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The Washington Report.

February 24, 2006
Congress recently returned for the new year and one of the first items of business was to receive the President’s FY 2007 budget request. Asbestos litigation reform legislation hit a roadblock in the Senate, while the House once again passed the budget reconciliation bill (with slight modifications) that it had passed in December. Meanwhile, conference committee negotiations should be underway soon on tax reconciliation and pension reform legislation.

FY 2007 Budget
On February 6, the President proposed a $2.7 trillion FY 2007 budget that would increase defense spending by about five percent while reducing non-defense and homeland security discretionary spending for the second straight year. The President calls for slowing the growth of Medicare by $36 billion over the next five years and he proposes the elimination or reduction of 141 programs from throughout the federal government that would generate savings of $14.5 billion.

Below is a targeted analysis of the President’s budget that examines programs of importance to the New England region.

Amtrak Funding
In last year’s budget, the President proposed cutting off funding completely for Amtrak unless the intercity rail provider undertook a series of reforms to reauthorize and strategically restructure the rail provider’s finances, infrastructure and operations. Amtrak and lawmakers responded by proposing reforms and Amtrak subsequently received $1.3 billion in funding. This funding level was a victory for New England’s economy, which benefits from Amtrak’s Northeast Corridor intercity rail system. This year, funding for Amtrak has started off on a brighter note, but the President’s FY 07 funding request of $900 million, if enacted, would likely still result in Amtrak’s shutdown. Of the President’s proposed $900 million in funding for Amtrak in FY 2007, $500 million would be provided for capital costs to assist in the restoration of the Northeast Corridor.

Medicare/Medicaid
The Administration’s FY 2007 budget request for Health and Human Services would increase funding by $58 billion over last year, bringing total budget authority to $698 billion. Discretionary spending, however, would fall by $1.5 billion to $66 billion.
Of the Department’s budget, mandatory spending programs Medicare and Medicaid will consume 84 percent of the budget. Last year, the President proposed trimming Medicaid growth by $45 billion over 10 years. Congress reduced that to a $5 billion cut over five years. The new budget calls for Medicaid savings of $13.5 billion over five years.

Net Medicare costs, which include revenue from premiums, are expected to reach $387 billion in fiscal 2007. The Administration proposes a $36 billion cut in the rate of growth of Medicare over the next five years, by cutting hospital payments, establishing competitive bidding for lab service, and increasing premiums for high income seniors. The New England Council has concerns over the President’s proposal to cut the automatic payment increases that hospitals receive under Medicare. Hospitals in New England, especially the community hospitals, would be significantly impacted.

Health Information Technology (HIT)
Expanded use of health information technology is a priority of the New England Council. The President’s FY 2007 budget includes $169 million to develop national standards and an interoperable infrastructure for electronic medical records, including $116 million for the Office of the National Coordinator for HIT (ONCHIT). ONCHIT’s budget would increase 90 percent if the President’s request is funded. The proposed funding level also includes $50 million for the Agency for Healthcare Research and Quality and $3 million for the Office of the Assistant Secretary for Planning and Evaluation. The Council applauds these efforts to accelerate the development of HIT.

Low Income Home Energy Assistance Program (LIHEAP)
In FY 2006, the President requested $2 billion for LIHEAP. Congress has initially funded the program at $2.162 billion for FY 2006, and a group of New England Senators continue to fight for more funding. In FY 2007, the President proposes $1.78 billion for LIHEAP. Combined with $1 billion in additional FY 2007 funding provided in the recent budget reconciliation package, total FY 2007 funding for LIHEAP is estimated at $2.78 billion. However, several senators continue to work on a proposal that would move the additional $1 billion in LIHEAP funding from FY 2007 to FY 2006. While the Council is encouraged at the prospect of increasing FY 2006 funding, the resulting funding level for FY 2007 would be inadequate to serve the 32 million low-income Americans eligible for energy assistance and would fail to address the problem of rising energy costs for those most in need.

