2008 Congressional Outlook

January 14, 2008

The coming year will be an unusual one politically. Not only are there close divisions in the partisan make-up of the House and Senate, but for the first time since 1952 the presidential campaign will not include a sitting President or Vice President running for office.

Control of every level of governmental power is at stake and a choice between divided government and one-party control hangs in the balance.

The unfolding campaign themes and voter reactions will no doubt affect the second session of the 110th Congress. In general, we think it is unlikely that the presidential campaign season will mean less activity in Congress. On the contrary, we think 2008 will be a year of intense activity on a host of fronts as Democratic leaders make good on their commitment to prove that this is a “do something” Congress. The following outlines key areas that should be considered as you develop your 2008 federal strategy.

LEADERSHIP

To solidify their 2006 election gains, the Democratic Congressional leadership needs to make the case to voters that they are agents of change, that Republicans in Congress have obstructed the completion of popular legislation in critical areas, and that the way to fix this problem is to send more Democrats to both bodies in the coming election. In order to draw these distinctions between the parties, the leadership will likely continue to force tough votes in the Congress and challenge the president to veto legislation. For example, look for Congress to counter President Bush’s economic stimulus package message, scheduled for late January, with a more robust package of their own.

Now that the year-end blitz has ended, the Democratic Leadership in both Houses is actively developing an agenda for the next session of Congress. The early focus this session will be on the economy; House and Senate leadership will coordinate their message and develop policy solutions to respond to an economy teetering on the brink of recession.

In the past, the House Democratic leadership, under the firm control of Speaker Nancy Pelosi, has been inclined to advance an agenda that was much more aggressive than what Senate Democrats believed they could deliver given their slim majority and 60 vote requirement on most legislation. That tension will continue between the Democratic Leadership of the two Houses in the coming session.

PRESIDENTIAL ELECTION FACTOR

The nominees for President of the United States will likely be determined by early March. Both parties’ congressional delegations will try to highlight their nominees’ plans for the future by putting on the legislative calendar or by offering as amendments that further define the issues of the presidential campaigns.

Attempts will be made on both sides of the aisle to focus on issues that will energize each party’s base, while looking for opportunities to lure independents. For the Republicans that will mean a continued focus on restricting appropriations spending and holding the line against tax increases. The Democrats will likely focus on consumer protection issues in labor, health, housing, consumer credit, and environmental areas.

Overall, the presidential election, and the Democratic and Republican nominees in particular, will play a major role in the pace and content of the Hill’s legislative agenda. There are two schools of thought here. The first is the conventional “difficult to get anything done in a presidential election year,” where only the basic necessities of legislative life get done. This conventional view might unfold but we are more inclined to believe in another scenario: one driven by mutual survival, where Democrats fight the “do nothing” Congress label and Republicans, for their part, guard against an anti-Bush pendulum swing. This environment would provide the opportunity to make incremental achievement on some of the country’s major issues – health, energy, the economy, environment and taxes. Again, these would be incremental achievements but something on which individual legislators could hang their hats. At a minimum, even if Republicans behave differently, Democrats will generate much legislative activity, if not great legislative victories, trying to pass a range of bills affecting everything from consumer lending and credit to climate change.

ISSUES

The main focus of 2008 will be on domestic economic issues. There are several critical decisions which will be made by the Democratic Leadership in the House and in the Senate which will drive the calendar for the year. If they decide that they want to try and finish all of the appropriations bills, then that will severely reduce the time available for other legislative action, especially in the Senate. A second key decision is whether they want to pursue a reconciliation bill as a part of their budget proposal this year. The follow-on to that decision is what issues to address in a reconciliation bill. For example, would such a bill include an economic stimulus package, Medicare/Doctor fix, extenders, AMT, housing reform (FHA and GSE)? Some of the restrictions on what legislative changes can be made in a reconciliation bill may apply here. While reconciliation allows work to be done under expedited rules, it also takes a significant amount of time in the committees affected by the reconciliation instructions. It is important to note that if reconciliation is used for partisan purposes it can still be vetoed and needs a two-thirds vote to override. So reconciliation is not a free pass for the majority.

The first weeks of the new session will be dominated by two major issues that spilled over into 2008: the Farm bill and FISA. If reconciliation is not used by the majority, there are some other issues which must be addressed in the first few months of 2008: Medicare/Doctor fix, supplemental funding for Iraq and the tax extenders. Congress will also have to “patch” the AMT again this year. With these “big ticket” items, floor time for non-essential items will be limited.

Appropriations and Budget

There may be an early political fight over earmarks in appropriations bills. The Omnibus bill that passed in December put most of the earmarks in the report language, not in the legislative language of the bill. The White House has been told that report language is not law and does not have to be implemented. This leaves the president with at least two options: he can send to Congress a reconciliation bill to try and eliminate some of the earmarks by congressional action or he could by executive order simply rule that the money for the earmarks in report language does not have to be spent. Either action would create a fight with the Congress. However, if the president acts by executive order to stop spending on earmarks, it will require the Congress to spend even more time on the FY ’09 appropriations bills in order to include earmarks in the legislative language.

