidates are in Congress, and all are helping shift the politics of defense toward a higher topline.