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Through the Looking Glass
'"Curiouser and curiouser!" cried Alice.' That scene from Lewis Carroll's Though the Looking Glass
is the best description I have for the current scene in D.C. The White House is more deeply enmeshed and distracted by Russian investigations and potential criminal liability every day. 1600 Pennsylvania Avenue seems to have given up on most of the normal activities of governing. When they do act (cybersecurity initiative with Putin, efforts to eliminate federal funding for birth control, etc.) they are met with stoney silence and skepticism from Republican congressional leaders and lacerating scorn from across the Democratic spectrum. Neither Majority Leader McConnell nor Speaker Ryan can control the "anarchist" factions of their caucuses or satisfy their more moderate members. Both Congress and the federal agencies are at a standstill and the news media right and left report various outrages on a daily basis that inflame both the Democratic and Republican bases. Against this backdrop Congress faces hard deadlines to resolve health insurance exchanges, a debt ceiling, and a spending plan for FY18. Failure to resolve any of those issues is likely to create enormous disruption and drag on the economy and economic growth.
In poll after poll, the American public expresses overwhelming support for Washington to work collaboratively to address healthcare, the deficit, the budget, infrastructure, and a more equitable and efficient tax system. In these polls, Democrats and Independents express overwhelming support while Republicans are closely divided with a small minority favoring collaboration and compromise. The Senate has now done what was previously unthinkable in their cozy and self-protective culture, and delayed the once sacrosanct recess for two weeks. It's hard to explain how significant a departure this is from the Senate culture that has existed since the 1950's. The House and Senate leadership are so far committed to pushing through an agenda with Republican-only support, but the combination of the Tea Party's "close it down, burn it down" strategy and the squeamishness of moderate Republicans facing re-election has posed an insurmountable obstacle to the Congress's ability to enact a Republican-only agenda. While McConnell has hinted that he will be forced to find bipartisan solutions on healthcare, if his caucus cannot pass a repeal of Obamacare, it is clear that bipartisan legislating will not commence until the Congress goes through a period of intense political pain and disruption. The question is: How high is the pain threshold? How much disruption and uncertainty can the economy sustain? What happens to high stakes congressional negotiations when the President of the party that controls three branches of government is willing to cut the ground out from under his own members and is willing to act in a totally unpredictable and undisciplined fashion.
Here is the doomsday calendar of government dysfunction:
- July - Individual Market Health Insurance Filing Deadline
- September 30 - End of Fiscal Year 2017: The end of the federal Fiscal Year brings two separate deadlines.
- Last chance for Obamacare repeal and replacement.
- The threat of a government shutdown.
- September/October - Breach of debt ceiling.
It is difficult, if not impossible to make accurate predictions about where all this is headed. As corporations, NGOs, and individuals plan for the fall and next year, it is prudent to recognize that the US, in the course of our 241 year history, has never faced this kind of stalemate, willful destruction, and government-created fiscal uncertainty. Not withstanding that fact, there are some general guidelines that can be useful in preparing for the coming federal fiscal year.
On the health insurance exchanges, it now appears that even if Leader McConnell can miraculously herd his Senators to undo Obamacare, the likelihood of an agreement between the Senate and the House on healthcare is vanishingly small and virtually impossible prior to the deadlines that the budget reconciliation process imposes on Congress. Based on their past statements and on the fact that the Republicans "own healthcare," there is a high level of probability that at a minimum the President and Congress will provide funding for sufficient subsidies for the insurance exchanges to continue operating, and a level of guidance to the exchanges, which will allow them to continue to function. However, the result, as we have already seen, will be significant increases in insurance costs to reflect the government-created uncertainties and risks in the insurance marketplace.
The House and Senate have not passed a budget, which is typically at the foundation for major fiscal policy and for the appropriations bills. Internal disputes about funding levels, massive cuts to entitlement programs, and support for increased defense spending have paralyzed the budget committees to the extent that it is unlikely that a budget will be passed prior to the September 30th end to the federal fiscal year. Congress frequently and in recent years, regularly, fails to pass appropriations bills in a timely fashion. It is almost a certainty that the House and Senate Appropriations Committees will fail to agree on the thirteen appropriations bills for government discretionary spending. The leadership of the Appropriations Committee will likely offer a short-term continuing resolution to keep the government operating after September 30. The most conservative/anarchistic members of the House have determined to insert funding for the Trump border wall and will resist any spending measures that does not include funding for the wall. This will be a non-starter, both among the Democrats and within the House Republican caucus. Therefore, Speaker Ryan will not be able to pass even a short-term/avoid a shutdown spending bill without significant Democratic support. The Democratic leadership will have significant leverage in this process and can be expected to resist almost all Trump Administration initiatives and to maintain current funding levels for agencies like the EPA, the State Department, USAID, and HHS that were targeted for major cuts in the Trump budget. There are even-odds that Speaker Ryan will need to go
through a shutdown - even a short-term one - in order to create sufficient urgency to get a budget through the House that will be deeply distasteful to the majority of his members. And, there is a possibility of a longer-term shutdown. Lack of Presidential interest and leadership and the weariness of the Republican caucus about being blindsided by the President (as they were when he called their health care bill "mean" after pressuring them to pass it) could create a climate where a longer shutdown of several weeks or more is possible.
