The 2012 Presidential and Congressional elections, the most costly in U.S. history, have concluded for all but a few races still not tallied and the results look vaguely similar to the 112th Congress. However, given the press of budget and tax issues described as a “fiscal cliff” that could churn markets and depress the U.S. economy further, and the fact that exit polling showed that 60 percent of Americans believe the economy is the most important issue, we expect that there will be a more sustained level of activity than we have seen since the 2010 midterm elections. Attempts to conquer the enormous federal budget deficit in the near term and in the long term will consist of efforts to reform entitlement programs, continue the squeeze of discretionary appropriations, and overhaul of the Internal Revenue Code. We expect that every sector, from manufacturing to nonprofits, will have substantial interest in the proposals that the President and Congressional factions will offer. Although facially the election results look like an endorsement of the status quo, it does not mean that there will be a lack of effort to legislate a resolution to the pressing fiscal issues and get the country on the right track.

The Government Relations Practice Group of Arent Fox has prepared the following initial analysis and commentary on the election results and what they might mean for policymaking in the remainder of the current session of Congress and in the first two years of the President’s new term of office.

The Context

President Obama won fairly handily in the Electoral College (303 to 206, with Florida’s 29 electoral votes still not yet awarded) but with currently a 50.4% total in the popular vote (2.8 million margin out of 120 million votes cast), it is harder for the President to consider his re-election a sea change in American politics. Interestingly, though for much of the last two years Congressional approval ratings have hovered in the low double digits, going as low as 10% in August, 2012, the 2012 election did not result in a “throw the bums out” pattern of results. Accordingly, while the Democratic majority in the U.S. Senate has increased by two seats (from a 53-47 split to a 55-45 split that assumes two Independents will caucus with the Democrats), Majority Leader Harry Reid (D-NV ) will not have the filibuster-proof 60 votes needed to enact most legislation and will be contending with a nearly exclusively conservative Republican opposition under the leadership of Minority Leader Mitch McConnell (R-KY). And, while losing a few seats and facing a narrower majority starting in January, the House Republican majority looked like it would have a final tally of around 235 members, down from the current 240. House Democrats posted modest gains, but not the net of 25 seats needed to reclaim the majority. As of today the Republican majority stands at 233 to the Democrats’ 192, with a few seats undecided. Given the procedural rules of the U.S. House, even a slim majority can permit one party to run roughshod over the other where there is strong party discipline, so the House Democrats’ pickup of several seats will not necessarily weaken the Republicans’ ability to act unilaterally if they choose to.

The “status quo” Congressional election results create a hurdle for those seeking prompt resolution of the multiple challenges facing Congress and the Administration, but initial optics suggest a renewed effort to find common ground. President Obama and Senate Majority Leader Reid already are reaching across the aisle to determine what issues may be resolved in the lame duck session scheduled to begin next week. Majority Leader Reid already has laid out his timetable for the session, which will begin on November 13 and end six weeks later on December 21. Reid announced this schedule in an effort to put pressure on members to come to a deficit reduction deal before the end of the year. The House Republican majority had previously announced a similar schedule for the post-election period (although possibly ending one week earlier in December).

There may be an effort among some Senate Republicans in the lame duck session to embrace a “grand bargain” on deficit reduction and sequestration, which would include large spending cuts, tax reform, and revenue increases. However, it is not clear whether the House Republican majority, still dominated by conservative and Tea Party members, would sign off on such a deal. Although we expect there may be a robust effort to attempt to forge a debt reduction in the lame duck session, we anticipate that most “fiscal cliff” issues (described below in greater detail) will not be resolved before the end of the year and will be the first order of business for the new Congress when it convenes in January.

