CBO Is Wrong Again — Revenues Are Surging; Fed Curbs Eyed; Congress Continues to Surprise

Greg Valliere, Chief Political Strategist
May 8, 2015

A DRAMATIC SURGE IN RECEIPTS: Everyone focuses on spending, but we’ve argued for years that the key factor in analyzing the budget is receipt growth. That certainly looks true this year, following the release of post-April estimates from the Congressional Budget Office that showed receipts through the first seven months of this fiscal year are up by an astonishing 9%, thanks to surging tax payments — which CBO maddeningly ALWAYS underestimates. Revenues rose by $48 billion more this April than in 2014.

THIS DEMOLISHES CBO’S GLOOMY FORECAST OF MARCH 9 – so in less than two months, the agency’s official forecast is already obsolete.  It’s virtually certain that more progress in lowering the deficit is likely this year, despite a surprisingly strong rise in outlays (much of it from entitlements) and a drop in payments to Treasury from Fannie Mae and Freddie Mac.  It’s all about receipts, so we think red ink this year will fall significantly below CBO’s deficit forecast of $486 billion.

HOW LOW CAN IT GO?  The deficit this year, as a percentage of GDP, surely will fall below CBO’s estimate of 2.7% — perhaps to 2.5% or a little less, with a further drop in fiscal 2016-17, perhaps getting close to 2% of GDP. Yes, there will be some new spending, but this is a very positive story for the bond market — the deficit will not be a major concern until much later in the decade, when demographic changes could drive red ink higher.  Can we grow our way out of deficits?  That’s a wildly optimistic scenario — but we can grow our way to a low deficit environment that the markets can easily live with.

CONGRESS EYES CURBS ON FED:  No good deed goes unpunished — the Federal Reserve almost single-handedly saved us from another Great Depression, but Congress wants to meddle.  The bill to watch is from Richard Shelby, Chairman of the Senate Banking Committee.  Not only would he seek to curb the influence of the NYC Fed, but his proposal would impose a “mechanical” rule — modeled after proposals from Stanford Prof. John Taylor — that would stipulate conditions under which the Fed could raise or lower rates.

THERE’S SURPRISING ANTIPATHY TOWARD THE FED IN CONGRESS — which could intensify if critics on the left begin to stir once the central bankers raise rates later this year.  For now, we think any legislation — including a measure to audit the Fed’s decision making — would get vetoed if it got to the White House, so the Fed is off the hook at least until 2017.  Beyond that, if Republicans control the White House and Congress in two years, all bets are off.

CONGRESS CONTINUES TO SURPRISE: It’s not exactly a well-oiled machine, but Congress continues to exceed low expectations, defying predictions of gridlock and dysfunction.  After Senate passage, by 99-1, of a bill to review an Iranian nuclear deal, the stage is set early next week for a key procedural vote on “fast track” trade legislation.  We think the Senate will pass the trade bill, setting up a close (but winnable) fight in the House later this spring.

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Medicare Inpatient Hospital Payment for New Medical Devices; Medical Device Tax

Sasha Simpson, Health Policy Analyst 
April 6, 2015

Medicare Inpatient Hospital Payment for New Medical Devices:  CMS is likely to approve four new technology add-on payment applications in the 2016 final regulation for inpatient hospital pay. This is positive for manufacturers and distributors of the new medical devices, in our view.

Medical Device Tax:  We believe the legislation to repeal the device tax is most likely to move through the House after the Supreme Court rules on King v. Burwell in June.  The legislation could reach enactment as part of a larger bill in September when Congress sets government spending for part or all of the 2016 fiscal year and raises the debt ceiling.  If the legislation were to stall in the current Congress, the likely 2017 Senate Democratic leader, Charles Schumer of New York, would be a more likely ally than the current Democratic leader, Harry Reid of Nevada.  Senator Schumer, who is slated to move into the top Democratic leadership position in 2017, has voiced his support this year for repeal of the device tax.

The Doc Fix; SCOTUS’s Ruling on the ACA

Paul Heldman, Senior Health Policy Analyst 
April 1, 2015

The Doc Fix: The legislative risk will likely be minimal through 2016 for cuts in projected Medicare payments to hospitals, post-acute care and other health providers after likely enactment in mid April of a $210 billion, 10 year bill to replace the flawed Medicare physician pay formula and extend children’s health insurance funding.  The bill would squeeze about 1% of projected aggregate Medicare payments to hospitals and post-acute care, including hospice, over the next 10 years.

The Supreme Court Ruling on Federal Subsidies:  The Supreme Court ruling is a close call, however, and nine to eleven southern and mountain states, including Texas, would likely resist starting a state exchange to keep subsidies flowing if the court rules them illegal on federal  exchanges.  A ruling against the administration poses a threat to an otherwise positive regulatory outlook for hospitals.