Department of Energy
On February 6, President Bush released a $23.6 billion FY 2007 budget request for the Department of Energy that includes funding for science programs, a new nuclear power initiative and increased funding for programs aimed at encouraging the development of alternative energy sources such as solar, wind, ethanol, biomass and hydrogen. The overall departmental budget request is level with the FY 2006 appropriation for DOE programs.

The new $250 million Global Nuclear Energy Partnerships would expand nuclear power at home and abroad while also investing in new technologies that would address non-proliferation and nuclear waste problems. For example, the initiative promotes a new method of reprocessing spent fuel the Department says would diminish the threat of nuclear proliferation.

The Budget also proposes $4.1 billion for the Energy Department science programs in the Office of Science. The request, which is part of President Bush’s American Competitiveness Initiative, represents a $505 million or 14 percent increase over last year’s request.

Under the Budget proposal, energy efficiency and renewable energy projects would receive $1.2 billion, an overall increase of $2.6 million over last year. State energy program grants would increase by $14 million to $49 million, hydrogen technology would increase by $40 million to $196 million, and biomass refinery research would increase by $59 million to $150 million. Solar energy and wind programs would also receive increases. However, certain programs, such as vehicle and industrial technologies, would see reductions. The Weatherization Assistance Grants, for instance, would be cut by $78.4 million to $164.2 million.

The Administration’s Budget proposes to eliminate two tax breaks included in the Energy Policy Act of 2005. The two cuts included a reduced recovery period for natural gas distribution lines and the ability for energy companies to write off certain geological and geophysical expenditures. The natural gas distribution lines tax break and the geological tax break are estimated to be worth $833 million and $730 million, respectively, during the years 2007-2016.

Yucca Mountain Project
The New England Council has long supported the construction of the Yucca Mountain Nuclear Repository to help expedite the removal of high level radioactive waste and to avoid long-term storage at commercial nuclear power plant sites throughout our region. Last year’s budget included $494 million for the Yucca Mountain Nuclear Repository. For FY 2007, the Administration’s Budget requests $544.5 million toward continued construction of the Repository. The Department of Energy, however, has raised concerns that the costs of building and licensing the project might not be covered by rate payer fees and federal government contributions. Without adequate funding, the project, which is already behind its original completion date of 2010, may be delayed even further. The Council continues to support efforts to get the Yucca Mountain Nuclear Repository functional as soon as possible.

American Competitiveness Initiative
The Administration’s FY 2007 budget requests $5.9 billion for the American Competitiveness Initiative (ACI) to increase investments in research and development, strengthen education, and encourage entrepreneurship and innovation. The amount includes $1.3 billion in new Federal funding and an additional $4.6 billion in R&D tax incentives.  Over ten years, the ACI commits $50 billion to increase funding for research and $86 billion for R&D tax incentives.

The Council is supportive of the ACI. New England is a world leader in areas such as information technology, defense technology, biotechnology and healthcare. These industries drive our regional economy. But the engine for these industries is fueled by bright, enthusiastic individuals who have gained the knowledge and have been taught the skills to become valuable employees at our leading companies and institutions of learning.

Action like the President’s ACI is needed to ensure that America and New England continue to lead the world’s innovators. The quality of teaching in science, technology, engineering and math (STEM) needs to improve and the number of teachers and students majoring in these disciplines needs to significantly increase.

R&D Funding
The President’s budget would increase federal investment in research and development to $137 billion in FY 2007, which is a 1.9 percent increase or $2.6 billion above last year’s funding level. The increase is short of the 2.2% increase needed to keep pace with expected inflation. In inflation-adjusted terms, the total R&D portfolio would decline for the first time since 1996.

Total defense R&D would increase 2.1 percent to $78.4 billion. Department of Defense development would increase by $4.2 billion and NASA development of space vehicles would increase $851 million. Combined, these two increases are more than the overall increase in requested R&D funding.