Several weeks after what will almost certainly be a crippling fight over a short-term spending bill the Congress will need to raise the debt ceiling. The logical strategy would be to couple the short-term spending bill with the raising of the debt ceiling. This may happen, but it will require all of Leader McConnell's legislative legerdemain and extraordinary pressure from the White House. If Congress is not able to couple the passage of a spending bill with the raising of the debt ceiling, we may be in a situation where the government is shutdown and the Congress is debating raising of the debt ceiling in an atmosphere of investigations, potential criminal charges, and an isolated and embattled White House more focused on political survival than on the continued functioning of the government.
The abyss is deep and the fall frightening. The question is: Will Senators McConnell and Schumer, two immensely talented legislative and political strategists, be able to head off a governmental meltdown and if so, how much pain and public opprobrium will the members need to endure before reaching an accommodation?
One way or another, the fiscal situation will almost certainly be resolved with either minimal or maximal damage to the economy and to the lives of those who depend on government. After all of that Sturm und Drang, will the Congress be able to return to regular order, and to a culture that allows compromise, collaboration, and commonsense?
Chet
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The Healthcare Covfefe
Less than twenty-four hours after the Senate resumed from its brief weekend recess, the entire nation encountered serious whiplash, with healthcare repeal/reform/replace falling to pieces faster than the President can tweet. With the amended Better Care Reconciliation Act (BCRA) still in serious jeopardy following the Senate's adjournment last Thursday, a late Saturday night announcement revealed that Senator John McCain, R-AZ, had undergone surgery to remove a blood clot from above his eye and would not be returning to Washington in time for a vote on the BCRA this week.
Then yesterday, upon their return to Washington, Senators Jerry Moran, R-KS, and Mike Lee, R-UT, jointly announced that they would oppose not only the BCRA, but the "Motion to Proceed," the vote to bring the BCRA to the Senate floor for debate. This essentially killed the BCRA as Senate Majority Leader Mitch McConnell, R-KY, lacked the votes to even bring the legislation to the floor.
Since then, a whirlwind of activity has left everyone with their heads spinning, especially GOP leadership, who are currently trying to determine what, if any, path forward they may have. Senator Rand Paul, R-KY, has long advocated for a repeal only of Obamacare, a proposal Leader McConnell floated last night and again today, with the intent to revive the 2015 repeal that was vetoed by then-President Obama. But the Congressional Budget Office (CBO) scored the repeal only legislation as leaving approximately 32 million Americans without insurance - something that is unpalatable for many Republican Senators, even ultra-conservative ones like Jerry Moran, who said last night that, "we must now start fresh with an open legislative process to develop innovative solutions that provide greater personal choice, protections for pre-existing conditions, increased access and lower overall costs for Kansans."
And while Senator Collins, R-ME, remained opposed to the BCRA even after last week's proposed amendments, it was unclear where Senators Murkowski, R-AK, and Heller, R-NV, fell. However, this afternoon, Senators Collins, Murkowski, and Capito, R-WV, another swing vote, all came out in opposition of the repeal legislation, further stifling Senator McConnell's attempt to move any version of "Trumpcare." Notably, these three Senators are the three women who were omitted from the GOP working group discussions.
Even if the Senate is somehow able to resurrect a repeal bill - an effort buffeted by opposing forces, on the one side the legendary whipping skills of Leader McConnell, and on the other immense reluctance to commit to a full repeal without a President who would veto the bill - it remains unclear if the House and Senate could come to an agreement on a compromise bill to actually send to the White House for President Trump's signature.
