the 113th congress: the path forward

The 113th Congress:

The Path Forward

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FEBRUARY 2013

113th CONGRESS OUTLOOK| FEBRUARY 2013

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TABLE OF CONTENTS

Introduction 3

The White House 4

New Cabinet Positions 5

Congress

Senate 6

Senators Up for Re-election in 2014 8

House of Representatives 9

Key Policy Issues for the 113th Congress

Budget/Fiscal Issues 12

Calendar of Near-Term Fiscal Issues 13

Appropriations 13

Agriculture 15

Defense 16

Education 17

Energy/Environment 19

Financial Services 22

Health Care 24

Homeland Security/Cybersecurity 25

Immigration 28

International Affairs 30

Judiciary 31

Labor 32

Tax 34

Technology 35

Trade 37

Transportation 39

Conclusion 40


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After the State of the Union: A New Path for the

113th Congress or More of the Same?

At the time of this writing, the President has just delivered his State of the Union address and the 113th Congress is six weeks into its new session. Congress is still organizing and no major legislative initiatives have been introduced or enacted. The budget process, which begins with the release of the President’s budget, is weeks behind schedule. It seems to many in Washington that the new 113th Congress is just an extension of the 112th, given the election results and the fact that the last Congress punted a number of crucial fiscal issues to the new one. The overarching questions that will play out over the coming months are what, if anything, has changed and what can be expected now that the President has announced his agenda. The November elections certainly produced status quo results in terms of White House and Congressional control. However, the President’s close but decisive victory has emboldened him, as was seen in the December fiscal cliff battle and the January debt ceiling show-down. The White House has signaled that they are moving to a much more aggressive political strategy in keeping with their successful re-election effort. At the same time, Republicans have shown a new-found willingness to address issues, such as comprehensive immigration reform, which are key to constituencies that deserted them in November. But Republicans have also drawn a harder line when it comes to compromise on budgetary issues. It remains to be seen if there are new issues and coalitions that will engender compromise in the 113th Congress, or if toxic partisanship and political posturing will continue to poison the legislative well. At this post-State of the Union interlude, this document “previews” the 113th Congress and the beginning of the President’s second term, with a focus on the major issues, key players and the internal party dynamics that will come into play in the next two years. Washington is still a divided city, reflecting the country’s stark political contrasts. Policy-making will still be separated into the mandatory, must-pass fiscal issues and the “discretionary” group of non-fiscal policy issues and legislative authorizations, which succeed only with bi-partisan agreement. Both parties took lessons from the November elections that may lead to compromise in some areas while highlighting bright lines that will never be erased as long as there is divided government. We examine all of this as the legislative action now begins in earnest.


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THE WHITE HOUSE The Administration’s sense of political momentum is strong, with few indications of olive branch offerings to House and Senate Republicans. Having executed one of the most strategically and effective national political campaigns in American history, and the historic transition of Obama for America into a 501(c)4 organization, expect the Administration to bring its considerable political and organizational skills to bear on behalf of its agenda. Each and every contentious legislative item, from comprehensive immigration reform to gun control to budget and sequestration battles, are likely to be critically evaluated through a political prism hardened by 2012 campaign data. Believing that it holds the high ground on a wide range of issues and buttressed by a variety of factors -- the President’s job approval numbers; the “which party do you trust more” polling; the ongoing internal civil war in the GOP, Presidential control over the national bully pulpit and the compelling demographic changes ongoing in contemporary America-- the White House holds the political upper hand for the near-term. As a result, we expect little compromise from the Administration. The President’s second term affords him the opportunity to pursue domestic agenda items that remained unfinished business after his first four years:

growing income inequality (highlighted by minimum wage and comprehensive tax reform debates);

energy and conservation;

“social justice” battles, ranging from gun control to gay rights. While focusing on these wide ranging agenda items, we can expect the White House to operate with a governing calculus that the pending legislative/political battlefield affords them the high ground. The White House will also fiercely leverage and maximize its institutional campaign capabilities on behalf of this legislative agenda. When the legislative process cannot produce the desired result, expect the Administration to turn to executive action in pursuit of its priorities. The National Labor Relations Board (NLRB), for example, will provide a much friendlier venue for redress of labor’s agenda than will Capitol Hill. The issuance of new regulations by Federal agencies may supplant regular legislative order as the most watched vehicle for policy enhancement. The President’s use of executive power over the next four years is certain to lead to major court challenges and confrontation with House and Senate Republicans. In reference to a January Appeals Court ruling indicating that the President had exceeded his constitutional powers in the NLRB’s Noel Canning case, Senator Chuck Grassley (R-IA) recently said: “It’s a dangerous road he’s going down contrary to the spirit of the Constitution. Just because Congress doesn’t act doesn’t mean the President has the right to act.” This sets up a myriad of fights over Administration executive and regulator action.


