The Heritage Foundation

Backgrounder #1947 on Federal Budget

June 27, 2006

June 27, 2006 | Backgrounder on Federal Budget

Third-Quarter Report Card for Congress: Improvement Needed

As the 109th Congress draws closer to its conclusion, there is growing disappointment among many Members and voters over how little has been accomplished since the 109th convened in February 2005. Federal budgets for fiscal years 2005 and 2006 were not completed until several months into the next fiscal year, the earmark epidemic has been linked to corruption, the much-maligned highway bill was enacted two years late (and gained nothing in quality from the delay), the new Medicare drug benefit plan will add more than $1 trillion to the federal budget over the next 10 years, and the financially shaky Social Security system remains untouched and unreformed.

With such a disappointing record, incumbents have every reason to be nervous about their prospects for re-election in November. Indeed, as the accompanying third-quarter report card reveals, both the House and the Senate are flirting with a failing grade for their performance.

As with academic report cards, the purpose of this exercise is to guide the recipient to better performance by noting deficiencies and suggesting how they might be remedied. Because some in Congress might find this exercise an unwelcome intrusion on their legislative independence, and because it comes without earlier notice, final grades for the session will be based only on House and Senate activity in the final months of this session. In other words, Members will not be graded on past performance, and votes for legislative disgraces already enacted, such as the highway bill and prescription drug benefits plan, will not be counted against them in calculating their grades. Instead, final grading will be limited only to domestic legislative issues that are still in play and subject to future votes by one or both houses.

The report card grades a dozen major economic domestic policy issues: spending restraint, budget process reform, earmark reform, property rights, Social Security reform, pension reform, energy, tax relief, tax reform, Medicare, Medicaid, and health care reform. Details and the third-quarter grade for each issue follow.

Spending Levels
Brian M. Riedl

By the time fiscal year (FY) 2006 comes to a close, federal spending will have leaped 45 percent since 2001. The popular scapegoat, defense, accounts for just over one-quarter of this increase, as even non-defense discretionary spending has increased twice as fast under President George W. Bush as it did under President Bill Clinton. The past five years have seen the most expensive education, agriculture, highway, and Medicare bills in American history. Recent massive entitlement expansions overwhelm last year's modest entitlement reconciliation bill. The increasing reliance on supplemental bills offers a loophole for additional spending. Within a decade, unless spending is reined in, taxes will have to rise by nearly $7,000 per household just to balance the budget.

In this budget environment, the House recently passed an FY 2007 budget resolution that expands non-emergency discretionary spending by 3.5 percent, with most of the increase concentrated in defense. Regrettably, lawmakers have failed to fundamentally restructure existing programs to deal with new budget realities. The proposed $6 billion in entitlement savings over five years would barely affect the $80 billion annual increases in entitlement spending.

Even worse, the Senate budget resolution initially added $16 billion more in discretionary spending than the President's and House of Representatives' $873 billion figure before finally acceding to their target. The Senate budget makes no reductions in runaway entitlement spending. Both the House and Senate appear willing to shift money out of defense and then replenish those funds by adding to future supplemental bills.

Senate Grade: D

House Grade: D+

Needed Improvements: Lawmakers should stick to the $873 billion spending level and reject the gimmick of shifting defense dollars into other programs and then replenishing that defense spending in the next supplemental bill. Lawmakers should also terminate low-priority spending and significantly reform entitlement spending.

Additional Background: Brian M. Riedl, "Federal Spending: By the Numbers," Heritage Foundation WebMemo No. 989, February 6, 2006, at http://www.heritage.org/Research/Budget/wm989.cfm.

Budget Process Reform
Brian M. Riedl

Created in 1974, the current budget process has been subject to more than 30 years of abuse and loopholes from lawmakers seeking to exploit its structural flaws. These flaws are numerous: No statutory spending caps exist to require that lawmakers restrain spending, set priorities, and make trade-offs. Even modest congressional budget restraints are routinely overridden by a simple majority vote in the House and a three-fifths vote in the Senate.

Once the appropriations process begins, two-thirds of the budget is deemed "uncontrollable" and excluded from the oversight of annual appropriations. Emergency spending is also typically excluded from annual appropriations bills and instead relegated to ad hoc budgeting outside of normal budget constraints. Static tax scoring and baseline budgeting create biases in favor of spending increases and against tax cuts. Budgeting by credit card, Congress does not even measure its own long-term financial commitments. Overall, the broken budget process has enabled Congress's spending spree.