U.S. House of Representatives –Narrowed Republican Majority Remains in Power

According to the Associated Press on Wednesday morning, Democratic challengers had beaten 12 Republican House Members, including 10 of the 87 Republican freshmen elected as part of the “Tea Party” class of 2010. It is important to note that most of the Tea Party freshmen did survive their first re-election bids and will continue to make up a substantial portion of the party caucus that Speaker John Boehner (R-OH) and his leadership team must contend with. Offsetting these few Republican losses were victories in nine Congressional districts previously held by Democrats, including defeats of incumbents in Kentucky, New York, North Carolina and Pennsylvania and winning open seats in Arkansas, California, Indiana, North Carolina, and Oklahoma that are currently held by Democrats who retired or ran for another office.

Several Democratic incumbents lost their bids for re-election, including Rep. Leonard Boswell of Iowa, who was defeated by Rep. Tom Latham. Rep. Kathy Hochul lost to Chris Collins in the conservative 26th District in Western New York. Hochul won that District in the May 2011 special election which, at the time, was seen as a good omen for Democrats. And in Ohio, Rep. Betty Sutton was defeated by Rep. Jim Renacci in a race for a newly created district that pitted the two incumbent Members against each other. Meanwhile, on the GOP side, a closely watched race between Tea Party favorite Allen West and Patrick Murphy in Florida resulted in West’s defeat. West had switched districts following the redistricting of his own home seat following the 2010 census. In Maryland, long-time Republican Roscoe Bartlett lost in one of the State’s few remaining Republican districts.

In the wake of the Republican victory in the House, it is almost certain that Rep. John Boehner will retain his role as Speaker of the House, and that the leadership of the House, including Majority Leader Eric Cantor and Majority Whip Kevin McCarthy, also will remain. However, the leadership team in the House on the Democratic side going forward is not as clear. Minority Leader Nancy Pelosi has not indicated whether she will seek re-election by her peers and there was some indication before the election that if Democrats maintained control of the Senate but lost the House, she may step aside and allow for new leadership of the House Democrats. If this were to occur, Minority Whip Steny Hoyer almost certainly would seek to be Minority Leader and would be the odd-on favorite. It is worth noting that in the event of an opening at the top or in secondary positions, there are several ambitious members of the Caucus and leadership including Assistant Democratic Leader Jim Clyburn of South Carolina, Vice Chair of the Democratic Caucus Xavier Becerra of California, Joseph Crowley of New York, and Budget Committee Ranking Member Chris Van Hollen from Hoyer’s own state of Maryland.

At the Committee level, due to term limits imposed on chairmen by the House Republican rules, there will be some initial instability during the buildup to the 113th Congress with a few contested chairmanship races. Many eyes are focused on the House Transportation and Infrastructure Committee, where current chairman John Mica (R-FL ) would love to retain the gavel despite term limits but we expect Rep. Bill Shuster (R-PA ) to succeed Mica in that role. Rep. Paul Ryan (R-WI) will likely need a waiver to continue as Budget Committee chairman, but that appears to be easily within his reach. We expect Rep. Jeb Hensarling (R-TX ) to assume the chairmanship of the Financial Services Committee and Doc Hastings (R-WA) to chair the critical Rules Committee, which sets the procedures for floor consideration of important legislation. Reps. Lamar Smith (R-TX ) and James Sensenbrenner (R-WI) are likely to vie for the Science Committee gavel, while Rep. Ed Royce (R-CA ) has the edge to become the new chairman of the Foreign Affairs Committee. Rep. Bob Goodlatte (R-VA ) does not appear to have encountered opposition as he mounts an effort to take over the House Judiciary Committee, which has jurisdiction over intellectual property issues that are a focal point for the Congressman.

There will be a key opening in the top Democratic slot on the House Appropriations Committee, with Rep. Nita Lowey (D-NY ) and Rep. Marcy Kaptur (DOH) likely to vie for the position that will, in turn, create other shifts in Appropriations subcommittees for the role of ranking minority member. Rep. Maxine Waters (D-CA ) is expected to serve in that role on House Financial Services. And, the departure of Pete Stark (D-CA ) means a new ranking member on the Health Subcommittee of the Ways and Means Committee, a critical role for entitlement programs policy development.

