U.S. Federal Government Shutdown: Daily Update #7

by Manatt, Phelps & Phillips, LLP

The Elevator Speech Overview
Wednesday is day nine of the Government Shutdown. Eight days until the Treasury says the U.S. will hit its debt ceiling. Democratic and Republican House leaders met today in a private meeting and President Obama announced he will be holding a series of meetings with Congress at the White House this week. The President met with House Democrats on Wednesday for the first of the series. However, Republicans announced they would willing to send 18 Members to meet with the President.

U.S. House of Representatives
On Wednesday, Minority Leader Nancy Pelosi (D-CA) and Minority Whip Steny Hoyer (D-MD) met with Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) in a private meeting. No negotiations occurred. Neither side appeared to change stance based upon the meeting.

Meanwhile, a memo from Moody’s Investors Service, an investment rating agency, was circulating among House Republicans that downplayed the consequences of Congress failing to pass a debt ceiling increase prior to the October 17 deadline. According to the memo, government expenditures will be limited to the amount of incoming revenue and it will not result in a technical default on debt. Rather, the memo maintains, a failure to increase the debt authority would mean that the government would need to prioritize WHICH obligations it must pay first and which obligations it would need to forgo, at least in the short term, until a solution were found OR the government were compelled to pay the obligations by the courts. The underlying assumption of the Moody’s report is that the Treasury would elect to pay bond debt and therefore not “default” on those debts (assuming there would be enough cash flow into the government to pay these maturing bond obligations). But, instead of failing to pay bonds, the Treasury would instead choose to forgo making other obligated payments like Social Security, Medicare, Medicaid, etc. This theory would be heavily tested around the First of November when the federal government must make nearly $60 billion in payments within a couple of days as Social Security and other payments are typically sent out.

Of course, the Moody’s memo assumes that at some point revenues will increase enough to pay both the past obligations that had been foregone as well as current obligations coming due. This would be the equivalent of the federal government deciding that it will pay the mortgage first, but not pay the phone bill or the car insurance and hope that the income next month is enough to cover everything, including last month’s missed payments.

Several Republicans, such as Rep. King from Iowa, have also become very vocal in their public statements that they do not believe a default of U.S. Treasury Bonds would be as bad as many are claiming; other members of the GOP remain concerned.

House Democrats began sending out letters to the twenty-two Republicans that have publicly expressed support for a clean continuing resolution (CR), pressing them to sign the discharge petition that would bring the clean CR to the floor for a vote. Many believe that if Speaker John Boehner allowed a vote to be held, enough Republicans will join with Democrats to pass the measure and reopen the government. Speaker Boehner continues to assert that the clean CR does not have sufficient support to pass. On Wednesday, the House also voted on and passed another targeted CR, this time focused on the Federal Aviation Administration (FAA), and a measure that would ensure that the Pentagon is able to pay death gratuities and survivor benefits to the families of fallen military members. The Senate is expected to continue its boycott of the House’s piecemeal funding approach and ignore both measures.

During Wednesday’s private Republican Study Committee meeting, House Budget Chairman Paul Ryan (R-WI) put forth a proposal that would provide for a six-week debt limit increase but require both the House and the Senate to agree on undertaking both tax and entitlement reform. The plan would require Congress to pass legislation to reform both within the six weeks, as well as agree to a long-term increase to the debt ceiling. Additionally, it would require dollar-for-dollar budget cuts with the initial $118 billion debt limit increase. The plan would also have an enforcing mechanism, possibly as was used in the Budget Control Act that resulted in the budget cuts known as sequestration. The release of Chairman Ryan’s proposal comes in advance of House Republicans meeting with President Obama, which is scheduled for Thursday. President Obama announced in a press conference on Tuesday that he is open to a clean short-term debt ceiling increase. It is unclear if the Ryan proposal passes the President’s definition of a “clean” increase because it does contain some obligations.

U.S. Senate
With the introduction of Senate Majority Leader Harry Reid’s (D-NV) clean debt ceiling bill on Tuesday, attention has turned to the probability of Democrats being able to recruit the six Republican votes they would need to overcome a filibuster and pass the bill. The odds are low so far, as only one Republican, Senator Mark Kirk (R-IL), publicly saying he would vote for it while other Republicans appear unified in opposing the bill. The situation has spurred yet another discussion of the “nuclear option,” a highly controversial action in which Majority Leader Reid would eliminate the option of a filibuster. He would accomplish this through the use of an obscure procedural work-around that would only require 51 votes to change the rules, rather than the usual threshold of 67 votes to change the rules as required by regular order. Although Majority Leader Reid has threatened to use the nuclear option to overcome Republican opposition twice already this year, it was always averted through bipartisan compromise. The filibuster is a powerful tool of the minority party to halt legislation and thus disrupt the majority party’s agenda; the power of the filibuster is an important differentiator of the Senate and the House, where the majority party rules. Many Senators and observers worry about the precedent this would set for future Senates and legislative governance in general.

