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Capital Report

Coverage of legislation and regulatory activity that affects higher education

By Liz Clark

Summer Debt Ceiling Debate on Capitol Hill Is Only the Tip of the Iceberg

On Tuesday, August 2, President Obama signed legislation to raise the current federal debt ceiling of $14.3 trillion by as much as $2.4 trillion. After months of heated debate, partisan rhetoric, and talk about economic catastrophe, the agreement was struck. Washington lawmakers will not have to vote again on lifting the debt ceiling until after the November 2012 elections.

The agreement calls for an immediate increase in the debt ceiling, 10-year discretionary spending caps, and assignment of a bipartisan committee to identify an additional $1.5 trillion in deficit reduction.

The legislation was met with criticism from both sides of the aisle. House Democrats, particularly progressives, are unhappy with the agreement because of the scope of potential entitlement reform and cuts to discretionary spending, as well as the lack of any tax reform. Republicans opposed to the deal simply found it inadequate, arguing that it offers little reform and does not do enough to curb government spending.

Markets Choppy, U.S. Rating Downgraded

The $17 billion in Pell Grant funding in the legislation is primarily paid for by eliminating the in-school interest subsidy for graduate student loans; the Congressional Budget Office estimates that this change will yield $18.1 billion over the next 10 years.

Initially, Wall Street responded optimistically to the deal. On the morning the agreement was announced, the Dow Jones Industrial Average gained in the first few minutes of trading, as did the S&P 500 stock index, the NASDAQ indices, and Asian and European markets. However, markets quickly deteriorated as several indicators showed the economy teetering once again on the brink of recession-and with creditors sharing the same sentiment as some conservatives that the deficit reduction elements of the deal did not meet expectations.

Late Friday, August 5, Standard & Poor's downgraded the U.S. credit rating from AAA to AA-plus, prompting a sell-off the following Monday that saw the Dow Jones drop by nearly 635 points. Markets will likely remain volatile because of a combination of perceived ineffectual U.S. leadership, continuing economic woes in Europe, and a dismal overall global outlook.

Agreement Lifts Ceiling, Cuts Spending in Stages

Elements of the agreement include the following:

  • Immediate 10-year discretionary spending caps, generating nearly $1 trillion in deficit reduction, with a firewall between defense and discretionary spending. Domestic programs cannot be cut to raise defense spending.
  • An immediate increase of $900 billion in the debt ceiling. A second installment, between $1.2 trillion and $1.5 trillion, will be available at the president's request—probably early next year—thus eliminating the need for further increases until 2013. Congress could vote to block the second portion of the increase, but it is unlikely that legislators could assemble a veto-proof majority to prevent presidential action.
  • A bipartisan committee assigned to identify an additional $1.5 trillion in deficit reduction, including entitlement program cuts and tax reform. The committee is required to report legislation by Nov. 23, 2011, and Congress must vote on it by Dec. 23, 2011.
  • An enforcement mechanism triggered by Congress's failure to agree on a $1.5 trillion plan, with spending reductions beginning in 2013—split 50-50 between domestic and defense spending. Enforcement protects Social Security, Medicare, and low-income programs from any cuts. The trigger is designed to displease both Republicans and Democrats so as to provoke the committee to come up with a $1.5 trillion bipartisan proposal that is easier to swallow than the enforcement plan.

Short-term Pell Grant Stability

The final agreement includes protections to maintain the maximum Pell Grant award at its current level of $5,550 for the 2012–13 award year—an element that was also a point of contention for House conservatives.

The $17 billion in Pell Grant funding in the legislation is primarily paid for by eliminating the in-school interest subsidy for graduate student loans; the Congressional Budget Office estimates that this change will yield $18.1 billion over the next 10 years. If these subsidies were not redirected to saving the Pell Grant program, monies would be insufficient to adequately fund the $5,550 maximum grant next year.

In addition to the major spending reforms that could develop over the next several months, colleges and universities will want to pay close attention to any tax proposals that are on the table.

