Washington Update: Part I – A Primer on the Federal Budget Process: What it is and Why it is Important

March 23, 2015

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Congress decides how much to spend each year and on what programs, and how to raise the money to pay for that spending. The Congressional Budget Act of1974 lays out a formal framework for developing and enforcing a budget resolution to guide the process. Congress seldom completes action on the budgetresolution by the April 15 target date specified in the Budget Act, and it failed to complete action on a resolution for fiscal years 1999, 2003, 2005,2007, and each year from 2011 through 2014. However, should this Congress actually succeed in passing a budget resolution, the resolution might lead toimplementation of the “reconciliation” process, which provides for an expedited consideration of legislation related to mandatory spending and taxes.

The reason this process is important this year is that the budget reconciliation process could be used to bring about the ultimate political challenge tothe Affordable Care Act.

Components of Federal Spending

Before discussing the process, it is important to understand the components of federal spending: (1) discretionary spending, (2) mandatory spending and (3)interest.

Discretionary spending covers programs whose funding is appropriated annually by Congress, and funding for these programs must be renewed each year to keepgovernment agencies open and the programs in this category operating. The laws that establish those programs leave Congress with the discretion to set thefunding levels each year. Almost all defense spending is discretionary, as are a broad set of public services, including environmental protection,education, job training, border security, veterans’ health care, scientific research, transportation, economic development, some low-income assistance, lawenforcement, health research and international assistance. Discretionary spending comprises about one-third of the budget.

Mandatory spending represents more than half of all federal spending. This category includes the three largest entitlement programs − Medicare, Medicaidand Social Security − as well as certain other programs, including but not limited to SNAP (formerly food stamps), federal civilian and military retirementbenefits, veterans’ disability benefits, and unemployment insurance. These programs are not funded through annual appropriations but are ongoing spending.

Interest: Interest on the national debt also is paid automatically. However, Congress places a limit on how much the Treasury can borrow. This “debtceiling” must be raised through separate legislation when necessary.

The Process

Once the President has delivered his budget to Congress, Congress begins work on the budget resolution.

The Congressional Budget Resolution: The budget resolution is not an ordinary bill and therefore does not go to the President for his signature or veto. Because it does not go to thePresident, a budget resolution cannot enact spending or impose taxes. Instead, it sets spending or revenue-raising targets for other congressionalcommittees that can propose legislation directly providing or changing spending and taxes. It is, in essence, a blueprint for committees to follow.

If you were to read a budget resolution, you would not necessarily find specific policies mentioned in most of the document. The budget resolution consistsof a set of numbers stating how much Congress is supposed to spend in each of 19 broad categories (known as budget functions) and how much total revenuethe government will collect. The Congressional Budget Act requires that the resolution cover a minimum of five years, though Congress has in recent timespreferred to cover 10 years. The difference between the spending ceiling and the revenue floor represents the deficit (or surplus) expected for each year.

The House and Senate Budget Committees hold hearings and then each committee develops its own budget resolution. Once the Budget Committees pass theirresolutions, the bills go to the House and Senate floors to be considered, and then a conference occurs between the House and Senate to iron outdifferences and to create one final budget resolution. The House and Senate then pass that final resolution and its conference report.

Congress is supposed to pass the budget resolution by April 15, but it often takes longer. In recent years it has been common for Congress not to pass abudget resolution at all. When that happens, the previous year’s resolution, which is a multi-year plan, stays in effect, although the House, the Senate orboth can and typically do adopt special procedures to set spending levels through a Continuing Resolution.

After a Budget Resolution is Adopted:Following adoption of the budget resolution, Congress considers the annual appropriations bills that are needed to fund discretionary programs in thecoming fiscal year, and legislation to enact changes to mandatory spending or revenue levels as specified in the budget resolution.

The conference report that accompanies the budget resolutions contains what are known as 302(a) allocations. These allocations are what the committees ofCongress must follow. Often the report accompanying the budget resolution contains descriptions of the assumptions behind it, including how much itenvisions certain programs being cut or increased and how. These assumptions serve only as guidance to the other committees and are not binding on them.Sometimes, though, the budget resolution includes more complicated devices intended to ensure that particular programs receive a certain amount of funding.

