Balancing Act

here was irony in the timing of President Clinton's first post-election budget meeting with leaders of Congress. As they shook hands and pledged cooperation on budget issues, they might have recalled that just one year earlier, the government was on the verge of shutting down many of its operations in the long-running, bitter confrontation between House Speaker Newt Gingrich and his House revolutionaries and Clinton's White House team. Key lawmakers were openly talking, even bragging, about forcing the Administration to accept their spending and tax plans by putting federal workers on the street.

There was no such talk at the White House in November. Threats of budget train wrecks have given way to the less-than-revolutionary idea that government should concentrate on getting the trains to run on time. As Gingrich said in late November, "If the last Congress was the 'confrontation Congress,' this Congress will be the 'implementation Congress.' "

Gingrich's conciliatory tune was surely music to the ears of Clinton's new budget director, Franklin Raines. If the Republican-led 105th Congress is more pliant than the 104th, Raines' job of eliminating deficit spending will not be the impossible task his predecessors faced. And the music should be sweet to the ears of federal managers and employees, because it suggests that the trains won't go off the track this year.

The good news is tempered by the reality that budgets will remain under pressure, as Raines observed in a recent interview with Government Executive. This is true even though favorable economic conditions have reduced the size of projected budget deficits, easing the task of eliminating deficit spending, and the attention of budget cutters seems likely to shift away from agency spending to focus more on the government's huge entitlement programs.

In the discretionary accounts that fund agency operations, the military will continue to be squeezed, not only due to tight budget caps but also because weapons systems modernization programs are costing more than budget projections assume. On the domestic side, the promises President Clinton made during his re-election campaign to increase spending on education, the environment and other priorities imply fewer resources for other programs.

And Raines does not seem the kind to paper over mismatches between agency programs and available resources; he has been insisting that agencies present realistic plans for cutting their operations to levels needed to reach the budget balance Congress and the Administration have agreed will occur in 2002. The extent to which he succeeds in this endeavor will be on display for between-the-lines budget readers when Clinton sends his fiscal 1998 budget to Congress in early February.

A Call for Cooperation

The more accommodating posture struck by congressional leaders recognizes the direction in which political winds have been gusting in the last year. First, the train wreck strategy did not succeed. While Clinton did agree to the Republican demand for a seven-year balanced budget plan that would meet the test of Congressional Budget Office (CBO) score-keeping, the White House never succumbed to what it considered to be excessive demands to trim certain programs, cut various taxes, and implement a variety of nonbudget riders.

Second, playing hardball backfired on Republican leaders, who saw their popularity nosedive in the weeks during and following the two partial government closings. Not until the 104th Congress was ending and Republicans compromised with the White House on a variety of issues (including additional spending for many of the president's highest priorities), did Congress' approval ratings start to rebound.

Third, the results of the 1996 elections were interpreted by some as a call from voters for cooperation rather than confrontation. Among the chastened was Gingrich, whose popularity suffered greatly as thousands of commercials sponsored by Democrats pictured him as the radical proponent of unacceptable change. Gingrich led the congressional delegation to the fiscal peace meeting at the White House and used the most conciliatory language of any member of the Republican leadership. On Nov. 20, the day he was re-elected Speaker, Gingrich told his fellow House Republicans, "We bear the unusual burden of reaching out to a Democratic President and saying, 'Together, we are in fact going to find common ground.' "

Fourth, the election narrowed the Republican majority in the House, giving Republican moderates a much greater say in the outcome of most policy fights, especially those having to do with their primary concern, the budget. This group may include as many as 60 members, many of whom were unhappy with the train wreck strategy to begin with, and who now may hold the balance of power in the House on some key issues.

For all these reasons, federal employees, who were dealt psychological if not financial blows by the two government closings, should be breathing a sigh of relief as this year's budget process gets under way. Another deficit reduction train will almost certainly leave the station in the year ahead as both Congress and the Clinton Administration try to make good on their campaign promises, but federal agencies seem less likely than in 1995 and 1996 to be the primary focus of the spending changes.

