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State & Local News Vol. 20, No. 4, Summer 1997 WASHINGTON'S LABYRINTHINE WAYSOtto J. Hetzel is an professor of law emeritus at Wayne State University and practices law in Washington, D.C. By Otto J. HetzelFor the Budget Agreement, the Devil's in the Details. While the President and the congressional leadership have agreed upon overall numbers for a "Budget Agreement," supposed to lead to a balanced budget by 2002, the details have not been worked out. There is a good potential for the "deal" to break down. So much political capital has been expended by the leadership on both sides, it is still likely that the "Agreement" will hold at least through this current appropriations season. Efforts to breach it have been occurring daily as specifics are confronted. The details should come to the President before the start of the new fiscal year on October 1 in two reconciliation measures, one containing program amounts, the other tax reductions. Defections are occurring on both sides. Minority Leader Richard Gephardt (D Mo.) is already distancing himself from the Vice-President by attacking the agreement that Gore supports. According to Citizens for Tax Justice, the top-earning 1 percent of taxpayers would be the beneficiaries of more than two-thirds of the anticipated tax cuts under the most likely outcomes. They also point out that the full impact of the tax cuts will not be felt until after 2002 when they could "explode the deficit." The Basic Elements of the Budget Agreement. Due to Congressional Budget Office calculations that suddenly found $240 billion dollars extra in estimated revenues for this five-year period, each side was able to get almost everything it wanted without too much pain. The overall reduction is to be $320 billion, less $85 billion in tax cuts and additional funding of $29 billion for programs favored by the President. Republicans wanted an even larger tax cut, so the "deal" contemplates further tax reductions amounting to $250 billion over a ten-year period. These amounts are being justified in part by savings of over $115 billion through cutting income to medicare providers, perceived as already getting too much money. Try asking your doctors, however, how they feel about their own economic prognosis! For his part, the President is to get middle-class tax reductions related to higher education tuition and a $500 per child tax credit for families with young children. What amounts and the actual form tax reductions will finally take has not yet been determined, but the battle is underway in the House Ways and Means Committee. Republicans are unable to force greater reductions because they only have an eleven vote margin in the House; "Blue Dog" conservative Democrats will not support tax cuts until spending is reduced, so they cannot be relied upon to offset Republican defections on particular items. Capital gains reductions to 20 from 28 percent and higher estate tax thresholds are likely. Whether the Low Income Housing Tax Credit, currently one of the few tools for financing low-income housing development, will survive is problematical. Chair Bill Archer (R Tex.) would favor its repeal. The five-year Budget Agreement was to retain the credit and also fund some $5 billion of expiring section 8 rental contracts. The First Potential Cracks Appear in the Budget Deal. The White House understood the Agreement would restore benefits to some legal aliens whose benefits eligibility were removed by last year's welfare changes. The Budget Agreement states that Congress would "restore Supplemental Security Income and Medicaid eligibility for all disabled legal immigrants who are or become disabled and who entered the United States prior to Aug. 23, 1996." The House Welfare Committee, however, has allowed only immigrants receiving disability benefits last August to re-obtain them, not those who become disabled in the future. The Budget Agreement will not restore food stamp eligibility for legal aliens, ending this August. End-Game D.C. Style: Rider for Automatic Continuing Resolution to Avoid Closing Government Down in the Fall (and to Undercut the President's Budget Items) Delays Emergency Appropriations for Flood Relief. Anticipating that resolving budget issues for fiscal year 1998 funds could again result in gridlock with the President, despite the Budget Agreement, Republicans attempted to curtail Clinton's leverage to implement his new program initiatives in the five-year Agreement. They attached a rider to the Emergency Appropriations bill (that includes funds for flood victims and U.S. troops in Bosnia) to limit the President's ability to obtain funding for his new program initiatives in education, etc., which were to come into effect this fall. On its face the provision appears innocuous: starting October 1, with the new fiscal year, in the event of an appropriations impasse federal agencies could spend at their prior year budget levels, ostensibly to ensure that there would be no shutdown of government as occurred before. Republicans tried to use the Emergency Funding bill thinking the President would not veto disaster relief, but they were wrong; he vetoed and returned it nineteen minutes after it arrived, a