Capital Thinking Update - August 1, 2011

    View Author 1 August 2011

    General Legislative

    On Monday, August 1, the House (and possibly the Senate) will take up the Budget Control Act of 2011, which embodies legislative text leadership and the Administration agreed to late Sunday, July 31.  If it passes both chambers and is signed into law the legislation will avert a projected August 2, 2011 default on the debt.  

    Budget, Appropriations


    • Agreement Reached on Deficit Reduction / Debt Ceiling Proposal. Late Sunday evening, a deal was announced by the White House and Congressional leaders on a strategy to increase the debt ceiling by up to $2.4 trillion through 2013 while mandating spending cuts of $2.1 trillion over the next decade (as scored by the Congressional Budget Office). The plan does not include revenues.

      Finally, it appears the situation will be resolved by Tuesday, August 2 – the deadline imposed by the Treasury for the debt limit increase. The House will move first on the Deficit Control Act, which will be a technical amendment to the Education Sciences Reform Act legislation (S. 365).  The amendment will substitute the bipartisan agreement (Deficit Control Act).  It is possible the Senate will not vote on the House bill until tomorrow. 

      Like the legislative vehicle used to carry the Boehner bill to the Senate last Friday, S. 365 will function as a privileged Message from the House to the Senate.  As such, Leader Reid can call it up immediately, and, if a consent agreement limiting debate does not exist, file cloture on the motion to concur with the House bill.

      We expect that the House passes the bill later this afternoon/early evening; Senate passes tonight or tomorrow.

      The White House, Republican and Democratic leaders are working hard to gather rank-and-file support for the agreement. With as many as eight-eight Republicans lined up to vote against the measure, House leaders will need to get the support of at least sixty-four Democrats to ensure passage. We anticipate the bill will pass both chambers today or tomorrow, albeit with a significant amount of grumbling from both Democrats and Republicans.

      The plan provides for a two-step debt limit increase: (1) an immediate $900 billion debt ceiling increase coupled with a $1 trillion spending reduction achieved through 10-year discretionary spending caps; and (2) a subsequent debt limit increase up to $1.5 billion contingent on at least an additional $1.2 trillion deficit reduction.

      As originally proposed by the “Gang of Six”, the measure establishes a bipartisan, bicameral Congressional committee comprised of three Republicans and three Democrats from each chamber. The committee will be tasked with recommending the second installment of spending reductions totaling $1.5 trillion by the end of November 2011. The committee may consider both entitlement and tax reforms as part of its package. 

      If Congress fails enact at least an additional $1.2 trillion in spending cuts by the end of the calendar year, across-the-board spending cuts would be implemented through a “sequestration” budget process. While defense and entitlement programs would be impacted, specific programs that benefit low-income populations may be exempt and Medicare would face only a two percent hit, with cuts affecting only payments to providers, not beneficiaries.

      For the near-term, the proposal sets discretionary (defense and non-defense) spending caps of $1.043 trillion for FY2012 and $1.047 trillion for FY2013. It also includes a “firewall” provision which will prevent domestic account reductions from being used to offset increases in security spending. The measure also provides for a vote on a Balanced Budget Constitutional Amendment between October 1 and December 31, 2011.

      To recap recent whirlwind activities –

      Last week, Senate Majority Leader Harry Reid (D-NV) and House Speaker John Boehner (R-OH) each released, and subsequently revised, their own proposals. Both put forth a total debt ceiling increase of approximately $2.5 trillion tied to similar spending cuts and also established the bipartisan Congressional Committee included in the final deal. The spending cuts proposed by Speaker Boehner would have been achieved through discretionary spending reductions; future spending caps at specified levels; and subsequent across-the-board spending cuts if those caps were exceeded. Additionally, Speaker Boehner’s proposal included the balanced budget amendment provision which became part of the final proposal. Alternatively, Leader Reid’s plan included discretionary defense and non-defense spending cuts, with an additional $1 trillion in savings anticipated from winding down the wars in Iraq and Afghanistan.

      On Friday, July 29, Speaker Boehner’s Budget Control Act (S. 627) passed the House on a vote of 218 – 210. Less than two hours later, the Senate voted 59 to 41 to table the bill. 