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New Cabinet Positions

U.S. Federal Agency Current/Nominated Secretary

*notes nomination

Outgoing Secretary

Dept. of Agriculture Tom Vilsack

Dept. of Commerce Rebecca Blank (acting)

Dept. of Defense Chuck Hagel* Leon Panetta

Dept. of Education Arne Duncan

Dept. of Energy Steven Chu

Dept. of Health and Human Services

Kathleen Sebelius

Dept. of Homeland Security Janet Napolitano

Dept. of Housing and Urban Development

Shaun Donovan

Dept. of Interior Sally Jewell* Ken Salazar

Dept. of Justice Eric Holder

Dept. of Labor Hilda Solis

Dept. of State John Kerry Hillary Clinton

Dept. of Transportation Ray LaHood

Dept. of Treasury Jack Lew* Tim Geithner

Dept. of Veterans Affairs Eric Shinseki

Central Intelligence Agency John Brennan* David Petraeus

Environmental Protection Agency

Lisa Jackson

Office of Management and Budget

Jeffrey Zients (acting)

U.S. Trade Representative Ron Kirk

U.S. Securities and Exchange Commission

Mary Jo White*

Consumer Financial Protection Bureau

Richard Cordray* (currently serving- recess appointment)

New White House Staff

Chief of Staff (COS) Denis McDonough Jack Lew

Deputy National Security Adviser

Tony Blinken Denis McDonough

Deputy COS for Policy Rob Nabors Nancy-Ann DeParle

Communications Director Jennifer Palmieri Dan Pfeiffer

Senior Adviser Dan Pfeiffer David Plouffe

Director of Legislative Affairs Miguel Rodriguez Rob Nabors


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CONGRESS: SENATE SENATE DEMOCRATS The 2012 elections were an unexpected boon for Senate Democrats, turning what most thought would be a year in which Democrats lost the Senate majority into one where they gained two seats. But even though they increased their majority to 55 seats, Senate filibuster rules means 60 votes are still required for Democrats to truly control the Senate. Even with new curbs on the filibuster, 60 votes will still be the brass ring for legislation to pass the Senate. With at least ten incumbent Senate Democrats facing re-election in 2014 from battleground states, the challenge is even greater for President Obama’s agenda. However, the high bar to Senate passage means that any item that clears the Senate hurdle has momentum when it is sent to the House, a dynamic that proved successful on budget-related deals in recent months and one which will be in play in the 113th. Democratic Agenda Not all Senate-passed legislation sailed through the House in the 112th Congress. Notable exceptions were the Violence Against Women Act (VAWA), the farm bill, Postal Service reform, and the Hurricane Sandy Supplemental Appropriations bill. Congress has already acted again this year on a bi-partisan basis to clear a new version of the Sandy Supplemental, and the Senate overwhelmingly passed a new version of VAWA. Majority Leader Harry Reid (D-NV) announced in January that the Senate would revisit the other major Senate-passed legislation that failed to pass the House. Senate Democrats in late January also laid out their top ten bills for the 113th Congress which, other than a reauthorization of a veteran’s employment bill and the farm bill reauthorization, are essentially a statement of Democratic legislative priorities and principles. Included in this list are resolutions calling on Congress to act on: immigration reform; issues resulting from the Sandy Hook massacre embodied in Vice President Biden’s gun control task force recommendation; infrastructure investment; VAWA reauthorization; measures to prevent the impact of extreme weather events, including clean energy and infrastructure investments; tax loophole reforms; and, election and campaign finance reforms. Some of these are Democratic perennials but others are a new response to recent headline news events. Either way, they are an attempt to present themes that have widespread popular support and that unify the Democratic caucus. Caucus Dynamics Among these caucus members are a number of Red- or Purple-state freshmen who were swept into office during the Democratic wave election of 2008 including Senators Kay Hagan (D-NC), Mark Warner (D-VA), Mark Begich (D-AK), Jeanne Shaheen (D-NH), and Mark Udall (D-CO). All except Senator Warner could face a tough re-election challenge and even Senator Warner will likely hew to a moderate-to-conservative line based on past performance. Another group of veteran Democrats will face the voters in states which two years earlier voted decisively against President Obama including, Senators Max Baucus (D-MT), Mark Pryor (D-AR), Mary Landrieu (D-LA), and Tim Johnson (D-SD). The 2014 Democrats will run in the aftermath of a big class of nine


