Promises, Promises

By National Journal and Jeff Shear

December 14, 1996

A provocative and disturbing chapter of a soon-to-be-published book by the redoubtable Brookings Institution has been making the prepublication rounds in Washington. Titled ``The Unfulfillable Promise,'' the chapter is a woeful portent of forthcoming federal budgets.

Surprisingly, however, the ``unfulfillable promise'' is not the stuff of welfare, medicare or social security, the budget's so-called entitlement programs. The chapter instead discusses discretionary spending--that is, the everyday business of running the country.

If significant changes in social security and medicare are off the table next year, only a small portion of the projected $1.6 trillion-plus in the government's fiscal 1998 budget would be available for cuts--in other words, discretionary spending.

``As a proportion of the budget, we are heading toward the smallest percentage of [nondefense discretionary] spending since the 1950s,'' Robert D. Reischauer, author of ``The Unfulfillable Promise'' chapter, said. The senior Brookings fellow and former Congressional Budget Office director also pointed out that ``those were the years before we had an interstate highway system, a space program, the Nuclear Regulatory Commission, the Federal Emergency Management Agency. There was no Environmental Protection Agency, no low-income housing programs, no Head Start. We didn't have the Departments of Transportation, Education, Energy, Housing and Urban Development [HUD].'' All of these programs fall under discretionary spending.

Congress and President Clinton will be hard-pressed to find more cuts in discretionary spending. In an effort to bring burgeoning budget deficits under control, Congress already slashed such spending by 45 per cent in the 1990 Omnibus Budget Reconciliation Act. The 1993 reconciliation act took another 18 per cent. When the Republicans came into power in 1995, they rescinded $16.4 billion from the fiscal 1995 act. They also attempted but failed to freeze discretionary spending in fiscal 1997. And the budget-meisters will cut more this round.

``But not much more,'' said Richard Kogan, a senior fellow at the Center for Budget and Policy Priorities, a Washington-based nonprofit organization that tracks the effects of federal spending on low-income people. ``Maybe we can do another 10 per cent. But not 22 per cent, as the President has proposed.'' Or 24 per cent, as Republican budget plans propose.

And there is pressure to increase spending on such discretionary programs as environmental protection, highways and housing subsidies.

Still, both Republicans and Democrats persist in the notion that they will be able to take huge whacks out of discretionary spending--with some adjustments in entitlement programs--and balance the budget. This is where the smoke and mirrors come in. Both parties will show big discretionary cuts by ``back-loading'' the biggest and most painful bites. That means that the smaller, achievable cuts will be reserved for the near term. After that, the bigger, tough cuts will be left for the next Congress to worry about. As the ``rosy scenario'' became emblematic of Reagan-era efforts to game the budget, back-loading is the legerdemain of the new stewards.

Why is it so tough to cut discretionary spending? After all, such spending represents about 33 per cent of the federal budget. And these are the only monies Congress actually votes to spend.

But to say that roughly one-third of the budget is ``discretionary'' is deceptive, because a hedgerow has grown up around the defense budget, which is labeled as part of discretionary spending.

Defense represents 16 per cent of the total federal pie. So just 17 per cent of the budget that is discretionary spending is truly so, and these ``nondefense'' discretionary outlays already have been cut to the bone. Moreover, about a third of what is left goes to the states, which are under increasing pressure to cope with dramatic changes in welfare, food stamps and other programs for the poor.

Money for law enforcement and public safety programs accounts for 19 per cent of nondefense discretionary spending. The voting public won't be likely to approve of cuts in those programs. The administration of entitlement programs costs another 4.1 per cent. That can't be cut without reducing services. (Entitlements themselves account for 49 per cent of the federal budget.) And then there are the untouchables: Veterans Affairs, the National Institutes of Health and the like, which represent 24 per cent of the $320-plus billion nondefense discretionary budget. What is more, many of these programs must grow, if only to keep up with inflation.

John M. Spratt Jr. of South Carolina, the newly ensconced ranking Democrat on the House Budget Committee, is candid--and skeptical. He thinks that budgeters have used the discretionary side of the budget as a ``plug,'' noting that ``it's the number that gets used to make the bottom line work.''

The only solution, if the nation is to cut spending, is to rationalize the agenda of government, according to Martha H. Phillips, executive director of the anti-deficit Concord Coalition and a former director of the House GOP Budget Committee staff. She said that means keeping those programs that are necessary and making them more efficient, and killing the rest.

That calls for hard choices. But politicians don't get elected by offering voters bitter pills.

The Republicans promised to downsize big government, and they ran into a political cross fire when they tried. Clinton has said that the era of big government is over. On Feb. 3, when he presents his new budget, he will have an opportunity to explain what he means.

