Washington Weekly: State and Local Aid

The Senate attempted to formally open the debate and consideration of police reform legislation, but the procedural vote fell short of the needed 60 votes (see below). The Senate also passed a bill invoking sanctions on Chinese officials and financial institutions for human rights violations in Hong Kong (see below). The House approved a separate version of police reform legislation and will pass a bill to make Washington, DC the 51st state later today.

The Senate will debate the fiscal year 2021 defense authorization bill. The House will vote on a comprehensive infrastructure package and a measure to strengthen the Affordable Care Act ("Obamacare").

Stimulus 4: the next Stimulus Bill. 

On one hand, the escalation of COVID-19 cases in parts of the US provide ammunition to those in the Senate (Democrats) who want to pass a comprehensive fifth stimulus bill in line with the $3.5 trillion measure passed by the House in May. On the other hand, continued signs of economic recovery, evident this week in the slightly lower unemployment claim filings, give momentum for a smaller and targeted bill favored by Republicans. That dynamic will continue throughout July when a bill will be subject to more serious negotiations and could begin to gain traction, especially as the end of the enhanced unemployment benefits approaches. Nothing too serious on this front will occur until then.

State and Local Aid. 

It's not just governors and mayors who are advocating for additional assistance as part of the next stimulus bill (stimulus 4). The business community, led by the Chamber of Commerce, are advocating for a new round of funding for state and local governments, which would be in addition to the $150 billion that was included in the third stimulus bill (the CARES Act). Businesses have other priorities in the next bill as well, which makes this specific request a surprise to some, but they are concerned that local authorities will make up revenue shortfalls by increasing taxes on them (hence the clamor for federal aid). State and local governments are also beginning to threaten layoffs in their ranks at some point later this year (about 4 million jobs are at risk), which has gotten the attention of lawmakers. We're confident that state and local governments will get money as part of stimulus 4 but not as much as the $500 billion in the House-passed bill.

Police Reforms. 

Efforts to enact police reforms were successful in the House, as it passed a comprehensive bill, but hit a wall in the Senate as Senate Democrats rallied to oppose the consideration of a reform bill authored by Senator Tim Scott (R-SC) and other Senate Republicans (a summary can be found here). The Senate needed 60 votes to formally consider the bill and any amendments. That would have required at least seven Democrats to support the procedural measure, but only three Democrats did. Senate Majority Leader Mitch McConnell (R-KY) will likely try again next week, perhaps with some modifications to the Scott bill, but we are not optimistic that effort will succeed either. Police reform legislation could be resumed at some point later in the summer or fall, but this effort looks now to be a victim of the broken political process in Washington.

State vs. Feds. 

One complication in crafting police reform legislation is that police departments are generally funded and overseen by state and local governments. As such, the federal government has historically been reluctant to tell state and local governments how to run them. This dynamic was evident in the Scott bill as well as the lead Democratic alternative in the Senate. These bills didn't mandate national police standards as much as they focused on federal law enforcement (FBI, DEA, Customs, etc.), which has not been at the center of recent controversies. The bills address state and local impacts by tying the extension of federal funding grants to certain reforms and practices, such as prohibiting chokeholds. State and local governments have long had an ability to make their own reforms, including those now being called for. The focus on federal officials is an important part of the debate, but action at the state and local level will be more impactful.

SEC Controversy. 

The abrupt departure of the US attorney in New York and the Trump administration’s plan to nominate SEC Chairman Jay Clayton in his place has thrust the well-respected SEC Chairman into a political maelstrom. As the top federal prosecutor in New York, the position has outsized importance for the financial industry. Congressional Democrats have highlighted the latest controversy as an example of the Trump administration’s political interference with federal prosecutors, an issue that they explored in a House Judiciary Committee hearing this week. Clayton, who has indicated that he will stay on as SEC Chairman in the interim, also faced calls to withdraw his nomination for the US attorney post and was on the hot seat at another House hearing this week. As it is, his nomination faces dim prospects. Reflecting a longstanding Senate tradition of deference to home state Senators on judicial nominations, Senate Judiciary Committee Chairman Lindsey Graham (R-SC) has indicated that he won’t move ahead with the nomination without the support of New York’s two Senators (and both of them oppose it). The nomination isn’t going anywhere even if Clayton doesn’t bend to the increasing pressure to withdraw.