To be sure, some prominent Republicans in Congress are determined to keep up the pressure to shrink or eliminate parts of the federal bureaucracy. House Appropriations Chairman Robert Livingston, R-La., for example, said in late November that House Republicans will continue to slash spending. "We're not backing down one iota from the goals of the Contract with America," Livingston told reporters, saying GOP leaders still will concentrate on decreasing the size of the federal government and adding he still believes the Energy and Education departments should be eliminated. But he said that in 1997, the Republicans "expect to work with [Clinton], not against him."

Even if the deficit reduction train does get knocked off the track, last year's head-on collisions probably will not recur. The shutdowns and furloughs were too unsuccessful, too unpopular and too much a symbol of failure rather than resolve to be considered seriously as a budget process tactic.

John Koskinen, who as deputy director for management at the Office of Management and Budget managed the closings for the Clinton Administration, says last year's experiences were eye-opening for Congress. Contrary to what many expected, Koskinen says, "It quickly became obvious that people cared a great deal about the government services that were not provided." Congress learned, he says, that it was "counterproductive to try to use the shutdowns as leverage on the budget."

Appropriations to Entitlements

Some government workers have already realized that this change has taken place, survey data indicate. In October, the Greater Washington Research Center released survey results showing increased optimism about the economy in the D.C. area. Though the strong national economy influenced these views, experts attributed more of the result to Washington-area government workers' belief that there would be no more budget deadlocks.

And prospects for a change in the nature of the budget debate in 1997 should also be heartening. This year's debate may finally do what budget analysts, the bond market and political pundits have been demanding for some time-deal primarily with entitlement programs. That means programs that depend on appropriations-including the operating budgets of virtually all federal agencies-may no longer be the prime focus of the deficit reduction effort. And some programs will get increases.

Appropriations, of course, have been under pressure in recent years. Many agencies have had to cut back on administrative and other costs as others, in such favored fields as law enforcement, have grown.

In fiscal 1996, once the dust settled from the prolonged budget war, non-defense discretionary accounts suffered their first overall reduction in many years. For fiscal 1997, however, non-defense spending started back up again as the Clinton Administration pushed Congress to provide more for some of its key domestic priorities.

In fiscal 1998, it appears that the pressure on domestic appropriations may continue to ease. Martha Phillips, who as executive director of the Concord Coalition is one of Washington's most influential balanced budget proponents, says she would not be surprised if Congress and the president agree on higher totals for at least military and international programs and perhaps domestic spending as well. "Congress learned over the past year their constituents valued these programs," she says, and that "the groundswell of public support" that many Republicans had expected for deep cuts in appropriations "turned out not to be there."

IT'S THE ENTITLEMENTS With entitlement programs consuming an ever larger share of federal spending, controlling their growth will be key to eliminating budget deficits. (in billions)

Source: Congressional Budget Office

The Favorable Baseline

General fiscal trends also seem to have diminished the need for large appropriations cuts. The most important has to do with the baseline deficit projected to occur if there are no changes in federal spending or taxing policies and if the economy performs as expected. This is the starting point for any deficit reduction discussion; you can't know how much has to be done unless you first know how big the deficit will be.

The good news is that the baseline is much lower than had been forecast even as recently as a few months ago. Official revisions in the baseline will not be available until the President's budget is sent to Congress in early February and the Congressional Budget Office releases its economic and budget update later that month. But private sector estimates using CBO assumptions and scoring methods show the baseline deficit between fiscal 1998 and 2002 might be much lower than previous estimates.

Moreover, these smaller deficit reductions can be achieved by changes being discussed in entitlements, corporate subsidies, revenues and lower interest payments. Appropriations might not have to be touched, or touched only minimally. The fact that significant nonappropriations budget cuts are even being considered seriously may be the biggest positive budget change for federal employees in the last two decades.