record. The rider would have prevented the President closing down government services because Republicans failed to provide adequate appropriations. The extra funding he achieved over months of negotiations still requires annual appropriations approvals. The President refused to reduce his leverage in obtaining the agreed to appropriations. Calling the attempt "bad policy and bad politics," Republican moderates overrode their leadership and deleted the rider, after which Clinton immediately signed the bill. Republicans Attempt to Prevent Use of Statistical Estimates in the 2000 Census. Also inserted in the Emergency Appropriations measure and ultimately withdrawn was another rider preventing the Census Bureau from using statistical techniques to compensate for anticipated undercounts of inner-city minorities in the upcoming year 2000 Census. These numbers will affect allocation of congressional seats to various states, potentially changing existing congressional districts and therefore party strengths in Congress. Republicans estimate this would lose them as many as twenty-four seats, more than twice their current margin. Apparently they didn't like the conclusion reached by the National Academy of Sciences, after studying the issue at Congress's request, that recommended such statistical approaches to avoid the undercounts found in the the 1980 and 1990 censuses. Tapping Housing Fund Contracts for Flood Relief. Ironically, funds for the Emergency Supplemental bill's allocation for emergency relief to flooded areas came from previously obligated funds being held in the Treasury as a six-month reserve for section 8 housing programs, to be used for increased costs. When Congress discovered them, it quickly moved to transfer them to pay for flood relief to be provided by the Federal Emergency Management Agency. But what will happen if housing costs increase? Vitiating housing contracts deprives housing providers of section 8 funding. Is this robbing Peter to pay Paul? Funding Contemplated Under the Budget Agreement for Further Empowerment Zones. Among the Administration's program initiatives in the Budget Agreement of interest to local governments is a modest expansion of the Empowerment Zone/Enterprise Communities (EZ/EC) program. The Clinton Administration budget includes $100 million for a new competitive round of EZ designations. Members of Congress whose communities were not successful in the first round should be most interested. How the funds will be apportioned is not fully clear yet, but with thirty to be selected, this would average $3.3 million each, not the previous $100 million per designee. This would appear to make the program more akin to the $3 million in funding received by each EC in the first round, but with the added value of special access to federal funds and the benefits of going through the planning process that even disappointed applicants found useful the first time around. Additional funds are also to be provided for an urban Brownfields Redevelopment Initiative to encourage use of former toxic sites, as well as for support for employment opportunities for long-term welfare recipients. Capital Gains Tax Cut May Be Illusory for Many Real Property Investors. The capital gains tax cut being contemplated in the House Ways and Means Committee would reduce the levy from 28 to 19.8 percent. In an effort to raise some $5 to $10 billion to implement the Budget Agreement, however, one commentator reported that provisions under consideration would apply the reduced levels, in the case of real estate, to only that portion of the gain on sale that represents an actual increase in the price or market value of the property after its acquisition. The current 28 percent rate would still be applied to gains resulting from depreciation deductions. Depreciation deductions reduce the "basis" of the investment and thus increase profits on sale and resulting tax liability to the extent of depreciation taken. Owners of stocks and bonds, however, would pay the lower rate on their full gain, creating an investment differential that could discourage investment in housing. The rationale for the two tax levels for real estate was to avoid enticing owners to sell as soon as lower rates applied, although saving tax revenues really provides the motive. Since most real estate has experience little increase in value, the lower tax rate would not cover depreciation taken during the holding period. An unintended effect of discouraging sales, moreover, could be increased deterioration of urban properties because funds for delayed maintenance and improvements are generally available for such purposes primarily when properties are sold. Federal District Court Invalidates Presidential Item Veto. Perhaps Congress will be rescued from its rash decision last year to cede the President line-item veto authority over individual appropriation and tax items furthering his relative power over Congress. A federal district court invalidated the legislation, and the Supreme Court heard expedited argument in May. The Court must first decide whether plaintiffs in that action, five members of Congress, had the requisite standing to challenge the Act and whether the case was "ripe," in that no reductions had