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  Federal Budget and Revenue Update
 
Volume 10, Number 1 February 3, 2004


An Information Service of the NCSL Budgets and Revenue Committee

Back Issues Archive

President Releases FY 2005 Budget


Note: This document is based on a preliminary review of the President's FY 2005 Budget. Not all programs and funding activities are covered.

On February 2, 2004, the President's Fiscal Year (FY) 2005 Budget was released. The budget, which weighs in at $2.4 trillion, supports and advances three overriding national priorities: winning the war on terror, protecting the homeland, and strengthening the economy. In general the budget:

* Increases defense spending by 7 percent.
* Increases homeland security spending (not limited to the Department of Homeland Security) by 10 percent.
* Holds the growth in total discretionary spending to 3.9 percent with non-defense and non-homeland security spending held to .5 percent growth.
* Acknowledges a projected $521 billion deficit for FY 2004.
* Proposes to cut the annual deficit in half within 5 years.
* Eliminates 65 domestic programs valued at $4.9 billion.
* Assumes permanency for most tax cuts made in 2001 and 2003.


Highlights

In the President's budget, outlays for Federal grants to states decrease from an estimated $418 billion in 2004 to $416 billion in 2005, with Medicaid payments accounting for 65 percent of grant outlays to state and local governments. The higher figure in 2004 is due primarily to the temporary fiscal assistance, in particular the temporary increase in FMAP.

Education receives the most notable proposed increase in funding with a $3.1 billion jump. The $3.1 billion increase consists of a $1.6 billion increase in discretionary funding and a $1.5 billion increase in mandatory funding. This includes a $1 billion increase for both Title I (No Child Left Behind) and Special Education (IDEA).

Several smaller programs in the Department of Health and Human Services (HHS) receive additional funding, including an $11 million increase for block grants to states under the Low Income House Energy Assistance Program (LIHEAP), a $53 million increase for the Substance Abuse Block Grant, $81 million for communities to develop innovative approaches to address diabetes, obesity and asthma, and an additional $35 million for the Ryan White AIDS Drug Assistance Program.

As for reductions, the HHS budget reduces funds for the public health preparedness and capacity building grants administered by the Centers for Disease Control and Prevention (CDC) and the Health Resources and Services Administration (HRSA) by $105 million and $39 million respectively.

The HHS budget also curtails intergovernmental transfers (IGTs) under Medicaid and contains a proposal to reduce states' federal reimbursement for administrative costs of Medicaid by $300 million to reflect the share assumed in the TANF block grant. States would be prohibited from using TANF funds to pay for these costs during FY 2005.

The budget for the Department of Labor includes a proposal to consolidate three State formula grants for training and employment services. The consolidation comes with a loss of approximately $100 million dollars. In addition, unspent formula grant balances would be used to maintain or increase service levels and provide more flexibility to the Department of Labor to reallocate and target funding where it is most needed.

While the President's budget contains a 10 percent increase in homeland security funding, state formula grants for "first responders" are targeted for a $1 billion reduction, with those funds being redirected to high-threat urban areas. The President also chose not to provide any funds for interoperable communications or Urban Search and Rescues Grants.

Similar to the President's FY 2004 budget proposal for the Department of Justice, state and local law enforcement assistance programs take a hit in FY 2005. The budget includes a proposal to consolidate the Byrne Grants, Local Law Enforcement Block Grants and COPS Hiring Program into a simplified, flexible Justice Assistance Grant program. The consolidated program would be funded at $500 million, a 50 percent reduction from the FY 2004 funding levels for the 3 programs separately. The Justice budget also includes eliminating funding for other programs such as the State Criminal Alien Assistance Program (SCAAP).

The budget provides $50 million ($40 million in grants to states) to the Election Assistance Commission to implement the Help American Vote Act (HAVA). The HHS budget includes $14.9 million-$9.9 million for payments to States to promote access for voters with disabilities and $4.9 million for payments to states for protection and advocacy systems-to implement HAVA. This number is far short of the $600 million authorized for 2005.

Below are highlights from specific departmental budgets.


Department of Agriculture

* Proposes an additional $381 million for new agriculture and food defense initiatives to protect the nation's food supply.
* Provides a $3 billion contingency reserve for the Food Stamps Program.
* Provides an additional $33 million for USDA Forest Service fire fuels reduction projects.
* Provides $427 million in assistance through community facilities grants and loans. The program provides low interest loans, loan guarantees and grants to rural communities, which help them afford facilities such as police stations, medical units, and daycare centers.


Department of Defense

* Provides $401.7 billion for the Department's base budget, an annual increase of seven percent, for a total increase in defense spending of 35 percent since 2001.


Department of Education

* Provides $13.3 billion-a $1 billion increase from FY 2004 levels-for Title I funding.
* Provides $11.1 billion-a $1 billion increase from FY 2004 levels-for Special Education.
* Provides $1.3 billion-a 12 percent increase-for early reading programs.
* Includes $269 million for competitive grants to help states and school districts improve classroom instruction and accelerate learning in math for struggling students.
* Provides an additional $12 million to help states establish State Scholar programs.
* Makes a commitment to provide sufficient funding for Pell Grants, and retire the shortfall.