The failure of the Congress to pass any kind of repeal and/or replacement legislation, however, has impacts ranging far and wide beyond the public perception of the GOP's inability to deliver on almost a decade of campaign promises. While the BCRA and the American Health Care Act (AHCA) contained some health care provisions, they were (arguably chiefly) massive entitlement cuts that would allow Congressional leadership to move on to tax reform and a new budget framework with much more ease than the current situation. The failure of the AHCA and BCRA - even if the Congress does pass a clean Obamacare repeal bill - leave Republican leadership in a real quandary when it comes to moving on to other major pieces of their platform, with a shrinking timeframe before the mid-term elections.
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FY18 Federal Funding
Turning to "regular order," the narrowing timeline for the completion of an already constricted Fiscal Year 2018 (FY18) budget and appropriations process and a necessary debt ceiling increase is also looming large in Washington right now. Neither the House nor the Senate has moved forward on a budget resolution, missing the April deadline. The Appropriations process is starting to pick up steam, particularly in the House, but it is still behind schedule. The full House Appropriations Committee has approved nine of the twelve FY18 appropriations bills, and the final three, the Labor, Health and Human Services, and Education bill (commonly referred to as Labor-H), the State and Foreign Operations bill, and the Interior bill are expected to be completed by the full committee tomorrow.
The Senate Appropriations Committee, meanwhile, has only reported one bill out of committee; Military Construction and Veterans Affairs (MilCon-VA). To put this pace of work in a bit of context, by this time last year, Senate appropriators had completed all twelve bills and their House counterparts had finished ten bills, four of which had passed the full House. Lawmakers and staff on Capitol Hill are blaming this delay on the late wrap-up of FY17 appropriations and the delayed completion of President Trump's FY18 budget request.
As far as floor consideration of the spending bills before the summer recess, in the House there is a possibility that we will see a 4-5 bill defense/security-related "minibus" with either Transportation, Housing and Urban Development or Financial Services tacked on. Security-related appropriations bills that are being floated as options to go into this package include Defense, Homeland Security, MilCon-VA, and State and Foreign Operations. These bills tend to be among the least contentious every year, and have been marked up by the Appropriations Committee to realistic spending levels (in contrast to a Trump Administration budget request that was panned by many on both sides of the aisle).
The House appropriators and leadership are also considering packaging all twelve committee-reported appropriations bills together for a massive omnibus that would be voted on before the recess. However, this would mainly be a rhetorical move for the House GOP Caucus, since many of the topline spending figures agreed to by the House are unlikely to stand up to Senate scrutiny, and will also likely conflict with the pending budget resolutions More on this below.
Regarding floor action in the Senate on spending legislation, it is very unlikely that the chamber will move before the August recess, even after the recently-announced two week working period extension announced by Majority Leader McConnell. While the slow pace is unfortunate, this is not out of the ordinary, at least in recent memory. All twelve appropriations bills haven't been completed on time in the Senate in over two decades, and the upper chamber hasn't finished a single appropriations bill on time since 2011.
We'll elaborate a bit more on Congress's responsibility to agree on a concurrent budget resolution. Set forth by the Congressional Budget and Impoundment Act of 1974, every year Congress is instructed to adopt a budget resolution by April 15 that serves as a mechanism for directing aggregate levels of spending, revenue, the surplus or deficit, and public debt. Acting as a blueprint for the actual appropriations process, the budget resolution sets a spending limit for the House and Senate Appropriations Committees, known as the 302(a) allocation. The Committees then divvy up the 302(a) number among the twelve subcommittees, based on the programs and priorities of those subcommittees. These figures are known as the 302(b) allocations. The deadline to established a budget resolution is sometimes not reached, as is the case for FY18, which creates headaches for the House and Senate Appropriations Committees, particularly the subcommittee chairs (aka cardinals) because they do not have the 302(a) and subsequent 302(b) allocations as guidance. This leads to an important point that should be kept in mind as the House funding bills work their way through the process. The current topline non-defense discretionary numbers in the committee-reported FY18 House bills are significantly below the FY17 numbers. In other words, spending for educational programs, health programs, social service programs, agricultural programs, etc. are most likely facing severe reductions in the House legislation compared to what they are receiving for FY17. It would appear that this low number is an attempt by the leadership to appease those Republican members who wish to dramatically cut non-defense discretionary spending, and secure House passage with the backing of the majority of the conference.
We offer some solace to those concerned with the low numbers for their programs of interest: the Senate will not support all, if any, of these topline numbers, so a compromise will likely be reached in the future. As of now, we do not know how any House-proposed cuts will be mitigated by Senate action. The process will be ongoing well into September, and probably beyond, as the specter of a government shutdown looms.