Iran Deal Adds More Pressure to Oil Prices; North Dakota Oil Stabilization Regulation; Crude-By-Rail Regulation

Former Secretary Spencer Abraham, Senior Energy Analyst &
Joe McMonigle, Senior Energy Analyst
April 6, 2015

Iran Deal Adds More Pressure to Oil Prices But Congressional Action Expected:  With the announcement of a framework deal with Iran on its nuclear program, the White House is in full sell mode until April 14, when Congress returns from its scheduled recess for Passover and Easter. Any deal is likely to be viewed by Congress as too accommodating to Iran. After that point, Congress is expected to pass bipartisan legislation in mid-to-late April requiring the deal to be approved by Congress. President Obama said he will veto the bill, but with eight Democrat Senators as cosponsors the legislation is in striking distance of a veto-proof majority. The White House is working on an approach that will circumvent Congress. Current law requires congressional approval to “lift” the sanctions but the president can “suspend” sanctions if he deems it “in the national interest.” The Administration plans to “suspend” sanctions for years, or at least through the president’s second term. Iran is seeking immediate sanctions relief, especially with regard to oil exports. The White House contends it will be phased in. The question of sanctions will be a key negotiating point in talks for a full agreement due by June 30. Whether the sanctions relief is in weeks or months, we expect an extra 500,000 barrels per day of Iranian crude exports by the end of the year just from turning on existing fields. This is similar to Libyan exports coming back online last fall, which led to a production surplus and subsequent price collapse. However, getting back to pre-sanctions production levels of about 4 million barrels per day will take much more time, investment and western technology.

North Dakota Oil Stabilization Regulation Starts April 1:  North Dakota’s new rule requiring producers to stabilize crude oil and remove flammable properties at the well site before transport goes into effect on April 1. The state regulators hope the rule will reduce or eliminate fireballs and explosions that have resulted from recent crude-by-rail train derailments. The acting head of the Federal Rail Administration told Congress late last month that the draft federal crude-by-rail regulation is unlikely to contain similar language due to concerns about legal authority. However, Reuters reported this week that safety advocates believe the North Dakota rule will be ineffective because it does not address increased vapor pressure of fully loaded oil tankers in transit.

Federal Crude-By-Rail Regulation Expected Later This Month:  The White House is currently reviewing draft crude-by-rail regulations from the Department of Transportation, and we could see a final rule by the end of April.  We expect the rule to require new cars or retrofits with thicker 9/16″ steel hulls. We see the older DOT-111 tank cars being phased out in 2-3 years and the newer CPC-1232 tank cars phased out in 5-7 years. Most of the burden and expense of the regulation will fall to the energy industry which generally owns the tank cars. The rail industry seems to have escaped tougher brake requirements, speed limits and two-man crews.

Net Neutrality Rules to be Published Soon; Comcast-Time Warner Cable; Spectrum Set-Asides

Paul Glenchur, Senior Telecom-Cable Analyst
April 6, 2015

Net Neutrality:  The FCC’s net neutrality rules will soon be published in the Federal Register, triggering appeals in federal court.  We continue to believe the reclassification of broadband as a Title II telecom public utility is probably sustainable but the Commission could face vulnerabilities on its forbearance decisions, a risk factor that works against the interest of cable and telecom broadband service providers.  There are also significant legal questions about compliance with administrative notice requirements and the common carrier treatment of mobile data services.  Despite the Title II victory the FCC delivered to net neutrality purists, the rules present legal, implementation and political risks to all industry players, including edge providers like Netflix, Amazon, Facebook and others.  These mutual risks could lay the foundation for meaningful discussions over a legislative alternative in the months ahead.  Serious discussions in this regard could generate more positive long-term sentiment for cable operators and telcos.

Comcast-Time Warner Cable:  The recently-announced deal between Charter Communications and Bright House Networks potentially resolves a minor issue affecting the review of the Comcast-TWC merger.  Time Warner Cable consolidates programming and equipment purchases with Bright House pursuant to a prior arrangement and the risk that Bright House systems could expand Comcast negotiating leverage with independent programmers should not be a concern if Charter acquires Bright House.  The larger regulatory concern in Comcast-TWC, however, remains expanded broadband subscriber reach and its potential impact on emerging over-the-top video services.  We think the deal should still gain approval with major conditions, including incorporation of the substance of the new net neutrality rules, a condition that could also apply to the AT&T-DirecTV deal.  The FCC shot clock is on hold and the merger review is likely to carry into the summer.

Spectrum Set-Asides:  T-Mobile, Sprint and Dish Network want the FCC to reserve at least 40 MHz for bidders other than AT&T and Verizon in the upcoming incentive auction of broadcast airwaves.  The smaller competitors argue that the two largest wireless service providers already control 73 percent of commercial spectrum below 1 GHz, prime airwaves due to superior signal propagation characteristics.  We think the FCC is inclined to expand the reserve from the current 30 MHz to the requested 40 MHz but the move could risk a legal challenge from the major carriers as they could be forced to compete against each other to win 20 MHz of paired spectrum holdings in major markets.  Because regulators have indicated that they want four nationwide carriers in the market (by signaling a T-Mobile and Sprint combo is unwelcome), the second tier providers insist they both must have enhanced access to critical low-band spectrum to ensure their long-term competitive survival.