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Democratic freshmen elected in 2012, three of whom, Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), and Tim Kaine (D-VA), triumphed in challenging climates for Democrats and one, Angus King (I-ME), will look to maintain his independence from the Democratic caucus as much as possible. At the same time, new liberal Democratic women Senators Elizabeth Warren (D-MA) and Tammy Baldwin (D-WI), illustrate the diverse ideological range of this freshmen class – and the Democratic caucus as a whole. Managing this diversity will be a challenge to Democratic leadership at times. For the most part, Democratic leaders should expect unity on most bread-and-butter economic issues that define the party such as infrastructure investment and veterans’ employment. On other, more contentious issues such as gun control and aspects of immigration reform, leadership will be content to let the chips fall where they may and let defectors stray. At the same time, the Administration will actively engage its campaign-style grassroots operation to maximize political leverage in these tough debates while seeking to avoid alienating moderates they may need on other issues. SENATE REPUBLICANS Senate Republicans now hold 45 seats and remain the minority opposition to the President, losing two seats in the November elections. Senator Mitch McConnell (R-KY), re-elected as Minority Leader, leads a more conservative caucus due to the loss of moderates from the caucus. Senator John Cornyn (R-TX) was elected Minority Whip while Senators John Barrasso (R-WY) and John Thune (R-SD) kept their leadership positions. Significantly, the resolution of a critical debate surrounding Senate rules and the use of the filibuster avoided an otherwise destructive and poisonous issue. It was hoped that the agreement would set a better tone for the collegial body beginning its work in the 113th Congress, an aspiration that was immediately challenged by the contentious nomination of former Senator Chuck Hagel to lead the Pentagon. The critical fiscal issues facing the Congress early in the session will be a true test of the rule changes and the comity sought after in the Senate. Only 13 Republican Senators are up for re-election in 2014, including McConnell. Two Senators, Saxby Chambliss (R-GA) and Mike Johanns (R-NE), have already announced their retirement. Because of a more conservative Republican Senate caucus to begin this session and more political challenges from the far right, Members will be reluctant to crossover to support the majority of the Democratic caucus on many issues. These factors will make achieving the 60-vote supermajority for passage of most legislation a greater challenge. Filibuster Changes The new filibuster rules changes and standing orders, agreed to by the Senate in late January, give incremental momentum to efforts to speed up debate, which has bogged down in recent years on all but the most important and bi-partisan legislation and nominations. Despite the changes, the majority can still choose the traditional path on debatable motions to proceed – file cloture, wait two days, invoke cloture if 60 votes are attainable, wait up to 30 more hours. More likely will be the process under the new standing order (good only for the duration of the


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113th Congress) where debate is expedited at the price of guaranteeing the minority two amendments of its choosing. In recent years, both parties – when they’ve been in the majority – have been reluctant to allow the minority to offer amendments without pre-clearing them. The prerogative of the majority leader to fill the amendment tree, and block minority amendments, has resulted in a chicken-or-the-egg blame game where the minority has responded by blocking the majority’s efforts to proceed to favored legislation. Now, at least two amendments of the minority’s choosing will be voted on, although the rules changes allow the majority the indirect route of tabling the minority’s amendments by a majority, not a supermajority, vote. But it has been this reluctance to even face tough votes on tabling amendments that has turned the Senate into not much more than an elite debating society, with dueling political messaging strategies. In order to make progress on Democratic agenda items, Majority Leader Reid will have to give Republicans votes on at least two amendments, no matter how noxious they are to the majority of Democrats, or tempting to vulnerable moderate Democrats. This will be a feature of the Senate in the 113th Congress that bears close scrutiny. If there is bi-partisan satisfaction with this baby step, it could be made permanent in the Senate rules and even expanded-upon in the next Congress. Additionally, the reduction in post-cloture debate time on sub-cabinet and district court judicial nominations may produce an incremental uptick in executive calendar activity, although these nominations will still require 60 votes if they face determined opposition. This may be the only consolation available to the Obama Administration in the wake of a recent court decision invalidating the President’s pro forma recess appointments in the 112th Congress.