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FY18 Beacon Hill Budget
Almost three weeks into Fiscal Year 2018 (FY18), a final spending plan has yet to emerge.
Amid mounting revenue uncertainty, the Legislature passed a $5.15 billion interim budget, keeping the state's lights on through the end of June. This cushion gave budget writers additional time to craft a fiscally responsible agreement that could appease both the Executive and Legislative branches.
The Conference Committee process is typically conduced behind closed doors, and this year was no exception as conferees grappled with major healthcare policy rewrites and significant tax collection uncertainty. The $40.2 billion budget that emerged preserved necessary support for prioritized initiatives, while accounting for the state's below benchmark revenues. Budget riders included new fees (Employer Medical Assistance Contribution) and penalties on employers proposed by the Baker Administration to balance the budget. The Legislature, however, uncoupled these provisions from Administration's proposed MassHealth eligibility reforms intended to bring the state's budget further into the black.
Yesterday, the Administration returned the FY18 budget to the Legislature, slashing an additional $320 million in earmarked spending - bringing the bottom line down to $39.4 billion, assuming revenue growth of just 1.7% growth over FY17 levels. Governor Baker provided clear direction to the Legislature to finalize MassHealth reform within the next 8 weeks. The consequence of inaction? Further "corrective action" in order to meet the state's balanced budget requirement, including the unilateral reduction or elimination of funding for Legislative pet projects.
Turnover in the Legislature and the Administration has further complicated the calculus. House Ways & Means Chairman, Representative Brian Dempsey, recently announced his decision to leave Beacon Hill. House Speaker Robert DeLeo has appointed Representative Jeffrey Sanchez to take over the helm, citing Sanchez's extensive health care expertise. Secretary for Administration and Finance, Kristen Lepore, will become Governor Baker's Chief of Staff, following the departure of Steven Kadish. Assuming the role of Secretary is the state's current Department of Revenue Commissioner, Michael Heffernan. Safe to say, both will quickly earn their stripes.
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Massachusetts Marijuana Law Rewrite
Compromise marijuana reform legislation has finally emerged, well past the Legislature's self-imposed June 30 deadline. The measure substantially revises the voter enacted adult use and medical marijuana ballot initiatives, passed in 2016 and 2012, respectively.
The proposal creates a five-member Cannabis Control Commission (CCC) tasked with constructing licensure requirements, along with general oversight of both the adult use and medical marijuana programs. A 25-member Cannabis Advisory Board (CAB) will inform the Commission's work, with a particular emphasis on the meaningful market participation of minority-owned and small businesses. Notably, the compromise strips State Treasurer Deborah Goldberg of sole oversight authority, instead situating the Commission under the shared supervision of the Treasurer, Attorney General, and Governor.
The Commonwealth's bourgeoning adult use marijuana industry will face a tax of up to 20% on retail sales under the proposal, which increases the excise tax from 3.75% to 10.75%, permits a local option of up to 3%, and applies the state's standard sales tax of 6.25%. A close read of the proposal reveals that both the taxation rate and method could stand to change in the not so distant future, with the Commission required both to annually review the sufficiency of revenue collected and to report on the feasibility of alternative tax bases (e.g. weight, volume, and/or THC potency) by 2020.
Where the House allowed local elected officials to opt out of the adult use marijuana law and the Senate preserved the ballot initiative's local referendum procedures, the compromise bill splits the difference. Municipalities that backed the adult use referendum (a majority of the state's municipalities) may opt out only by way of referendum. Municipalities that rejected the adult use referendum may opt out by way of majority vote of local elected officials.
The Legislature will almost certainly send the compromise bill to the Governor's desk by the end of the week. The Baker Administration may then take up to 10 calendar days to review the proposal, leaving just one day before the bill's August 1, 2017 deadline to appoint members to the Advisory Board. As Governor Baker will likely not want to sully his stellar approval rating by wading into the cannabis debate, we anticipate that he will sign the measure without amendment.
Even though several marijuana industry advocates have applauded the compromise, not everyone is so thrilled. Treasurer Goldberg has come out swinging, lamenting the Legislature's closed-door negotiations. The Massachusetts Municipal Association (MMA) has expressed concern over the expense of implementing the local opt out procedures. What's more, legal analysts have raised the scepter of a constitutional challenge to the blended municipal opt out approach, concluding that the provision may violate the equal protection clause of the Massachusetts Constitution.
While we may see final statutory language within the week, the final shape and form of the Commonwealth's cannabis industry will take far longer to appear.
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