      On Saturday, July 30, the House voted down Leader Reid’s revised proposal, 173 - 246, and the Senate cloture vote on the same proposal failed 50 – 49. 
    • House Plans Symbolic Votes on Balanced Budget Amendment. In the coming days, the House plans to hold votes on two balanced budget amendment measures (H.J. Res. 1 and H.J. Res. 2). The first measure (H.J. Res. 1) is similar to the provision included in the House-passed Cut, Cap, and Balance Act (H.R. 2560). Alternatively, H.J. Res. 2 omits the spending cap and supermajority provision on taxes. A two-thirds majority is required to pass either measure, which means that at least 50 Democrats must join Republicans in voting for the resolution. Neither is expected to garner sufficient support. However, H.J. Res. 2 stands the best chance as it already has 14 Democratic co-sponsors, most of them members of the fiscally conservative Blue Dog Coalition. 
    • FY2012 Appropriations Activity. With scores of amendments pending, the Interior-Environment bill remains on the House floor and will not likely see further action until September. So far, Democrats have offered a number of amendments to address their opposition to the bill’s significant cuts and policy riders targeting Environmental Protection Agency (EPA) regulations, most of which have failed. Republican efforts to further reduce funding for the Smithsonian Institution and the National Endowments for the Arts and Humanities also failed. Additionally, the State/Foreign Operations bill was marked up in subcommittee on July 27, and the full Committee has scheduled a markup for Wednesday. The remainder of the appropriations schedule in both chambers is on hold until after the August recess.
      An interesting note: the FY2012 discretionary spending cap that would be established by the deficit reduction / debt ceiling agreement is approximately $24 billion more than what is designated in the House-passed budget resolution (H Con Res 34). This could provide a bit of domestic spending flexibility as the House finishes its FY2012 appropriations work.




    • Debt Ceiling Bill’s Impact on Pell Grants. Under the debt limit bill unveiled on Sunday the Pell Grant program will receive $10 billion in FY2012, which is an increase in funding from FY2011. The bill also appropriates an additional $7 billion in FY2013. Last week, conservative House freshmen opposed Speaker Boehner’s proposal to increase the program by $17 billion over the two-year period and characterized Pell Grants as a welfare program. The legislation also eliminates repayment incentives (e.g. reductions in interest or origination fees), unless otherwise authorized, on loans for which disbursement is made on or after July 1, 2012.
    • FY2012 Education Budget. On Wednesday, July 27, the Senate Appropriations Subcommittee on Labor, Health and Human Services, and Education held a hearing on the FY2012 Department of Education budget. Secretary of Education Arne Duncan testified before the subcommittee and answered questions about the Administration’s proposed budget. During the hearing, Republican Members indicated that they intend to make significant cuts to education funding. The primary targets for spending cuts are “Race to the Top” and the Pell Grant programs. Under President Obama’s proposed FY2012 budget, the Department of Education requests a 10 percent increase in funding from FY2011 spending levels and looks to sustain the maximum award levels of the Pell Grant program. Due to the recession, more people have become eligible for the program, which has created an $11 billion shortfall.
      As for Race to Top, the Administration requested $900 million for FY2012, which is a $500 million increase from FY2011 funding levels. In addition to funding concerns, Republican Members believe the grant program places rural and poor states at a disadvantage to compete because of the lack of resources. Republicans also contend with the standards and assessments states must adopt in order to receive funding. 




    • Offshore Revenue Sharing. After the August recess, the House Natural Resources Committee is expected to consider legislation sponsored by Chairman Doc Hastings (R-WA) that would provide a greater share of royalties from oil and gas projects to coastal states. Congressman Hastings believes the legislation would help incentivize more domestic offshore production. Ranking Member Ed Markey (D-MA) opposes state revenue-sharing at a time of severe federal deficits and has already introduced legislation to repeal a prior revenue-sharing law for Gulf Coast production states.
    • Congressional Hearings. On Wednesday, the House Ways and Means Committee will hold a joint Subcommittee hearing on “whether energy policy should be conducted through the tax code, and if so, how best to design provisions that advance the principles of both sustainable energy policy and tax reform.” Existing tax provisions and the New Alternative Transportation to Give Americans Solutions Act of 2011 or “NAT GAS Act” (H.R. 1380) are expected to be topics of focus. Written stakeholder comments are due to the Committee by August 17. Also on Wednesday, a Senate Energy and Natural Resources Subcommittee will hold a legislative hearing to consider several bills, including the Geothermal Production Expansion Act of 2011 (S. 1149).


