Washington Weekly: Government Shutdown Threat

Both the Senate and House passed legislation to avert a partial government shutdown by extending government funding in two stages through March 8 and March 22 (see below). The Senate also approved various Biden administration nominees.

The Senate will continue to approve Biden administration nominees. The House plans to vote on a bill to improve access to capital for certain types of businesses. Both the Senate and House will continue to work on government funding legislation (see below).

Government Shutdown Threat.

Congress this week faced a March 1 deadline (today) to pass four bills covering government spending for select agencies and functions (relating to agriculture, transportation, housing, veterans, military construction projects and energy). To avert a partial government shutdown, the House and Senate voted to punt this deadline to March 8. Both chambers will have to work overtime next week to finalize and then vote on these bills. That won’t be easy. While there is general agreement on the cost of each of the four bills, plus two other funding bills that also face the new March 8 deadline, there is still significant disagreement over how to spend the allocations and over whether conditions should apply to some of the spending. Lawmakers from both parties will have to accept some compromises they otherwise may find distasteful as a part of this process. While March 8 is the new deadline, there is no guarantee this timeline will be met and a government shutdown of these affected agencies and functions will remain on the table as we work through next week.

Government Shutdown, Act Two.

The other six bills that must be passed to fund the government this year have a new deadline of March 22 under the legislation passed this week. These bills cover much of the remainder of federal government operations, to include health programs, trade, foreign aid, broader defense and education. The passage of these bills will be more challenging due to disagreements over programs under their jurisdiction and will require even more compromise in a Congress that has shown little inclination to do so. There has been work on these bills, but it has lagged behind the bills mentioned above. Congress may have to extend the March 22 deadline again, which is dispiriting to many members. It is difficult for us to see a path forward without some level of government shutdown in some agencies over the next month.

A Broken Process.

The process to fund the discretionary government spending each year is clearly broken. Congress for many years has largely ignored the traditional process (set forth in rules and deadlines established by Congress in 1970) whereby it should pass a budget and then the 12 spending bills that fund government operations each year. The last time all 12 appropriations bills were passed on time was in 1996, and it’s only happened four times in the five decades since the process was implemented. With the breakdown of this process, the common practice instead has been having a small group of congressional leaders and the White House write and pass one or two very large bills containing all government spending (and well beyond the established deadlines). This slipshod approach doesn’t allow for the proper scrutiny of funding decisions at the committee level and the involvement of most lawmakers. That, in turn, leaves them frustrated and skeptical of the end products. Many members vote for or against the funding bills due to their substance, but many other members also now vote against the bills because they are frustrated by the process that has produced them. This needs to change or Congress will continue to face a significant government shutdown threat year after year.

Ukraine, Israel, Southwest Border in Limbo.

President Biden met this week with congressional leaders to urge passage of a large foreign aid bill to help Ukraine, but the bill won’t move forward any time soon. House Republicans want to add immigration reforms to the bill that the Senate won’t support. This stalemate isn’t expected to break anytime soon. A bipartisan bill that scales back both Ukraine funding and immigration reforms supported by most House Republicans could be taken more seriously in the weeks ahead in the absence of other alternatives. Separately, both President Biden and former President Trump visited the southwest border this week to tout their views on immigration, underscoring the issue’s potency in this year’s election. The surge at the southwest border has been a political liability for Biden, and we suspect that he will make a major announcement on a proposed remedy next week during his State of the Union address.

Senate Impeachment of Border Chief.

Playing into the politics of immigration policy is the status of Department of Homeland Security Secretary Alejandro Mayorkas. Secretary Mayorkas was narrowly impeached (214-213) in a House vote two weeks ago, and the Senate will soon act on his fate. The Senate will almost certainly vote to acquit him, but how it does so will be important. The Senate usually follows a House impeachment vote with a trial on the official impeached. The Senate could also vote on whether to have a trial at all. The vote to acquit seems to be preordained given the Democratic majority in the Senate, but will the absence of a trial create a perception that Democrats are ignoring the Secretary’s controversial performance and the broader problem of immigration surges at the southwest border? We believe there likely will be a trial and the focus may be more on Biden’s immigration policies than Mayorkas’ performance.

Private Placement Life Insurance.

Senate Finance Committee Chairman Ron Wyden (D-OR) recently released a report on the use of Private Placement Life Insurance (PPLI), asserting that a few thousand ultra-wealthy individuals exploit these policies primarily to avoid income, estate or gift taxes. Chairman Wyden’s investigation found at least $40 billion in death benefits in a few thousand policies that typically require premiums of more than $1 million. This has caught Chairman Wyden’s attention and is consistent with his advocacy of a “wealth tax.” He plans to soon introduce legislation to address the tax treatment of PPLI, though there is little to no chance that any such legislation will be passed into law this year. However, the idea of a new tax on wealth, including further scrutiny of PPLI, will be in play next year if Senator Wyden remains chairman of the Finance Committee.

Climate Disclosure.

The SEC next week will finalize its long-awaited final rule to mandate corporate disclosure of climate risks. The proposal would require companies to disclose information about the physical and transition risks of climate change, how those risks impact their business, and how they are managed and overseen. It would require companies to not only disclose direct and indirect emissions from their business operations, but also indirect emissions by suppliers and customers in their value chain, which can be hard to quantify. The proposal, which was issued back in March 2022, has faced serious pushback from many in Congress (particularly Republicans) and some business groups who have questioned the legal authority for the SEC to mandate some of these disclosures. It also has been subject to serious debate within the SEC, and that has delayed its finalization. In part to fortify the rule against expected court challenges, the SEC is expected to relax many of the requirements in the rule, including the one on indirect emissions. The SEC has had a sprawling agenda covering dozens of other pending rule proposals, but the climate rule has been among the most prominent within that agenda.

The Weight of Net Interest Payments.

The Congressional Budget Office’s annual Budget and Economic Outlook was the focus of a recent hearing in the House Budget Committee. This voluminous report covers a number of budgetary aspects from economic growth to inflation to revenue and spending levels. One item that caught the attention of many lawmakers was the scope of net interest payments, which have been climbing due to higher interest rates and debt levels. This federal outlay is estimated to be $870 billion this year and could grow to $1.6 trillion by 2034. This year’s level is almost identical to the annual defense budget in the US. In the future, payment on the debt will grow and crowd out other spending priorities as part of government spending bills. The high level of debt is acknowledged by everyone in Washington, but very few are stepping up to address it with thoughtful proposals.

Fresh Faces in Leadership.

Mitch McConnell, Chuck Schumer, Mike Johnson, Hakeem Jeffries – we’re all familiar with these names as key party leaders in Congress. Earlier this week, Senate Minority Leader McConnell (R-KY) announced that he will step down from his position in November. It is plausible that this year’s elections in the House and Senate may replace the other three leaders as well. If Republicans win a majority in the Senate, current Senate Majority Leader Schumer (D-NY) would take over the minority position that McConnell holds now. If Democrats win a majority in the House, as many people believe will occur, Speaker Johnson (R-LA) will be replaced as Speaker by House Minority Leader Jeffries (D-NY). There could be a substantial reshuffling of party leaders and responsibilities overnight. A trio of Senate Republicans, including Senators John Barrasso (R-NV), John Cornyn (R-TX) and John Thune (R-SD), are the favorites to take over for McConnell. A serious passing of the torch is very likely to occur next year among Congressional leaders.