yet occurred. Since the Act included explicit authority for members to challenge it in court, it would appear that if that part of the law were held invalid, the entire Act would fall based on the obvious intent of Congress to enact it only if there was an opportunity for immediate judicial review. The grant of this extraordinary authority was challenged on separation of power grounds, involving the propriety of delegation of budget authority by Congress to the President. As argued to the Court, giving that power to the President allows him to "make," not only execute, the law. The President can exercise this power simply by sending a message of his decision on specific items within five days after he signs the bill. This has been characterized as an unprecedented and unconstitutional delegation of power to the President to "repeal" a law after signing it. The excuse for delegating this power, that Congress seems unable to exercise the necessary discipline itself to reduce budget items, was attacked as insufficient to justify Congress's abandonment of its constitutional responsibilities. Minimum Wage Requirements Could Raise Costs to States of Funding Employment Required Under the Welfare Law. An issue with significant implications for states and local governments is whether employment for welfare recipients needed to meet federal welfare requirements in order to maintain current levels of welfare funds to states must comply with minimum wage levels, now $4.75 and rising to $5.15 in September. Poverty advocates and unions have objected, the latter to avoid lower wage levels undercutting members' jobs. States have also been lobbying to get the President to back off his position that minimum wage levels must apply. The House Welfare Committee has indicated it will undercut the requirement by allowing states to count the value of several federal benefits in order to meet minimum wage requirements, such as food stamps, welfare, Medicaid, child care, and housing subsidies At least the 10,000 welfare recipients the President has asked federal government agencies to employ, albeit at lower paid, temporary jobs, to meet welfare employment goals will get minimum wages. Sweeping Overhaul of Public Housing Passed in House and Senate, But Versions Differ. H.R. 2 in the House, the Housing Opportunity and Community Responsibility Act of 1997, and S. 462, the Senate's version, keep alive last year's public housing reform movement that failed because differences in House and Senate versions could not be resolved. It appears that some form of public housing reform will result before year-end. The Clinton Administration supports major changes in public housing, but not all of these proposed in Congress, and has inserted its own version, H.R. 1447, which incorporates many but not all provisions in the pending congressional bills. HUD, however, has drawn a line in the sand on one critical issue: the extent to which public housing will still be focused on poorer families. The House bill would allow households with incomes of as much as $35,000 to reside in public housing, in contrast with today's median income: $6,500. The question is whether increasing the range of eligible income for residency in public housing will improve stability and livability of projects through better income mix and the viability of public housing in the long term. Both bills would merge section 8 voucher and certificate programs, authorize minimum rents to allow housing authorities to retain higher income families, and replace project-based subsidies provided under section 8 with vouchers that tenants can use anywhere, including to stay put. The Congressional Bills Differ Primarily on Tenant Income Targets. For section 8 rental support of privately owned units, the House bill would reserve only 40 percent of section 8 housing certificates for low-income families with incomes below 30 percent of area median incomes. The Senate would require that a greater number of lower income families be served. Some argue that higher income tenants are essential to provide needed income for public housing administrators who face continuing reductions in funds from the federal government and who will have to maintain units and compete for tenants in the future. Public housing now serves only 1.2 million of the 5 million families whose income qualifies them for assistance. HUD Secretary Cuomo has asked Congress what provision will be made for those unable to get this financial support. Other Notable Provisions. Among controversial aspects, the House bill eliminates support for new public housing construction and institutes an independent accreditation board to evaluate performance of housing authorities. It also allows local governments to ask HUD to channel funds to them along with discretion to allocate amounts to local housing authorities. Increasing local government's interest in what generally are independently operated housing authorities, Community Development Block Grant (CDBG) funds of that jurisdiction could be reduced if housing authorities did not function effectively. In the past, HUD has attempted to divest housing authority management from cities in states like California and Michigan where administration is under local government