    • Hydraulic Fracturing. Comments on the EPA’s first-ever, newly-proposed regulations to reduce air pollution from hydraulically fractured wells (as well as natural gas transmission, crude storage oil tanks and natural gas processing plants) are due in early October. In addition, Secretary Chu’s Energy Advisory Board Natural Gas Subcommittee will meet on August 15 to discuss an interim report to the Board and recommendations regarding shale gas.
    • EERE Director Nominee. President Obama has nominated Dr. David Danielson to serve as the Department of Energy’s (DOE) Assistant Secretary for Energy Efficiency and Renewable Energy, which oversees the ENERGY STAR, weatherization, energy efficiency and other programs to promote and facilitate renewable energy resources. He has been the Advanced Research Projects Agency-Energy (ARPA-E) Program Director since 2009. The Senate Energy and Natural Resources Committee will consider Dr. Danielson’s nomination at an upcoming hearing as part of the Senate confirmation process.
    • Keystone XL pipeline. The State Department is expected to issue the Final Environmental Impact Statement for the proposed TransCanada pipeline by mid-August, beginning a 90-day review period for interested federal agencies to provide views on whether issuing a Presidential permit would be in the nation’s interest. (The House passed legislation (H.R. 1938) on July 27 to expedite the Administration’s decision by no later than November 1, though it is not expected to gain traction in the Senate).
    • Distribution Transformers. Written comments and requests to be nominated as a member of a new DOE negotiated rulemaking subcommittee to work towards consensus development of a proposed rule for the energy efficiency of distribution transformers are due by August 15.  It follows a July 2009 court-approved settlement agreement that allows final rules issued in 2007 to become applicable in 2010 but required DOE to review the standards for certain distribution transformers and determine whether amendments are warranted.




    • Contamination Clean Up. On Wednesday, August 3, the Senate Committee on Environment and Public Works, Subcommittee on Children’s Health and Environmental Responsibility will hold an oversight hearing on federal actions to clean up contamination from uranium mining and milling operations.
    • Nuclear Safety. On Tuesday, August 2, the Senate Committee on Environment and Public Works, in conjunction with its Subcommittee on Clean Air and Nuclear Safety, will hold joint hearing to review the United States Nuclear Regulatory Commission’s near-term task force recommendations for enhancing reactor safety in the 21st century.
    • Agricultural Biotechnology. On Thursday, August 4, the House Committee on Agriculture, Subcommittee on Rural Development, Research, Biotechnology, and Foreign Agriculture will hold a hearing to review government regulation of agricultural biotechnology.