U.S. Senate – Democrats Maintain Control, Add to Majority

Conventional wisdom prior to the election was that the Senate Democratic majority would either stay essentially frozen at 53-47 or possibly decrease by one or two seats. Some GOP observers thought that a Romney loss at the top of the ticket might nonetheless be offset by pickups in several states that Republicans thought eminently winnable (such as North Dakota, Montana, Virginia, Nebraska, Wisconsin). As the final ballots are tallied, it is clear that Senate Republicans had a setback in the 2012 elections, only picking up Nebraska from Democratic hands and losing Indiana, Massachusetts, and Maine (Independent Angus King is likely to caucus with the Democrats and won the seat held by Republican Olympia Snowe). It is hard to make generalities about the Senate races since they often revolve around the specific personalities involved and are less reflective of a new wave of thinking among the electorate. (Note that history was made last night in that a record 20 women will be Senators when the new Congress convenes in January.)

Following Thursday’s elections, Democrats will continue to maintain control in the United States Senate and may have a 55-45 constructive majority, which is not filibuster proof, but closer to 60 votes than the current 53-47 split. The 55 figure includes Independents Sen. Bernie Sanders of Vermont and Senator-elect Angus King of Maine, who is expected to caucus with Democrats, especially after national Republicans poured millions of dollars into an effort to defeat him.

Notably, the Democrats succeeded in taking back from Republicans Senate seats in Indiana and Massachusetts. The victory of Elizabeth Warren in Massachusetts was a particularly sweet victory for the Democrats, reclaiming the seat that had been held by liberal icon Ted Kennedy and which Republican Sen. Scott Brown had held since early 2010. The Democrats also claimed victories in several other hotly contested Senate raises including Connecticut, Virginia, Ohio and Wisconsin, which elected the first openly gay Member of the Senate, Congresswoman Tammy Baldwin. In an otherwise positive night for the Democrats, one setback was the defeat of former Democratic Senator Bob Kerrey in Nebraska. However, despite a narrowing of the polls in recent days, this was not a race that the Democrats were expected to win. Although most pundits had predicted that the Democrats would maintain their Senate majority, this is a much different outcome than political observers anticipated when the election cycle began in 2011. At that time, the conventional wisdom was that Democrats would likely lose four or five seats due to the number of seats they had to defend (23 out of 33) and the perceived unpopularity with President Obama’s initiatives, such as healthcare reform. As it turned out, Democrats were able to successfully defend Senate seats that were previously thought to be unwinnable or leaning Republican and in the process flipped two Republican seats, in Indiana and Massachusetts, respectively. Republicans took only one Democratic seat, that of retiring Sen. Ben Nelson (D-NE ) in Nebraska.

In Massachusetts, as noted above, Democratic candidate Elizabeth Warren won nearly 54 percent of the vote to beat Sen. Scott Brown. This was one of the most closely watched races in the country, and one of the most expensive; by mid- October, Elizabeth Warren raised more than $37 million and Sen. Brown had received roughly $28 million in contributions. In addition, Brown began the race with more than $7 million left over from his special election, which means that combined the two races will have spent more than $70 million. Warren, the former head of the Congressional Oversight Committee for the Troubled Asset Relief Program (TARP ), ran on a platform of expanding the middle class and protecting consumers. She has been a vocal critic of Wall Street and a lightning rod for Congressional Republicans because of those views.

In Indiana, Democratic Congressman Joe Donnelly soundly defeated Republican Richard Mourdock to fill retiring Sen. Dick Lugar’s (R-IN ) seat. Mourdock, a Tea-Party affiliated candidate, was initially favored to win but suffered a major set-back when he made controversial comments about abortion, which alienated many voters. Mourdock’s comments came in the wake of a similarly controversial statement made by Congressman Todd Akin (RMO ), which reverberated nationally and sunk his campaign against incumbent Sen. Claire McCaskill (D-MO ).