Department of Energy

* Provides $880 million-a $303 million increase over FY 2004 levels-for Yucca Mountain, and proposes a new funding mechanism to ensure that the Department can begin accepting waste on schedule in 2010.
* Supports changes to Federal tax law concerning gains from the sale or disposition of transmission assets and preserving the tax-exempt status of rural electric cooperatives that provide open access to their transmission or distribution facilities.
* Provides $292 million-a $64 million increase over FY 2004 levels-for the Weatherization Assistance Program.



Department of Health and Human Services
(a reminder these are only select items)
* Proposes to curtail intergovernmental transfers (IGTs) under Medicaid-$9 billion over 5 years.
* Contains a proposal to reduce states' federal reimbursement for administrative costs of Medicaid by $300 million to reflect the share assumed in the TANF block grant and will prohibit states from using TANF funds to pay for these costs during FY 2005. In the past, costs common to AFDC, Medicaid, and Food Stamps were charged to the former AFDC program and so included in each state's TANF base year. This would be a reduction in the payments to states for Medicaid administration for one year, for FY 2005-$1.9 billion over 5 years.
* Reduces the enhanced federal matching rate for information and claims management systems from 90 percent to 75 percent in FY 2005. This one-year change would save the Federal government approximately $80 million in FY 2005.
* Provides an increase of $218 million for health centers.
* Provides an increase of $10 million for breast and cervical cancer screening.
* Provides an increase of $81 million for communities to develop innovative approaches to address diabetes, obesity and asthma.
* Provides a total of $2.1 billion-a $35 million increase over FY 2004 levels-for the Ryan White HIV/AIDS program, specific to the AIDS Drug Assistance Program (ADAP).
* Provides $1.8 billion-a $53 million increase over FY 2004 levels-to the Substance Abuse Block Grant.
* Reduces funds for the public health preparedness and capacity building grants administered by the Centers for Disease Control (CDC) and the Health Resources and Services Administration (HRSA) by $105 million and $39 million respectively.
* Extends premium assistance to Qualified Individuals (QI) through FY 2005. States would continue to be fully reimbursed for the cost of the program.
* Includes a proposal to extend and simplify Transitional Medical Assistance.
* Provides assistance to vulnerable populations transitioning from welfare to work through the extension of the Transitional Medical Assistance Program.
* Proposes $240 million a year ($1.2 billion over 5 years) for a state-based competitive matching grant program to support healthy marriages. A limited number of States, territories and tribal organization would receive funds. Funds would be redirected from the Performance Bonus in TANF.
* Doubles the President's financial commitment-$270 million-to abstinence education.
* Increases funding for faith-based initiatives, including doubling the Access to Recovery program to $200 million, more than doubling the resources for the Compassion Capital Fund ($100 million) and proposes level funding-$50 million-for mentoring children of prisoners.
* Provides an additional $11 million in formula block grants for states under the Low Income Home Energy Assistance Program (LIHEAP).
* Provides level funding for the Child Care Development Fund.
* Mandates collection of medical child support enforcement and mandates other enforcement strategies.
* Includes an increase of $169 million for Head Start funding.


Department of Homeland Security

* Reduces state formula grants to $750 million. (FY 2004 level was $1.7 billion)
* Increases funding for high-threat urban areas to $1.4 billion. (FY 2004 level was $725 million)
* Eliminates funding for Urban Search and Rescue Grants. (FY 2004 level was $60 million)
* Provides an additional $47 million to improve biosurveillance.
* Provides the Transportation Security Authority (TSA) a 20 percent increase for screener training, enabling security managers to improve screener performance and to enhance air cargo security.
* Reduces funding for the firefighter grants programs to $500 million. (FY 2004 level was $750 million)
* Does not provide funding for interoperable communications. (FY 2004 level was $85 million)


Department of Housing and Urban Development

* Proposes a four-year $300 million Prisoner Re-Entry initiative, in coordination with the Department of Labor.
* Funds the HOME Investment Partnership Program at $2 billion-an increase of $78 million over FY 2004 levels.
* Proposes $4.618 billion for the Community Development Block Grant program (FY 2004 level was $4.3 billion)
* Eliminates funding for the Revitalization of Severely Distressed Public Housing (HOPE-IV) program; alternatives considered.
* Zeroes out Rural Housing and Economic Development Program; had received $25 million in FY03 and FY 04.


Department of Interior

* Includes $226 million for Payment in Lieu of Taxes (PILT).
* Provides an increase of $53 million for the Abandoned Mines Lands program.


Department of Justice

* Proposes consolidation of Byrne Grants, Local Law Enforcement Block Grants and COPS Hiring Program into a simplified, flexible Justice Assistance Grant program. The program would be funded at $500 million.
* Eliminates funding for a number of existing state and local law enforcement assistance programs including funds for the State Criminal Alien Assistance Program (SCAAP).
* Proposes a four-year $300 million Prisoner Re-Entry initiative, in coordination with the Department of Housing and Urban Development.


