Political Memo: After Snips to Budget, a Thicket Looms

With time growing short before an Aug. 2 deadline to raise the federal debt limit, Republican and Democratic lawmakers meeting with Mr. Biden behind closed doors are just beginning to weigh the big fiscal trade-offs necessary for a compromise that could clear the way for a Congressional vote.

An accelerated schedule of meetings for next week will test whether the six members of the House and Senate talking with the White House are willing to entertain the serious political concessions and to make the hard choices needed to cut a deal in time.

In the colorful phrasing of Mr. Biden, the moment has arrived to find out who is willing to trade their side’s bicycle for the other side’s golf clubs.

“The really tough stuff that is left are the big-ticket items,” Mr. Biden said Thursday at the conclusion of the week’s third bargaining session, meetings that took lawmakers and administration officials to every corner of the federal budget in a search for consensus on ways to save federal dollars.

Lawmakers and aides say the negotiators quickly gobbled up low-hanging fruit like trimming agriculture subsidies and selling more of the telecommunications spectrum to generate revenue. There is a general consensus that federal workers are going to have to contribute more to their pensions, though the details are still to be determined. The Pension Benefit Guaranty Corporation will collect higher fees from stable companies, and some idle federal property could be up for sale.

But those actions are not going to produce anywhere near the $2 trillion or more in savings that both sides agree is the level required to win a debt limit increase while putting the government on course to save $4 trillion over the next decade — a goal set by Mr. Biden.

To get there, negotiators are going to have to make some excruciating choices about federal health care and safety-net programs, as well as the tax structure. At the same time, they need to reach a deal that not only can be sold to a bipartisan majority in the House and Senate, but also is credible enough to assure investors worldwide that Washington is getting serious about taking care of its financial health.

Representative Chris Van Hollen of Maryland, the senior Democrat on the Budget Committee and a participant in the talks, said one reason for setting three-hour meetings four times next week is to gauge whether he and his fellow budget bargainers can ever come to terms.

“We are picking up the pace in a big way, recognizing that we’ve got to determine whether we can reach agreement in principle or recognize that we are not able to bridge our differences,” he said.

Watching the clock, Senator Harry Reid, the Nevada Democrat and majority leader, on Friday called on the negotiators to keep working through the Fourth of July recess if necessary.

To Democrats, a major impediment is the Republican position against relying on any significant new revenues as part of the deal, insisting that most of the $2 trillion or more come from cuts in federal spending — although not from Pentagon spending, a major potential source of savings.

Democrats say they will never be able to sell a compromise without some new revenue to their colleagues in the House and Senate. They say the most affluent Americans should contribute to the debt limit deal through new taxes on hedge fund operators or by phasing out tax deductions for those at the highest levels of earnings.

But Representative Eric Cantor of Virginia, the majority leader who is representing House Republicans in the talks, on Thursday reiterated the deep Republican opposition to higher taxes.

“Our side will not support any attempt to raise the debt ceiling that is not accompanied by the kinds of cuts necessary or reforms necessary,” he said. “Nor will we support an attempt to raise the debt limit that raises people’s taxes. That, we don’t want to do.”

Republicans want to see Democrats embrace more changes in Medicare and Medicaid, the federal health programs for older Americans and the poor.

Democrats have so far pushed for modest changes like allowing the government to negotiate prescription prices with drug companies and to require drug industry rebates for people eligible for both Medicare and Medicaid — a proposal that could potentially generate tens of billions of dollars. But Democrats will not support any major Medicare overhaul, saying they believe that they have the political high ground on the issue at the moment.

To get a deal, lawmakers on both sides are going to have to bend considerably and back unpopular positions. They are then going to have to sell the plan to their rank and file on the grounds that they need to avert the economic disarray that could result from a failure to raise the debt ceiling.

Both sides say that all those in the talks want to reach a compromise. “There is no principal in that room that doesn’t want to get agreement,” Mr. Biden said.

Yet that is no guarantee that the deal will be done.

“I’m confident,” said Representative James E. Clyburn of South Carolina, another top Democrat in the talks. “But I’ve been confident before and come up short.”

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Public Pensions, Once Off Limits, Face Budget Cuts

Conventional wisdom and the laws and constitutions of many states have long held that the pensions being earned by current government workers are untouchable. But as the fiscal crisis has lingered, officials in strapped states from California to Illinois have begun to take a second look, to see whether there might be loopholes allowing them to cut the pension benefits of current employees. Now the move in Detroit — made possible, lawyers said, because Michigan’s constitutional protections are weaker — could spur other places to try to follow suit.