Notably, in Wisconsin, seven-term Congresswoman Tammy Baldwin (D-WI) beat former Governor Tommy Thompson (R-WI) to fill the seat vacated by retiring Sen. Herb Kohl (D-WI). Baldwin has a progressive legislative record in the House of Representatives, served on the Health subcommittee on Energy and Commerce, and is expected to champion social issues and be a strong supporter of President Obama. And, Senator-elect Heidi Heitkamp enjoyed a slim margin of victory to defend the Democratic Senate seat held by Kent Conrad and overcame what most pundits thought was a likely Republican switch as she defeated atlarge Congressman Rick Berg.

Overall, it was a good night for Democrats. However, despite this success, the election’s outcome will have little impact on the functionality of the Senate, since neither party has the 60 votes necessary to overcome filibusters and pass partisan legislation. In order to pass legislation, Majority Leader Harry Reid (D-NV ) will need to either secure agreements with Minority Leader Mitch McConnell (R-KY) or convince enough Republicans to vote with the Democrats to overcome filibusters on bills dealing with budget and tax policy and a variety of other domestic issues that could come up in the 113th Congress, such as energy policy, higher education reauthorization, immigration reform, and miscellaneous health care measures. Leadership on several key committees will change due to retirements, but Finance, Appropriations, and Health, Education, Labor, and Pensions Committees are not expected to change their chairmen or ranking minority members. For example, Sen. Jim DeMint (R-SC ) is expected to replace retiring Sen. Kay Bailey Hutchison (R-TX ) as the top Republican on the Senate Commerce Committee, which has jurisdiction over transportation, telecommunications, and consumer issues. DeMint, one of the most outspoken conservative members of the Senate, opposes new spending and federal regulations, and voted against major legislation produced by the Committee this year, such as the Federal Aviation Administration reauthorization bill. Although he is not expected to work as cooperatively with his Democratic counterpart, Chairman Jay Rockefeller (D-WV), as his predecessor did, he has an amicable relationship with Rockefeller and will have to take into account the views of his fellow Republican members, many of whom work well with committee Democrats. Still, the Commerce Committee will almost certainly be much more partisan than in past Congresses.

Sen. Ron Wyden (D-OR ), is expected to become Chairman of the Energy and Natural Resources Committee, replacing retiring Sen. Jeff Bingaman (D-NM ). Wyden, who has an independent streak and is known for working with Republicans, will likely champion clean energy issues supported by Democrats but has also indicated that he intends to work to expand natural gas production and address federal land management issues. Sen. Lisa Murkowski (I-AK) will remain the top Republican member of the committee.

Sen. Tom Carper (D-DE ), is expected to become Chairman of the Homeland Security and Governmental Affairs Committee, which has primary jurisdiction over the Department of Homeland Security. The committee also oversees the District of Columbia’s budget and city government activities. Carper is a moderate Democrat with a reputation for working well with Republicans.

Lastly, Sen. Patty Murray is expected to become Chairman of the Senate Budget Committee, which will play a prominent role in addressing federal spending issues and the deficit. Murray, who will replace retiring Sen. Kent Conrad (D-ND ) as Chairman, has served as a member of the Senate Democratic Leadership and was selected to serve as co-Chairman of the Joint Select Committee on Deficit Reduction (aka “the Supercommittee”), in 2011. She is well respected within the Democratic Party for her steady leadership and knowledge of key issues, and has cordial relationships with Republican members. Notably, Murray will be an important player in negotiations regarding the “fiscal cliff” of expiring Bushera tax cuts and budget sequestration.

A few ranking minority members will shift due to party-imposed six year term limits, including possible moves by Sen. James Inhofe (shifting from Environment and Public Works to Armed Services), Sen. Mike Crapo (displacing Sen. Richard Shelby on Banking, Housing, and Urban Affairs), and Sen. David Vitter (taking Environment and Public Works). We expect Sen. Orrin Hatch to remain the lead Republican on the Finance Committee in January, preserving his critical role on tax policy as well as Medicare and Medicaid reforms.

