United States: The Fiscal Deal: What Is It, What Does It Mean, And When Is The Next Crisis?

Last Updated: October 23 2013
Article by Stephanie A. Kennan and Brian J. Looser

After days of gridlock following the expiration of appropriated funds necessary to keep the federal government operating, Congress passed a short-term resolution to the government shutdown and the Treasury's need to borrow money to avoid default. However, all this agreement really does is push the bigger issues off (for background information, see our previous alert).

The proposal, which originated from the Senate, contains the following:

  • Funds the federal government through a Continuing Resolution (CR) until Jan. 15;
  • Raises the national debt limit until Feb. 7 and allows the Treasury to use "extraordinary measures should Congress not raise the debt limit by Feb. 7;
  • Requires bicameral budget negotiations that must be concluded by Dec. 13; and,
  • Requires certification that individuals receiving subsidies for insurance purchased on the exchanges meet the required income levels.

It is important to note that the funding of the government does not change the sequester spending caps that are currently in place.

Why these dates?

Continuing Resolution: The CR would fund government operations through Jan. 15, 2014. That date is significant because Jan. 15, 2014, is also the same day that a $21 billion across-the-board sequester cut is slated to take place, including Medicare cuts. Most Democrats oppose the cuts that would go into effect on Jan. 15. Many members of Congress support achieving spending reductions through a less blunt mechanism than the sequester. A CR in place until Jan. 15 gives lawmakers time to find agreement to raise or lower spending on programs in a more thoughtful manner than the sequester's across-the-board cuts.

Debt Ceiling: By extending the debt ceiling until the beginning of next year, the Treasury could continue to use special strategies to handle cash and debt management to avoid hitting the limit, often referred to as "extraordinary measures." However, by moving the debt limit to Feb. 7, even with the ability to use extraordinary measures, the timing of reaching the new debt limit ensures that it will be in the mix of issues at a time when the entire House of Representatives and one-third of the Senate is up for election in 2014. Thus, addressing the issue is likely to get heated.

In addition, the debt limit increase will apparently be done by a resolution of disapproval similar to the process followed in 2011, in which the House and Senate would have to disapprove of an extension of the debt ceiling increase authorized by the President. The president can veto any disapproval if it passes the House and Senate, meaning the debt ceiling will increase unless the Congress could find the two-thirds majority necessary to override a veto.

Budget Negotiations: The bicameral budget negotiations would conclude in December, giving both bodies time to enact legislation that will impact overall federal spending levels and potentially lead to other changes in key programs like Medicare and other entitlements, as well as tax policy. The negotiations would be led by Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI), who are the chairmen of the Senate and House Budget Committees, respectively.

What is the issue of certifying individuals who receive subsidies for insurance purchased on the exchanges about?

Under the ACA, individuals with incomes below 400 percent of the federal poverty level (FPL) are generally eligible for tax credits to help pay for health insurance premiums. The ACA also contained provisions that would require ensuring individuals were eligible for subsidies through random audits, not unlike how the Internal Revenue Service takes a random sample of tax returns to audit. Though HHS had initially planned to have a verification system to make sure applicants qualify for the subsidies operational by 2014, the Administration said in July it would not have such a system in place until 2015. Instead, consumers will self-attest to the information submitted as part of the insurance application process, including income levels. Under the fiscal deal, new steps will be taken to ensure that fraud does not occur and that each individual receiving a tax credit is actually qualified for that credit.

What Happens Next?

First, the Senate leadership and House leadership would appoint conferees to the budget negotiations and those discussions would begin. These negotiations will be broad and include a variety of issues that will lead to policy changes that could be sweeping. Most likely these negotiations will focus on (1) reducing growth in entitlements; (2) tax reforms; (3) sequester spending caps; and (4) potentially, changes to the Affordable Care Act. Needless to say, these negotiations and their product will be the focus of many who want policy changes that impact spending.

This committee will differ from the Super committee appointed last year to determine budget cuts. This is a return to what is known as "regular order." Under regular order, when the House and Senate pass budget resolutions, they meet to work out their differences and create one budget resolution. That has not happened in recent years.

The government will need another CR passed to remain open past Jan. 15. Thus, we could have a government shutdown again, if Congress does not fund the functions of the government through regular appropriations legislation or through a CR.

Conclusion

The next three to four months will be significant. The next few months potentially hold the framework for a variety of changes in overall government spending, particularly for Medicare and other entitlement programs and for tax policy. In their floor speeches when the agreement was announced, many senators stressed the need to come together to solve the nation's problems. Only time will tell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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