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Jacob J. Lew - March 10, 2000

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March 10, 2000

Mr. Chairman, and Members of the Committee, I am pleased to be here this morning to discuss biennial budgeting and other budget reform proposals.

This Administration has strongly supported many reforms to improve the efficiency and effectiveness of the Federal Government. Beginning with the Vice President's National Performance Review in 1993, the Administration has sought to reinvent the Federal Government, so that it will work better and cost less.

We have already seen a number of successes. For example, since President Clinton took office, the number of Federal, executive branch civilian employees has dropped by over 360,000 to the lowest level in 39 years. In addition, when the Administration took office, the Federal budget routinely ran deficits of well over a hundred billion dollars per year, deficits then projected to continue into the indefinite future. This trend has been decisively reversed, with the Federal budget running a surplus in the last two fiscal years -- FY98 and FY99. Prior to these surpluses, the last balanced budget had been in fiscal year 1969, and the last time that the Federal Government had two consecutive balanced budgets was in fiscal years 1956 and 1957.

The fact that we are running a surplus does not mean, however, that fiscal discipline is no longer needed. To the contrary, fiscal discipline is essential to protect Social Security and strengthen Medicare, so that both will be there in the years ahead. Reducing the accumulated Federal debt will help us to protect these important programs, improve our ability to respond to future fiscal problems or crises, lower both interest rates and Federal interest costs, and encourage continued strong economic growth. Accordingly, the President's Budget for Fiscal Year 2001 proposes a new framework for the budget process that includes tools for ensuring continued fiscal discipline. These tools include a Social Security Solvency Lockbox to ensure that Social Security surpluses are not used for other purposes, as well as measures to strengthen Medicare and reduce the publicly-held debt. In addition, the framework proposes to extend to 2010 both the "paygo" and discretionary spending caps enforcement mechanisms.

In this context, the Administration continues to believe that biennial budgeting offers a management tool with potential to contribute to the enhanced performance of the Federal Government. In 1993, Vice President Gore's "Report of the National Performance Review" proposed moving to biennial budgeting. The potential benefits of biennial budgeting were also outlined in testimony presented by two of my predecessors as OMB Director -- Leon E. Panetta and Franklin D. Raines -- in their testimony before the House Governmental Operations Committee (in 1993), the Senate Rules Committee (in 1994) and the Senate Governmental Affairs Committee (in 1997).

Most recently, the President's FY2001 Budget states that "Reaching agreement on budget priorities for two years would provide greater predictability and planning certainty to program administrators and beneficiaries. Making appropriations that cover two fiscal years would also permit congressional committees to perform their oversight functions in the off-year with less distraction."

In their testimony in support of biennial budgeting, OMB Directors Panetta and Raines focused on its potential benefits. I would like to first reiterate the substantial advantages of biennial budgeting. In addition, given the serious consideration being given to biennial budgeting this year, it is particularly important to discuss some of the practical considerations for biennial budgeting to succeed.

The potential benefits from biennial budgeting can best be appreciated by considering what happens nearly every fall under the current process. During the months of September and October, Congress and the Administration are typically negotiating final appropriations levels for the new year and reaching agreement on one or more continuing resolutions. Simultaneously the agencies and departments of the Executive Branch are beginning the new fiscal year operating under continuing resolutions while also expending great amounts of time developing their budget requests for the subsequent fiscal year.

The current process does not serve us well. It is very inefficient, and the task of budgeting consumes a great deal of time and energy that could be better devoted -- by the Congress, the President, and the agencies - to addressing programmatic issues from a longer-term and more in-depth perspective. In sum, the primary potential benefit from biennial budgeting is that, by concentrating budget decisions in the first year of each two-year period, time would be freed up in the second year that could be redirected to management, long-range planning, and oversight.

These are familiar arguments that have helped build the growing interest in biennial budgeting. By contrast, many of the criticisms of biennial budgeting focus on concerns about how it will function in practice. These important concerns must be kept in mind when crafting legislation. Because of growing support for biennial budgeting, I want to spend time on problems that could arise under it, and the challenges that the Congress and the Executive Branch will have to address to ensure that it succeeds.

First, for biennial budgeting to work, the two branches in the first year of the biennium will have to negotiate, and reach agreement on, appropriations that span two years instead of only one. This will be difficult. The problems with the current process result from the difficulties that Congress and the Executive Branch have encountered in negotiating, and reaching agreement, on appropriations that cover one year. Having to negotiate and reach agreement on two years of appropriations will inevitably be more complex.

As a result, the two branches will have to exercise discipline in carrying out negotiations, to ensure that they reach a successful conclusion within about the same time frame as we now do for the thirteen appropriation bills. If the negotiations drag on into November and December, then the time that is saved in the second year of the biennium comes at the expense of having to devote more time to budgeting in the first year. Alternatively, if the two branches give up and enact only annual appropriations, then we will have essentially created a more time-consuming version of the current process.