As part of the President’s American Competitiveness Initiative, funding for key federal agencies that support basic research programs in the physical sciences and engineering would receive substantial budget increases. These agencies include the National Science Foundation (NSF), the Department of Energy's Office of Science (DoE SC), and the Department of Commerce's National Institute of Standards and Technology (NIST). However, the overall federal investment in basic and applied research would decline 3.4 percent to $54.7 billion.

Overall, non-defense research funding would increase 1.7 percent to $58.5 billion. National Science Foundation funding would increase seven percent to $6.0 billion. Funding for the Department of Energy’s Office of Science would increase 14 percent to $3.8 billion. NIST intramural research would increase 18 percent to $383 million, however the President proposes eliminating the NIST’s Advanced Technology Program and would cut the budget of the Manufacturing Extension Partnership by half. The Environmental Protection Agency’s R&D funding would fall 7.2 percent to $557 million. The National Oceanic and Atmospheric Administration (NOAA) would see its R&D budget fall 6.3 percent to $578 million. Also, the Department of Homeland Security, which has received R&D increases over the last several years, would see a decline of 5.6 percent to $1.3 billion in FY 07.

The President’s FY 2007 Budget proposes level funding for NIH at $28.6 billion, after receiving a small cut in FY 06. Proposed increases in some of the institutes are offset by decreases in the budgets for others such as the National Cancer Institute and the National Institute for Biomedical Imaging and Bioengineering. The agency anticipates a decline in the number of research project grants for a third year in a row to 35,805, a two percent decline in the amount of an average research grant, and another decline in the grant success rate to 19 percent.

Asbestos
On February 14, the Senate fell one vote short of the 60 votes needed to waive a budget point of order against asbestos litigation reform legislation that the Senate had been considering. The legislation (S. 852) would establish a trust fund to compensate victims of asbestos-related illnesses in lieu of having asbestos-related cases tried in the court system. The trust fund would be financed by payments from insurers and companies facing asbestos lawsuits.

After the Senate failed to waive the budget point of order, the asbestos bill was pulled from the Senate floor. It is uncertain if or when the full Senate might resume consideration of the bill.

Budget Reconciliation
On February 1, the House once again approved the budget reconciliation package it had originally passed late last year. The legislation saves about $40 billion over five years in mandatory spending programs such as Medicaid, Medicare, student loans, and welfare. The House had to vote a second time on the bill because the Senate made minor changes to it before passing it on December 22 of last year. While last year’s House vote on the bill was close, the re-vote was even closer (216-214), as a handful of members who had supported the bill in December, including Rep. Rob Simmons (R-CT), opposed it this time after heavy lobbying by opponents of the bill.

Tax Reconciliation
Last week, the Senate named conferees for the tax reconciliation package that has passed the House and Senate in different forms. Previously, the House had named its conferees. Member negotiations on a conference report are not expected to get underway in earnest until after Congress returns from its Presidents’ Day recess next week. The two versions of the bill before the conference committee differ significantly. The House bill contains a two-year extension of the dividend and capital gains tax cuts, which the Council has supported, while the Senate bill does not. The Senate bill contains a one year fix for the Alternative Minimum Tax (AMT), while the House has passed a fix outside of the reconciliation process, as there is a limit on the amount of tax cuts that are protected under the reconciliation bill, which is not subject to a filibuster in the Senate. Also contained in both the House and Senate versions of the bill is an extension and expansion of the Research and Development Tax Credit, a priority of the New England Council.

Energy & Environment
LIHEAP
On February 10, Senators Snowe (R-ME) and Collins (R-ME) along with co-sponsors Senators Jeffords (I-VT), Sununu (R-NH), Leahy (D-VT), Kerry (D-MA), and nine others from the Northeast-Midwest region introduced a bill that would make available in FY 2006 an additional $250 million for the LIHEAP regular program and an additional $750 million for the emergency contingency fund for a total of $1 billion in additional funds for LIHEAP. These additional LIHEAP funds are from the recently passed Budget Reconciliation legislation which had originally allocated the $1 billion for use in FY 2007. The bill has been placed on the Senate Calendar and Senate Majority Leader Bill Frist (R-TN) has indicated he hopes to pass the bill by unanimous consent.
A companion measure has been introduced in the House by Reps. LaTourette (R-OH) and Meehan (D-MA).