``Policy makers are going to be under pressure to reduce discretionary spending at the same time they have to satisfy a variety of emerging claims and cost pressures,'' according to Paul Posner, director of the budget issues group at the General Accounting Office (GAO).

If that is the case, and it is true that all politics is local, then Members are going to be under the gun from their constituents to satisfy opposing principles: They must both spend and save. That could mean making promises they know they can't fulfill.

BUDGET OBSTACLES--AND VICTIMS

The repercussions of additional cuts in nondefense discretionary spending will be felt at all levels of government and among all parts of the public, especially the poor. It is this part of the budget that pays for the FBI, medical research, the Postal Service, national parks, veterans hospitals, public housing, roads, airports.

And what if defense spending goes up, as is likely and arguably necessary over the next five years? How much will the rest of the discretionary budget have to bear? According to Reischauer, the deepest cuts would come in community and regional development, agriculture, international affairs and energy.

By any fair measure, the poor took the biggest hit in the federal government's most recent efforts to balance the budget. A late-November study issued by the Center for Budget and Policy Priorities demonstrated that while low-income programs made up 21 per cent of nondefense discretionary spending, they bore 34 per cent of the cuts.

This, at a time when welfare has been limited to two years and federal job training programs have been cut 20 per cent below their fiscal 1995 levels, when adjusted for inflation. This also came at a time when youth-training grants have been cut 80 per cent, funds for homeless assistance grants have been reduced 31 per cent and the heating assistance program for the poor has been cut 36 per cent below the final, inflation-adjusted fiscal 1995 levels. And more such savings could be on the way, even though organizations such as the National Conference of Catholic Bishops and the Evangelical Lutheran Church of America have banded together to oppose them.

Economic choices ``determine who will be helped and who will be hurt and how we will move toward the future,'' said a statement on this issue from the Rev. William S. Skystad, chairman of the domestic policy committee of the United Catholic Conference.

Another big setback for the poor may be in store. A Sept. 16 letter from departing HUD Secretary Henry G. Cisneros to Office of Management and Budget (OMB) director Franklin D. Raines warned, ``The most critical issue facing the department in FY 1998 is the sharp increase in budget authority needed to maintain [federal] rental subsidies to nearly three million [housing] units'' covered by section 8 of the 1974 Housing and Community Development Act. Section 8 is a complex provision that provides rental subsidies for the poor. Under the program, 30 per cent of a resident's income goes toward rent and HUD picks up the rest, about $300-$500 a unit per month, according to the GAO.

Cisneros continued, ``The number of expiring section 8 contracts . . . grows precipitously over the next five years.'' This represents the period addressed by the fiscal 1998 budget. ``In FY 1997,'' Cisneros wrote, ``contracts covering 833,500 units will expire.'' In 1998, that number will leap to 1.8 million units. Here's the upshot, according to Cisneros: Whereas the fiscal 1997 budget required about $4 billion to cover the renewals, the budget authority needed in fiscal 1998 will more than triple, to $13.5 billion.

HUD faces a double whammy. The 15-year and 20-year housing contracts the department wrote in the 1970s and '80s are coming due. In the past, as these long-term contracts expired, HUD renewed them but saved money by shortening the length of the contracts. More and more contracts were signed for one year, not 20. The shorter the contract, the less budget authority HUD needed to request from Congress. These contracts must also now be renewed. Cisneros wrote: ``HUD will be renewing more than three-quarters of all section 8 units each year by FY 2000.''

Here's what is critical. Section 8 addresses the housing needs of only about 25 per cent of the nation's poor. Obviously there isn't the money to expand the program, and keeping even will be no small achievement. HUD hopes to sustain the program by manipulating cash flow. The money the agency needs for entering into contracts, known as budget authority, is zooming, but the spend-out rate, money referred to as outlays, trickles through the budget pipe more slowly. And it is the outlays that count toward the deficit.

HUD is counting on internal reforms to contain these outlays. From now until 2002, yearly outlays would grow to only $17.1 billion, just $1.2 billion above current levels. That means HUD must hold outlay increases to 1 per cent per year, far below the rate of inflation. No small feat. Without reforms, which would entail a struggle with powerful private-sector interest groups, outlays could increase by $7 billion, or much more. And that would count toward the deficit.

The problem in all of this is that the discretionary budget is subject to caps on both budget authority and outlays. With a $9.5 billion leap in HUD's budget authority, appropriators will find it difficult to stay below caps that are increasingly stringent.

``We're looking at a time when the government is going to have to face a huge jump in spending,'' Judy England Joseph, the director of the GAO's housing division, said. ``We're looking at sums way beyond what Appropriations Committees can fund.''