Policy Priorities For President Obama and the 113th Congress

As noted above, we expect that fiscal policy will dominate the President’s domestic agenda and Congressional activity. The re-elected President and the essentially similar Congress will start a new phase of grappling with the economy and budget issues shortly, first in the “lame duck” session of Congress that starts next week, and then during the 113th Congress that starts in January.

A Stark Backdrop

The elections took place against a stark backdrop of fiscal issues that merit action by the Administration and Congress. Already today, we received a sober reminder of this when Fitch Ratings announced that “failure to reach even a temporary arrangement to prevent the full range of tax increases and spending cuts implied by the fiscal cliff and a repeat of the August 2011 debt ceiling episode would mean that the general election had not resolved the political gridlock in Washington and likely result in a sovereign rating downgrade by Fitch.” That would mean the U.S. would not retain its AAA status.

  • The fiscal year that concluded Sept. 30 resulted in a federal budget deficit for the year estimated at about $1.1 trillion, or 7 percent of GDP , according to the Congressional Budget Office (CBO ). While that figure is $200 billion lower than the FY 2011 deficit, we have had deficits of over $1 trillion for an unprecedented four years in a row. CBO estimated that the decline in last year’s deficit largely reflected an increase in revenues, particularly corporate income tax receipts. Federal spending was about 2 percent lower than the prior fiscal year.
  • Conventional wisdom is that our nation is heading toward a “fiscal cliff,” which is the phrase coined to describe a confluence of tax increases and spending cuts that are required by statute or the expiration of prior tax laws, and which would reduce the expected FY 2013 federal budget deficit by roughly $500 billion. The components of the fiscal cliff include around $400 billion in tax increases that would result from the expiration of the 2001, 2003, and 2009 tax cuts (extended in 2010) and the expiration of the alternative minimum tax (AMT ) “patch,” which indexes the AMT exemption for inflation and is of great benefit to the middle class. Perhaps the greatest catalyst for action on the expiring provisions in the lame duck is projections that the AMT left unchecked will add 27 million taxpayers to the ranks who pay into this regressive tax system. Other tax provisions that are included in the $400 billion include expiration of the temporary two percent reduction in the employee’s Social Security payroll tax and the expiration of other tax reductions, such as corporate depreciation and some temporary provisions known as “extenders.”
  • Within the “fiscal cliff” calculations are more than $100 billion in expected automatic spending reductions mandated to occur January 1, 2013 pursuant to the Budget Control Act from 2011, which specified that if the “Supercommittee” did not fashion a 10 year, $1.6 trillion deficit reduction plan that Congress enacted, there would be across-the-board cuts in the current fiscal year of between 8 and 10 percent for most discretionary spending programs, and subsequent cuts for the next nine years. The fiscal cliff also includes an assumption that Congress will fail to extend the so-called “doc fix,” which means that Medicare reimbursements to physicians would drop dramatically in the absence of new legislation.
  • The current federal debt ceiling will become a restraint by the end of 2012 and Treasury officials have indicated that Congress will need to enact a higher debt limit in early 2013 to avoid default. The brinksmanship that occurred in 2011 when this last took place caused roiling in financial markets and a downgrade by Standard and Poors for U.S. debt.

Likely Policy Initiatives

Budget Deficit Reduction and Tax Policy

With the votes counted, Congress will return next week to tackle fiscal issues such as those outlined above. Whatever is not completed by year’s end will necessarily roll over to the new Congress, since it is widely recognized that these issues cry out for resolution. Key phrases inside the Beltway of late have been “grand bargain,” “Gang of Eight,” “Simpson-Bowles,” and the aforementioned “fiscal cliff.” What these phrases indicate is that many in Congress and the President are contemplating how to address the spiraling national debt and restrain federal spending while not choking off potential economic recovery. Nobody believes that one can solely reduce discretionary spending accounts to solve a trillion dollar a year deficit; it is a question of what to do with entitlements like Medicare and Medicaid and how to build consensus for changing tax policy. The latter is made more difficult when so many Members of Congress feel beholden to a pledge given to an interest group to refrain from supporting legislation increasing taxes. Some Republicans are more inclined to permit increased tax revenues from closing loopholes (as opposed to raising rates) but there is no consensus that there would be enough loopholes to make significant inroads to balancing a budget. We expect a continued approach by well-intended Members to meet informally to devise budget reduction plans, such as the group of eight bipartisan Senators who met in October at Mount Vernon to see where consensus may lie (as a follow up to the meetings six of them had earlier in the 112th Congress).