Senators Up For Re-election in 2014

Democrats (16) Open Seats Republicans (11)

Baucus, Max (MT) Per Retirement: Alexander, Lamar (TN)

Begich, Mark (AK) Chambliss, Saxby (R-GA) Cochran, Thad (MS)

Coons, Chris (DE) Harkin, Tom (D-IA) Collins, Susan (ME)

Durbin, Richard J. (IL) Johanns, Mike (R-NE) Cornyn, John (TX)

Franken, Al (MN) Lautenberg, Frank R. (D-NJ) Enzi, Michael B. (WY)

Hagan, Kay (NC) Rockefeller, John D., IV (D-WV) Graham, Lindsey (SC)

Johnson, Tim (SD) Inhofe, James M. (OK)

Landrieu, Mary L. (LA) McConnell, Mitch (KY)

Levin, Carl (MI) Special Election Held in June 2013: Risch, Jim (ID)

Merkley, Jeff (OR) Kerry, John (D-MA)* Roberts, Pat (KS)

Pryor, Mark (AR) Sessions, Jeff (AL)

Reed, Jack (RI)

Shaheen, Jeanne (NH)

Udall, Mark (CO)

Udall, Tom (NM)

Warner, Mark (VA)


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CONGRESS: HOUSE OF REPRESENTATIVES HOUSE REPUBLICANS Even though they lost seats, the Republicans emerged from the election in a strong position in the House. The 234-Member House Republican delegation is the second largest since 1947. Republicans overwhelmingly represent safe Congressional districts with only a handful elected with less than 55 percent of their electorate. Republicans are likely to continue to control the House through the remainder of the decade until the next redistricting occurs. The election saw the continued reduction in the number of conservative Blue Dog Democrats whose seats were claimed by conservative Republicans. Combined with the defeat and departure of influential moderate Republicans, the result is a more polarized House of Representatives. Republican Agenda The House Republican Leadership will adopt a more deliberative legislative process with the goal of confronting Senate Democrats, rather than directly challenging the President. The goal will be to force Senate Democrats to be held accountable for specific policy options to define the differences between the two political parties and using the process to increase pressure on moderate Senate Democrats who are seeking re-election in 2014. The House Republican majority will adopt a new “Senate first” strategy of deferring to the Senate to act first on contentious legislation, such as gun control and immigration reform. The House Republicans look to avoid simply passing legislation which never sees the light of day in the Senate. Instead, they will use the tactic of sending bills to the Senate that moderate Democrats will find difficult to oppose. There also will be much more emphasis on oversight and holding the Administration responsible for how the implementation of its highly controversial first term achievements, the Affordable Care Act and Dodd-Frank, are proceeding. House Majority Leader Eric Cantor (R-VA) has outlined an agenda that seeks to place a more personal touch on the Republican brand. While continuing the emphasis on traditional Republican goals of reducing federal spending, tax reform and maximizing domestic energy development, House Republicans will examine transportation and infrastructure funding, the way federal funding is allocated for education, immigration policy for highly skilled workers, agriculture support and conservation funding programs in the quadrennial farm bill, and legislation addressing the implementation of the Affordable Care Act. Expanded free trade will be another priority as Republicans target policies to return economic growth to its historic norm from the anemic levels registered since 2008. Conference Dynamics House Republicans have been split into two factions over governance of the House. One faction feels it represents a mandate from their constituents to support a limited smaller government. This group believes control of the House grants the power to govern the country and there is no need to collaborate with the President. This model draws inspiration from the Gingrich speakership of 1995 and the Tea Party Republicans of 2011 -12. The other faction recognizes you cannot govern from the House because control of one half of one third of the government does not provide the power needed to force through policy positions, demonstrated most


