The Center's work on 'Process' Issues


Don’t Be Fooled by Small “Reconciliation” Savings Targets in House Budget Committee Plan

March 19, 2015 at 3:54 pm

The House Budget Committee-approved budget plan instructs various committees to prepare bills that would cut programs by specified amounts; Congress would then consider these bills under a fast-track process called “reconciliation.”  The specified savings, ranging from $1 billion down to $15 million over ten years, are tiny in relation to the more than $4 trillion of entitlement savings that the budget plan proposes as a whole.  But the cuts that the committees will eventually recommend will likely be much, much bigger.  As Chairman Tom Price has explained, reconciliation instructions to committees set a floor on cuts, not a ceiling.

For example, the reconciliation savings target for the House Agriculture Committee, which has jurisdiction over SNAP (formerly food stamps), is $1 billion.  That’s just a placeholder, not a sign that House Republicans are abandoning plans to cut SNAP.  The budget plan calls for roughly $125 billion in SNAP cuts, and the eventual reconciliation bill could well end up with most or all of those cuts.

The Budget Committee presumably put small dollar amounts into the committee instructions for tactical reasons, as House and Senate Republican leaders likely haven’t decided which parts of their budget plans to implement through reconciliation.

As we’ve explained, reconciliation is an attractive vehicle for budget legislation that the majority views as a high priority, mostly because a reconciliation bill can’t be filibustered in the Senate and, thus, can pass with just 51 votes.

Republican leaders have expressed interest in using reconciliation to repeal or greatly scale back health reform, but their plans may depend on the outcome of the King v. Burwell case, which the Supreme Court will decide in the coming months.  They have also discussed a broader range of entitlement and tax changes.  By setting only small reconciliation savings targets in the budget resolution, Republican leaders are simply keeping their options open.

Unusual language in the House Budget Committee plan seems to confirm that plans for reconciliation are still evolving.  Section 203 grants Chairman Price extraordinary powers to “develop additional guidelines providing further information, budgetary levels and amounts, and other explanatory material to supplement the instructions included in this budget resolution.”  So it’s virtually certain that the instructions in the budget resolution aren’t the final word on what the reconciliation bills later this year will contain.

The Risks of Dynamic Scoring

February 26, 2015 at 11:06 am

In a guest TaxVox blog post for the Tax Policy Center’s series on “dynamic scoring,” I discuss some of the risks of a new House rule requiring dynamic scoring for official cost estimates of tax reform and other major legislation.  Under dynamic scoring, those estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending.

Dynamic estimates vary widely depending on the models and assumptions used.  I conclude that to make sense of those scores, policymakers will need more information about the models and assumptions than the House rule requires:

The House rule allows the House to use any increase in revenue from highly uncertain estimates of macroeconomic growth to pay for other policies. Policymakers will also be tempted to use a favorable dynamic estimate as proof that a policy is good for the economy and therefore should be enacted.  But the uncertainty and gaps in the models may mean that such a simple conclusion isn’t appropriate. Lawmakers will need more information than the House rule requires to assess the reliability of the estimate and to understand a bill’s possible economic effects.

“Generational Accounting” Is Misleading and Uninformative

February 24, 2015 at 9:55 am

The topic of “generational accounting” will likely surface when economist Lawrence Kotlikoff, who helped develop the approach over 20 years ago, testifies at tomorrow’s Senate Budget Committee hearing.  Generational accounting purports to compare the effects of federal budget policies on people born in different years.  But it’s far more likely to obscure than illuminate the budget picture, as we have explained.

Generational accounting calculates “lifetime net tax rates” for each one-year cohort of the population through at least age 90 and a separate lifetime net tax rate for all future generations combined.  Those measures are supposed to reflect each generation’s tax burden, minus the benefits it receives through programs such as Social Security and Medicare, under existing budget policies.

But generational accounting rests on several highly unrealistic assumptions.  Its calculations of lifetime net tax rates assume that there would be no changes whatsoever in current law for taxes or benefit policies for anyone now alive.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  And it ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, CBPP, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that. Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.

