The Bipartisan Debt Ceiling and Deficit Reduction Agreement

Click to Download the text of the BUDGET CONTROL ACT AMENDMENT

After months of negotiations and various failed proposals, President Obama, Speaker Boehner, Majority Leader Reid, and Minority Leader McConnell announced late on Sunday that they had reached an agreement to raise the federal government’s debt ceiling, just two days ahead of the deadline set by Treasury Secretary Geithner in order to avoid the nation’s first ever default.

What does the agreement do?

Immediate Increases to Debt Ceiling

If approved by the House and Senate, the agreement allows an increase in the debt ceiling of $900 billion, with an initial increase of $400 billion, which will be enough for the federal government to meet its obligations through September. The second increase of $500 billion, to come later this Fall and enabling Treasury to meet its obligations through early next year, will be subject to a resolution of disapproval by Congress, but that resolution can be vetoed by the president and it would require two-thirds majorities in both the House and Senate to override the veto.

Spending Reductions

Initial spending cuts will total $900 billion spread out over the next decade, with discretionary spending for Fiscal Year 2012 reduced by $7 billion, and Fiscal Year 2013 by $3 billion. National security spending accounts for approximately half of these reductions, and would affect the Department of Defense, the Department of Homeland Security, the Department of Veterans’ Affairs, the National Nuclear Security Administration, the intelligence community management account, and all accounts under international affairs.

Creates Bicameral “Super Committee”

The agreement creates a twelve-member Joint Select Committee on Deficit Reduction with members evenly divided among Democrats and Republicans and appointed by Speaker Boehner, Minority Leader Pelosi, Majority Leader Reid, and Minority Leader McConnell

The committee will be charged with recommending deficit reduction measures, which could entitlement and tax reform, for Fiscal Years 2012 through 2021 totaling at least $1.2 trillion, but as much as $1.5 trillion, by November 23. These cuts are to be evenly distributed between domestic and defense spending. The committee recommendation, once made, cannot be amended or filibustered, and must be approved by December 23.

The agreement requires Congress to vote on a balanced budget amendment to the constitution sometime between October 1 and the end of the year and sent to the states for ratification. If that happens, the president can increase the debt ceiling by another $1.5 trillion.

Alternatively, if the spending reductions recommended by the Super Committee total between $1.2 trillion and $1.5 trillion, the president can again increase the debt ceiling by that amount. This increase is subject to a resolution of disapproval by Congress that can be vetoed by the president. It would require a two-thirds majority of the House and Senate to override the veto.

The balanced budget amendment provision had been included in Speaker Boehner’s proposal late last week when it looked like he didn’t have the votes to ensure passage, and is credited with winning over enough Republican votes to ensure passage of the bill that ultimately failed in the Senate.

Enforcement Mechanism (trigger)

Should Congress fail to enact the bicameral committee recommendation, there is an enforcement mechanism, or trigger, that will automatically make $1.2 trillion in spending cuts with half allocated to defense, and half to non-defense spending, including Medicare, but not Social Security, Medicaid, veterans, or civil and military pay. The cuts to Medicare will not affect beneficiaries, but are targeted toward healthcare providers and insurance companies, which would see a reduction in payments. These cuts are limited to two percent. The triggered spending cuts would not, however, be implemented until January 2013, just over a year from the December 23 deadline. Any spending cuts resulting from the enforcement mechanism will apply to Fiscal Year 2013 through Fiscal Year 2021. Interestingly, January 2013 is also the month in which the so-called “Bush tax cuts” are set to expire, so any debate resulting from the triggered cuts, and expiring tax cuts, will likely involve a substantial review of tax and entitlement reform.

A failure to enact the recommendations of the Super Committee by December 23 would also allow the president to further increase the debt ceiling by $1.2 trillion. As with the $500 billion increase expected later this year, the Congress can vote on a resolution of disapproval of the $1.2 trillion increase, but it would also require a two-thirds majority to override a presidential veto.

Congressional Budget Office Score

The non-partisan Congressional Budget Office today said that the initial spending cuts, when factoring in lower interest costs, would total approximately $917 billion over the next decade. If the trigger mechanism comes into effect, the additional $1.2 trillion in mandatory spending cuts mean the agreement would cut the nation’s deficit by $2.1 trillion according to the CBO.

Next Steps

Meetings were scheduled at 11am today for both the Senate Republican and Democratic caucuses, and House Democrats were scheduled to convene at Noon to discuss the proposal. Vice President Biden was expected to attend the Democratic meetings in both the House and Senate in order to urge their support for the agreement.

We hear that Democratic leadership expects about one-third of their caucus to vote against the measure, one-third to support, and the remaining one-third to be a toss-up. It is believed that 90-100 Democratic votes will be necessary for final passage in the House.

The House is expected to move first, with a vote later tonight. There will be one hour of debate. If approved by the House, the bill could be taken up by the Senate tonight as well.

If you have any further questions, please feel free to contact ML Strategies – Tel: 202.296.3622