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recently in the fiscal cliff showdown. This model is best exemplified by Speaker John Boehner (R-OH) and Representative Paul Ryan (R-WI). House Republicans are at risk of becoming a regional southern party. The Republican House majority is based on the 57 seat advantage it holds in the eleven southern states stretching from Virginia through Texas. Outside the Deep South, Democrats hold a 24-seat margin in the House. Redistricting has shifted more seats away from the northern states where Democrats are strongest, to the fast-growing southern states where the Republicans dominate rural and suburban areas. The Deep South is by far the most conservative area of the country and this southern Republican dominance heavily affects policy decisions and internal politics within the entire Republican Conference. For example, almost 90 percent of southern Republicans opposed the fiscal cliff budget deal while a majority of Republicans from outside the South supported the fiscal cliff deal. The same voting patterns emerge with the recent vote on aid for Hurricane Sandy. The increased regionalization of House Republicans creates a growing perception in other areas of the country that the party is a Southern and rural party. Population shifts continue to erode the party’s popularity outside of the South and rural areas. HOUSE DEMOCRATS In 2013, House Democrats already have been called upon to deliver votes (and the majority) for major legislative initiatives. The fiscal cliff deal (passed in the last days of the 112th Congress) and the Hurricane Sandy supplemental appropriations package were passed only after Democrats delivered a solid majority of yes votes from their caucus. With the House GOP caucus searching for greater cohesion, House Democrats may have a stronger role to play than typically afforded to a House minority caucus. The House Democratic leadership remains largely unchanged from the previous Congress. Following a pickup of eight seats in November’s election, Minority Leader Nancy Pelosi (D-CA) chose to lead her caucus again in the 113th Congress. With only 17 seats between Democrats and the majority, Leader Pelosi and her caucus will continue to search for opportunities to splinter the GOP caucus and marginalize House Republicans as extreme and out-of-step with mainstream America. Opportunities to do so are forthcoming, with debt ceiling and government funding bills on the horizon. Mid-Term Elections Democrats need to take over 17 seats to gain a majority in the House of Representatives. That will be difficult to achieve in a midterm election, where the turnout composition is much different than in a Presidential election year, and where the President’s party in Congress has a long record of losing seats. In midterm elections since 1946, the President’s party has lost an average of 26 seats in the House; it has gained seats only four times since the Civil War, most recently in special circumstances in 1998 (a reaction to the Clinton impeachment) and again in 2002 (rallying of support for Bush’s response to the attacks of 9-11). Turnout in Presidential election years is always higher because of the greater participation of minorities and youth voters. The voter turnout among these groups tends to be lower during midterm elections, which creates an older less diverse electorate that favors Republican candidates. Unless the turnout composition changes historically in 2014, Democrats will have to substantially out-


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perform their 2012 effort to win control of the House with a likely far more conservative electorate. Recent redistricting also plays a much greater role in the midterm election. The 2010 Congressional redistricting left few truly competitive seats available for Democratic takeover. Democrats will have to win some conservative districts to regain the majority. Those districts with their less diverse and older constituencies favor Republicans and are where the President’s approval becomes a much greater factor. Another mid-term election factor is the role of the primary election in safe Congressional districts. It is well known that a highly motivated charismatic challenger can defeat an incumbent with far greater financial assets. As a result, incumbents in safe districts, both urban Democrats and rural Republicans, always have an eye on the possibility of a primary challenger. The potential primary focuses incumbents on keeping their voting records as close as possible to what they perceive to be the views of the primary, not the general, electorate in their Congressional districts. This leads to more conservative Republican and more liberal Democratic voting patterns.


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KEY POLICY ISSUES FOR THE 113th CONGRESS

BUDGET/FISCAL ISSUES Continuing Resolution

Last October, Congress approved a six-month continuing resolution (CR) for Fiscal Year 2013, which expires on March 27, 2013. By that date, Congress will need either to pass the appropriations bills (likely in the form of an omnibus) or advance another CR. These FY 2013 negotiations have taken on greater import given the decision by House Republicans to bypass, for the time being, a high stakes fight over an increase in the federal debt ceiling. Instead of repeating the 2011 debt ceiling showdown, they decided to take their stand on further spending cuts in the context of FY2013 funding. House Republicans are vowing to adhere to a $974 billion cap on discretionary spending—a considerable sum below the previously assumed $1.047 in annual discretionary spending level found in the six month CR passed in October. Additionally, Congress must consider the debt limit extension by late summer. Sequestration The failure of the Joint Select Committee on Deficit Reduction, or the so-called “Super Committee,” to identify $1.2 trillion in spending cuts over the next decade triggered budget sequestration that was set to occur on January 2, 2013. But on January 1, 2013, the House and Senate passed H.R. 8, “The American Taxpayer Relief Act” (ATRA), which delayed the sequester until March 1, giving Congress additional time to develop legislation that would prevent the budget cuts from taking effect. To offset the two-month delay, discretionary spending caps were lowered and the eligibility to convert Individual Retirement Accounts (IRA) to Roth IRAs was expanded. More on the specifics of sequestration can be found here. As the threat of sequestration draws closer, President Obama has made several statements about the need for a “balanced” package of short-term spending cuts and tax reforms that will help the country avoid the sequester. He has referenced the budget and tax issues that he and Speaker Boehner discussed during negotiations in December including carried interest; oil and gas industry tax benefits; corporate aircraft depreciation; and a cap on itemized deductions for the wealthy. During his State of the Union Address, the President advocated for additional ways to achieve savings, including reducing taxpayer subsidies to prescription drug companies, asking the wealthiest seniors to pay more and changing the way the government pays for Medicare to achieve the health care savings (as proposed by the Simpson-Bowles commission).