control. In most jurisdictions, mayors appoint housing authority boards. The House bill also would delete HUD's power to evict a household in some cases where one of its members was found to have used or possessed drugs, changing current "one strike" eviction policies. Housing authority efforts and success in eradicating pests, such as cockroaches, would be one factor used by HUD to assess local administration by the Public Housing Management Assessment Program (PHMAP). Mandatory community work requirements on residents who do not work (principally because of child-care responsibilities). Residents would be required to "volunteer" eight hours community service a month. Democrats unsuccessfully objected to the nomenclature used, pointing out that being forced to volunteer was incongruous with a voluntary contribution. Increased Local Discretion. An essential element in the reform versions is federal control over local authority operations. Removing the federal bureaucracy that has imposed close federal oversight for sixty years is a change in this locally originated, but largely federally financed program. Two block grants for funding are likely to emerge in the final version reducing the number of federal discretionary grants. Federal authority would be increased, however, to deal with distressed public housing situations, allowing for quick takeovers through receivers where local programs seem poorly administered. The importance of "passing" grades in PHMAP scores that trigger HUD takeovers has been increased, although HUD is now in the process of again revising that calculation which local authorities have complained has been too subjective in a number of categories. The proposed legislation also contemplates, as with welfare changes, that most households will henceforth use public housing only as temporary support, rather than remaining long-term tenants. With this objective of tenant turnovers, effective training and job opportunities are critical if residents are expected to move into mainstream housing. The House bill would reduce HUD regulatory authority as it did last year by repealing the 1937 Housing Act. Largely symbolic, it would force HUD to start all over on regulations. The Senate bill and HUD's own version only amend the Act. Given how long it takes currently for HUD to issue regulations for new laws, the effect of repeal could cripple federal oversight except on critical matters, leaving more local discretion. This would be consistent with HUD's new role as "an ATM machine," as one commentator has characterized it. Rick Nelson, executive director of NAHRO, the industry's voice, has suggested that "without regulatory relief, housing authorities are going to collapse under the weight of federal requirements given the uncertain future of funding levels. The combination of program cuts and welfare reform will necessitate greater local autonomy." For some in Congress, of course, the real objective is to abolish HUD altogether. A contentious conference committee process will be needed to resolve differences. Independent Counsel's Assault on White House Attorney-Client Privilege Could Set Precedent for State and Local Government Counsel and Chief Executives. The scope of the attorney-client privilege as applicable to government officials is at stake in a pending certiorari request supported by the Justice Department to reverse a 2-1 decision of the court of appeals granting the independent counsel access to White House counsel notes taken at a session with the First Lady and her private counsel following her appearance last year before a grand jury. The underlying issue could be critical for chief executives at all levels of government. When accusations or legal proceedings affecting the executive, his top staff, or even family members (whose activities and staff are often supported by government funds) impact the executive's ability to govern effectively, to what extent should government counsel be briefed on what is occurring without breaching the executive's attorney-client privilege? If it takes the case, which is by no means sure, the Supreme Court may provide some guidance affecting government at all levels. This issue was one of the grounds for Independent Counsel Ken Starr's allegation that the White House has been impeding his investigation by denying him evidence. New Proposed Minority Business Regulations Will Impact Minority Firms. In early May, the Clinton Administration proposed regulations regarding awards of government contracts to minority businesses in keeping with its earlier announcements of a year ago for changes in its affirmative action efforts. To meet the Supreme Court's "compelling interest" and "narrowly drawn" tests, they call for the study of eighty industries that has generated minority business, that has amounted annually to some $11 billion of the $200 billion in federal procurement. The data will determine where government's use of minority businesses falls below an industry benchmark allowing federal agencies to offer a 10 percent "price credit" to disadvantaged firms having the effect of lowering their bid. Price, however, is only one factor often weighed in federal procurement.
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