The contract renewals that HUD faces are ``discretionary obligations,'' something of a contradiction in terms. As a practical matter, they bear the same ineluctable costs as entitlements. Costs are not driven by laws requiring increased expenditures as population and the economy change--more elderly moving into social security, for example, recessions, inflation. They are driven by rising rents, and unless congressional appropriators are prepared to cut eligibility rolls or landlords are willing to accept more-austere terms, costs will swell.

NUCLEAR WASTE CLEANUPS

Another such discretionary obligation that Congress can look forward to is the cleanup of nuclear waste sites--for instance, the Hanford Nuclear Reservation located in an arid region of Washington state. East of the Cascade Range and half the size of Rhode Island, Hanford has been ``stabilized'' for now. That is, its 140 underground tanks that contain cast-off radioactive materials are no longer considered to be in danger of nuclear detonation and leaking. Hanford once made plutonium, a radioactive metallic element that does not occur in nature but is necessary for both hydrogen and atomic bombs. One of its isotopes has a half-life of 76 million years.

In 1989 and 1990, the Energy Department entered into agreements with states to clean up sites such as Hanford, which alone contains one-third of all the nation's environmentally critical weapons facilities. Two things were unknown to Energy when it cut the deal: how to do the cleanups and how much they would cost. The agreements were made for the purpose of keeping the sites operating. Moreover, the expectation was that Congress would ultimately abrogate these agreements when the full costs became known (which is still possible).

Having completed the study phase of such problem sites as Hanford, the Energy Department discovered that the full, 30-year cost of a site restoration, including remedying groundwater contamination, would make the $200 billion-plus savings and loan cleanup look like a trifle. Hanford will cost at minimum $50 billion over the next 20 years, and it will never be pristine.

And there's a kicker. Failure to complete these cleanups is subject to substantial penalties. The federal managers of these programs can be held personally responsible for agreements signed with local regulators. If administrators do not ask OMB for the necessary funds to complete the work, they are subject to criminal action. What would happen if Congress refused to act on the request may soon be tested.

According to GAO sources, the costs of Hanford's cleanup during fiscal 1998 will be about $6 billion, and costs will increase a billion a year, to $10 billion by 2002. At the moment when Energy will need the most money, the back-loaded federal budget will have the least to spend.

STATE DEPARTMENT BLUES

``Pretty bad'' is how a State Department official described the situation as he began to discuss his department's budget. At first he spoke in measured diplomatic tones, then with increasing rancor. ``Over the course of the last 11 years, the international affairs budget has declined 50 per cent . . . in inflation-adjusted dollars!'' Thirty U.S. embassies and consulates have been closed worldwide.

Recent polls have demonstrated that the public thinks U.S. foreign aid expenditures are budget busters that add some 25 per cent to the cost of running government. In fact, the entire State Department budget, including embassies, the Peace Corps and foreign aid, represents only 1.2 per cent of expenditures.

``We don't spend money on foreign aid,'' the official said, as he tried to correct the semantics of the debate. ``Fighting global environmental degradation is not foreign aid. Preventing the world's population from exploding isn't foreign aid. Stamping out smallpox and now polio is not foreign aid. Stopping nuclear proliferation is not foreign aid. It may help others, but it protects us at home. These are minuscule amounts of money compared to what it would cost us to fall back into our old Cold War ways.''

In fiscal 1996, the State Department budget request was $21.2 billion. Congress provided $18.5 billion. In fiscal 1997, the department requested a more modest $19.2 billion and was cut back to $18.3 billion. ``There is no international organization to which the U.S. belongs where our payments are not in arrears,'' the State official said. ``We are turning national debt into international debt. That makes our leadership position in the world more difficult.''

HOW TO PAY FOR THE ENVIRONMENT?

With the Cold War over, Americans are looking inward, and congressional appropriators have to be a little worried about what the voters are seeing. For one thing, the GOP Congress had hoped to save money in the domestic nondefense discretionary budget by cutting back on environmental spending. It worked closely with business interests to rewrite regulations and curtail strict enforcement. In a poll by the Roper Center for Public Opinion Research Inc. in November 1995, only about 1 per cent of those questioned listed the environment as their big concern.

But the environment turned out to be a hot-button issue with voters. It became a key issue for the President with which he spanked the Republican Congress and opponent Robert Dole. Stanley B. Greenberg, a prominent Democratic pollster, found that in eight of nine surveys he tracked after the 1996 election, the environment was No. 1 of two factors in voters' decisions to oppose candidates.