“These things do tend to be herd-oriented,” said Sylvester J. Schieber, an economist and consultant who studies pensions.

The mayors of some hard-hit cities have said that the high costs of pensions have forced them to lay off workers: Oakland, Calif., laid off one-tenth of its police force last year after failing to win concessions on pension costs.

Elsewhere there is pension envy: some private sector workers, who have learned the hard way that their companies can freeze or reduce their pensions, resent that the pensions of public workers enjoy stronger legal protections. But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game.

It has been far more common for cities and states to adopt more modest retirement plans for future workers. But the savings from new plans are initially small, growing only over time. Other states have gone further, requiring workers to work more years before retiring, or to contribute a higher portion of their salaries toward their pensions. A few states have rolled back cost-of-living increases for retirees, prompting lawsuits. Reducing the rate at which government workers earn pension benefits — even modestly, as Detroit did — has been rare.

Pension funds can run out of money. In Prichard, Ala., a small city outside of Mobile, the fund ran out in 2009. The city stopped sending pension checks to its 150 retired workers, defying a state law that requires it to pay what it has promised. In the 19 months since the checks stopped, 18 retirees have died while waiting for their money.

When Gov. Scott Walker of Wisconsin, a Republican, moved to curtail the collective bargaining rights of public worker unions in the state, he exempted police and fire unions. But they often have among the most expensive pension benefits.

That is, in part, because they must be paid for more years. Because police work and firefighting are dangerous, physically demanding jobs, it is not uncommon for cities to promise workers full pensions after as little as 20 years of service, even if that means paying retirees from their 40s until they die. Such pensions are powerful recruiting tools.

When the mayor of Jacksonville, Fla., addressed a recent conference there for the trustees of police and fire pension funds, he said that he would not attend the “Guns ’n’ Hoses” boxing tournament on the last night. The mayor, John Peyton, had spent the past year in rancorous, fruitless negotiations trying to get his local unions to agree that future police officers and firefighters should have to work 25 years before getting full pensions, instead of 20, among other things.

“I fear that if I showed up, I’d be put in the ring and I’d come out unrecognizable,” he said, joking.

In Omaha, the police union recently agreed to reduce the benefits being earned by current officers after the city agreed to put more money into the teetering pension fund.

The struggles of Detroit, of course, are extreme. The report by the arbitrator, Thomas W. Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling. Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.

The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr. Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.”

Detroit’s efforts to cover those costs through aggressive investing have not helped. In a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The Securities and Exchange Commission is investigating.

The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent. Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to?find a solution?to?the fund’s imbalance.?

Michigan’s new Republican governor, Rick Snyder, has taken a carrot-and-stick approach to the state’s troubled cities. The carrot: He scrapped the old way of distributing state aid, and wants to make aid contingent on having cities adopt “best practices,” which he says should include reducing the rate at which workers earn pension benefits. The stick: A new law allowing the state to appoint fiscal managers with broad powers over distressed local governments.

Mayor Dave Bing of Detroit referred to both carrot and stick in his budget address this month, when he spoke of the need to reduce pensions for current workers, and to move away from traditional pension plans to those more like 401(k)’s for “at a minimum all new hires.”

“If we are unable or unwilling to make these changes, an emergency financial manager will be appointed by the state to make them for us,” he said. “It’s that simple.”

 

Japan Announces Emergency Budget for Rebuilding

The $48.5 billion budget is likely to be followed by more spending as Japan takes on the gargantuan task of rebuilding the section of its Pacific coastline ravaged by the March 11 earthquake and tsunami. Parliament is expected to pass the budget next week.

At least 14,133 people have been found dead, an additional 13,346 remain missing and more than 130,000 are living in evacuation centers. Government estimates put the total damage from the quake and tsunami at $300 billion.

The nuclear crisis set off by the tsunami has added to the human and economic toll. On Friday, the government banned residents from a 12-mile evacuation zone around the Fukushima Daiichi Nuclear Power Station, where several reactors have suffered explosions and radiation leaks. A previous order urged but did not require evacuation from that zone; the government still recommends that residents leave if they are within 19 miles of the plant.

“We all share the hope that reconstruction does not mean a return to where we were, but the building of a brighter future,” Prime Minister Naoto Kan said at a news conference.

“I feel it was my fate to be prime minister at a time of great adversity,” said Mr. Kan, whose handling of the crises has been criticized sharply in Parliament and in the country at large.