Second, the two branches would have to ensure that, during the second year of the biennium, the Federal Government remains able to respond to changing and unforeseen circumstances, as well as evolving priorities. It is not reasonable to expect that appropriations could be proposed, and decided upon, in the first year of the biennium, with no changes needed during the next two years. Under biennial budgeting, a mid-cycle review would have to occur and necessary corrections made. Thus, there will be a need for the President to have the opportunity to propose orderly changes, and for Congress to provide updates. Should the supplemental become thirteen appropriations bills, the efficiencies of biennial budgeting would be lost. There will also be a need to provide agencies with additional flexibility in how they use their funding, to enable them to address changing conditions and evolving priorities without the need for a legislative change in each and every case.

We should not expect the answer to this challenge to be immediately obvious. It will likely take the two branches some period of time, as they implement biennial budgeting, to learn how the benefits of biennial budgeting can be realized without sacrificing necessary Government flexibility. We should endeavor to meet this challenge. Biennial budgeting will not work if the process either becomes too inflexible or too open-ended. On the one hand, the Federal Government will not be able to carry out its responsibilities properly if it finds itself locked into long-term appropriations that are open to review and revision only once every two years. On the other hand, the potential benefits from biennial budgeting -- namely, the time that can be saved and redirected to longer-term reviews and initiatives -- will not be realized if in place of the current system with structured annual budget reviews, we produce a system in which the two branches become so accustomed to considering and passing supplemental bills that the task of budgeting becomes an unstructured and unending process.

For biennial budgeting to work, then, the two branches will have to avoid these extremes, and find the proper balance under which the major task of budgeting is carried out once every two years. Furthermore, mid-course corrections should be limited to those changes needed to address changing and unforeseen circumstances, as well as significant changes in priorities. That balance will require cooperation between the branches. Supplemental appropriations bills will require both congressional and presidential action. I would anticipate that additional flexibility for agencies will be accompanied by appropriate congressional consultation and notification requirements. Efforts should be made to avoid a process that enables single parties to block agency activities at a very low level of detail.

Finally, there will also have to be an appropriate transition period before the Federal Government converts over to biennial budgeting. It must be recognized that biennial budgeting will constitute a very fundamental change in how the Federal Government operates. A conversion to biennial budgeting will have to take into account the magnitude of the change that would be required, both in terms of the need to make necessary conforming changes to those laws that presume the proposal and enactment of annual appropriations, as well as in terms of the need for Congress and the Executive Branch to develop and implement new practices for proposing, considering, and enacting biennial budgets. For example, we will need to ensure that an incoming President has sufficient time, upon taking office, to prepare a budget proposal that will cover two years rather than one. Additional time may be necessary for the Administration to prepare the first biennial budget proposal as well as for Congress to pass the first set of biennial appropriations bills. We can expect a challenging process in the first year, and the legislation should allow for that.

In order to realize the many potential benefits of biennial budgeting, we must think through carefully how it would work in practice, so that we can successfully meet the challenges that will be involved in carrying out the transition and in implementing the new system. Indeed, careful attention must be devoted to crafting biennial budgeting legislation to ensure that the adoption of biennial budgeting will work in practice, with the intended results.

* * * *

As I have explained, biennial budgeting has the potential to enable the Congress and the Executive Branch to save time that can be devoted to more in-depth and longer-term reviews and initiatives. By itself, however, biennial budgeting cannot remedy all of the shortcomings of the existing budget process. In order to strengthen the budget process and maintain the fiscal discipline that has brought us so far, we need to also address the budget process proposals presented in the President's Budget.

As I noted earlier, the President's Budget for FY2001 proposes a new framework for the budget process. The reforms that the Administration has proposed will protect Social Security, strengthen Medicare, and ensure continued fiscal discipline. Establishing budget protections for Social Security and Medicare, along with other budget reforms such as extending paygo and the discretionary caps, will strengthen the framework for fiscal discipline for the long term and ensure our continued success in getting our fiscal house in order.

It is also important that biennial budgeting not be used as a vehicle to make other potentially damaging changes in the budget process, such as ending the paygo requirements for tax cuts and new mandatory spending. Finally, it should be noted that points of order can be used to block non-conforming action, but not to compel agreements on a two-year cycle. It will take cooperation and constructive negotiations to reach a two-year agreement.

Carefully crafted biennial budgeting legislation, particularly if it is combined with the budget process reforms in the President's budget, can be an important tool to improve management of our Government. I look forward to working with you in that process and would be pleased to respond to your questions.

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