Last Friday I spoke to more than 200 Republican House Members at the House Republican retreat in Baltimore.  I was one of three on a panel on the budget, chaired by House Budget Committee Chairman Paul Ryan.

I will post separately about my presentation and my thoughts on the retreat, but I was struck by the enormous impact of having 96 new Members in this year’s freshman class (87 R and 9 D).  I realized that many of these freshman find themselves immersed in substantive and strategic discussions about the budget, the continuing resolution, and the debt limit before they have had an opportunity to learn the basics of the budget process.

I have therefore written this memo for them.  I hope you might find it useful, too.  Here it is as a PDF.

Stanford, California
Sunday, January 16, 2011

MEMORANDUM FOR NEW MEMBERS OF THE HOUSE OF REPRESENTATIVES
FROM:    KEITH HENNESSEY
SUBJECT:    INTRODUCTION TO THE FEDERAL BUDGET PROCESS

As a new Member of the House you will cast several important early votes on budget issues.  This memo is a crash course on the federal budget process.  I assume you’re starting fresh.

You will need a deeper understanding than I provide here to participate in the budget process.  I’ll help you build the puzzle frame and show you what the picture on the box looks like, and over time you can assemble the rest of the puzzle.  This memo therefore leaves out many important but, I think, secondary process elements that you can learn later.

This is a process memo.  If you find this helpful, please let me know and I’ll write more about the substance of particular fiscal issues.

The budget resolution

Congress dominates the budget process, not the President.

Congress starts by passing a blueprint called the budget resolution in the spring.  The budget resolution sets the total amount of federal spending, revenues, and deficits  for the next five (or sometimes ten) years.  Oversimplifying, the budget resolution consists of lists of numbers and process rules written as legislative language.

The budget resolution is a concurrent resolution.  This means that (if successful) the House and Senate must pass identical legislative language, but it does not go to the President for his signature or veto.  This is why it’s called the Congressional Budget Resolution.  This initial Congress-only process step is a principal source of Legislative Branch power relative to the Executive Branch.

By itself the budget resolution does not spend a single dollar or raise any tax revenue.  It is to spending legislation what a blueprint is to a house:  a plan, a set of guidelines, constraints, and rules that the builders must follow.

The budget resolution is crafted in the House and Senate Budget Committees, led by their Chairmen, Rep. Paul Ryan (R) and Sen. Kent Conrad (D).  They are the most important people in the budget resolution process early in the year.  The legislative lead then shifts to other Committee chairs who write individual bills that conform to the budget resolution.

In addition to setting totals, the budget resolution also divvies up total spending by committee.  The Committees of which you are a member are each given a spending allocation  by the budget resolution.  This number constrains legislative action by the committee over the next year.  The House Ways & Means Committee and Senate Finance Committee handle all revenues.

Each committee then acts throughout the calendar year to pass bills that stay within the numeric constraints established by the budget resolution.

At this point the road forks into two types of spending:  discretionary spending (aka appropriations), and mandatory spending (aka entitlements).  This is a critical distinction that you need to understand.

Discretionary spending through annual appropriations bills

About 30% of total federal spending, classified as discretionary spending, is assigned to the Appropriations Committee.   The House Appropriations Committee Chairman (Rep. Hal Rogers) will further divide his committee spending allocation into 12 subcommittee spending allocations.   Beginning in late spring, these 12 subcommittees and then the full Appropriations Committee will write 12 appropriations bills.

If all goes smoothly, the House will pass all 12 bills.  The Senate has a parallel process.  Each of these bills will go to a conference committee.  Compromise versions will be repassed in the House and Senate and will then go to the President for his signature or veto.  Twelve new laws will be enacted before the new fiscal year begins on October 1.  All rarely goes smoothly.

In addition to the suballocation among 12 subcommittees, there’s an important division within the appropriations pie between defense and nondefense spending.  Sometimes this division is set by the budget resolution, and sometimes it’s left to the discretion of the Appropriations Committee Chairman (often with “guidance” from House Leadership).  Radically oversimplifying, Republicans tend to prioritize defense spending more highly than Democrats do, relative to nondefense spending.

The keys to discretionary spending are:
•    It is decided annually.  This means Congress spends a lot of time on these bills and the thousands of spending decisions contained within them.
•    Congress must act for money to be spent each year.  If Congress fails to enact one or more of the 12 appropriations bills by October 1, the programs in that bill will stop operating on that date.  The default is that no money will be spent.
•    Most of the functions you think of as “the federal government” are funded through these annual appropriations bills.

The appropriations process begins with a baseline amount for each discretionary spending program.  The baseline assumes for each program that we will spend next year what we are spending this year, usually plus an allowance for inflation.  If $100M is being spent for program X and the topline appropriations baseline inflation adjustment is 2%, then the baseline for program X for next year will be to spend $102M.

The 12 Appropriations Subcommittee Chairs lead their committees in a process that then moves these baseline figures for each program up or down to conform with their overall subcommittee spending allocation.  If a bill would spend $104M on program X next year, that is often characterized as a “$2M increase above baseline.”  If a bill would spend $101M on X next year, then those who want to spend more will characterize this as a “$1M cut