This is the first in a series of blogs on the President's fiscal year 2015 budget proposal to Congress. Over the next several days, CRD Associates will be analyzing major components of the budget, including defense, health, infrastructure and education. Please be sure to check back regularly.
by Dom Ruscio, Partner
Whether the $3.901 trillion budget President Obama sent to Congress on March 4 elicits plaudits or just a toe-tag really doesn’t matter. When Congress limped across the finish line a few weeks ago, the $1 trillion-plus spending bill that passed looked nothing like what either side proposed last spring.
So call it call it one of many benchmarks in an austerity march which, by the way, seems to be working.
According to Congressional Budget Office predictions, the budget deficit this year will slip to $520 billion, or 3 percent of GDP, down sharply from a 9.8 percent share in 2009 (or 5.4 percent 40 years ago). Turns out that the hard-fought budget deals struck since the first debt ceiling crisis in 2010 have produced deficit reduction adding up to $3.3 trillion over the next 10 years. Nearly half of that--$1.8 trillion—is attributable to spending cuts, 88 percent of which were absorbed by discretionary programs.
What’s Missing and What’s New?
Unlike previous years, there seems to be no appetite in Washington for a “grand bargain,” a blueprint that includes entitlement reform and new tax revenues aimed at righting the nation’s fiscal ship.
Acknowledging that congressional Republicans simply won’t entertain the thought of new taxes, the president’s budget argues that government has the potential to help millions of Americans prosper. Gone is last year’s proposal to cut future Social Security benefits through chained CPI, replaced with new money for infrastructure, education and job training.
Dubbed the “opportunity, growth and security” initiative, the administration proposes an additional $56 billion in discretionary spending, split between defense and non-defense. The new initiative includes:
- Innovation and job creation – The budget proposes to create 45 manufacturing innovation institutes over the next 10 years; target R&D resources on advanced manufacturing, clean energy, health care and agriculture.
- Infrastructure – The budget includes a $302 billion, 4-year transportation reauthorization proposal and proposes establishing an independent infrastructure fund to leverage public and private capital.
- Education and skills training – The budget proposes to raise tobacco taxes to support a preschool for all partnership with states; create a new program to redesign high schools; provide bonuses to colleges that improve outcomes for Pell Grant recipients; and increase investment in job training.
- Expanding opportunity and middle-class security – The budget calls for Congress to increase the minimum wage to $10.10 and extend unemployment insurance; double the Earned Income Tax Credit for childless workers; and fully implement the Affordable Care Act.
For discretionary programs, the budget adheres to the $1.014 billion spending cap set by the Ryan-Murray budget deal struck in December. Of that total, $492.5 billion is set aside for domestic discretionary programs, the remainder for defense. Overall, that’s about $2 billion more than fiscal year 2014, and so long as Congress doesn’t exceed the spending cap, discretionary programs will not face any across-the-board sequester cuts.
In order to remain within the spending cap and still provide room for growth, the budget assumes that Congress will pass immigration reform, a move that would yield $158 billion in the first 10 years and nearly $1 trillion in deficit reduction over 20 years. The president also counts $650 billion in revenue increases from tax reform and $402 billion in savings through changes to Medicare and Medicaid. The tax code changes include: capping the value of tax deductions to 28 percent and requiring millionaires to pay at least 30 percent of their income after deducting for charitable contributions.
(If enacted, the entitlement spending cuts, new tax revenues and immigration reform savings would total just over $1.2 trillion, enough, the president says, to replace sequestration in fiscal year 2016)
Following are major highlights of the budget plan.
Agriculture (including FDA): The budget for the Department of Agriculture proposes to spend more money on research, school nutrition and protection of honeybees, while reviving the administration’s attempt to slash crop insurance subsidies to save $14 billion. The budget also revives a proposal rejected in the farm bill to buy more of the assistance abroad, near where it is needed, in lieu of shipping U.S.-grown commodities. The Food and Drug Administration is proposing again to impose user fees to pay for ramping up inspections the agency is required to do under the Food Safety Modernization Act, while a USDA fee on imports would raise $169 million to pay for inspecting imported foods, and a fee on food facilities would bring in $60 million to inspect processors. USDA’s budget also includes $75 million to launch three new multidisciplinary agricultural research institutes dedicated to crop science and pollinator health, bio-based product manufacturing and antibiotic resistance.