Climate Change
On February 2, Senate Energy and Natural Resources Chairman Pete Domenici (R-NM) and Ranking Member Jeff Bingaman (D-NM) released a 14 page climate change white paper as the first step in fulfilling a promise made last year during the energy bill debate to revisit climate change legislation. In order to draft a mandatory bipartisan greenhouse gas reduction plan this year, many difficult decisions need to be made, including whether to auction greenhouse gas emission credits or allocate some credits for free to mitigate costs for affected industries, and whether to implement a plan that restricts emissions across the nation’s economic sector or adopt an approach that is sector-specific. In determining which entities to regulate, the white paper discusses whether regulation should be based on a “downstream” emissions approach or “upstream” fossil fuel production approach.

The committee will be taking comments on the white paper until March 13th and will host a public conference on April 4th.

Postal Reform
On February 9, the Senate passed sweeping postal overhaul legislation by unanimous consent. A manager’s amendment included revised language by Senator Ted Stevens (R-AK) that would give the Postal Service the option of using smaller planes so that rural communities can continue to get mail service. The amendment also included language calling for the Postal Service to solicit broader public comment before consolidating mail facilities and a provision that would revise term limit and qualifications set for members of the Postal Service’s board of governors. The measure heading to conference now faces opposition to language that would transfer payment of the Postal Service’s military pensions back to the Treasury and give the agency access to money slated for an escrow account. The Administration has threatened to veto the bill if the language is ultimately passed by both houses of Congress.

Supreme Court
On January 31, Samuel Alito was sworn in as the newest Supreme Court justice, replacing the retiring Justice Sandra Day O’Connor. Earlier that day, the Senate confirmed Alito by a vote of 58-42, the second most partisan confirmation vote in the high court’s history. Four Democrats joined all Republicans but Sen. Lincoln Chafee (R-RI) in voting to confirm Justice Alito.

Administration
On January 31, Ben Bernanke, former chairman of the White House Council of Economic Advisers, was approved by the Senate to succeed Alan Greenspan as the Chairman of the Federal Reserve. He was officially sworn in to his new position the next day. Bernanke previously served as a Fed governor and as an economics professor at Princeton and at the Stanford Graduate School of Business. He holds an economics degree from Harvard and a Ph.D. in economics from MIT.

On January 30, the White House announced the intended successor to Bernanke as Chairman of the Council of Economic Advisers. The President nominated Edward Lazear, a Stanford University economist, to the post. Lazear served on the President’s advisory commission on tax reform in 2005. He is the founding editor of the Journal of Labor Economics and he received his doctorate in economics at Harvard. Previous to his work at Stanford, Lazear taught at Brown University.

The Economy
On January 30, the Commerce Department announced that the savings rate was minus 0.5 percent in 2005. This marks the lowest annual savings rate since the Great Depression, when the rate reached minus 1.5 percent in 1933. A negative savings rate means that Americans spent all of their disposable income and then dipped into their past savings to finance their purchases. Many economists point to the housing boom as a cause for the low savings rate. With many Americans feeling more wealthy as the value of their homes skyrocketed, they were more likely to increase their spending.

The Commerce Department recently reported that the U.S. trade deficit set a record of $725.8 billion last year, an increase of $108.2 billion over the 2004 deficit of $617.6 billion. This was the fourth consecutive year that the United States has set a new trade deficit record. New individual trade deficit records were also set with China, Japan, Europe, Mexico, Canada, and OPEC nations. Imports reached $2 trillion in 2004 and U.S. exports reached $1.27 trillion.