Thoughts on the FY2024 Congressional Appropriation process

Debt Ceiling Deal Takes Default Off the Table, but Parties Continue to Fight Over Appropriations

So I wrote this for Nextfed’s newsletter and have posted it on Linkedin, but figured I could add it here as well:

There is a lot of ground to cover trying to layout the state of play for FY 2024 appropriations, but to put the bottom-line up front: following the deal brokered to resolve the debt ceiling crisis, Congress is moving forward on the authorization and appropriations legislation required to fund the government in FY 2024. Due to conflict within the House Republican caucus, the House and the Senate will be marking up appropriations to different topline levels. This will create a fight over spending heading into the end of September with the risk of a government shutdown or, the more likely outcome, the passage of a continuing resolution. From there, Congress will face the need to complete its appropriations by the end of calendar year 2023 or the CR going into 2024 will be at a lower level of spending based on provisions in the debt ceiling bill.

It is also unclear how strong the House position is or if it will be able to pass appropriations bills at the levels envisioned by its allocations resulting from the debt ceiling deal (a return to the FY 2022 discretionary topline but with Defense, VA, and DHS spending largely shielded from cuts). The House position will result in a series of appropriations bills at the committee level and potentially on the floor showing major funding cuts relative to FY 2023 levels (an average reduction of 20% for unprotected appropriations). Companies with exposure to non-defense discretionary spending should be aware of these proposed reductions, but it remains highly unlikely that these cuts will become law. While there is risk of some reductions after future negotiations or via an extended CR (which would result in cuts based on language included in the debt ceiling deal), these reductions are likely to be much more manageable than the numbers that will be announced by House Appropriations. Interested clients should reach out to Nextfed to get updates on negotiations or to better understand risks to their portfolio posed by the Congressional process.

Note: FY 2023 figures include emergency funding/supplemental spending that results in it exceeding FY 2024 projections. Base spending is growing from FY 2023 to FY 2024, albeit slowly.

Now, on to the details. Last month, House Speaker Kevin McCarthy (R-CA) and President Joe Biden announced a deal to suspend the debt ceiling through January of 2025 in exchange for agreeing to cap discretionary spending toplines through FY 2025 and a variety of smaller Republican legislative priorities. At the time, the deal was heralded as a solution to this year’s potential fiscal issues, as with agreed upon topline caps and, some incentives in the legislation for pushing forward with “regular order” around the twelve appropriations bills. However, the far right of the House Republican caucus was deeply disappointed with the details of the debt ceiling bill, expressing that disappointment first in opposing the legislative vehicle to bring the debt ceiling bill to the floor (which, in a rebuke to House Republican leadership, required House Democrats’ assistance to pass) and then in effectively blocking House leadership’s control of the floor. Now, in order to assuage these rebels, Speaker McCarthy has decided to mark up the House’s version of this year’s appropriation bills at the FY2022 topline (while protecting DoD, the VA and DHS). This, in turn, will result in a spending fight with the Senate, where both parties have agreed to proceed using the caps from the debt ceiling bill, and the White House, which feels McCarthy is reneging on an agreement. Both chambers have begun to move forward with their various budget processes, but the end of the year outlook is now decidedly murky.

In the House, Appropriators have announced sub-committee allocations, i.e. the caps, for each of the 12 appropriations bills, and begun to vote out legislation. As of Tuesday, June 20th, the House Appropriations Committee had voted out the Agriculture and Military Construction-VA bills along party lines. At the same time, the House Armed Services Committee has passed its version of H.R. 2670, the FY 2024 National Defense Authorization Act (NDAA). For those interested in the details of the NDAA, Nextfed Insights will be incorporating the result of that mark-up into its FYDPEvolved Budget Tool within a week of the committee report’s release. In the Senate, Appropriators have committed to moving forward with the debt ceiling deal caps and began their mark-ups on Thursday, June 22nd. Similarly, the Senate Armed Services Committee has passed its version of the NDAA. In all cases, Nextfed Insights will incorporate the data into FYDPEvolved as report documentation is made available.

Given the radically different toplines, it will be curious to see how much progress both chambers make in passing appropriations bills this year. Historically, the House has had an easier time passing appropriations bills than the Senate (the Congressional Research Service maintains a tracker that provides historical data here), however with the massive cuts envisioned by the House Appropriations’ Committee’s allocations, it will be interesting to see if House Republicans in vulnerable districts will vote for massive cuts to popular programs. While it is difficult to forecast how, exactly, negotiations will proceed. The narrow partisan divide in the House and the Senate may result in a situation where neither chamber makes progress on funding for FY 2024 by September, leading to crisis negotiations to avoid a potential shutdown. Despite the successful debt ceiling deal, Congress and the White House seem likely to be back on the hot seat later this year as the FY 2024 funding fight continues.