Japan has rebounded from other catastrophes: The 1923 Great Kanto earthquake killed as many as 140,000 people and caused widespread destruction in Tokyo. It also is thought to have wiped out almost 40 percent of the country’s gross domestic product. In comparison, the death toll from the March 11 quake and tsunami is far lower, and the economic damage is likely to add up to just a few percent of G.D.P.

Still, Japan faces different challenges now, which could weigh heavily as it rebuilds: a rapidly aging population, a long-stagnant economy and public debt that is already at twice the size of its economy, thanks to profligate public works projects of the 1990s. That debt burden adds serious obstacles to financing the great reconstruction. Raising taxes, for which there appears to be a measure of public support, will dampen already tepid personal consumption levels. Issuing more government bonds will add to the ballooning deficit.

Mr. Kan’s grip on leadership also appears to be weakening under the withering criticism, including charges that he bungled the initial response to the nuclear crisis, causing it to worsen.

The president of Fukushima Daiichi’s operator, the Tokyo Electric Power Company, visited an evacuation center on Friday. “I have no words to express my regret,” the president, Masataka Shimizu, told the evacuees after making his way through cardboard beds and blankets. Television cameras in tow, he knelt and bowed deeply — the ultimate posture of apology in Japan.

Some refugees bowed back, but others heckled him. “We all just want to go home,” one told him quietly.

 

The Budget Debate, Revealed

The battle ahead “is the big one, and goes to the very major questions about the role of government,” said G. William Hoagland, a former Republican staff director of the Senate Budget Committee.?“This is going to be a very fundamental clash of ideologies.”

The Democratic and Republican Parties have their own internal tensions to address as the debate goes forward in Congress and on the presidential campaign trail. But in its early stages at least, it is liberals who are on the defensive.

The aging of the baby boom generation and the costs of maintaining Medicare and Social Security have put the two pillars of the social welfare system on the table for re-examination. The growing weight of the national debt has given urgency to the question of whether the government has become too big and expensive.

The tepid nature of the current economic recovery, following big stimulus packages, has provided an opening to challenge the effectiveness of Keynesianism as the default policy option for government. And the revived energy of grass-roots conservatives has given electoral clout to the movement’s intellectual and constitutional arguments.

Arthur Brooks, president of the American Enterprise Institute, the conservative research organization, said, “The optimistic view is that we have a confluence of the business cycle, of the demography and of the politics that makes it not just possible to achieve real change, but impossible that we not deal with these things if we want this country to continue on the path envisioned by the founders.” So just two and a half years after a presidential election that was in part a repudiation of conservative governance, and with the nation still smarting from the aftereffects of a financial crisis that grew out of failures of markets and regulation, President Obama finds himself in a somewhat surprising position: forced to articulate and sell a vision of how liberalism and the institutions it built in the 20th century can be updated for the constraints of the 21st.?

The speech he delivered Wednesday at George Washington University in Washington was his most ambitious effort so far to do so. In it, he harnessed the language of both left and right to argue against the extremes on both sides while suggesting that many of their core principles were not mutually exclusive — in other words, that Great Society values can endure in a Tea Party moment.

He defined “patriotism” as a shared sense of responsibility for the vulnerable and less fortunate.?Basic standards of security for the elderly and poor and government investment in a more prosperous future, he said, can not only coexist with a tradition of “rugged individualists with a healthy skepticism of too much government,” but are also a vital part of what makes America exceptional.

“We are a better country because of these commitments,” he said. “I’ll go further — we would not be a great country without those commitments.”

Republicans in Congress, he suggested, would shred that tradition under cover of a debate that is only nominally about the budget. “The fact is,” he said, “their vision is less about reducing the deficit than it is about changing the basic social compact in America.”

Conservatives would and did object to his implication of heartlessness, but not necessarily to his assessment of their ambition.

The Republican plan put forward by Representative Paul Ryan of Wisconsin, the chairman of the Budget Committee, and adopted by the House on Friday as its policy blueprint for the next decade contains a substantial dose of deficit reduction but is really a manifesto for limited government.

 

Lobbyists Won Key Concessions in Budget Deal

Even delivered in shorthand, the call’s meaning was clear to Mr. Wyden: a health care plan he had succeeded in getting passed months earlier despite furious lobbying by big business and labor had been pulled out of the blue and killed as part of the broader budget deal struck between the White House and Congress. What was most perplexing was that it had little to do with budgets or government shutdowns.