Commerce: The Budget provides Commerce with $8.8 billion to support mission areas across its diverse bureaus, including $680 million for National Institute of Standards and Technology (NIST) laboratories to help accelerate advances in a variety of important areas, ranging from cybersecurity and forensic science to advanced communications and disaster resilience. For weather satellites and weather forecasting, the budget provides $2 billion to continue the development of NOAA’s polar-orbiting and geostationary weather satellite systems, as well as satellite-borne measurements of sea level and potentially damaging solar storms. And to strengthen research and ocean and coastal stewardship, the budget includes significant investments in NOAA’s ocean and coastal research and observing programs.
Defense: The FY 2015 base budget provides $495.6 billion, a reduction of $400 million below the FY 2014 enacted budget of $496.0 billion The FY 2015 budget request continues most of the force reductions made in the FY 2014 budget request, though it proposes a placeholder amount of $79.4 billion for the war in Afghanistan and the global war on terrorism. Not surprisingly, congressional defense hawks will likely try to raise future defense spending caps so as to avoid further cuts, but that seems unlikely for fiscal year 2015. Defense Secretary Chuck Hagel has argued that the current defense strategy would not be sustainable if the budget caps remained in place in the coming years. (The Pentagon included in its budget documents a version of its projected requests through fiscal 2019 that would exceed congressionally mandated budget limits by about $115 billion.) The Pentagon is planning for a smaller Army than they prefer — an active duty force of 420,000 instead of 440,000 — and for having the Navy go from 11 carriers to 10. Meanwhile, the military will fight to preserve modernization programs at the expense of force size. It set a limit for military manpower at 1.3 million in fiscal 2015, down from 1.36 million in fiscal 2014. Under the budget proposal, the Army would see its operations and maintenance funding increase from $31 billion in fiscal 2014 to about $33 billion in fiscal 2015, and the Navy would see a jump from $36 billion in fiscal 2014 to $39 billion in fiscal 2015. The Marine Corps’ operations funding would increase from $5.4 billion in fiscal 2014 to $6 billion in fiscal 2015, while the Air Force would see a jump from $33 billion in fiscal 2014 to $35 billion in fiscal 2015. Defense-wide operations and maintenance would remain roughly flat at about $31 billion in fiscal 2015. The Defense Department claims it will save $94 billion through efficiencies over five years, including: a 20 percent cut in headquarters operating budgets; a reduction in contractor funding; civilian manpower restructuring; health-care cost savings; terminating or deferring weapons programs and military construction projects; and a base-closure round in 2017, according to Pentagon briefing documents.
Education: Overall, the Education Department would receive $68.6 billion in discretionary funding under the president’s budget, about $1.3 billion more than in fiscal year 2014. The budget requests a new $300 million competitive grant program designed to reduce educational inequality in the country’s poorest schools. Funding to long-standing marquee formula grants at the elementary and secondary level, meanwhile, would remain mostly flat. Title I formula grants, which are given to schools that have large populations of students from low-income families, would be funded at a total of $14.4 billion, unchanged from last year. The administration also would maintain largely flat funding for formula grants to states to help pay for the increased expenses of educating children with disabilities. The grants, provided through the Individuals with Disabilities Education Act (PL 91-230), would be funded at $11.6 billion, about $100 million more than enacted fiscal 2014 levels, attributable to a new $100 million competitive grant program for states to improve the delivery of special-education services to children from birth through age 21. Total mandatory and discretionary funding for the Pell Grant program would provide grants to nearly 8.9 million students during the 2015-2016 school year, while increasing the maximum Pell Grant award to $5,830. The budget proposes changes to Pell Grant eligibility to strengthen academic progress requirements and extend eligibility to students who are co-enrolled in adult and postsecondary education as part of a career pathway program. The budget also includes a mandatory College Opportunity and Graduation Bonus proposal to reward colleges that successfully enroll and graduate a significant number of low- and moderate-income students on time. The estimated total 10-year cost of the College Opportunity and Graduation Bonus proposal is $7 billion.