DOWNSIZING THE DEFICIT The good news for agencies worried about future appropriations is that the federal budget deficit, which has been heading downward for four years, is no longer expected to rise dramatically in the next four years, either. Total federal deficits between 1997 and 2002 are now projected to add up to $796 million, down from the $1.37 trillion the Congressional Budget Office projected last May. Between 1991 and 1996, annual deficits totaled $1.18 trillion. Projected Deficits . . . . . . . . Past Deficits

Source: Congressional Budget Office Charts: Phyllis L. Maringer

How It Could Be Done

Medicare may be the best example of how and why the picture has improved for agency budgets. The looming financial disaster in Medicare-which is projected to run out of cash just before the next presidential election-is likely to put pressure on and provide the political cover for Congress and the White House to consider reforms that up to now have been politically unacceptable. The situation may allow changes in the program that would curtail spending and take pressure off appropriations.

The potential presidential candidates for the 2000 election-including Vice President Al Gore and House Minority Leader Richard Gephardt, D-Mo.-would like to have the Medicare problem solved well before they start their campaigns. That's another reason to believe this largely untouchable program will be in play this year. Republicans, many of whom believe the President unfairly manipulated the Medicare issue during his campaign, will be hard-pressed not to participate in some type of bailout of the program.

Federal corporate subsidies, both outlays and taxes, are also much more likely to be a part of the upcoming budget debate than they have been for years. Although there is widespread disagreement about how much of what is called "corporate welfare" should be reduced, there is increasing acceptance that its reduction is inevitable.

Pressure on appropriations will also be eased if, as seems likely, there's a major effort to reduce federal deficits by cutting the cost of living adjustment for some entitlement and tax programs. The means would be a revision in the Consumer Price Index (CPI). For the last two years, many economists and budget analysts, including Federal Reserve Board Chairman Alan Greenspan, have been saying the CPI formula significantly overstates inflation and that it should be adjusted. Even the Bureau of Labor Statistics, the agency that compiles the CPI, agrees that the formula may be too generous, although BLS believes that the overstatement is far less than Greenspan stated. Senate Finance Committee ranking Democrat Daniel P. Moynihan of New York and outgoing House Budget Committee ranking Democrat Martin Sabo of Minnesota also favor a CPI revision.

This seemingly technical revision has big implications for the deficit, and therefore for appropriations-as the deficit is reduced by CPI changes, the need to limit appropriations will be less.

The amount of savings is substantial-on the order of $80 billion between fiscal 1998 and 2002, according to former CBO director and current Brookings Institution senior fellow Robert Reischauer.

However, Phillips of the Concord Coalition warns that passing the CPI change will not be easy, especially because the largest programs affected would be Social Security, civil service and military retirement and three tax provisions-the standard deduction, personal exemption, and tax brackets. "It's going to be tough," she says, for lawmakers to vote in favor of legislation that will "lower Social Security and retirement benefits compared to what people were expecting and increase taxes compared to what people would have otherwise paid." She adds, however, that the savings are "out there for everyone to see" and that they "will be difficult for Congress to ignore."

"The only way the CPI change happens is if Republicans and Democrats join hands and do it together" says Norman Ornstein, a resident scholar at the American Enterprise Institute who specializes in Congress. "Anything other than absolute bipartisanship will give the side not supporting the CPI change a political advantage that the supporters cannot allow."

And, adds Brookings' Reischauer, because of the political implications of appearing to cut Social Security benefits and increase taxes, any CPI change will be "the last piece that will be fitted into the deficit reduction puzzle" by White House and congressional budget negotiators. To make sure everyone gets equal blame, "it will only happen, at 2 a.m., with the lights off, and Republicans and Democrats shackled together," Reischauer predicts.

But there are reasons to believe that, in spite of sharp partisanship on the budget in the last two years and the acrimonious 1996 election campaign, a deal on CPI is possible. Moderates in both parties will hold the key, and they may be emboldened by the 1996 election results. In the Senate, a bipartisan coalition of moderate Republicans led by John Chafee of Rhode Island and conservative Democrats led by John Breaux of Louisiana for the last two years have been pushing a centrist budget plan that included changes in Medicare, a revision in the CPI, and a reduction in subsidies to corporations.