The Congressional response to the looming sequester has been mixed. Although Members from both parties have expressed a desire to halt sequestration, there have been few, if any, proposals that would receive bipartisan, bicameral support. Senate Majority Leader Reid has met with Speaker Boehner to discuss the possibility of a plan with reports of no progress being made. Additionally, in recent statements Speaker Boehner, when discussing a compromise, stated that it is “time for the Senate to do its job,” and proclaimed that the House would wait

http://www.prime-policy.com/practitioners-corner/fiscal-follies-guide-navigating-upcoming-budget-battles


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to see what sort of package Senate Democrats propose before addressing the issue further. Senate Democrats produced a package that included new tax revenue, cuts to agriculture subsidies and more targeted defense cuts.

Calendar of Near-Term Fiscal Issues

February Shaded Red boxes = Legislative work days

Sun Mon Tues Wed Thurs Fri Sat 17 18

House & Senate District/State Work Period

19 House & Senate District/State Work Period




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24 25 26 27 28

March 1

Sequestration Triggered

2

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

House & Senate District/State Work Period


27 House & Senate District/State Work Period CR Expires After Session Sequestration


29 Good Friday House & Senate District/State Work Period

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Appropriations Once considered the most plum of assignments, the Appropriations Committee has suffered under the weight of Washington gridlock and the continuing Congressional battle over the nation’s fiscal policies. Last year, not a single annual appropriations bill was enacted into law—the latest example of the deleterious trend away from regular legislative order. This broken process, the ongoing pressure to cut spending, and the renewed ban on earmarks were enough to help dissuade two senior Democratic senators from chairing the committee following the death of Senator Daniel Inouye (D-HI) in December. On a bicameral and bipartisan basis, Congressional appropriators are pledging to restore regular order in the appropriations process, but that goal is likely to remain out of reach unless


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Congressional leaders agree on a broader budgetary framework. They will have their first opportunity to hammer out such a framework in the coming weeks as Congress works to wrap up fiscal 2013 appropriations bills. Even as Congress considers its legislative options for funding government through the remainder of FY 2013, appropriators will have to begin the fiscal 2014 process. The FY 2014 appropriations cycle also is likely to get off to a rocky start. The Obama Administration is signaling that it will not send up its budget request to Congress until March, calling into question the timing of the House and Senate budget resolutions. These budget resolutions provide the appropriations committees the topline spending numbers that become the basis for the subcommittee 302(b) allocations. This delayed start and ongoing Congressional battle over spending will only strain efforts by appropriators to restore regular order in the appropriations process, and as a result, it will again be unlikely that Congress passes each of the 12 spending bills before the start of the new fiscal year (which hasn’t occurred since 1993). SENATE The Senate Appropriations Committee will have new leadership in the 113th Congress. Senator Barbara Mikulski (D-MD) was named Chair of the Committee in December. Senator Richard Shelby (R-AL) is the Committee’s new Ranking Member, replacing Senator Thad Cochran (R-MS) who moved to be the top Republican on the Agriculture Committee. New members of the Committee include Senators Tom Udall (D-NM), Jeanne Shaheen (D-NH), Jeff Merkley (D-OR), Mark Begich (D-AK), Mike Johanns (R-NE) and John Boozman (R-AR). In assuming the leadership of the committee, Chairwoman Mikulski stated, “Our committee will function in a way that is open, transparent and follows regular order.” She underscored the need to work in bipartisan fashion to “meet our national security needs but also the compelling human needs in this country.” HOUSE Representative Hal Rogers (R-KY) returns as chairman of the House Appropriations Committee. He welcomes new members: Jeff Fortenberry (R-NE), Tom Rooney (R-FL), Chuck Fleischmann (R-TN), Jaime Herrera Beutler (R-WA), and two freshmen, David Joyce (R-OH) and David Valadao (R-CA). On the Democratic side, Representative Nita Lowey won her bid to replace the now retired Representative Norm Dicks (D-WA) as Ranking Member of the committee. Tim Ryan (D-OH) and Debbie Wasserman-Schultz (D-FL) return to the Committee after a two year hiatus, joined by new members Representatives Henry Cuellar (D-TX), Chellie Pingree (D-ME), Mike Quigley (D-IL) and Bill Owens (R-NY). Chairman Rogers is already warning the committee members that “we’re going to be squeezed like we’ve never been squeezed before with a [budget allocation] that’s going to be severe.” This ominous message portends tough decisions and spirited debate within the committee. Chairman Rogers has also suggested that the Committee will bolster its oversight activities to keep busy while waiting for the President’s budget request.


