They Made a Deal

Late Saturday, President Joe Biden and House Speaker Kevin McCarthy announced that they had agreed to a deal that would raise the debt limit.  What emerged appears to be a true meet-you-halfway compromise, with neither side getting all that it wanted.  The President had wanted a clean bill, and the Speaker had wanted significant cuts to domestic discretionary funds while increasing substantially funding for defense.  As more and more information becomes available, what is becoming abundantly clear that If adopted, the bill, entitled the Fiscal Responsibility Act would have a significant impact on states and localities, though not nearly as great as would have been the case had many of the provisions of the House bill, entitled the Limit, Save, Grow Act, had been adopted.  These included a ten-year freeze on domestic discretionary funding based on fiscal year (FY) 2022 appropriations, major changes to fossil fuel energy permitting rules, elimination of student loan forgiveness, expansion of work requirements for food assistance, welfare, and Medicaid recipients, and termination of some of some pieces of the Inflation Reduction Act in exchange for raising the debt ceiling one year. 

Instead, each side got some of what they wanted, but not all.  The president did get the debt ceiling raised until January 1, 2025, and the speaker did get a near freeze on domestic discretionary funding, but only for two years and based on FY2023 spending levels.  The speaker also got expanded work requirements for some food assistance recipients, but not for Medicaid or Temporary Assistance to Needy Families (TANF).  Significant changes to fossil fuel energy permitting rules were set aside due to time constraints, and the student loan forgiveness program was left intact, though the date on which interest begins to accrue was moved forward. 

For local governments and regions, the biggest impact may come from the rescission of funds previously provided through COVID legislation. The Fiscal Responsibility Act would immediately rescind unobligated funds that had previously been provided under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, or CRRSSA. This provision provided $10 billion for states to spend on projects that are eligible under the Surface Transportation Block Grant Program and required that a portion of the $10 billion be suballocated to areas of more than 200,000 people.  The approximately $2.2B in unobligated amounts that remain under this section will no longer be available once the Fiscal Responsibility Act is signed into law.

The debt ceiling package will also rescind funds from other programs and other legislation (including the American Rescue Plan) that will impact local governments and regions as well. The full picture of the impact of these rescissions is not yet clear.

It now appears that the rescissions outlined in the act are likely to impact in significant ways state and local governments.  Though domestic discretionary funding makes up a small slice of the federal budget — not quite 15 percent — it accounts for most, if not all of the money that flows to states and localities, according to Governing.  It is also the category from which most of the rescissions are being made.  Therefore, any reduction or freeze on spending will have a significant impact on individual programs.  Overall, the rescissions outlined in the bill would cut spending by more than $28 billion. 

Here is what we do know.  In addition to the Fiscal Responsibility Act rescinding billions in Covid relief funds despite federal health officials’ concerns that these cuts would impact efforts to stem future viral outbreaks, like mpox, the deal would also rescind $21.4 billion of the $80 billion that had been provided to the Internal Revenue Service (IRS) to modernize and improve customer service.  The bill includes only a $1.4 billion rescission, the additional $20 billion is part of a “gentlemen’s agreement” to further cut IRS funding.

The Fiscal Responsibility Act contains changes to the National Environmental Policy Act of 1970 (NEPA) and makes minor changes to permitting requirements.  It requires the Department of Health and Human Services (HHS) to report on the employment outcomes for the Temporary Assistance for Needy Families (TANF) recipients in line with reporting requirements for the Workforce Innovation and Opportunity Act but does not establish work requirements. 

Changes to the work requirements for those who receive Supplemental Nutrition Assistance Program (SNAP) benefits was changed.  The upper age limit was raised to 54 from 49 though homeless persons, veterans, and youth aging out of foster care are exempt. Finally, it lifts the moratorium on student loan payments and prohibits the Department of Education from establishing future moratoria on payments but does not end the program as had been hoped for by the Speaker.

Here are some examples provided by the Government Finance Officers Association (GFOA).  The largest cut – nearly $10 billion – would come from Public Health and Social Services Emergency Fund.  The Highway Infrastructure Program would be cut by more than $2 billion, followed by the Aviation Manufacturing Jobs Protection Program and the CDC-Wide Activities and Program Supports, each of which would be cut by slightly more than $1.7 billion.  Also cut would be the SBA’s Disaster Loans Program Account, the USDA’s pandemic response program, and state unemployment insurance and employment service operations funds, each of which would be cut by between $1 and $1.5 billion.   The Child Care and Development Block Grant, important to working parents who cannot afford child-care including SNAP and TANF recipients, would be cut by $278 million, Federal Emergency Management Agency federal assistance would be cut by $25 million.  Grants to the National Railroad Passenger Corporation (AMTRAK) would be cut by $2 billion.

On Tuesday, May 30, the House Rules Committee is expected to review and approve the bill for floor consideration.  On Wednesday the House is expected to adopt the bill.  From there it will go to the Senate for its consideration.  The Senate is expected to work through the weekend to ensure that the bill is adopted by June 5, the date the U.S. Treasury Department says the U.S. will run out of the funds to pay its bills.

A section-by-section description of the bill can be found here.