Actions taken by the Appropriations Committees or by committees considering tax or entitlement bills (or amendments to them) must fit within theallocations decided by the Budget Resolution. The cost of a tax or entitlement bill is determined (or “scored”) by the Budget Committees, nearly always byrelying on the nonpartisan Congressional Budget Office (CBO). CBO measures the cost of tax or entitlement legislation against a budgetary “baseline” thatprojects mandatory spending and tax receipts under current law.

The main enforcement mechanism that prevents Congress from passing legislation that violates the terms of the budget resolution is the ability of a singlemember of the House or the Senate to raise a budget “point of order” on the floor to block such legislation. In some recent years, this point of order hasnot been particularly important in the House because it can be waived there by a simple majority vote on a resolution developed by the leadership-appointedRules Committee, which sets the conditions under which each bill will be considered on the floor. However, the budget point of order is important in theSenate, where any legislation that exceeds a committee’s spending allocation − or cuts taxes below the level allowed in the budget resolution − isvulnerable to a budget point of order on the floor that requires 60 votes to waive.

Budget Reconciliation

Congress can make use of an optional, special procedure outlined in the Congressional Budget Act known as “reconciliation” to expedite the consideration ofmandatory spending and tax legislation. This procedure originally was designed as a deficit-reduction tool, to force committees to produce the spendingcuts or tax increases required in the budget resolution. However, it was used to enact tax cuts several times during the George W. Bush Administration,which increased the deficit. Senate rules now prohibit using reconciliation to consider legislation that would increase the deficit; House rules prohibitusing reconciliation to increase mandatory spending.

What is a reconciliation bill? A reconciliation bill is a single piece of legislation that typically includes multiple provisions (generally developed by several committees), all ofwhich affect the federal budget − whether on the mandatory spending side, the tax side or both. A reconciliation bill, like the budget resolution, cannotbe filibustered by the Senate, so it requires only a majority vote to pass and the President can sign or veto it.

How does the reconciliation process work? If Congress decides to employ the reconciliation process, language known as a “reconciliation directive” must be included in the budget resolution. Thereconciliation directive instructs committees to produce by a specific date legislation that meets certain spending or tax targets. (If they fail toproduce this legislation, the Budget Committee chair generally has the right to offer floor amendments to meet the reconciliation targets for them, athreat that usually produces compliance with the directive.) The Budget Committee then packages all of these bills together into one bill that goes to thefloor for an up-or-down vote, with limited opportunity for amendment. After the House and Senate resolve the differences between their competing bills, afinal conference report is considered on the floor of each house and then goes to the President for his signature or veto.

Constraints on reconciliation: the “Byrd rule.” While reconciliation enables Congress to bundle together several different provisions from different committees affecting a broad range of programs, itfaces one major constraint: the “Byrd rule,” named after the late Senator Robert Byrd of West Virginia. This Senate rule provides a point of order againstany provision of (or amendment to) a reconciliation bill that is deemed “extraneous” to the purpose of amending entitlement or tax law. If a point of orderis raised under the Byrd rule, the offending provision is automatically stripped from the bill unless at least 60 senators vote to waive the rule. Thismakes it difficult, for example, to include any policy changes in a reconciliation bill unless they have direct fiscal implications. Under this rule,changes in the authorization of discretionary appropriations are not allowed. Changes to Social Security also are not permitted under the Byrd rule, evenif they are budgetary.

In addition, the Byrd rule bars any entitlement increases or tax cuts that cost money beyond the five (or more) years covered by the reconciliationdirective, unless other provisions in the bill fully offset these “out-year” costs.

This Congress.The budget resolutions that were reported out of the House and Senate Budget Committees currently would both use the reconciliation process to overturn theAffordable Care Act. Because of the way reconciliation works, it cannot be filibustered in the Senate and needs only 51 votes to pass. Unlike the budgetresolution, reconciliation legislation is sent to the President to be signed into law or vetoed.

This update was prepared byStephanie A. Kennan.If you have any questions, please contactStephanie at skennan@mwcllc.com or another member of McGuireWoodsConsulting’sFederalPublic Affairs team. 

For related information, please see our Washington Update: Part II – FY 2016 Federal Budget: What You Need to Know.