    • Oil and Gas Pollution. The EPA is proposing standards to reduce air pollution from oil and gas drilling operations. These proposed updated standards, which are being issued in response to a court order, would rely on existing technologies to reduce emissions that contribute to smog pollution and can cause cancer. The standards are intended to leverage operators' ability to capture and sell natural gas that currently escapes into the air, in order to reduce harmful emissions that can impact air quality in surrounding areas and nearby states. This proposal would cut smog-forming volatile organic compound (VOC) emissions from several types of processes and equipment used in the oil and gas industry, including a 95 percent reduction in VOCs emitted during the completion of new and modified hydraulically fractured wells. The proposed changes also include requirements for storage tanks and related equipment. In sum, the proposal includes reviews of four air regulations for the oil and natural gas industry as required by the Clean Air Act which aim to produce: a new source performance standard for VOCs from equipment leaks at gas processing plants; a new source performance standard for sulfur dioxide emissions from gas processing plants; an air toxics standard for oil and natural gas production; and an air toxics standard for natural gas transmission and storage. As part of the public comment period, EPA will hold public hearings in Dallas, Denver and Pittsburgh. EPA intends to take final action by February 28, 2012.
    • BPA. The EPA is requesting public comment on possible toxicity testing and environmental sampling to study BPA’s potential environmental impacts. BPA has been shown to cause reproductive and developmental effects in animal studies. BPA is used in the manufacture of a wide range of consumer and industrial products, including food-can liners, hard polycarbonate plastics, epoxy paints and coatings and thermal papers, such as some cash register receipts. In January 2010, the U.S. Food and Drug Administration (FDA) announced it would further examine potential human health effects and reduce exposure to BPA in the food supply, which represents the greatest source of exposure to people. The EPA is working with the FDA, the Centers for Disease Control and the National Institute of Environmental Health Sciences on research to better determine and evaluate the potential health consequences of BPA exposures. At the conclusion of that research, the EPA will determine if additional actions may be needed to address human health concerns from non-food use exposures. Comments on the Advance Notice of Proposed Rulemaking (ANPR) must be received on or before September 26, 2011.


    Financial Services


    • Senate Committee Continues Mortgage Servicing Review. On Tuesday, August 2, the Senate Banking Committee will hold a hearing titled, “Housing Finance Reform: National Mortgage Servicing Standards.” Witnesses will include representatives from the Independent Community Bankers of America and the Hope Now Alliance.
    • House Subcommittee to Discuss GSE Reform. On Wednesday, August 3, the House Financial Services Consumer Subcommittee on Insurance, Housing, and Community Opportunity will hold a hearing titled, “Legislative Proposals to Determine the Future Role of FHA, RHS and GNMA in the Single- and Multi-Family Mortgage Markets, Part 2.” Witnesses will include Senator Johnny Isakson (R-GA), the Department of Housing and Urban Development, the Department of Agriculture and the Government National Mortgage Association.
    • Senate Subcommittee to Address Housing Finance System. On Wednesday, August 3, the Senate Banking Subcommittee on Securities, Insurance, and Investment will hold a hearing titled, “Examining the Housing Finance System: The To-Be-Announced Market.” Witnesses will include representatives from Barclays’ Capital, the Mortgage Industry Advisory Corporation and Andrew Davidson & Co., Inc.
    • Senate Subcommittee to Debate Debt Financing. On Wednesday, August 3, the Senate Banking Subcommittee on Financial Institutions and Consumer Protection will hold a hearing titled, “Debt Financing in the Domestic Financial Sector.” Witnesses will include Professor Joseph Stiglitz, Columbia University; Professor Edward Kane, Boston College; and Professor Paul Pfleiderer, Stanford University.
    • SEC Chairman to Testify before House Committee. On Thursday, August 4, the House Financial Services Committee will hold a hearing titled, “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission.” Securities and Exchange Commission (SEC) Chairman Mary Schapiro will testify.


    • SEC, CFTC to Hold Roundtable on Global Harmonization of Financial Reform. On Monday, August 1, the SEC and the Commodity Futures Trading Commission (CFTC) will hold a joint public roundtable on August 1 from 9 a.m. to 4 p.m. to discuss international issues related to the implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Specific areas of discussion will include the impact of new rules on cross-border transactions, global entities and market infrastructure entities, such as clearing agencies, execution platforms and data repositories.
    • CFTC Advisory Subcommittee to Discuss Data Issues. On Friday, August 5, the newly-formed CFTC Technology Advisory Subcommittee on Data Standardization will hold a public meeting to look into public/private solutions for creating well-accepted standards for describing, communicating and storing data on complex financial products.