President Bush will deliver his State of the Union address on Monday, January 28, 2008. His budget will be delivered to Congress on February 4, 2008. Due to the early Easter holiday, it may be difficult for Congress to consider the budget on the House and Senate floors until after the Easter recess. If Democratic Party leaders decide to pursue a reconciliation bill this year, it will put further pressure on the calendar. Reconciliation could be used to address Medicare/Doctor fix and issues such as the AMT tax patch, extenders and tax proposals to stimulate the economy if there is a continued economic slowdown.

The Democratic Leadership will make the budget and spending priorities a major issue in 2008 and the consideration and passage of a budget resolution will take on added importance. There is a lot of frustration within the Democratic caucus that so many important fiscal issues were pushed off to the end of the session and that Congress was once again forced to pass an omnibus appropriations bill to fund the government. There will be an effort this coming year to avoid a similar ending, and the leadership will devote more time and resources to highlight the different priorities of the two parties.

The consideration of individual appropriations bills will be given a higher priority to avoid the need to enact another omnibus appropriations bill. Democrats realized they lost all leverage this year in negotiations over funding with the White House. They were not able to take votes on the Senate floor or force the president to veto legislation because funding issues in an omnibus bill are negotiated privately and then passed overwhelmingly in the end. There will be an effort to expedite consideration of appropriations bills earlier in the Congress and present them to the president.

It is also increasingly likely that the Congress will use reconciliation legislation this year to do as much business as they can on the economic, tax and direct spending front to expedite consideration in both Houses. Reconciliation is a fast track process in the Senate and may result in less consultation with Republican members of the Congress since it allows Congress to complete action on difficult fiscal issues by simple majority. Senator Baucus was reluctant to use reconciliation this year because he favored a more inclusive process, but we think that may change after the chaotic ending to this session and the difficulty they had passing tax legislation.

Taxes

The tax extenders expired in 2007 and need to be extended retroactively at some point in 2008. There is precedent for extending these provisions retroactively. The question is whether the extenders will drive a small train or be a part of a larger one.

The “X” factor early in the year remains the struggling economy weighed down by a housing crisis that many believe has not yet bottomed out. The behind-the-scenes discussions on Capitol Hill regarding how Congress should respond are just beginning. There is likely to be intense pressure on the Democratic leadership by their rank and file, the Republicans and, ultimately, the media to develop an economic stimulus proposal that could include tax provisions. If historical tendencies hold, the Democrats would likely focus on tax relief for lower-and-middle-income taxpayers while the Republicans would push business tax incentives aimed at generating jobs. With the Democrats holding such a narrow majority in the Senate, any meaningful economic stimulus package would likely necessitate a cooperative bipartisan environment in an election year. This would be a challenge for sure, but one we believe would benefit both parties heading into a volatile presidential election.

“Pay Fors” will continue to affect corporate business as Democratic lawmakers continue to seek ways to pay programs which they see as important in an election cycle.

The Agriculture bill, currently in conference, remains a potential vehicle for miscellaneous tax provisions, although there is understandable reluctance to add weight to a bill that is already under veto threat.

Health Care

Health care will continue to be a top domestic issue in 2008, with the presidential campaigns setting the stage for potentially early action by a new president in 2009. This year, Congress will focus attention on a range of health care issues, including various Medicare reimbursement and oversight issues that are driven by the expiring physician “patch.” Children’s health care, mental health parity and health information technology will also be priority issues.

In February, the Administration will submit its FY 2009 budget to the Congress. It is widely expected to include modest health care proposals aimed at increasing health insurance coverage and variations of several Medicare reimbursement proposals from last year’s FY 2008 budget proposal. In addition, the Administration is expected to include proposals designed to reduce general revenues as a share of Medicare costs (referred to as the “45 percent trigger requirement”). While these proposals must be considered by both Houses of Congress, they do not have to be approved. This requirement to consider Medicare proposals is significant because it creates a possible vehicle for additional Medicare proposals that could be considered germane to the underlying legislation and then subsequently added.

Key Committee Chairs, such as Senate Finance Committee Chairman Max Baucus, have mentioned Medicare and health care reform as a top agenda item for 2008. Concerns among certain policymakers – particularly House Democrats – that 2007 did not yield more comprehensive health care legislation will drive an aggressive schedule for both committee and floor debates on key health care issues. This is an area where we do not anticipate major breakthroughs but see possibilities for incremental advancement. Congressional action on the budget resolution will likely define the parameters and set the stage for legislation in 2008.