Whatever action occurs in the lame duck session will set the stage for tax reform in the next Congress by the House Ways and Means and Senate Finance Committees. A philosophical split exists, with some Members of Congress looking to tax reform as a means of raising substantial new revenues to reduce future expected deficits and to curtail the increase in the national debt, and with other Members arguing that revenue increases are not necessary if one tackles entitlement and other federal spending programs sufficiently to reduce the deficit. Many of the proposals for comprehensive tax reform include options such as reducing corporate marginal rates in return for eliminating various deductions and credits and forms of “tax expenditures” that drain the Treasury. (One key issue for many companies will be to ensure fair treatment of passthroughs, such as LLC s that are taxed at individual rates and would not automatically benefit from lowered corporate income tax rates.) Proposals often seek to simplify the individual tax structure as well (with some proposals including caps on charitable deductions and home mortgage deductions). There are Members who advocate national sales taxes, consumption taxes generally, and flat taxes.

Tax reform is likely to move forward if and when the short-term budgetary obstacles have been addressed. Senate Finance Chairman Max Baucus told the media last weekend that he expects President Obama to present a proposal to Congress that includes some tax cuts and revenue-raisers while not stifling economic growth. Lame duck and future negotiations will be driven by what is in the Administration’s plan.

The Republican majority in the House has indicated a willingness to move comprehensive tax reform, as reflected by its approval of framework legislation for fast-track consideration this Summer. The Senate has not taken up this bill, which would require that the Ways and Means Committee report a tax reform bill out of committee by May 20, 2013 and creates a process for the House and Senate to avoid procedural hurdles and would help ensure more prompt consideration of tax reform legislation. It is worth noting that Budget Committee Chairman (and Ways and Means Committee member) Paul Ryan will return to Congress and is expected to play a role in negotiations with the Administration. With the House of Representatives maintaining a Republican majority, Ways and Means Chairman Dave Camp is sure to advance some of the tax provisions put forth in the House passed FY 13 Budget.

Likely Policy Initiatives

Health Care

Many observers predicted the 2012 election would be a referendum on health care issues, though exit polls conducted yesterday indicate a deep split remains between voters who support the Affordable Care Act and those who believe it should be fully or partially repealed. Voter sentiment closely mirrors the bitterly divided Congress that in 2010 enacted the health care reform law to expand health care access for approximately 32 million Americans without a single Republican vote. For the last two years, Republicans in Congress have sought to repeal the law – in fact former Governor Mitt Romney vowed to repeal the law on his first day in office.

Now, it appears that other than some attempts to de-fund implementation of the Affordable Care Act by House Republicans (which have not succeeded given the majority status of Senate Democrats and the President’s potential veto power), most people will focus on the actual implementation. In fact, health care providers should expect a flurry of Affordable Care Act regulations to be released by the Dept. of Health and Human Services in the next few weeks, now that the election has passed, which is an indication of how politically charged health care reform has remained. Longanticipated rules providing guidance to insurers, health care providers and states on how to implement the law and codify privacy and security rules mandated by the HITEC H Act dealing with enforcement, breach notification and penalties were simply too controversial to be released prior to Election Day.

