**Constituent Letter**

Dear constituent,

Balancing the budget takes courage. The wisdom of Solomon would come in
handy too. Thank you for offering your comments on the proposed Deficit
Reduction Act, helping me to see yet another facet of the decision at
hand.

The Deficit Reduction Act originated in a Budget Act procedure called
"reconciliation." Reconciliation was last used in 1997 to rein in
spending on entitlement programs. It was hard work, but it helped us
balance the budget for the first time since 1969. (Most of the credit,
though, goes to the revenues created by the tech boom in the economy.)
We're doing reconciliation again and the fur is flying.

As passed by the House on November 17, 2005, the Deficit Reduction Act
reduces the rate of growth in federal spending by \$50 billion over the
next five years. The Senate has passed its own deficit reduction package
so now the differences must be harmonized in a House-Senate conference
committee. The conference committee report will have to be approved by
the full House and by the full Senate.

Over the next five years the federal government is going to spend
\$16,780,000,000,000 (that's \$16.78 trillion). In the Deficit Reduction
Act we're attempting to save \$50,000,000,000 (that's \$50 billion).
Imagining it as a family budget discussion (by dropping nine of the
zeros from both numbers) makes the makes the discussion more real for
me. It's as though the Inglis family were going to spend \$16,780 over
the next five years. The question is whether we could find a way to
shave that spending by \$50 over those five years.

Since I've got to believe the Inglis family could shave \$50 out of
\$16,780 over five years, I voted for the Deficit Reduction Act which
shaves \$50,000,000,000 out of the federal government's expected
\$16,780,000,000,000 of expenditures over the next 5 years.

A Deficit Reduction Act that seeks to shave only \$50 out of \$16,780
strikes deficit hawks like me as more than a wee bit undersized. But I
need to be reminded that (a) why we're looking for \$50 in savings and
(b) where we're going to find those savings says something about our
family.

\(a\) [Why look for \$50 billion in savings?]{.underline} Our opponents
say that we're looking for the \$50 billion so that we can cut taxes;
that we shouldn't try to find offsets for Katrina relief spending when
we didn't insist on offsets for spending on the war in Iraq; and that if
we hadn't spent \$357 billion on the War on Terror, we'd have no need to
find \$50 billion in savings. Each of these arguments has some merit. In
a second reconciliation package that we hope to pass in the next month
or two, Republicans in Congress hope to extend certain tax cuts that are
scheduled to expire. One of those is an extension of a 15% capital gains
tax rate. If we don't extend this tax cut, the capital gains tax rate
will rise automatically to 20%, killing jobs in an economic expansion
that's been underway for 10 straight quarters (with growth rates in GDP
of more than 3%) and that's created more than four million new jobs in
the past 29 months. As it were, the family is trying to find \$50 in
savings so that it can invest some of that money in income-producing
assets.

It's true that we didn't insist on offsets to pay for the War on Terror;
we've simply borrowed the money. That's a questionable decision, but we
wouldn't improve the family's position by making the same mistake on
Katrina spending. So, as it were, the family is trying to reduce its
spending by \$50 so it doesn't add another \$50 to the credit card
balance.

\(b\) [Where we find \$50 billion in savings.]{.underline}

If the Deficit Reduction Act doesn't become law, federal entitlement
spending will increase by 6.4% over the next 5 years. If it does become
law, federal government spending will increase by 6.3%. We've found the
0.1% reduction in the rate of growth by seeking the majority of the
savings in the following areas:

**Pensions** (Inflows of \$6.612 billion)

-   Businesses would pay higher premiums to the Pension Benefit Guaranty
    Corporation (PBGC) (the premium moving from \$19 per participant in
    a defined-benefit pension plan to \$30 per participant).

-   Allows the PBGC to impose a three-year \$1,250 annual premium per
    participant on companies emerging from Chapter 11 bankruptcy.

**Student Loans (**Savings of \$14.47 billion over five years)

*Borrower Benefits*

-   Gives students the opportunity to borrow larger amounts during their
    first and second years in college (old maximum was \$2625 for
    first-year students and \$3500 for second-year students; new
    maximums would be \$3500 and \$4500; lifetime limit would remain
    unchanged at \$23,000).

-   Fees paid by students at the inception of new loans (currently as
    high as 4%) would be reduced over 5 years to 1%.

-   Frees students to consolidate their loans with the company of their
    choice rather than the company which holds their loans (eliminates
    the "single holder rule")

> *Decreased Benefits*

-   During the high interest rates of the 1970s, lenders were given
    incentives to make loans at less-than-market rates of 9.5%. The
    market rate is now far below 9.5% but the tax-exempt bonds that make
    those loans possible are still existent. Lenders still use those
    bonds to get the 9.5% guaranteed rate. The Deficit Reduction Act
    eliminates these higher-than-market guaranteed rates, thereby saving
    the federal government's money.

-   Lender-paid origination fees for student loans increase from 0.5% to
    1%. The lender-paid portfolio fee on consolidation loans would
    increase from 1.05% to 1.30% for companies that deal primarily in
    consolidation loans.

-   Currently, collection agencies and guarantors can keep 23% of the
    amount they collect on defaulted loans. We reduce the collection
    agency's share to 20%, thereby increasing the government's share by
    3%.

-   Students will how choose between a variable or a fixed rate on
    consolidation loans. Fixed rate loans would look in at the market
    rate plus 1%. Variable rate loans would be pegged to the market
    rate.

-   Consolidation loans will now come with a 1% origination fee.
    Proponents believe that lenders may pay some of this fee due to
    competitive market conditions. Opponents say the fees will be born
    by graduates who consolidate loans.

**Child Support** (Savings of \$4.899 billion over five years)

-   The federal government pays 50% of administrative costs for most
    joint state/federal programs. However, it pays for 66% of the
    administrative costs for child support enforcement. The Deficit
    Reduction Act reduces the federal share to 50%.

-   Reduces the federal match on Child Support Enforcement incentive
    payments.

**Medicaid** (Savings of \$11.877 billion over five years)

*A bipartisan group of governors asked for help in reforming Medicaid
because the surging cost of the federal-state program was busting
budgets everywhere.*

-   Next year the Medicaid program is projected to grow by 7.3%. The
    Deficit Reduction Act reduces the growth to 7.0%.

-   Medicaid for legal residents only: The Deficit Reduction Act saves
    about \$220 million over five years by requiring Medicaid recipients
    to prove they are in the country legally.

-   The Deficit Reduction Act would crack down on the practice of hiding
    assets to qualify for Medicaid by extending the "look back" period
    from three to five years.

-   A portion of savings in Medicaid comes from requiring those with
    more than \$750,000 equity in their house to pick up their long-term
    care bills.

-   Changes the formula that Medicaid uses to reimburse pharmacists so
    that the federal government pays the average sales price of the
    drug.

-   States would get the flexibility to design their own benefit
    packages, as long as those packages meet benchmark standards.

-   Co-pays would be a part of Medicaid for the first time---about \$3
    for services. 

**Food Stamps** (Savings of \$800 million over five years)

-   Requires most non-citizens to wait seven years (currently five)
    before applying for food stamps.

-   Ends automatic eligibility for recipients of non-cash Temporary Aid
    for Needy Families (TANF).

This is just a start. We need to take a hard look at everything in the
budget and set priorities. That means big entitlement programs like
Medicaid and Medicare; but it also means agriculture and business
subsidies that benefit the well-to-do. If we are willing to make hard
decisions, we can balance the budget again.