In an attempt to communicate a unified message, both parties will continue to develop health care principles that will guide and define messaging and action throughout the year and into 2009. Entitlement spending, health care costs and quality, access and tax policy issues are likely to dominate health care policy discussions, which will play out in the context of the presidential campaigns and in Congressional efforts to address the following:

1) SCHIP. The 2007 debate over comprehensive changes to the State Children’s Health Insurance Program (SCHIP) program resulted in a scaled-back reauthorization in part due to the partisan, polarizing nature of health care reform issues. House Democrats with the support of moderate Republicans have promised to accelerate their efforts this year and build on previous SCHIP reforms so that additional individuals are brought into the SCHIP program.

2) Medicare Reimbursement. In December 2007, the Congress passed and the president signed a $5.3 billion Medicare package that included a 6-month “patch” for physicians who were scheduled to receive a reduction in Medicare reimbursement. Congressional leaders have stated a strong desire to develop a broader solution to the physician reimbursement issue and in addition to examine other Medicare reimbursement issues. Beginning in February, committees of jurisdiction will examine the president’s FY 2009 budget as it pertains to Medicare and hold hearings on its proposals and alternatives with the goal of achieving support for a Medicare package that either extends or reforms the physician payment system beyond July 2008 and also includes various Member priority items for passage and presidential signature. While such a comprehensive package did not succeed in 2007, Congressional leaders are currently debating whether to include budget reconciliation instructions that would provide procedurally stronger protections for floor debate and subsequent passage.

Climate Change/Energy

While the House has barely begun its work on climate change legislation, the Senate Environment and Public Works Committee approved a comprehensive, bipartisan bill in December, expected to be on the Senate floor shortly after the Senate returns. Sponsored by Sens. Joe Lieberman and John Warner, the legislation would cap greenhouse-gas emissions, provide emission allowances to polluters, and set up government auctions for a small portion of the allowances.

While the Energy bill from last year was pared well back before passage, the Democratically-controlled Congress scored a significant legislative accomplishment with enactment of higher CAFÉ standards geared toward reducing car emissions. We expect the Speaker to continue to push hard on climate change, including a renewed effort toward enacting a renewable portfolio standard (RPS) and making global climate change her "flagship issue.”

Chairman Dingell is taking a methodical approach and will continue his efforts to develop comprehensive legislation. The Subcommittee on Energy and Air Quality will hold a hearing on Thursday, January 17, to examine the Administration’s view of the United Nations Climate Change conference held in Bali, Indonesia from December 3-14th, 2007. At that meeting, participants adopted the “Bali Action Plan” which will guide international climate change negotiations over the next two years as the United Nations attempts to address climate change after the expiration of the Kyoto protocol.

Trade

The expectation is that the White House will push hard to pass the Columbian free trade agreement early in the year. The closer the election nears, the more difficult passage of Columbia, Korea, and Panama trade agreements will become. Trade legislation is an issue that could rally the Democratic base, and the concern will be that even if this issue has a minimal effect on turnout it could be enough to tip close elections.

Efforts to extend trade promotion authority have stalled and probably will not be revived unless the United States and its trading partners reach an agreement on WTO which could add some momentum to considering implementing legislation by the Congress. Even if this happens, there seems to be a growing consensus that this is something that should be negotiated and implemented by the next President because of its importance to our domestic economy.

Banking/ Housing/ Subprime

The Banking committee is expected to have a busy 2008 as Chairman Dodd shifts his attention to the committee after his unsuccessful presidential bid. He has stated that he will concentrate on putting together a consumer driven Credit Card Reform bill which seeks to regulate credit card practices. Chairman Frank has also expressed interest in this field and subcommittee Chairwoman Maloney has been a long-time advocate for regulation.

The housing subprime loan issue continues to boil over. Bills introduced by Senate Banking Committee Chairman Dodd and House Financial Services Chairman Frank are aimed at restricting aggressive lending practices in the market. There is a good chance of reform of the Federal Housing Administration (FHA) loan program as well. The White House has been committed to meaningful FHA reform. Both the House and Senate have passed their own version of FHA reform and it is expected that lawmakers will come to agreement on a consensus bill in the next few months. Action can also be expected on the subprime issue by attempts to liberalize government sponsored enterprise (GSE) loan portfolios although there is still strong disagreement between Democrats and Republicans over just how the oversight rules should be changed. Consumer credit and lending standards will remain a focus.

Corporate Governance/Pensions

Both Government Oversight and Financial Services have had hearings on executive compensation and the role of consultants in executive compensation. There is a possibility that legislation limiting conflicts of interest in consultancy could pass.

Chairman Miller has been working the last few months on pension legislation which would clarify fees on 401K’s and add more transparency. In addition it would make it easier for many workers to sign up and eliminate the extended vesting period in most circumstances. This legislation will be marked up by the Committee on Education and Labor in early 2008. As a populist issue in an election year, it will produce significant debate and one that should be watched carefully.

Patent Reform

Recently there has been much chatter from Leadership about a deal being reached to pass Patent Reform. The suggested timeline indicates an aggressive approach with possible floor time in February or March.

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