On the evening of July 31, President Obama announced that he and congressional leaders from both parties had reached a deal on a debt reduction/debt ceiling increase package, paving the way for legislative action to be completed before the August 2 default deadline. The flurry of weekend activity on Capitol Hill capped off weeks of intense negotiations on competing packages of spending cuts, as lawmakers raced to avoid the impending government default.

A section-by-section analysis of the legislation – S. 365 – can be found here. The full text of S. 365 can be found here.

The House brought the compromise legislation to the floor the on August 1, passing the bill by a vote of 269-161 that evening. 95 Democrats joined 174 Republicans to pass the legislation. 95 Democrats and 66 Republicans voted against the measure.

S. 365 then moved to the Senate, where it passed by a vote of 74-26 on August 2, with six Democrats and 19 Republicans voting against the legislation. President Obama signed the bill into law soon after Senate passage, just hours before the deadline set by Treasury Secretary Geithner to avoid default.

DETAILS

The non-partisan Congressional Budget Office (CBO) estimates that the legislation will cut at least $2.1 trillion from the federal deficit over the next 10 years.

Details of the compromise package largely consist of portions of the competing debt reduction proposals put forth last week by House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV). (Please see our last update.) Such provisions include:

Debt Ceiling Increase

  • The package would immediately increase the debt limit by $900 billion in order to avoid default. Of that amount, $500 billion will be subject to a congressional resolution of disapproval, which would then be subject to a presidential veto (of which a two-thirds majority vote in both the House and Senate would be needed to override). While it is highly unlikely that this mechanism will be used successfully, it does give those that are against any increase another opportunity to force Members to go on the record in favor of increasing the debt ceiling.
  • The size of the next debt limit increase in this two-step process will be contingent upon congressional action. Once the federal government is within $100 billion of reaching the debt ceiling again, the President can make this next request.
  • If the new bipartisan, bicameral debt reduction committee (see below for details) recommends $1.5 trillion in additional savings and Congress passes such legislation, the next debt limit increase will equal $1.5 trillion. If the committee recommends savings that are less than $1.5 trillion, or if Congress is unable to enact any further savings, then the second step of the debt limit increase would equal $1.2 trillion (which would be offset by a required sequestration of $1.2 trillion over nine years). As with the first step, the second step will also be subject to a resolution of disapproval.

Spending Cuts & Enforcement Mechanisms

  • The spending cuts included in the compromise package also are implemented in two steps. First, the deal achieves $935 billion in savings over the next 10 years by placing immediate caps on discretionary spending for Fiscal Year (FY) 2012 through FY 2021. For FY 2012 and FY 2013, the discretionary spending caps will equal $1.043 trillion and $1.047 trillion, respectively.
  • If Congress does not abide by these caps, a process of automatic cuts in discretionary spending would be triggered, which was the same sequestration mechanism in place in the 1985 and 1997 budget agreements.
    • Specifically, across-the-board reductions would occur 15 days after Congress adjourns at the end of a session and the President would be able to exempt military personnel accounts from the cuts provided that savings are reached through reductions in the remainder of the defense budget.
  • Similar to the Boehner plan, the legislation creates a bipartisan, bicameral committee to recommend up to $1.5 trillion in additional reductions that will be voted on by both chambers before the end of 2011. The committee will include six Republicans and six Democrats – three from each chamber – with co-chairman to be named by House and Senate majority leadership.
    • All deficit-reducing provisions will likely be on the table, from entitlement reform (i.e., Medicare, Medicaid and Social Security) to tax reform, though achieving either is sure to prove difficult, given how dug-in each party is on what they will and will not be willing to accept.
  • As was provided in the Boehner plan, this committee will be required to report its recommendations by November 23, and the House and Senate must vote (a simple up-or-down vote with no amendments) on such recommendations by December 23 – likely guaranteeing another busy holiday season on Capitol Hill.
  • Should the above deadlines not be met, any legislation the committee produces will lose the privileges of expedited consideration, and a similar sequestration mechanism will be triggered should the committee not produce at least $1.2 trillion savings. Such automatic spending cuts would go into effect in early 2013.

Balanced Budget Amendment

  • Both chambers are required to hold a vote by the end of 2011 on an amendment to the Constitution that would require a balanced budget. If an amendment is forwarded to the states, an additional $1.5 trillion increase in the debt ceiling would be authorized, obviating the need for a Debt Reduction bill from the Joint Select Committee.

For National Security and Federal Budget and Debt Wonks Only

One of the interesting parts of the debt ceiling legislation is the change in definition of security and non-security items. If the Joint Select Committee on Deficit Reduction reaches agreement on more than $1.2 trillion in debt reduction over the next decade, then the security category includes Department of Defense, Department of Homeland Security, Veterans’ Affairs, the National Nuclear Security Administration, the intelligence community and all State Department and international assistance accounts. That is important because all of those accounts would fall under a limit to discretionary budget authority and outlays for the next two years and if a sequestration was needed they would all be lumped together for any across the board cuts.

If the Select Committee does not reach agreement or the Congress does not pass a deficit reduction bill above the $1.2 trillion dollar mark by January 2, 2012, the definition of security program becomes just the Department of Defense. In that scenario, the firewall between defense and non-defense programs would be moved from $686 billion for the larger definition of security programs to $546 billion for just DoD. In addition, in the worst case, half the annual $125 billion in necessary sequestered cuts (one ninth of $1.2 trillion) would come solely out of DoD programs. The other half would come out of all non-defense programs including those formerly considered security programs. Thus there will be a strong incentive for companies that receive defense and health care funding from the federal government to support a successful effort by the Select Committee and Congress to enact major deficit reduction legislation.

For people with a long memory there are a number of programs that were exempted from sequestration under the original Gramm-Rudman-Hollins legislation and those exemptions still exist. Mainly for trust funds, transfer payments and social safety net programs including Social Security (2 USC 905 and 906).

WHAT’S NEXT?

Upon final passage of S. 365, the House and Senate went into recess for their customary month-long August district work period. Normally the two Houses would have adjourned but by recessing and meeting every three days for pro forma sessions President Obama is blocked from making recess appointments. This is the same procedure the Democrats used with President Bush at various times. The two chambers will return to session after Labor Day.

House and Senate leaders now have two weeks to appoint the 12 members of the newly-created joint deficit reduction committee – a process that has already become the subject of debate among lawmakers.

As always, we continue to closely monitor this important matter in addition to all news from Capitol Hill and encourage you to contact a member of our team should you have questions or need additional information.