US-China Trade. 

Confusion reigned early this week after a key White House official, Peter Navarro, proclaimed the phase one US-China trade deal dead. Navarro has never been enthusiastic about the deal, and we believe his comments accurately reflect his thinking. Nonetheless, he later backtracked on the comment, and the official US position is that the deal is still intact. However, there is disagreement among senior White House officials about whether to continue with the deal given China's mixed compliance record and the dynamics of the US presidential election. We believe President Trump still favors the deal, but his thinking could change as he tries to position himself as tougher than Joe Biden on China as the campaign evolves, a need exacerbated by claims in John Bolton's book about conversations the President had with Chinese President Xi. While the phase one deal began as a big victory to tout in the election, it could be abandoned by President Trump in the fall if he deems Chinese compliance subpar. This would be a risky approach that would rattle the markets right before the election, but we are not ruling anything out given the fluid nature of US-China relations and the competitive US presidential election.

Hong Kong Sanctions.

In response to China’s impending imposition of a national security law on Hong Kong, the Senate unanimously passed legislation that would express disapproval of the Chinese government’s actions and sanction Chinese officials involved in human rights violations on the island (and financial institutions that do business with those individuals). The sanctions bill, which is sponsored by Senators Pat Toomey (R-PA) and Chris Van Hollen (D-MD), had come up a few weeks ago, but objections were raised at that time to give the Trump administration the opportunity to make some technical corrections. The Senate’s vote follows other recent Congressional actions on China, including a bill to delist Chinese companies from US exchanges that was passed by the Senate and another China sanctions bill to address human rights violations against the Uighurs that was signed into law by President Trump. The defense authorization bill (discussed below) also has a variety of China-related defense and security provisions and more China measures could be added as it is debated on the floor. With tensions heightening between the US and China and with China likely to become a dominant campaign issue, this week’s actions won’t be Congress’s final say on the broader US-China relationship.

Defense Bill Complication. 

Both the House and Senate are advancing their own versions of the annual defense spending authorization bill, which has passed each year for 59 consecutive years. A controversial part of the bill this year is an effort to create a commission to re-name military bases currently named after Confederate generals and to remove any reference to the Confederacy in federal defense facilities. Fort Bragg in North Carolina, Fort Benning in Georgia and Fort Hood in Texas are three of ten bases affected. The $730 billion Senate bill requires the re-naming of the ten bases in three years, while the emerging House bill has a similar provision but within one year. President Trump has threatened to veto the bill if it contains any base re-naming provision. Over the next two weeks, there will be efforts to dilute the requirement in the Senate bill by making re-naming optional or giving local communities more of a say in what the bases are named. We'll hear more about this issue in the upcoming weeks, but our best guess is that a re-naming provision will remain in the final bill and the President will have to deal with it in 2021 if he is re-elected.

Congressional Turnover. 

On Tuesday, Congressman Eliot Engel (D-NY) likely became the fourth incumbent House member to succumb to a primary challenge this year (due to the high amount of voting by mail, the results are still not final). The media inevitably focuses on high profile primary challenges and we have seen major upsets in recent years, including the 2018 defeat of House Democratic Caucus Chairman Joe Crowley (D-NY) and the 2014 upset of House Majority Leader Eric Cantor (R-VA). Nevertheless, incumbents rarely lose primary elections, though a large portion of Congress still turns over every two years due to retirements. There already are 50 current House members (almost 10%) who will not be returning next year, and this is before anyone loses a race in November. Despite its reputation for having Members that serve for extremely long periods of time, a large portion of the House turns over every two years, and this November will be no different. This natural turnover is one reason why term limits are not enacted.