Senator Susan Collins (R-ME), a moderate Republican, sparked some hope for bipartisan compromise on Wednesday as she began circulating her own proposal to end the government shutdown. Her proposal includes a repeal of the medical device tax and would offer federal agencies more flexibility in dealing with the budget cuts imposed by the sequester. It does not yet include a way to deal with the debt ceiling but Democratic Senators have indicated that they would like to see a debt ceiling component added. At least two other key Republican Senators have endorsed her plan and Democrats have hinted that they might be willing to negotiate over the proposal. As with Majority Leader Reid’s bill on the debt ceiling, however, her proposal has a tough road ahead.

The White House
President Obama announced Wednesday that he would be holding a series of meetings at the White House this week with Members of Congress. Scheduled for Wednesday afternoon, the meeting with House Democrats was the first to take place. DC Delegate Eleanor Holmes Norton (D-DC) expressed displeasure over the shutdown’s impact on the District of Colombia. On Thursday, the President’s second meeting of the series is to be held with House Republicans. In response to the President’s invitation, the Republicans announced they will send “a smaller group of negotiators,” rather than the whole caucus. The group of eighteen will include elected members of leadership and key committee chairman. The White House expressed disappointment that the entire conference of House Republicans will not attend.

The White House, however, continued with other government business and President Obama announced the nomination of Federal Reserve Board Vice Chairwoman Janet Yellen as his choice to replace retiring Chairman Ben Bernanke. Yellen’s nomination was greeted favorably by Wall Street with two of the three indices yielding a small gain for the day. Yellen was the president’s second choice for the post, after former U.S. Treasury Secretary and former Harvard President Lawrence Summers withdrew his name fro consideration. Summers had been strongly opposed by Senators from both parties over strong concerns over temperament.

Agency Spotlight: Department of Homeland Security
The Department of Homeland Security (DHS) is responsible for issues spanning aviation and border security, cybersecurity, chemical facility inspectors, and emergency response. Partially shut down due to the lapse in appropriations, the DHS has been able to maintain roughly 86% of its federal employees (known in the DHS as “exempted” employees rather than “excepted” as at other federal agencies) whose work is essential to the safety of life, property or national security. DHS programs that will be affected by the shutdown include: all of the Federal Emergency Management Agency’s (FEMA) non-disaster related grant programs; the E-Verify system; and the issuance or renewal of seaman documentation and licensing. DHS will also not be able to enter into any new contracts while the hiatus in funding continues. For selected components, the percentage of personnel reporting to work during the shutdown is as follows: Transportation Security Administration (TSA) – 93%; FEMA – 78%; U.S. Coast Guard (USCG) – 88%; Customs Border Protection (CBP) – 88%; Immigration and Customs Enforcement (ICE) – 80%; U.S. Citizen and Immigration Services (USCIS) – 97%; and Secret Service - 92%.

For more information on specific activities, please see the DHS Contingency Plan:

Public Opinion
On a lighter note, results from a Public Policy Polling (PPP) poll show that Congress has a ways to go before it gets back in Americans’ good graces. PPP was recognized as one of the most accurate polling organizations throughout the 2012 elections. Leading up to the Halloween holiday, Witches and Zombies appear to have higher approval ratings than the United States Congress.

  • What do you have a higher opinion of: Congress or Wall Street?
    • 15% Congress
    • 46% Wall Street
  • What do you have a higher opinion of: Congress or the IRS?
    • 33% Congress
    • 42% IRS
  • What do you have a higher opinion of: Congress or witches?
    • 32% Congress
    • 46% Witches
  • What do you have a higher opinion of: Congress or jury duty?
    • 18% Congress
    • 73% Jury duty
  • What do you have a higher opinion of: Congress or Lindsey Lohan?
    • 40% Congress
    • 36% Lindsey Lohan
  • Other things that participants had a higher opinion of than Congress:
    • Hemorroids, Zombies, Potholes, and the DMV.
  • In good news for Members of Congress, participants preferred Congress to:
    • Ebola virus, Heroin, Syria, Honey Boo Boo, and Miley Cyrus.

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Manatt, Phelps & Phillips, LLP

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