Energy: The budget proposes to boost support for renewable energy research and energy infrastructure programs next year, as part of plan to increase Energy Department discretionary spending by 2.6 percent to $27.9 billion. The budget would increase spending for the Advanced Research Projects Agency-Energy program — which funds research on high-risk, high-reward technological breakthroughs — by 16 percent to $325 million. The plan also would fund new research on developing technology to monitor and reduce emissions from natural-gas infrastructure, underscoring the administration’s emphasis on improving energy infrastructure. Funding for a program designed to secure electric infrastructure from hazards and improve the system’s ability to recover from disruptions would increase almost threefold to $23 million. Lawmakers have called for protecting vulnerable electrical systems after an apparently coordinated attack knocked out a substation in California last year. The plan would increase funding for advanced manufacturing by almost 50 percent to $305 million. A program to integrate renewable energy technologies into electrical grid infrastructure would get $56 million next year, 8 percent more than in 2014 and more than double the total spent in 2013. Lastly, the budget would increase funding for wind energy research by 16 percent to $115 million and boost funding for geothermal research by 22 percent to $62 million. Solar energy technology would be trimmed by 4 percent to $282 million and hydrogen fuel research would be cut 12 percent to $93 million.
Homeland Security: The budget proposes $38.2 billion for the Department of Homeland Security and $6.8 billion for disaster relief. For cybersecurity, the budget includes $549 million to support the EINSTEIN intrusion detection and prevention system and continuous diagnostics and mitigation, two key Administration cybersecurity initiatives to combat threats to federal computer systems and networks. To continue progress in enhancing homeland security technology and developing state-of-the-art solutions for first responders, the budget proposes $514 million for research and development activities, targeted on opportunities in cybersecurity, explosives detection, nuclear detection, and chemical and biological detection. In addition, the budget includes $300 million to initiate construction in 2015 of the National Bio- and Agro-Defense Facility—to study large animal zoonotic diseases and develop countermeasures to protect citizens and agricultural economy from future threats.
Housing: Provides $46.7 billion for Department of Housing and Urban Development, or about $1.2 billion above current funding, including funding to expand the number of rental assistance vouchers and increase homeless assistance for vulnerable families, as well as for targeted neighborhood investments to help revitalize high-poverty neighborhoods. This includes funding for rental housing assistance to support 4.5 million low-income families, including Housing Choice Vouchers for 2.2 million very low-income families and investing $2.4 billion for Homeless Assistance Grants to continue progress toward the Administration’s goals of ending chronic homelessness and homelessness among veterans and families.
Justice: The budget includes $27.4 billion for the Justice Department, or $122 million above the 2014 enacted level. This includes funding for targeted investments for State and local justice assistance grants, including the Comprehensive School Safety Program, the Community Oriented Policing Services (COPS) Hiring Program and a new youth investment initiative encouraging State efforts to increase the availability of alternatives to incarceration, re-enroll youth into school after confinement and reduce ethnic and racial disparities in the juvenile justice system.
Transportation: The budget for the Transportation Department totals $91 billion in discretionary and mandatory funding, and assumes Congress will enact a four-year, $302 billion surface transportation authorization and restructure the Highway Trust Fund to pay for investments in intercity passenger rail along with roads, bridges and transit systems. The proposal would more than double the competitive TIGER grant program to $1.25 billion next year from $600 million and would establish a new $4 billion competitive grant program to encourage “critical reforms” by states and localities to improve safety and address peak traffic demand. The budget also would buttress slumping motor fuels tax receipts by devoting $150 billion to transportation spending from a corporate tax overhaul. Along with the new initiatives, the plan would repackage some previous White House transportation proposals, including a “fix it first” plan to concentrate limited funding on bringing existing surface transportation systems to a state of good repair.