Federal budget follies explained
As members of Congress return to Washington this week, they must confront a looming deadline: much of the federal government shuts down Friday night unless they pass and the President signs new spending authority.
The annual process of funding the government is arcane and complex, and yet it directly affects every American. Here is a brief introduction to how the process is supposed to work, and how more often than not it doesn’t work as intended.
More than two thirds of what Uncle Sam spends is considered non-discretionary, including Social Security, Medicare and interest on the debt. Those expenditures roll along on auto pilot, subject to formulas adopted under their own authorizing legislation. What remains, a little less than one third of annual outlays, is considered discretionary and must be re-authorized every year. It is this remaining $1.1 trillion that Congress controls directly of the $3.7 trillion total.
The budget process is supposed to follow a well-defined procedure. It begins in February, when the President submits his spending requests to Congress. This document lays down the Administration’s marker for future negotiations but is rarely taken up formally. Congress then proceeds to set its own overall spending target by adopting a “budget resolution.” The budget resolution does not require the President’s signature and serves as a declaration of total discretionary outlays for the year ahead.
Next comes the real work of determining the actual expenditures. Twelve separate “appropriations” bills must be passed by each house of Congress. Then differences between House and Senate versions must be reconciled in a conference committee, and the President must sign each bill into law. Only then is the money actually released to be spent over the following fiscal year. The sum total of the appropriations bills adopted determines federal discretionary spending.
How well does the process work? Not well. Only four times since 1976 have all 12 appropriations bills been adopted on time. More often than not, time runs out without agreement on many or most of the separate appropriations, and so a midnight expedient is adopted. Any unpassed appropriations are bundled into a giant catchall referred to as an “omnibus” bill. That huge sack of spending authority picks up any of the twelve appropriations that never made it through the process. That has become the default option in the modern era.
It should be apparent that the process can proceed in the absence of a budget resolution, and in fact Congress failed to adopt a budget from 2011 through 2015. The actual funding of the government takes place when the twelve appropriations bills (or an omnibus substitute) are passed and signed, to take effect for the next fiscal year beginning Oct. 1.
But what happens if Congress fails to appropriate the money before Oct. 1? In that event, parts of the government shut down since it is no longer legally authorized to spend discretionary funds. Congress must then take emergency action to temporarily authorize ongoing spending at the same levels until it completes the appropriations bills.
That is where we stand today. A temporary spending authorization, called a “continuing resolution” or CR was adopted on Sept. 29 to avert a shutdown. Another extension was passed in December, but expires this Friday at midnight. A shutdown looms unless another CR is passed.
The most likely outcome is a one or two week CR to kick the can. Contention over defense spending, the border wall and Obamacare subsidies will make passage of legitimate appropriations bills difficult. Watch for high drama as Friday approaches and the threat of shutdown consumes the attention of Congress.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett &