September 30, 2004

• Congressional/Legislative Update and Outlook
• Sunset Advisory Commission Review on TG Update
• Discussion of the FY2004 Elections and Potential Impact on the HEA Reauthorization and Title IV Programs
• The Texas Coalition
• CBO and CRS Estimates on Administration Policy and Possible Scenarios

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Congressional/Legislative Update and Outlook

Facts About The Current Political Environment
Money, or the lack of it, and the November elections will have a significant impact on the emphasis and focus of the agendas and priorities of the 109th Congress and 79th Regular Session of Texas Legislature. However, the twin budget deficits will be the principal issue that will force the agendas in both arenas toward reduced spending for the near future, unless new revenues are generated through tax increases.

At the federal level, the White House Office of Management and Budget (OMB) has directed all federal agencies to use their FY2005 budget outlays as the figures for developing their FY2006 budget requests to be submitted to the 109th Congress next year. This amounts to an across the board proposed reduction in FY2006 appropriations.

The reauthorization of the Higher Education Act (HEA) will take place during the 109th Congress, which convenes in January 2005.

Both the Administration and the Democratic presidential campaign have proposed $2 trillion to $4 trillion (the Administration) in new spending for a variety of programs, including student financial aid, over the next 10 years. Both propose paying for this increase through a combination of savings offsets and increasing tax revenues (Democratic campaign) and through spending cuts and increased tax revenues generated by an expanded economy (the Administration). A part of both sides' proposals involve finding savings in the federal student loan programs. The Administration has proposed savings in Title IV programs through program repeal and restricting eligibility requirements for certain programs. (See the Budget of the United States Government, Department of Education, Office of Postsecondary Education; and Program Assessment Rating Tool (PART) Performance and Management Assessments at www.whitehouse.gov/omb/budget/fy2005/ and the Kerry/Edwards higher education plan at www.johnkerry.com/issues/national_service/plan.html)

Unless federal revenues are increased, the FY2005 and FY2006 appropriations for Title IV student aid programs and the reauthorization of the HEA will be impacted by the increasing annual federal budget deficits (projected to be $500+ billion) and cumulative debt (currently $7.3 trillion and projected to increase to over $9.6 trillion by 2015). Neither figure includes the $12+ billion in emergency appropriations for the recent hurricane damage to the Southeast and East Coast states, the $150 - $200 billion spent so far for the Iraq and Afghanistan military operations, the estimated annual cost of $50 billion for these operations, or the cost of continuing all, or part, of the 2001 and 2003 tax reduction beyond their scheduled expiration dates.

Unless federal revenues are increased, the combination of factors leading to the federal budget deficits, increasing college costs, increasing postsecondary education enrollments, and increasing demand for student aid will effectively freeze — if not actually decrease — FY2005 and FY2006 appropriations for the federal Title IV student aid programs.

The congress actually controls annual spending for only about 25 percent of the annual $2.5 trillion budget, which includes about 20 percent for discretionary appropriations for non-defense domestic programs, including Title IV student aid programs.

Assuming the incoming Administration and Congress do nothing to increase tax revenues, with the continuing annual deficits and increasing national debt, reduced tax revenues as a result of the 2001 and 2003 tax cuts, increased costs for national defense, homeland security, and the war on terrorism, spending reductions should be expected in domestic, non-defense-related programs funded through this 20 percent of the annual budget.

See the next article for more information about spending and revenue issues facing the next Congress.

At the state level, the 79th Texas Legislature will convene for its biennial 140 day Regular Session on January 11, 2005.

The Governor's Budget Office has directed all state agencies to develop FY2006-2007 appropriations requests to be submitted to the 79th Regular Session of the Texas Legislature next year that are 5 percent below their current budgets.

According to the Center for Public Policy Priorities, the 79th Legislature will face a budget deficit for the 2006-2007 biennium of between $5 and $14 billion.

Priority issues for the next state legislature will be appropriations and a projected budget deficit, a broken public school finance system (The state's system was declared unconstitutional last month after a lengthy trial in a state district court and the state was ordered to cease funding the system on October 1, 2005 unless a new system was put in place by the state legislature.), transportation, Medicaid and health care reform, water, and revenue generators, e.g., fees.

Higher Education and student financial aid will be the subject of major legislation. However, the budget deficit will impact how successful this legislation will be.

Legislation to implement the Texas Student Financial Aid Steering Committee report — Preparing for the Emerging Texas — will be introduced and considered by the 79th Texas Legislature. A major push by legislators will be made to revamp the state's student financial aid "system" by reducing the number of programs to essentially a small group of grant, college work-study, and loan repayment programs and fully funding them.

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Sunset Advisory Commission Review on TG Update

The Sunset Advisory Commission (SAC) staff report, findings, and recommendations of TG was published in draft form, submitted to TG, and has been returned to the SAC staff with TG's suggested changes. An updated version will soon be posted on the SAC website for comment by the general public and, in particular, the Texas student financial aid community.

The SAC will convene in a public hearing on November 16th and 17th to receive the report and TG's response. On December 14th and 15th, the SAC will adopt the report.

After the SAC adopts the staff's report, the following steps will be (1) for one or two of the legislative members of the SAC to agree to sponsor the legislation that will incorporate the recommendations in the report, (2) for TG, SAC, legislative, and Texas Legislative Council staff to begin work on drafting the implementing legislation, which may include some technical amendments not included in the SAC staff report, (3) for TG staff to begin briefing selected legislative staff on the report and legislation, and (5) work to get the bill passed ASAP during the 2005 Regular Session of the 79th Texas Legislature, which promises to be a very politically divisive, contentious, and partisan Session that will be preoccupied with several significant issues cited above.

What can be stated with a great deal of assurance is that the 79th Texas Legislature will pass and send to the governor a TG Sunset bill prior to June 1, 2005 that will continue TG, in its current form, until September 1, 2017.

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Discussion of the FY2004 Elections and Potential Impact on the HEA Reauthorization and Title IV Programs

While the conventional wisdom is that the Republican Party will retain the majorities in the U.S. House of Representatives and Senate, there is a slim possibility that the Democratic Party will flip the current three vote Republican majority in the U.S. Senate.

The numbers are:

• Number of Senators — 100, with 51 Republicans, 48 Democrats, and one Independent, who generally sides with the Democrats on votes.
• Number of Senate seats up for election in 2004 — 34 (19 Democrat and 15 Republican).
• Number of open seats (no incumbent) — eight, with five currently held by retiring Democrats and three currently held by retiring Republicans.

At this time, Democrats have viable candidates for Republican held Senate seats in four states Colorado, Illinois, Oklahoma, and Alaska) where the Democrats are currently leading in state polls. But five open Democratic seats in the South (North and South Carolina, Georgia, Louisiana, and Florida) are on the line for the party. At this time North Carolina will remain a Democrat Senate seat, South Carolina will probably become a Republican seat, and the rest are toss ups.

The Democrats could gain the three seats they need for a majority by retaining three of the five southern seats and winning three or four of the Republican held seats where they are currently leading in the polls. Also If Kerry wins the presidential race, the Senate's presiding officer would be John Edwards who would vote in cases of a tie.

Still, because it takes 60 votes (two-thirds of the Senate) to take up and consider any contested bill or to approve presidential nominees, a one or two vote Democrat majority will have just as difficult a time in passing bills as the current Republican majority has, and, of course, the House will probably still be majority Republican.

The biggest impact of a Democrat majority in the Senate would be that the 20 committees would be controlled by the Democrats with Democratic majorities and chairpersons. Which would mean that the party leadership would control the 109th Senate's agenda, putting the national focus on domestic issues like increasing the minimum wage, fully funding K-12 education programs, passing an ambitious HEA reauthorization bill, repealing some, or all, of the 2001 tax cuts, or whatever issues their leadership chose to highlight that it claims have been ignored for the past four years.

Regardless of which party controls the Administration or Congress, gaining control of the annual budget deficit and getting back to a balanced budget as soon as possible will control the agenda for, at least, the two-year 109th Congress. The costs of the 2001 and 2003 tax cuts, the unanticipated, new costs of defense and homeland security, war on terrorism, and record annual budget deficits, will force the Administration (Republican or Democrat) and the Congress (Republican or Democrat) to find savings in the 25 percent of the annual budget that is funded through discretionary appropriations — at least for the near future — unless revenues increase.

In short, it probably will make little difference which party wins the White House or controls the Congress. Priorities may shift, with a Democratic Administration or Democratic Senate putting domestic issues on the "front burner" with their legislative proposals which will focus on reducing spending in some areas and increasing spending in other areas, along with increasing revenues. For the HEA reauthorization, it should be kept in mind that while the Democrats have proposed significant changes to some of the Title IV programs to achieve savings, e.g., linking student aid to national service, using an auction to pick FFELP lenders, reducing student loan fees and subsidies, etc., the appropriations for Title IV student aid programs for the period 2001-2004 has been essentially frozen at 2001 levels under the current Republican leadership. And, the Administration's budget proposals for 2005 continues this trend, including recommendations to achieve savings that mirror the Democrat's recommendations with respect to the loan programs.

If the Democrats do control the Senate when the new Congress convenes, a new version of S. 1793 — the College Quality Affordability, and Diversity Improvement Act of 2003 would probably be introduced as the Senate vehicle for the HEA reauthorization, since it is the only Senate reauthorization bill filed so far by the Health, Education, Labor, and Pensions Committee Ranking Member, Senator Kennedy, who would be the Committee's chairman under a majority Democrat Senate.

S. 1793 can also be characterized as the Democratic presidential campaign's higher education bill, since it includes aspects of the Kerry/Edwards higher education plank.

It is also the only comprehensive HEA reauthorization bill filed thus far in either the House or Senate.

Included among S. 1793's provisions are:

• raise the authorized annual Pell Grant to $7,600 next year increasing it to $11,600 by 2009;
• increase maximum authorized appropriations for all other Title IV student aid programs, TRIO, GEAR UP, and LEAP;
• increase the authorized funding and expand Title III (Hispanic Serving Institutions) and Title V (Historically Black Colleges and Universities) of the HEA;
• increase, make refundable, and establish a four year duration the Hope Scholarship;
• eliminate the student loan origination fee;
• establish the Direct Loan Reward Act to reward institutions with a financial incentive to participate in the Federal Direct Loan Program;
• establish a competitive grant program to fund institutional initiatives to reduce college costs
• direct the Education Department to convene a college cost summit composed of universities to discuss and agree upon future tuition and fee limits;
• index a state's share of Pell Grant and student loan funds to each state's maintenance of effort in supporting state student aid programs;
• require institutions to have truth in tuition disclosures and the Bureau of Labor Statistics to develop a higher education cost index that tracks college cost increases;
• provide a nonrefundable tax credit for interest on student loans;
• allow refinancing of Federal Direct Consolidation Loans;
• exempts from $9,000 to $18,000 in earnings from the student aid need analysis process;
• increase the amount allowed for student loan forgiveness and cancellation for Head Start, Early Head Start, and similar pre-kindergarten, mathematics, science, special education, and bilingual teachers;
• establish a comprehensive program to increase recruitment, retention, and graduation of low income students.

If S. 1793 were to be the primary reauthorization vehicle in a Democrat Senate, it would be amended as it proceeds through the legislative process. Garnering enough support for parts of the bill to pass through both the Senate (Republican or Democrat) and House (Republican or Democrat) would be difficult, if not impossible, because of the costs involved.

The recommendations concerning the FDLP, college costs, loan forgiveness, and programs to increase recruitment and retention all represent significant additional costs to the federal government. These increased costs, coupled with the even larger additional costs mentioned above, will control how far these proposals go during the next Congress.

Information about S. 1793 is available at http://thomas.loc.gov.

The Senate Republicans will eventually produce their version of the HEA reauthorization bill, which will include the Administration's proposals mentioned above. It too will have to address the issue of cost by finding savings through changes to the Title IV Programs that impact the student loan programs or, possibly, limit Title IV eligibility as implied in the Administrations FY2005 budget documents.

In searching for budget savings, some issues that are bound to resurface in this debate already cited by one or both parties and campaigns are: the questionable necessity of maintaining the FFELP and FDLP, the unnecessary costs associated with the loan programs, the need for the Perkins Loan program, restructuring the loan programs through instituting a student loan auction to pick lenders to originate loans, making all student loans subject to a variable interest rate, and adding a merit or academic component to Title IV Grant Programs.

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The Texas Coalition

In Texas we are fortunate to have developed over the past several years a student financial aid coalition of sorts involving the Texas Association of Student Financial Aid Administrators (TASFAA), Association of Texas Lenders for Education (ATLE), the state guarantor, and on occasion, other important organizations like the Independent Colleges & Universities of Texas (ICUT)and the Texas Higher Education Coordinating Board, to develop and communicate on a regular basis to Texas' elected policymakers common positions on key issues affecting student financial aid policy at the congressional and state legislative levels.

With this approach, Texas is in as good a shape as any state with respect to effectively advocating the need for a strong set of state and federal student aid programs to our 34 member congressional delegation and to key state representatives.

The coalition carries out its work by:

• Communicating with one another;
• Identifying common core issues important to strengthening student financial aid and positions on which all parties can agree;
• Developing a simple, uniform, and consistent message delivered as a coalition;
• Developing position papers and memoranda on selected issues and communicate the positions as a coalition;
• Making every effort to "support" rather than "oppose";
• Being accurate and factual, giving credit where credit is due to legislators and staff, being objective, reasonable, realistic, understanding, and cooperative;
• Keeping abreast of congressional and legislative activity concerning student financial aid issues;
• Focusing coalition efforts on key Texas members of Congress and the Texas Legislature, e.g., education, appropriations, and budget committees;
• Conducting periodic meetings and workshops with staff and members as a coalition.
• Inviting members to speak at association conferences;
• Developing and maintaining positive relationships with staffers and anticipate and fill their information needs; and,
• Providing testimony, or otherwise useful information, to legislative and congressional committees.

This unique collegial working relationship has been noted by national associations as a model that should be used in other states and has prepared the Texas community to face the challenges and opportunities during the coming reauthorization of the Higher Education Act and beyond.

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CBO and CRS Estimates on Administration Policy and Possible Scenarios

In a letter sent to House Budget Committee Ranking Member John Spratt on 9/23 the Congressional Budget Office (CBO) re-estimated its ten year projections to take into account planned changes in revenue and outlays over the next ten years.

Ordinarily, CBO's revenue and spending projections must use baseline scoring, which assumes current law will be carried out into the future. However, the extension of expiring tax cuts (like the ones recently adopted by the Congress), increased defense spending, and other administration policies that have not yet been enacted into law can have a substantial effect on these numbers.

According to Spratt, who requested the letter, "CBO has adjusted its baseline estimates to reflect the Bush Administration's funding and revenue proposals as well as other unavoidable costs."

Those administration policies include:

• the President's discretionary funding request;
• extension of all expiring tax cuts;
• CBO's estimate of additional expenditures for Iraq, Afghanistan, and the global war on terrorism;
• reform of the Alternative Minimum Tax (AMT) to prevent bracket creep.

According to CBO's September 7, 2004 Budget and Economic Outlook: An Update, deficits accrued between FY 2005 and FY 2014 will total $2.29 trillion. When CBO uses the Democrat's assumptions of Administration policy that total rises to $3.57 trillion over the same period. That would add $1.27 trillion to CBO's projection of the total debt in FY 2014.

In CBO's Update deficits decline in nearly every year from $422 billion in FY 2004 to $65 billion in FY 2014. Under the new estimate, deficits dip slightly to $312 billion in FY 2006 before rising again to $439 billion in FY 2014.

This type of report is commonly requested by the party that does not control the White House shortly after the semi-annual CBO baseline numbers to point out the costs Administration policies.

The letter and tables are available at www.cbo.gov (Budgetary Projections Incorporating Assumptions Specified by Ranking Member Spratt, September 23, 2004).

At the same time the Congressional Research Service (CRS) has published its latest "CRS Report for Congress" which outlines the types of revenue and spending changes Congress would have to undertake to achieve a balanced budget in 2005.

The CRS maintains that the federal budget is unlikely to balance on its own, but can be balanced by (or through a combination of): a 15 percent to 18 percent reduction in total federal spending, a 26 percent to 32 percent reduction in mandatory spending, a reduction in discretionary spending of 35 percent to 42 percent, a reduction in nonmilitary discretionary spending of 72 percent - 87 percent, or an increase in income taxes of 26 percent to 44 percent.

CRS offers a more realistic baseline scenario based on historical trends that assumes discretionary spending (about 25 percent of the annual federal budget, about $820 billion for 2004) is a constant percentage of the Gross Domestic Product (GDP), and that expiring tax cuts are renewed by the Congress and Administration. Under this scenario, CRS estimates that the annual on budget deficit for 2005 would be $426 billion, $78 billion more than the current CBO estimate which excludes the cost of extending the 2001 and 2003 tax reductions and the continuing $4 billion per month costs for the Iraq and Afghanistan wars.

Under this scenario, balancing the budget by the end of next year would require a 9 percent decrease in total spending (discretionary and mandatory), and a 22 percent increase in average effective tax rates, which is not likely.

Order the complete CRS report (RS21939)at www.pennyhill.com.

Since all Title IV student financial aid programs fall within the discretionary appropriations category, along with most all domestic programs outside of Social Security and Medicare, and, for the time being, national defense, growing pressure to find savings in these programs will continue to grow.

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For more information, contact:

TG Congressional and Legislative Relations
(512) 219-4503
P.O. Box 83100
Round Rock, TX 78683-3100