“I was flabbergasted, just flabbergasted,” Mr. Wyden, of Oregon, said Tuesday in an interview, describing the demise of a plan that would have allowed some 300,000 workers to pick their own insurance coverage through employer-financed vouchers.

With $38 billion in cuts on the line in a $3.5 trillion budget, the clash over federal spending played out in numbers so big that most standard calculators had trouble tracking all the zeros. But in the end, a handful of relatively small-bore line items affecting particular industries attracted some of the most aggressive lobbying behind the scenes, as business interests, health care providers and others fought to hold on to, or kill, proposals that affected their bottom line.

Much public attention focused on the social issues that appeared in the spending bill in the final weeks as social conservatives tried to use it to advance their causes, particularly the unsuccessful effort by abortion opponents to cut the financing of Planned Parenthood. In the end, the budget agreement reached late Friday night banned the District of Columbia from using its own money to provide abortions for low-income women in the city — a measure with a bigger social impact than fiscal.

But there was also intense but ultimately unsuccessful lobbying by General Electric and other military contractors to revive financing for an alternate engine for a costly jet fighter project. Proponents of tougher regulations for the politically influential and beleaguered commercial college industry succeeded, for now, in beating back an effort to block restrictions on how the schools get federal aid.

An analysis by the Congressional Budget Office found that the Wyden proposal had no short-term impact on federal spending and could actually save money over the next four years.

The plan to allow some employees to “opt out” of their employer-sponsored plans and choose their own coverage drew opposition from an unusual alliance of unions and businesses. Supporters said the vouchers would give employees more options and spur competition in the marketplace. Critics contended that younger, healthier employees would leave the plans and make insurance costlier for older, less healthy workers.

The American Benefits Council — a group that represents employers and insurers and spent nearly $1 million on federal lobbying last year — wrote its members that the Wyden proposal would have a “destabilizing” impact on employer insurance plans. The A.F.L.-C.I.O., which employs a formidable Washington lobbying force, warned that the proposal would create a “death spiral” of higher costs.

But the measure also had strong supporters. Charles Kolb, president of the Committee for Economic Development, said Tuesday that Mr. Wyden, in taking a different tack to managing health care costs, “was trying to introduce the type of structural reform that the system is crying out for.”

The measure did make it into the final health care plan signed by President Obama last year — only to be cut at the eleventh hour in Friday night’s budget agreement. “This is a lost opportunity,” Mr. Kolb said.

So who axed the program?

“I wish I knew,” Mr. Wyden said. “Everyone at the table says that someone else brought it up. They all say, ‘It wasn’t me.’?”

Democrats and administration officials insisted Tuesday in interviews that Republican leaders had moved to get rid of the Wyden plan. They acknowledge privately that were not in a position to fight it that aggressively, given that it was opposed by business and labor, and that agreeing to kill the plan was seen as a way of staving off other possible cuts in health care financing.

“There’s no question that eliminating this provision wouldn’t have been our first choice,” said an Obama administration official who spoke on the condition of anonymity in discussing private negotiations. “But these were tough, tough negotiations, and obviously no one got everything they wanted.”

Michael Steel, a spokesman for Speaker John A. Boehner, said “the program was eliminated because it costs jobs — and jobs are the American people’s top priority.”

Mr. Wyden said that regardless of who brought it up in the White House-Congressional negotiations, he suspects that the group driving the elimination of his plan was the Business Roundtable, a powerful lobbying force made up of chief executives from the country’s biggest companies. The Roundtable, which spent more than $8.2 million lobbying on a range of health care and financial issues last year, had come out strongly against the idea of letting employees pick their own insurance plans.

“This is a textbook case of the special interests prevailing — Exhibit A,” Mr. Wyden said of the demise of his health care voucher plan. “Everyone knows the Business Roundtable wanted this killed, and now they can go back with a trophy to say they protected business as usual.”

Executives from the Roundtable did not respond to voicemails or e-mails on Tuesday inquiring about the issue.

But even as Mr. Wyden was looking for ways on Tuesday to revive his voucher plan, the Business Roundtable was announcing a separate agreement with the Obama administration to sign on to a “Partnership for Patients Pledge” intended to show commitment to health care.

“We applaud the administration,” said former Gov. John Engler of Michigan, president of the Business Roundtable, “for taking this proactive step to bring together a diverse group of stakeholders — all of us committed to, and invested in, America’s health care system — to measurably improve health care quality.”