    • Spectrum Bill.  As of late Friday, the House Republican bill to raise the debt ceiling lacked spectrum reform provisions. The plan differs from Senate Majority Leader Harry Reid's (D-NV) proposal, which would authorize incentive auctions and reallocate the D-block to public safety agencies - reforms that the Congressional Budget Office estimated would result in more than $13 billion in revenue. The Senate plan is a stripped-down version of S. 911, Senate Commerce Committee Chairman Jay Rockefeller’s (D-WV) spectrum reform bill, which has left many stakeholders seeking other spectrum-related provisions to the extent that Reid’s plan is revised.
      It is difficult to predict whether spectrum reform makes it into a final debt plan if and when the two chambers near agreement. Against that backdrop and amid pressures from the wireless industry, broadcasters and public safety, behind-the-scenes discussions continue among jurisdictional committees about how to move spectrum reform forward if it is not addressed in the debt ceiling plan.
    • Data Retention. On July 28, the House Judiciary approved H.R. 1981, the “Protecting Children from Internet Pornographers Act of 2011” – by a vote of 19-10. Sponsored by House Judiciary Committee Chairman Lamar Smith (R-TX) and Representative Debbie Wasserman Schultz (D-FL), the bill creates new penalties for possessing, sharing or funding child pornography. The bill also requires Internet service providers (ISPs) to store all user IP addresses for 12 months. The Committee’s debate centered on a manager’s amendment that lowered the amount of time an ISP would have to store user IP addresses from 18 months in the original bill to 12 months. Language was also added to apply the retention provision to wired and paid wireless providers, and requires retention of other data to be used for identification purposes – i.e. names and credit card numbers. Amendments agreed to during the mark-up include an implementation cost study, a sentencing guideline increase and “Sense of Congress” language urging prompt consumer notification of a data breach. At the urging of Crime, Terrorism and Homeland Security Subcommittee Ranking Member Bobby Scott (D-GA), Chairman Lamar Smith (R-TX) also agreed to consider the impact of data retention on smaller and mid-size ISPs before the bill moves to the House floor for a vote.

      In Senate news, Senators Tom Carper (D-DE) and Roy Blunt (R-MO) introduced the Data Breach Act of 2011 on July 28, 2011. In establishing a single national data breach standard, the bill requires the safeguard of sensitive information, investigation of security breaches and notification when there is a substantial risk of identity theft or account fraud. Specifically, in the case of a breach, the bill requires the collecting entity to investigate the scope of the breach, the type of information compromised and to determine the potential for individual harm or fraud. If potential harm is determined, the bill requires the entity to notify the appropriate federal regulatory agency, as well as national consumer reporting agencies where the breach affects 5,000+ consumers, as well as all consumers affected by the breach. The provisions apply to retailers who take credit card information, data brokers who compile private information and government agencies that possess nonpublic personal information. Upon introduction, Senator Carper said, “We need to replace the current patchwork of state and federal regulations for identity theft with a national law that provides uniform protections” nationwide. Senator Blunt added that the bill “will help ensure that businesses and government agencies have consistent, national standards” to protect consumers,


    • FCC Open Meeting. The FCC has released a tentative agenda for its next open meeting scheduled for August 9, where Commissioners will consider Notices of Proposed Rulemakings and orders regarding: 1) regulatory barriers to the full and effective use of certain spectrum bands for wireless backhaul to promote broadband deployment; and 2) guidelines governing foreign ownership of common carrier radio licenses.
    • LightSquared. In a July 26 letter to Senate Judiciary Committee Ranking Member Charles Grassley (R-IA), FCC Chairman Julius Genachowski clarified that the FCC would not provide “individual member” agency records concerning the ongoing review of LightSquared’s proposal to create a new national broadband network. In making that clarification in response to Grassley’s July 5 request, Chairman Genachowski also made clear that the FCC has “complied with and will continue to comply with the request of Congressional committees with jurisdiction over the Commission’s activities,” which include the Senate Commerce and the Senate Appropriations Committees. “It’s ironic that a communications agency has such a clampdown on its own communications,” Grassley stated. “The issue is whether the FCC will operate voluntarily as an open, transparent institution or whether it will withhold documents from Congressional review unless legally forced to comply.  Refusing a legitimate request in the public interest should require more justification than ‘we don’t have to.’ What is the FCC hiding?” As you may recall, LightSquared has proposed to develop a new national wireless broadband network. Critics say the proposed network interferes with global positioning systems (GPS) transmissions in adjacent radio spectrums. The FCC is currently considering LightSquared’s proposal and its efforts to address this problem.