For years, Congress has stubbornly refused to repair the budget process, even allowing the successful discretionary spending caps to expire in 2002. The House defeated the Republican Study Committee's Family Budget Protection Act reforms in 2004, and recent spending restraints proposed by the Democrats' Blue Dog coalition went ignored. Although the "Taxpayers' Bill of Rights" model of limiting spending increases to the inflation rate plus population growth has been popular in several states, no Member of Congress has proposed legislation applying that standard to Congress.

Congress will finally take up budget process reform this summer in response to the President's proposed line-item veto. In doing so, the Senate will debate Senator Judd Gregg's (R-NH) new Stop Over-Spending (SOS) Act, which would cap discretionary and entitlement spending, create commissions to reform entitlements and wasteful spending, and bring about biennial budgeting and a line-item veto. It is a strong step in favor of fiscal responsibility. The House recently passed a line-item veto and may take up additional budget reforms.

Senate Grade: F

House Grade: D

Needed Improvements: The House and Senate need to fix the federal budget process by adopting strict caps on discretionary and entitlement spending such as the Taxpayers' Bill of Rights; create budget mechanisms to address long-term obligations of Social Security, Medicare, and Medicaid; and strengthen budget enforcement.

Additional Background: Brian M. Riedl, "What's Wrong with the Federal Budget Process," Heritage Foundation Backgrounder No. 1816, January 26, 2005, at http://www.heritage.org/Research/Budget/bg1816.cfm, and Alison Acosta Fraser, "Time for the Federal Budget Process to Include Unfunded Entitlement Obligations," Heritage Foundation Backgrounder No. 1818, February 3, 2005, at http://www.heritage.org/Research/Budget/bg1818.cfm .

Property Rights
Ronald D. Utt, Ph.D.

On June 23, 2005, the U.S. Supreme Court sent shock waves through America's homeowners and small businesses when it ruled that eminent domain could be used for economic development purposes. The case in question was Kelo v. City of New London, and under the Court's controversial ruling, private property could be taken from one private owner and transferred to another if the new owner would utilize that property in a manner that created more jobs and more tax revenues than would be the case under the previous owner.

In response, many in Congress introduced legislation that would limit the scope of the Court's ruling and provide greater protection to homeowners and small businesses. In the House, Judiciary Committee Chairman James Sensenbrenner (R-WI) introduced the Private Property Protection Act of 2005 (H.R. 4128) to prevent any government entity receiving federal funds from using eminent domain for economic development. A violation of the prohibition would disqualify that entity from receiving federal funds for two years. H.R. 4128 was passed in November 2005 by a vote of 376 to 38 and sent to the Senate for consideration.

The Senate, however, has not yet acted on H.R. 4128 or on any of the similar bills introduced by Senator John Ensign (R-NV) and by Senator John Cornyn (R-TX). All property rights protection bills introduced in the Senate have been referred to the Senate Judiciary Committee, where they have been bottled up.

Senate Grade: D-

House Grade: A+

Needed Improvements: The Supreme Court's Kelo decision has made it imperative that Congress act to protect individual property rights. The policies embodied in H.R. 4128 represent a constructive approach to meeting this need. It is now time for the Senate to act.

Additional Background: Ronald D. Utt, "Kelo Backlash Could Lead to Restoration of Property Rights Lost to Smart Growth and Eminent Domain Abuses," Heritage Foundation WebMemo No. 781, June 29, 2005, at http://www.heritage.org/Research/SmartGrowth/wm781.cfm.

Earmark Reform
Ronald D. Utt, Ph.D.

During the past several years, Congress has increasingly abused its constitutional responsibility over federal spending to target substantial sums of taxpayer dollars, or other valuable government assets and resources, to influential constituents. Under this practice, referred to as earmarks or "pork-barrel" spending, the typical abuse would allocate a certain sum of money for a defined purpose to a specific community, business, or institution, usually located in the Member's home state or district. At the most wasteful extreme is the infamous $220 million "Bridge to Nowhere" to connect a city of 9,000 people to an island with just 50 inhabitants, but more typical is the $400,000 for an "Uptown Jogging, Bicycle, Trolley Trail in Columbus, Georgia." The 2005 highway reauthorization bill contained more than 7,000 such earmarks, while another 15,000 peppered that year's appropriations bills, according to the Congressional Research Service.

When it became apparent that many of the recent lobbying scandals-notably that involving former Representative Randy Cunningham (R- CA)-involved paying bribes to Members in return for costly earmarks, the public was outraged. Pressure from the media and voters forced Congress to consider reforming the earmark process, and legislation of varying strictness was introduced and considered.