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Earmarks Efforts by earmarking proponents to reconsider their use in the annual spending bills have failed to gain traction. President Obama has said that he will veto spending bills with earmarks, and House Republicans have renewed their commitment to reject any legislation that includes earmarks for the 113th Congress. In the Senate, appropriators are more reluctant to formally foreclose the possibility of earmarks, but there is no clear path for a return to earmarking this year and likely next.

Agriculture The Farm Bill Enactment of a new long-term farm bill will be the most pressing agriculture issue in the new Congress. H.R. 8, “The American Taxpayers Relief Act of 2012,” provided for a temporary extension of the current farm bill through the end of September 2013. This will give Congress more time to consider the many thorny issues that have bedeviled consideration of a new farm bill to date. The work in both the House and Senate in 2012 to draft farm legislation will help jump start the legislative process. However, as the need for deficit reduction forces further spending cuts in agricultural accounts, the competition for scarce funds will only fan longstanding controversies over commodity price supports, crop insurance premium subsidies, Supplemental Nutrition Assistance Program (SNAP) outlays, disaster assistance programs and the “orphan” programs that were not part of the temporary extension of current law and lack CBO baselines beyond September 2012. In 2012 there was general consensus around the need to eliminate direct payments to farmers. However, that consensus was based on a trade-off—do away with direct payments in exchange for a “shallow loss” revenue program that would work in tandem with crop insurance to provide protection against reduced yields and low prices. This appealed to corn, soybean and wheat producers but caused heartburn for rice, peanut and cotton farmers who prefer the target-price format of current farm programs. This issue remains. With Senator Cochran assuming the position of ranking Republican on the Senate Agriculture Committee, southern crops can expect more favorable consideration in a new farm bill. Crop insurance will be subjected to scrutiny given the large outlays incurred as a result of the current drought. Attention will focus on reducing premium subsidies and limiting payments based on a farmer’s income. Most of the savings associated with both the Senate and House versions of the farm bill were derived from SNAP (formerly known as food stamps). But there was a big difference in the level of SNAP savings between the Senate and House bills. It was this disparity, by and large, which kept House Republican leaders from bringing the farm bill to the floor. Controversy around SNAP will continue to rage in the new Congress.


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Disaster assistance for livestock producers lapsed in 2011 and it had been assumed that such assistance would be renewed in the rewrite of the farm bill. When the record-setting drought struck the nation last summer, livestock producers were especially hard hit, as feed costs sky-rocketed, pastures dried up and relief in the form of emergency disaster payments was unavailable. The short-term extension of the current farm bill did nothing to address this situation, and so livestock producers continue to be exposed to natural disaster emergencies the way row-crop farmers are not. Producers of fruits and vegetables, organic farmers and conservationists did not fare well in the farm bill extension. Programs benefiting these parties were among those whose “orphan” status prevented them from being continued. Moreover, because they have no CBO budget baselines, inclusion of these programs in a new long-term farm bill will require Congress to find as much as $10 billion in additional offsets in order to fund them. Developments on the various fiscal and budget fronts will shape the timing and substance of the farm bill. Continued stalemate on those matters could result in another short-term extension of the farm bill in the fall.

Defense SENATE There have been several changes in defense jurisdictional Committee membership, particularly on the Senate side, where Senator Jim Inhofe (R-OK) replaces Senator John McCain (R-AZ) as the Ranking Member of the Senate Armed Services Committee (SASC). While Senator Carl Levin (D-MI) will remain as Chairman, several new members have joined the Committee, a number of whom engaged in spirited discussions regarding the nomination of former Senator Chuck Hagel to be Secretary of Defense. Ultimately, we expect that Senator Hagel will be confirmed and that the Armed Services Committee will retain its historical bi-partisan nature. The Senate Appropriations Committee will also see new faces at the national security helm as Senator Barbara Mikulski (D-MD) assumes Chairmanship of the full Committee, working with Senator Richard Shelby (R-AL) as Ranking Member. Senator Mikulski has a number of defense and space interests in her state. Chairing the Defense Subcommittee will be Senator Dick Durbin (D-IL) with Ranking Member Senator Thad Cochran (R-MS). HOUSE On the House side, the House Armed Services Committee Chairman Buck McKeon (R-CA) and Ranking Member Adam Smith (D-WA) will continue in their current positions. Representative Hal Rogers will continue as Chairman of the House Appropriations Committee with Representative Nita Lowey (D-NY) as Ranking Member. The Defense Subcommittee will continue to be chaired by Representative Bill Young (R-FL) with Representative Peter Visclosky (D-IN) assuming the Ranking Member position.