Raines at Work

All of the elements that are needed to put a budget deal together this year without a wholesale attack on appropriations have been under serious discussion for some time. In the last Congress these compromises were unacceptable to House Republicans, who had their own more fiscally conservative agenda. This year, however, with the smaller Republican majority in the House having to pay more attention to its moderate wing, there is a much better chance that a Chafee/Breaux-type centrist budget could be adopted and that the lifeblood of federal agencies-appropriations-could be spared, at least in comparison to the budget pressures they have faced in recent years.

Yet in fiscal 1998, many programs will face tough times even if the amount available for appropriations increases or stays about the same.

That is the message that new OMB Director Raines is sending. For example, he says appropriated programs "will continue to be an important part of a deficit reduction plan." He also says some programs would fare far better than others. "The president plans to carefully protect his priorities," such as education and the environment he said, "and reductions will have to be made elsewhere" to pay for these increases.

Raines has already impressed his senior staff and others in the Clinton Administration with his knowledge of the budget, tenacity and ability to fare well in bureaucratic infighting, three traits that every successful federal budget director must possess. In the short time since Raines was confirmed by the Senate in September, he has already made a strong impression as a director who wants to do more than crunch numbers. In budget reviews early in the fiscal 1998 budget process, he has been adamant about relating the numbers to program performance and management and in making agencies think hard about what it will take to reach the lower operating levels needed to reduce the deficit..

However, Raines has also impressed his colleagues with his interest in being more than just a budget cutter. He continues to ask what steps agencies need to take to update and modernize their operations. "It is important for the government to invest in both physical and human capital," he says, so that long-term budget goals can be met.

The course of Raines' career should have prepared him well for his current position. He dealt with budget issues as assistant director of the White House domestic policy staff and associate director of OMB for economics and government during the Carter Administration. As a general partner at the New York investment banking firm of Lazard Freres & Co., Raines worked on state and local government finance. As vice chairman of the Federal National Mortgage Association in Washington, Raines was responsible for legal, credit policy, finance and corporate development functions.

Living With the Caps

His experience with budgets and with management issues should give Raines a strong level of credibility as he delivers tough news to many agency leaders. At one level, the news will be that they will have to improve strategic planning, financial management and performance measurement, as dictated by the Government Performance and Results Act, the Chief Financial Officers Act and other recent management statutes. Agency budgets may be affected by compliance with these laws. At another level, Raines will also be explaining that some agencies will do better than others in budgets constrained by appropriations caps.

The caps were originally set for fiscal 1991 through 1995 by the 1990 Budget Enforcement Act. They were extended through fiscal 1998 in the budget deal between the Clinton Administration and Congress in 1993. In the last two years, appropriations have fallen below the limits. Even after Congress' last-minute spending spree last fall, fiscal 1997 appropriations were about $25 billion below the $530 billion Budget Enforcement Act cap. For fiscal 1998, relaxed pressure on accounts would mean appropriations could reach the statutory cap.

Of course, the Administration and Congress will pick winners and losers as they try to impose their priorities. The White House is expected to propose increases for education and environmental programs to make good on some of President Clinton's most visible and politically potent campaign promises, while Congress is expected to propose more money for the Pentagon. Given the caps, none of these can occur without offsetting decreases in other areas.

The upper limit on appropriations set by the caps may only be temporary because, under current law, they will expire at the end of fiscal 1998. Unless a budget process reform bill is enacted to extend the caps, appropriations will be unrestrained, at least legally, starting in fiscal 1999.

So, in the end, it seems that federal executives can expect some modest relief this year in the seemingly endless battle over the budget-probably no train wrecks or derailments, no head-on collisions, and appropriations that arrive at the station reasonably close to schedule at the beginning of the fiscal year. That would offer a breather from continual budget crisis, allowing some much-needed orderly planning for the continuing decline in the federal government's power and influence.