Department of Labor

* Proposes to consolidate the Workforce Investment Act (WIA) adult and dislocated workers program and Employment Service State grants into a single funding stream.
* Uses unspent formula grant balances to maintain or increase service levels and provide more flexibility to the department to reallocate and target funding where it is most needed.
* Eliminates the Migrant and Seasonal Farmworkers program.


Department of Transportation

* Provides $900 million for Amtrak. ($1.26 billion was provided in FY04)
* Provides $256 billion over 6 years for the Safe, Accountable, Flexible and Efficient Transportation Equity Act of 2003 (SAFETEA). This is $62 billion below the current funding levels in the Senate bill and $119 billion below the current funding levels in the House bill.
* Provides level funding for highways-$33.6 billion.
* Dedicates $7.5 billion over 6 years, through SAFETEA, so that states can eliminate hazardous roadway conditions to reduce fatalities and injuries on the highway system.
* Proposes level funding-$7.3 billion-for transit. Guarantees $6 billion from the Highway Trust Fund, but does not guarantee the additional $1.3 billion from the General Fund.


Department of Treasury

* Provides a permanent extension of most tax cuts from 2001 and 2003.


Election Reform

* Provides $50 million ($40 million in grants to states) to the Election Assistance Commission to implement the Help American Vote Act (HAVA). The HHS budget includes $14.9 million-$9.9 million for payments to States to promote access for voters with disabilities and $4.9 million for payments to states for protection and advocacy systems-to implement HAVA. This number is far short of the $600 million authorized for 2005.


Environment Protection Agency

* Reduces funding for the Clean Water State Revolving Fund (SRF) to $850 million-from $1.3 billion in FY 04.
* Increases funding for Superfund by 10% to $1.4 billion.
* Provides level funding-$850 million-for the Drinking Water SRF.
* Provides an addition $26 million in state grants for the inspection program for underground storage tanks.
* Provides $5 million to assist States implement the final CAFO (confined animal feeding operations) rule.
* Continues its commitment to the Clear Skies Initiative.
* Provides a new $23 million State and Tribal Performance Fund which will award competitive grants for projects that can demonstrate environmental and public health outcomes.


Budget Enforcement

The President's Budget proposal includes a comprehensive framework to establish spending controls in law binding both the Congress and the Executive Branch. The Administration will transmit a legislative proposal to establish discretionary spending limits, mandatory spending controls, and a new mechanism to measure the Federal government's long-term obligations and to prohibit a net increase in these obligations. In particular, for discretionary spending, the President proposes to set limits for 2005 through 2009 on net budget authority and outlays equal to the levels proposed in the 2005 Budget. Legislation that exceeds the discretionary caps would trigger across-the-board cuts on non-exempt discretionary programs. The proposal discontinues separate caps for conservation programs and provides for a single, discretionary cap with separate firewalls for Transportation programs only. Other enforcement mechanisms include:

* Allows for an adjustment for Social Security Administration Continuing Disability Reviews (CDRs).
* Creates a separate Budget Enforcement Act (BEA) for budget authority for Project Bioshield, to ensure that funding for this program is not reduced and used as an offset for other discretionary spending.
* Extends the pay-as-you-go (PAYGO) requirements for mandatory spending only; revenue legislation would not be subject to this requirement.
* Requires that any advance appropriations provided in an appropriations act for 2005 through 2009 in excess of the advance appropriations provided in 2002 be counted against the discretionary cap in the year enacted. In addition, the 2005 Budget freezes all advance appropriations at their 2002 levels.
* Provides for a definition of "emergency requirement," to respond to unforeseen disasters and emergencies.

Baseline
The proposal also includes several changes to how the baseline is established. This includes assuming the extension of all expiring tax provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 and certain provisions in the Jobs and Growth Tax Relief Act of 2003; adds a provision to exclude discretionary funding for emergencies from the baseline.

Other Changes

The President proposes a biennial budget; funding issues would be made in odd-numbered years, with even numbered years devoted to authorizing legislation.

The President is requesting constitutional line-item veto authority linked to deficit authority. The proposal would give the President authority to reject new appropriations, new mandatory spending, or limited grants of tax benefits (to 100 or fewer beneficiaries) whenever the President determines the spending or tax benefits are not essential. In addition, the President is proposing that in the likelihood that Congress does not finish its work on the budget by the October 1st deadline, and they do not pass a CR, the federal government would not shut down but funding would be automatically provided at the lower level of the President's Budget or the prior year's level.

The President's budget also included a Six-Point Economic Growth Plan to: make health care more affordable, reduce the lawsuit burden on the economy; ensure a reliable energy supple; streamline regulations and reporting requirements, open new makers for American products; and to make permanent certain tax cuts set to expire. In addition, the President has four specific programs to increase private savings. This includes: (1) the use of Retirement Savings Accounts; (2) the consolidation of various employer-based defined contribution savings plans into one simple plan called Employer Retirement Savings Accounts; (3) the creation of Lifetime Savings Accounts which allow individuals to earn tax-free returns on deposit amounts and all for the withdrawal of funds as needed without having to pay taxes or a penalty; and (4) the use of Individual Development Accounts which use tax credits to leverage amounts saved by low-income taxpayers.



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