If congressional budgeters respond to these concerns, it could cost them. For example, they will have to find money to finance the huge new stretches of wilderness declared national parklands in Utah. But if they balk, it could still be costly: Last year, when Sen. Conrad Burns, R-Mont., co-sponsored legislation to pull nearly 300 million acres of land from The Federal Register, local hunters fired off protests to his office. They feared losing access to Bureau of Land Management hunting grounds. Burns quickly backpedaled and helped vote down his own effort.

Then there is the perennial environmental issue of the superfund. Cleanups of many toxic waste sites have become symbolic of the federal government's best and worst efforts. Last year, both chambers of Congress passed legislation to roll back federal cleanup requirements. That backfired.

But the White House may have set itself up for a similar fall. During the campaign, the Administration scored points by noting it had cleaned up 197 waste sites, more than all the cleanups during the Reagan-Bush years. The President then promised to clean up 500 more sites by 2000. That promise could add up to real dollars.

THE HIGH COST OF HEALTH CARE

And then there's AIDS. In May, the 1990 Ryan White Comprehensive AIDS Resources Emergency Act was reauthorized. Spending rose from $633 million in fiscal 1995, to $736.1 million in 1996 and to $906 million in fiscal 1997. The money fills the gaps left by private care. States and hard-hit metropolitan areas also receive money. But these state programs have never reached the authorized $250 million-a-year spending level, topping $195 million only in 1995.

As is the case with many social problems, costly programs in the near term may avert out-of-control costs over the longer term. A new and costly cocktail of drugs known as protease inhibitors has shown dramatic results in curtailing symptoms and early death from one of the worst pandemics this century. In its fiscal 1997 appropriation, Congress said the Health and Human Services Department should speed clinical trials of these drugs for pregnant women and for children who have AIDS or are HIV-positive. The wholesale price for a year's supply of one such drug, which is used to supplement treatment and not to supplant other drugs, costs about $5,800.

About three-fourths of state AIDS drug assistance programs now pay in whole or in part for protease inhibitors, but costs are exploding. Plans to restrict access to these drugs, through waiting lists or caps, are under way. Some state programs report that their costs doubled or tripled from January to July. Program supporters claim savings of $47,000 per year per patient through the intervention of protease inhibitors. That represents real savings because the current costs for treating AIDS patients from diagnosis to death range up to $200,000 per person.

THE EXPENSIVE ROADS AHEAD

The biggest budget buster, not to mention battle, of the 105th Congress could be a program known as ``iced tea.'' ISTEA is an acronym for the 1991 Intermodal Surface Transportation Efficiency Act. The program supports the nation's highways and mass transit system.

Financed for six years, beginning in calendar year 1992, the $155 billion plan must be reauthorized this year. This money goes into a trust fund, which contains a surplus. Most likely, the reauthorization will be for a shorter period, four years, which reduces the burden on the budget. The powerful American Trucking Associations (ATA), however, will push for an increase in annual spending from the trust fund from approximately $20 billion a year to $30 billion.

``This is going to be a battle royal, first at the Budget Committee level, where they have to divvy up a shrinking pie,'' Kenneth D. Simonson, vice president and chief economist for the ATA, promised. ``The slice for transport is going to be a tug-of-war between aviation interests and surface, between highway transit and rail, and then state by state over how much money they will get from federal formulas.''

The Book of Genesis speaks of seven fat years followed by seven lean ones. In 1990, Congress put the nation's budget on a diet. Now it will attempt to add a few even-leaner years on top of the previous seven. Whether that is do-able is doubtful.

One bright spot in an otherwise dark discretionary picture is that the explosive growth in entitlement costs may be abating. A study by the Federation of American Health Systems, which represents privately owned hospitals and health sys- tems, shows what the federation characterizes as a ``giant'' drop in medicaid costs. The federation projects that program costs will fall by some $176 billion by 2002.

This potentially takes some pressure off the nondefense discretionary programs in the budget. Projected reforms in medicare might have an additional beneficial effect. There is also the prospect for a change in the way yearly social security increases will be calculated. None of this, by any means, is certain, however. One or two good years and unexpected years of slower growth may or may not represent a trend.

``The caps expire at the end of the fiscal year 1998 budget cycle,'' Stanley E. Collender, a managing director of the Washington office of the New York City-based public relations and public affairs firm Burson-Marsteller, said in an interview. The caps are the limits on discretionary spending that were instituted in 1990 and reauthorized for five years in 1993. They have effectively held down the growth of spending on the nonentitlement side of the budget and have never been breached. ``We are likely to see them reauthorized again this year, because it's not an election year,'' Collender said. He thinks that there is a shot at savings on entitlements but that the discretionary caps will still be lowered. ``The thing that should never be forgotten, however, is that politicians like to spend money on what they can take credit for.'' What that may mean is more promises and less money to fulfill them.


By National Journal and Jeff Shear

December 14, 1996

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