While there may be continued efforts to politicize the health care reform law, it will be the newly elected and returning governors and state legislators who will largely determine the progress of health care reform. Governors will play a crucial role in decisions about the Medicaid expansion and creation of state health exchanges. As of publication, of the 12 governors up for election, only North Carolina’s changed hands – from Democrat to Republican – though races in Montana and Washington are still too close to call.

Health care providers remain uncertain about the federal health care climate in large part due to the backlog of regulations that did not materialize in the year leading up to the election. With just a year to go until most of the health benefit exchanges go online, providers remain uncertain as to how many new patients will have health coverage.

These are some of the health care issues we expect to be policy priorities in the next two years for the President’s second term and for members of the 113th Congress:

  • Physicians treating Medicare patients are looking at Congress to revamp the sustainable growth rate (SGR) formula that helps determine Medicare physician payment, aka the “doc fix.” In January 2013, the SGR formula is scheduled to cut pay rates by more than 30 percent if Congress fails to prevent the decrease. Congress has averted SGR cuts repeatedly during the last decade using short-term pay patches. Lawmakers have continued to debate a longer-term solution, but the costs of an SGR repeal would be more than $300 billion over 10 years.
  • The expansion of health coverage will begin in 2014 when individuals and small businesses will be able to purchase private health insurance through state-based health exchanges- -a virtual marketplace for choosing health insurance plans based on benefits and cost. Most individuals and businesses with more than 50 employees will be required to purchase insurance or pay a penalty, though individuals at certain income levels will receive financial assistance in order to do so. The health care law authorizes states to establish their own exchanges and the federal government has provided states with grants to support the planning, implementation and operation of these exchanges. For states that opt not to establish their own exchange, the Department of Health and Human Services will provide a federal exchange for consumers in these states. Approximately 14 states and the District of Columbia have taken steps to create a health exchange but the vast majority of states have failed to move forward with legislation or executive authority to implement the law. States have only until November 16 to indicate their intent to establish a health care exchange.
  • Waste, fraud, and abuse: with federal budget pressures continuing to garner attention, we expect a continued push by the Administration and Congress to look for ways to investigate and punish fraudulent Medicare and Medicaid reimbursements, particularly since receipts from such compliance cases often greatly outweigh the cost of investigators and prosecutors for the government. Separately, we note that in recent weeks, the flaws within the process used by Medicare Recovery Audit Contractors to review reimbursement claims by providers has received Congressional attention and could be a hot topic in Congress in the new year if providers develop a critical mass for advocacy on the issue.

Likely Policy Initiatives

Energy

The re-election of President Obama, combined with continued divided government in the Congress, virtually ensures that major changes to federal energy and environmental policy will be based on existing regulatory authority rather than new legislation. With a continued strong House Republican majority and a larger Senate Democratic majority, the contentiousness of most energy and environmental policy issues will likely preclude major new legislation. A few matters where there is broad bipartisan agreement may be exceptions to this rule. To a large degree, we already know how this divided government functions— we have seen it over the past two years. Committee leadership changes in the new Congress may provide opportunities for moving legislation that did not exist previously. The most significant change is the likely elevation of Senator Ron Wyden (D-OR ) to Chairman of the Senate Energy and Natural Resources Committee upon the retirement of Senator Jeff Bingaman (D-NM ). Senator Wyden and Ranking Republican Senator Lisa Murkowski (R-AK) have traveled extensively together and, as noted above, appear to be working diligently to find common ground on policy matters. Meanwhile, on the House side, Energy and Commerce Committee Chairman Fred Upton (R-MI ) will continue to lead that panel and observers expect ranking minority member Henry Waxman (D-CA) to continue his important role.