Setting the Record Straight on Student Loan Costs

February 18, 2015 at 11:05 am

President Obama’s 2016 budget estimates that the outstanding portfolio of federal student loans will be $21.8 billion less profitable than previously thought over the loans’ lifetime.  This reestimate doesn’t mean that the program “had a $21.8 billion shortfall last year,” as a Politico story stated.  Nor does it justify adopting an alternative accounting method (so-called “fair-value accounting”) that would artificially inflate the program’s cost.  The reestimate is, indeed, completely unrelated to the accounting method.

Here, briefly, is what the reestimate does and doesn’t mean.

Lending programs appear in the budget with up-front estimates of the net costs or profits to the government over the loans’ lifetime.  In the case of student loans, the government makes a profit, even after accounting for defaults, which is why student loans are a good deal for both students and the government.  If the government later concludes that its earlier estimates of lifetime costs were too high or low, it reestimates all outstanding loans.  The reestimate is recorded in the year it’s made (in this case, 2015), not in the many past years in which the loans were issued.

The recent $22 billion upward reestimate is the net result of three factors:

  • The President’s decision to permit students who borrowed before 2008 to switch to the Pay-As-You-Earn (PAYE) repayment plan will raise future costs by an estimated $9 billion.  PAYE caps monthly loan payments at 10 percent of borrowers’ incomes and forgives the remaining debt after 20 years of payments.
  • More student borrowers than originally expected are switching to other repayment plans that tie payments to borrowers’ incomes, raising future costs by an estimated $15 billion.
  • Expected defaults are down (that is, more borrowers are expected to repay their loans than previously estimated), lowering future costs by an estimated $2 billion.

This isn’t a “shortfall.”  No cash is missing, nor are the 2015 inflows and outflows of student loans $22 billion lower than initially thought.  Rather, the $22 billion reestimate is a new, and slightly less sanguine, view of the net profits that the government will make over the next few decades on the student loans that are now outstanding.

The reestimate isn’t particularly large in percentage terms, either.  It’s about 2.9 percent of the outstanding portfolio of student loans, which is three-quarters of a trillion dollars.

Also, while Senator Deb Fischer (R-NE) cited the reestimate in introducing a bill requiring the use of “fair-value accounting” for student loans and other credit programs, “fair-value accounting” would make student loan accounting less accurate, not more, and it wouldn’t have avoided these reestimates.

Here’s why.  By law, the government estimates the costs or profits of its loans based on the difference between what the government will pay out in loans (including the cost to the Treasury of financing the loans) and the interest, principal, and associated fees that borrowers will repay over time, accounting for expected defaults.  “Fair-value” proponents say that the budget should reflect the higher financing and other costs that a private lender would incur if it, not the federal government, made the loans.  This approach would record loans as less profitable (or more expensive) to the government than they really are by including costs in the budget that the federal government never has to pay.  For these reasons, we strongly oppose “fair-value accounting,” as we’ve explained here, here, and here.

Importantly, even if the government had been using phantom “fair-value” costs in its initial estimates of student loans, it still would have needed to make the same upward revision in 2015 due to the three factors described above.  “Fair-value accounting” would not have affected that reality in any way.

FAQs on Budget “Reconciliation”

January 22, 2015 at 2:59 pm

Republican leaders plan to use a legislative process called “reconciliation,” which allows for special and speedy congressional consideration of certain tax and spending bills, to advance their fiscal policy agenda in 2015.  In the Senate, members can’t filibuster reconciliation bills, and the scope of amendments they can offer to them is limited, giving this process real advantages for enacting controversial budget and tax measures.  Our new report addresses some frequently asked questions about reconciliation:

  • How Often Have Policymakers Used Reconciliation?
  • What Kinds of Changes Can a Reconciliation Bill Include?
  • How Does Congress Start the Reconciliation Process?
  • What Role Do Committees Play?
  • What Special Role Do the Budget Committees Play?
  • How Many Reconciliation Bills May Congress Consider Each Year?
  • Can the Full House or Senate Amend a Reconciliation Bill?
  • What Happens After Each Chamber Adopts a Reconciliation Bill?
  • What Procedural Advantages Does Reconciliation Have in the Senate?
  • What Procedural Advantages Does Reconciliation Have in the House?
  • Can Reconciliation Be Used to Increase Deficits?
  • What Is the Byrd Rule?
  • What Provisions are “Extraneous” Under the Byrd Rule?
  • How Is the Byrd Rule Enforced?

Click here for the report.

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