FY18 Budget and Appropriations Update

With the current Continuing Resolution’s expiration deadline fast approaching on December 8th, it is hard to tell exactly what kind of deal Congress is going to strike to keep the government’s lights on. However, it is becoming clear that a final deal on funding will likely be pushed into the new year. On Capitol Hill, tax reform is truly sucking up most of the oxygen and burning the dwindling legislative days this year. President Trump has made it known that he expects a tax reform bill to sign on his desk before Christmas, meaning everything else is likely on hold until at least then. While some reports say a funding deal could be reached by the start of the new-year, appropriations staff have indicated that February is the much more likely finish line. A 2-3 month Continuing Resolution that kicks spending cap and appropriations decisions down the road is expected to be introduced in the next few weeks. But passing even that may prove contentious as some liberal Democrats threaten to shut down the government if Congress and the President fail to reach a compromise on DACA.

Here are the issues that need to be addressed to reach a final resolution on FY18 spending:

1. Senate’s Unfinished Business: The Senate has still not passed 4 of the 12 FY18 spending bills (Treasury, Homeland Security, Interior and Defense, as well as the EPA). Unless the upper chamber can get these bills marked up, out of committee, to the floor, and passed in the next two weeks, they will have nothing to conference with when the time comes.

2. Unknown Spending Levels: The appropriations committees still don’t know their top line spending limits because there is no deal yet on the Budget Control Act. Some of their FY18 House and Senate bills are several billions apart––making it very difficult to go into final negotiations on spending levels. For instance, the FY18 House LHHS-Ed bill is $156.042 billion, which is $4.983 billion below the FY17 level while the Senate LHHS-Ed bill is $164.066 billion, which is $3.041 billion above the FY17 level.

Senate staff has indicated that, for starters, the LHHS-Ed top-line number will need to increase by at least $5-6 billion to be able to increase FY18 funding for key programs. The reason that number is so high is that appropriators must first use extra dollars to restore funds to the mandatory programs it cut in FY17––like Social Security – and to restore the $3.3 billion Pell surplus. Any dollars that remain after the restoration of these program dollars could go for increases to LHHS-Ed programs but not all those dollars would go to education programs.

Based on this math and under a higher caps scenario, there is hope that programs like Title IV-A of ESSA could receive a few hundred million in additional funding in FY18––taking the program from $400 million to possibly $700 million – and that Title II might be preserved at $2 billion. However, if Congress cannot real a deal to raise the caps, the Budget Control Act’s sequestration spending caps would kick-in, resulting in all domestic programs facing across the board cuts in FY 2018 to reduce overall spending by $3 billion.

3. Bargaining Chips: There are several issues that Republicans and Democrats are going to use as bargaining chips to avoid (or cause) a shutdown and/or reach a budget deal. The issues right now include, emergency supplemental funding relief, Obamacare subsidies, the border wall, extending children’s health insurance programs (CHIP), raising the debt ceiling, and renewing authority for the National Flood Insurance Program. Democrats are seeking $300 billion in additional supplemental funding relief for Puerto Rico and the Virgin Islands but Republicans are asking for offsets to that additional spending––unlike the supplemental aid to Texas and Florida, which required no offsets. Further, President Trump continues to say there will be no DACA deal without a border wall deal.

4. The Tax Deficit: In addition to the issues above, House Republicans are in the process of marking-up a tax reform bill through the House that would add $1.7 trillion to the national deficit, according to the CBO analysis. The Senate is expected to release similar text today, but what it adds to the deficit is unknown. It is unclear how deficit increases caused by the tax bill would affect a spending caps/appropriations deal.

Source: Bernstein Strategy Group