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Out With A Bang

By David Taylor   •

On Wednesday, President Trump invited Congressional Republicans to the White House to celebrate their signature legislative victory of 2017 — adoption of the most sweeping changes to the Internal Revenue code since 1986. Achieving that objective forced a year-end legislative scramble that impacts every federal agency, particularly the Department of Defense.

On December 12th, Alabama scheduled a special election to fill the vacancy created when Senator Jeff Sessions (R-AL) resigned his Senate seat to become Attorney General. On election night, Democrat Doug Jones was declared the winner, defeating Roy Moore by 20,715 votes (1.5 percent) to become the first Alabama Democrat elected to a U.S. Senate seat since 1992. Moore has yet to concede. Given the narrow margin, he demanded that the Alabama Secretary of State count all absentee and military ballots. He has also threatened a statewide recount. While those steps may delay certification of the election results and change the margin of victory, Alabama Secretary of State Merrill (R-AL) commented that they are unlikely to change the outcome of the election. When Senator-elect Jones (D-AL) takes the oath of office, the Senate will be split 51-49 with Senators Cochran (R-MS) and McCain (R-AZ) absent for health-related issues.

That prospect altered the year-end game plan for Senate Majority Leader McConnell (R-KY) and Speaker Ryan (R-WI). Ensuring that Congress completed action on tax reform before Christmas became their primary focus. On December 19th, the House voted 227-203 and the Senate voted 51-48 to pass H.R. 1, the Tax Cuts and Jobs Act. Not a single Congressional Democrat voted for the measure. Prior to the Senate vote, a parliamentary ruling altered provisions in the House-passed bill forcing an additional House vote. On December 20th, the House voted 224-201 to pass the bill, clearing it for President Trump’s signature into law early next year.

For federal agencies, the political decision to delay budget negotiations (and ultimately approval of agency budgets) into the second quarter of FY18 has operational consequences. First, it means that they’ll spend the first 4-5 months operating under a Continuing Resolution (CR). Our forecast called for a 2-year budget agreement to be finalized before the end of December. The Alabama election delayed that timetable to mid-January. The third Congressionally-approved CR runs through January 19th. For most agencies, we expect that a 4th CR (likely early February) will be needed before FY18 Appropriations decisions are finalized. We expect the final FY18 budget for every major federal agency to exceed the levels requested by President Trump. While that’s good news on the procurement front, the mid-year increase shifts more procurement activity into the second-half of FY18. Finally, the last-minute negotiations also delayed Senate action on the House-passed $81 billion disaster supplemental to early next year.

A razor thin election-year vote margin in the Senate increases the importance of two objectives for McConnell and Ryan in the upcoming negotiations: securing a 2-year spending deal and extending the federal debt limit beyond the 2018 mid-term elections. For McConnell and Ryan, a deal minimizes the risk of a government shutdown or default that would limit general election prospects for 2018 House and Senate GOP candidates. Achieving those goals require concessions to Senate Democratic Leader Schumer (D-NY) and House Democratic Leader Pelosi (D-CA) who know that Democratic votes will be required to pass both measures.

How will Congressional Democrats exert their increased negotiating leverage? Expect their demands to include a larger increase in the non-defense spending caps, additional disaster funding for Puerto Rico and California, and concessions on their top year-end legislative priority — DACA. Schumer will also push for an infrastructure spending boost.

With all those moving parts, implementation of the deal will require at least 2 steps. Step 1 raises the FY18-19 Budget Control Act (BCA) caps for defense and non-defense, and includes a version of the House-passed $81 billion supplemental and a short-term CR. The second should include FY18 Appropriations, additional disaster relief payments (particularly for California and Puerto Rico), and a federal debt limit extension.

House Republicans will push for inclusion of FY18 DoD Appropriations in Step 1 consistent with the increased defense spending cap. McConnell, Ryan and Congressional Democrats have an incentive to delay that to Step 2 to give Congressional Republicans a political reason to vote for that package.

FORECAST

90% a 2-year budget cap-boosting deal emerges by mid-January