The Senate passed its lobbying/earmark reform legislation (S. 2949) on March 29, 2006. Because the bill's scope is limited only to earmarks that emerge in conference committee and are not part of the initial legislation, critics contend that modest changes in Senate practices would allow most earmarks to escape scrutiny and rejection. The House passed its lobbying/earmark reform bill (H.R. 4975) on May 3 2006, but its earmark control mechanism is even weaker than the Senate's. House members would be required to challenge an entire bill, not just the individual earmarks within it. The limited action is further circumscribed by its application only to appropriations bills; it excludes authorization and tax bills, which the Senate's version covers.

Senate Grade: C-

House Grade: D

Needed Improvements: House and Senate conferees need to strengthen the earmark control provisions by making all earmarks in all bills subject to a point of order.

Additional Background: Ronald D. Utt, "A Primer on Lobbyists, Earmarks, and Congressional Reform," Heritage Foundation Backgrounder No. 1932, April 27, 2006, at http://www.heritage.org/Research/Budget/bg1924.cfm.

Social Security Reform
David C. John

Social Security's financial future remains dim. The May 2006 report of the program's trustees says that, starting in 2017, it will begin to pay more in annual benefits than it will receive in taxes and that these deficits will continue indefinitely. In 2005, President George Bush pushed for changes in benefits for future upper-income retirees and for allowing younger workers to redirect a portion of their payroll taxes into a personal retirement account to make up the difference.

Neither the House nor the Senate took any action. Although several legislators introduced bills, not even one was considered. The House Ways and Means Committee conducted an extensive series of hearings but ended up bowing to leadership pressure to do nothing. Senate Finance Committee Chairman Charles Grassley (R-IA) made a major attempt to build a consensus on his committee but ultimately failed. An attempt by Senators Jim DeMint (R-SC) and Rick Santorum (R-PA) to bring a bill to stop spending the Social Security surplus to the floor was blocked by a procedural technicality. The only vote by either house was a DeMint-Mike Crapo (R-ID) amendment to the Senate budget resolution on March 16, 2006, which called for Congress to stop spending the Social Security surplus and allowed younger workers to own at least part of their benefits. It failed by a 46-53 vote.

Senate Grade: D-

House Grade: F

Needed Improvements: Both the House and the Senate need to improve Social Security's financial future and allow workers the option to invest a portion of their Social Security taxes in a personal retirement account.

Additional Background: David C. John, "How to Fix Social Security," Heritage Foundation Backgrounder No. 1811, November 17, 2004, at http://www.heritage.org/Research/SocialSecurity/bg1811.cfm.

Pension Reform
David C. John

The retirement security of millions of workers who are covered by defined benefit pension plans is at risk because many of those plans do not have enough money to pay all of the benefits they have promised. While the federal Pension Benefit Guaranty Corporation (PBGC) has had to take over underfunded pension plans from a number of airlines and most of the steel industry, worse is yet to come. The auto industry is also feeling the crush of massive pension obligations. The end result may be a massive bailout of PBGC that costs taxpayers tens of billions of dollars.

Regrettably, this situation is not likely to be significantly improved by the Pension Security and Transparency Act (H.R. 2830), which is being considered by a House-Senate conference committee. Pension funding rules are already horribly complex and generate results that are often very far from reality. Both the House and Senate bills did contain provisions that would significantly improve the current rules, but conference committee members will have to withstand industry and labor pressure to keep those features in the final version.

One of the worst features of this legislation is a Senate provision that would give the airlines- and perhaps other failing industries as well-20 years to fund their pension plans instead of the seven years that would apply to other pension plan sponsors. This unjustified move would only delay the inevitable failure of their pension plans while providing a precedent that would make it harder to deal with other politically powerful industries.

Senate Grade: D (If the section of the Senate bill giving airlines special treatment was dropped, this grade would improve to a B.)

House Grade: B-

Needed Improvements: The House-Senate conference committee should report legislation that requires much higher funding of pension plans. It should also eliminate current distortions that disguise the true state of pension plans and drop the special treatment to airline pension plans.

Additional Background: David C. John, "Avoiding the Next Taxpayer Bailout: A Strong Pension Bill or No Pension Bill," Heritage Foundation WebMemo No. 1056, May 3, 2006, at http://www.heritage.org/Research/SocialSecurity/wm1056.cfm.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

Related Issues: Federal Budget