The Pell Grant program already runs a shortfall due to recent appropriations bills that have not provided sufficient funds to cover the program's costs, although all eligible Pell Grant recipients are required by law to receive the aid for which they qualify. Consequently, other federal student aid, research, and education programs would have been affected well beyond the scope of the budget cuts included in the debt ceiling package, were the special provision for Pell Grants not in place. That said, stability for the Pell program beyond 2012–13 is not guaranteed. Pell Grants, as well as all other federal student aid, research, science, and education programs, could be targeted for dramatic reduction when the bipartisan deficit reduction committee meets in the fall.

Deficit Talks Slowed FY12 Appropriations Progress

The Senate Committee on Appropriations had, by and large, been waiting for the debt ceiling negotiations to end before scheduling markups for FY12 spending bills. When the Senate reconvenes on September 6 after the August recess, Senate appropriators will immediately begin work on moving individual appropriations bills through the legislative process. The overall discretionary spending budget will total $1.043 trillion, which represents a decrease of less than 1 percent from FY11 figures.

In the House, Republicans had made significant progress on their version of the FY12 spending bills, with a goal of cutting $30 billion from discretionary spending this year. They have passed more than half of the requisite 12 budget bills. However, the debt ceiling agreement sets spending for FY12 at about $24 billion higher than the amount approved by the House-adopted budget resolution. While cuts will be inevitable, they will not be of the magnitude House Republicans had been seeking.

House-passed FY12 legislation results in a mixed bag as far as funding for federal agencies that support university-based research:

  • At the Department of Energy, Office of Science funding is cut by $42 million and ARPA-E funding is cut by $80 million.
  • Department of Defense basic research accounts are slated for a 7.8 percent increase.
  • Almost all National Institute of Food and Agriculture budget lines are cut in the U.S. Department of Agriculture budget, with the competitive Agriculture and Food Research Initiative cut by $35 million.
  • The National Science Foundation is level-funded.

These numbers are not final, and the House and Senate must find common ground before they send the spending legislation to the president. While September 30 is the end of the current federal fiscal year, few in Washington are optimistic that Congress will meet the deadline, meaning that once again federal agencies will temporarily operate on continuing resolutions. The impact of the budget deal on specific programs will become clearer as appropriators focus on the FY12 budget this fall and also as the bipartisan committee begins its work to find an additional $1.5 trillion in savings.

Revenue Raisers Could Target Favored Tax Provisions

The general expectation is that all domestic programs will be competing for smaller pieces of the budget pie over the next 10 years. However, because tax cuts were not included in the deficit agreement, Democrats are eager to ensure that tax reform will be a part of the plan that emerges from the bipartisan committee.

In addition to the major spending reforms that could develop over the next several months, colleges and universities will want to pay close attention to any tax proposals that are on the table. Tax-reform efforts to curb or end the tax exemption of municipal bonds and to alter the charitable deduction were both part of the Simpson-Bowles plan that came out of the 2010 bipartisan National Commission on Fiscal Responsibility and Reform and therefore could be seen as potential revenue raisers by this new committee.

In short, the cap on the federal debt ceiling has been lifted, but the lobbying games are just about to begin, as President Obama and congressional leaders seek to implement fiscal reform while at the same time finding a path to economic recovery.

NACUBO CONTACT Liz Clark, director, congressional relations, 202.861.2553, liz.clark@nacubo.org

University-Based Research Support: How Funding Fares

House-passed FY12 legislation results in a mixed bag as far as funding for federal agencies that support university-based research:

  • At the Department of Energy, Office of Science funding is cut by $42 million and ARPA-E funding is cut by $80 million.
  • Department of Defense basic research accounts are slated for a 7.8 percent increase.
  • Almost all National Institute of Food and Agriculture budget lines are cut in the U.S. Department of Agriculture budget, with the competitive Agriculture and Food Research Initiative cut by $35 million.
  • The National Science Foundation is level-funded.