Congress Passes the Deficit Reduction Act

On February 1, the United States House of Representatives passed the Deficit Reduction Act (S. 1932), a fiscal reform bill meant to help rein in the rate of increase in mandatory federal spending.  Passage of S. 1932 is an important and necessary step towards greater fiscal responsibility in Washington.  In response to numerous letters-to-the-editor pertaining to this matter, I am pleased to provide greater context and more fully explain my reason for supporting this legislation.

Mandatory spending, which automatically increases every year by formula unless Congress affirmatively acts to reform it, is currently increasing at an average rate of 6.4% per year.  These increases are driven by a number of factors, including population, inflation, and medical costs.  S. 1932 is the first bill passed by Congress to slow the growth in mandatory spending since 1997. 

The increasing cost of mandatory spending, which is expected to grow from approximately half the federal budget today to over 60% in 2015, leaves less and less room in the budget for discretionary spending that must be approved every year by Congress.  Although the term "discretionary spending" makes such programs sound unimportant, they are in fact very important functions of government.  Discretionary spending includes funding for border and homeland security, federal law enforcement, education programs, national defense, and veterans' health care.

The debate in Congress regarding the Deficit Reduction Act demonstrates the gap which frequently exists between "inside the beltway" accounting and the accounting practices used in the real world by our nation's families and businesses.  Take, for instance, the Medicaid provisions of the bill.  Even with S. 1932 enacted into law, federal Medicaid spending will still increase by more than $70 billion between now and 2010, from $184 billion to approximately $257 billion.  Yet, the Medicaid provisions of the bill were widely denounced for "cutting" Medicaid.  This is because inside-the-beltway accounting defines a "cut" as any increase in spending which is not as large as was previously projected.            

The impact of S. 1932 on federal spending is modest, rhetoric notwithstanding.  Even with its provisions enacted into law, mandatory spending is still expected to increase by about 6.3% per year.  In addition, S. 1932 provides extra spending in certain high-priority areas, including funds for home heating assistance, child care for parents transitioning from welfare-to-work, grants for first responders to purchase communication systems, and payments to help guarantee Medicare beneficiaries continue to have access to their physicians. 

Overall, after taking into consideration the aforementioned spending increases, S. 1932 will produce approximately $40 billion in net savings over the next five years.  These savings are small when compared to the total federal budget, but-coupled with spending discipline elsewhere and a growing economy that produces increased revenue-they help to put our nation on a more responsible fiscal track.  

The fiscal reforms contained in the Deficit Reduction Act impact federal programs in a variety of ways.  I am pleased to address two aspects of the bill in detail.

First, with respect to higher education, S. 1932 provides much good news for students:  Total loan fees charged to students, which currently equal up to 4% of their loan amounts, are replaced with a single 1% fee; loan limits for first-year and second-year students are updated for the first time since 1986 and 1992, respectively; and, additional grant money is made available to low-income, high-achieving students, as well as for low-income math and science majors in their junior or senior year.  The majority of the so-called cuts to student aid which have been denounced by critics are, in fact, reductions in payments made to banks and other lenders.  For example, when interest rates fall below a statutorily set rate, lenders had been entitled to receive payments from the federal government equal to the difference.  However, when interest rates rise above this rate, the lender was allowed to keep the extra income.  This "windfall" for lenders at taxpayer expense is eliminated under S. 1932 for future loans.   

Second, with respect to Medicaid, the Deficit Reduction Act tightens rules against improper asset transfers.  An "improper asset transfer" is where a person disposes of assets for the purpose of qualifying for Medicaid benefits.  It does not include the transfer of assets for non-Medicaid purposes, and "hardship waivers" from the rules are available in certain circumstances.  S. 1932 lengthens the amount of time a state must look back for any future improper asset transfers from three years to five years, as well as adjusts when the penalty period for any improper transfer begins.  These changes, which were requested by a bipartisan group of state governors, are intended to ensure increasingly scarce resources for long-term care are available to those middle-class and lower-income seniors who truly need them.

Other provisions of the Deficit Reduction Act allow states more flexibility in the design of Medicaid benefits, so long as their benefits packages equal or exceed the benefits provided to state and federal employees, and reduce excessive reimbursement rates paid to some pharmacies for prescription drugs purchased by Medicaid.  S. 1932 also disqualifies individuals with more than $500,000 in home equity from Medicaid benefits and charges higher Medicare Part B premiums for senior citizen couples with annual incomes of $160,000 or more.  Yet other provisions would enhance worker pension security and free-up much-needed radio spectrum for emergency responders' communications needs.    

The reforms included in the Deficit Reduction Act are vitally necessary to ensure the long-term solvency of Medicaid, Medicare, student loan, and other important programs while also instilling greater fiscal responsibility in federal government spending.  I voted in favor of this legislation after careful and deliberate consideration of the many competing arguments pertaining to its provisions.  For more information regarding the specifics of the Deficit Reduction Act, please visit the House Budget Committee's web site at http://www.house.gov/budget/.