The greatest threat facing continued, rapid expansion of production of oil and natural gas from shale and tight rock plays like the Marcellus, Bakken, and Eagle Ford, is the potential EPA federalization of regulation of hydraulic fracturing, which has always been primarily regulated by state authorities. EPA seems determined to assert its regulatory authority, although the form and extent that will take remains undetermined. Further, the Department of the Interior likewise seems determined to issue its own regulations on hydraulic fracturing on public lands, with the strong potential for these regulations to conflict with pertinent state regulations. The Obama Administration can be expected to maintain its strong support for the production of renewable energy on public, private, state, and Native American lands. However, the expiration of numerous renewable energy tax provisions at the end of 2012 place the expansion of renewable energy at risk. Further, incoming Chairman Wyden recently stated that the renewable energy production tax credit law should be amended to be fair to hydropower. Given the bleak federal budget outlook, reauthorization of the existing renewable energy production tax credit faces significant hurdles.

Likely Policy Initiatives

Higher Education

While we can expect continued deliberation in Congress over the size and scope of Pell Grants during any consideration of budget legislation, over the next year Congress will begin the process of reauthorizing the Higher Education Act. Because the current landscape in the House and Senate remains virtually unchanged, there is little optimism that this will get accomplished before current law expires in 2013. Coupled with the potential for across-the boarddiscretionary spending cuts, the need to again extend the lower interest rate on subsidized student loans in July, and the unclear future of an array of expired or expiring education tax incentives, 2013 will be full of many uncertainties for those in higher education.

Likely Policy Initiatives

Anti-Poverty Legislation

The results of the election will have some bearing on a litany of federal assistance programs that help the poor. While mandatory programs are exempt from budget sequestration, including Social Security, Medicaid, and SNAP (formerly known as the Food Stamp Program), discretionary programs will be subject to the aforementioned 8.2 percent reduction if implemented in January. These cuts will impact critical anti-poverty programs, including the Low-Income Home Energy Assistance Program (LI HEAP ) which helps low-income individuals pay their heating bills; the Head Start Program which provides early education for lowincome children; and the Job Corps Program which provides education and job-training for at-risk youth.

With the status quo intact after last night’s election, it is hard to see how the two sides will reach a compromise in the near term, but we expect Members of Congress and the Administration to engage in furious negotiations over the next seven weeks. If the parties cannot reach a deal before the end of the year, these negotiations will stretch into the next Congress. During this process, there is no doubt that far-reaching cuts to critical anti-poverty programs will be on the negotiating table. Potential targets include discretionary anti-poverty programs subject to sequestration, such as LI HEAP and Head Start, as well as mandatory programs that are exempt from sequestration, such as SNAP /foods stamps and Medicaid. Far-reaching cuts to these programs will have a devastating impact on many American families who are struggling to get by in these difficult economic times.

Conclusion – Who Are the Real Winners?

A trite answer would be the owners of tv stations in battleground states, who made a fortune on political ad revenues. In a more serious vein, we believe the following individuals are winners now that the dust has settled from last night’s election returns:

President Obama – gets four more years to develop his legacy and to try to tackle the explosive fiscal policy issues that resulted in a 2011 stalemate.

Senator Harry Reid – pads his existing majority, which was unthinkable to many when the 2011-2012 election cycle began.

Senator Patty Murray – chaired the Democratic Senate campaign committee and will get kudos from all involved for helping shepherd the party through the minefield that was this cycle.

House Minority Whip Steny Hoyer – If Minority Leader Nancy Pelosi decides to leave her post, Hoyer may have a fairly clear path to replace her.

Senators-Elect Heidi Heitkamp (ND) and Angus King (ME) – Heitkamp’s razor thin margin in a seat that was deemed very likely to flip Republican makes her a heroine to fellow Democratic Senators, while Angus King will likely caucus with the Democrats after making sure to get favorable treatment for himself in terms of committee assignments.

House Speaker John Boehner – Maintains his party’s House majority after taking on the President for the last two years and with Senate Republicans further in the minority, House GOP remains a critical part of any legislative strategy by interests seeking to slow down Obama Administration regulatory efforts.

Senator Marco Rubio – The young Florida Republican received national attention as a possible Romney Vice President selection and now has the prospect of an open seat Presidential election in 2016.

Senator Chuck Schumer – A powerful force in framing legislative issues during this election cycle. He also played a key role in campaign finance and strategy.