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POLICY ISSUES With budget sequestration widely expected to reduce FY 2013 defense spending by $43 billion, the Pentagon has already begun implementing a civilian hiring freeze and a possible temporary furlough of the department’s 791,000 civilian employees. However, the Congressional appropriations committees will have an opportunity to address this issue in whatever action they take to respond to the March 27 expiration of the current CR. Sequestration is expected to have across-the-board application for all Department of Defense (DoD) programs, projects and activities. This will have a significant downward impact on force structure, research and development spending and new procurement and acquisition, including total units ordered. The defense industrial base will likely experience substantial contraction, depending on the duration of the sequester, unless Congress and the President can agree on a long-term budget solution. In this very uncertain period, defense authorizers and appropriators will be challenged to set spending levels and make choices among competing priorities. Big ticket items would appear to be most vulnerable, including shipbuilding, aircraft production and ground vehicle fleets. Another casualty will almost certainly be much needed reform. In 2001, then-Secretary Donald Rumsfeld launched a series of studies looking at reform of the military personnel and retirement system, procurement reform, among others. But these efforts were overwhelmed by the need to respond to 9/11. After eleven years of preoccupation with war in Iraq and Afghanistan, there is little reason to hope that those efforts can easily be reignited under the added strain of sequestration. In his State of the Union message, President Obama said that over the next year 34,000 troops will return from Afghanistan and by the end of 2014, “the war in Afghanistan will be over.” U.S. commitment beyond 2014, according to the President, will focus on training and equipping Afghan forces to carry out their own security. In addition, the U.S. will continue to assist countries across the Middle East to provide their own security against Al Qaida and other extremists. That said, the withdrawal from Iraq and the drawdown from Afghanistan, combined with unprecedented budget pressures and a new defense secretary, may be a winning formula for taking on reform.

Education SENATE The Senate Health, Education, Labor and Pensions (HELP) Committee will see a change in its leadership with Senator Lamar Alexander (R-TN) now serving as the Ranking Member. Senator Alexander is a former university president, Secretary of Education, and Governor and brings great experience to this position, particularly in addressing education issues. The overall membership of the HELP Committee did not change dramatically from last Congress. Democrats have added freshmen Senators Tammy Baldwin (D-WI), Chris Murphy (D-CT) and Elizabeth Warren (D-MA) while the Republicans have added freshmen Senator Tim Scott (R-SC). Senators Michael Bennet (D-CO), Richard Blumenthal (D-CT), and John McCain have departed the Committee.


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HOUSE The House Education and Workforce Committee did not see any changes in leadership and only minimal changes in its membership. Republicans added three freshmen Representatives Susan Brooks (R-IN), Richard Hudson (R-NC), and Luke Messer (R-IN) while asking Representatives Tom Price (R-GA), Brett Guthrie (R-KY), Kenny Marchant (R-TX), and Matt Salmon (R-AZ) to return to the Committee after not serving on the Committee in the last Congress. Democrats did not add any freshmen to their roster on the committee but asked Representatives Joe Courtney (D-CT), Marcia Fudge (D-OH), Jared Polis (D-CO), Gregorio Sablan (D-MP), John Yarmuth (D-KY), Frederica Wilson (D-FL) to re-join the Committee in the 113th Congress and Representative Suzanne Bonamici (D-OR) to serve for the first time on the Committee. POLICY ISSUES Elementary and Secondary Education Act Two major reauthorization bills will dominate the education agenda in the House and Senate during the 113th Congress. The first is the “Elementary and Secondary Education Act” (ESEA). The last time ESEA was reauthorized was early in President George W. Bush’s first-term through the “No Child Left Behind Act” because of the rigorous testing requirements it imposed on states. Efforts to reauthorize this law, however, have stalled over the past several Congresses. The Obama Administration, growing frustrated with the lack of legislative progress, began issuing waivers to states for certain key provisions of ESEA. At this time, thirty-four states have received ESEA requirement waivers from the Department of Education, and seven more have proposals for waivers under review. Many Members of Congress would prefer that Congress rewrite the ESEA completely, rather than allow the Department of Education to use its administrative authority to effectively change the law on a state-by-state basis. The House Education and Workforce Committee and the Senate HELP Committee have ESEA reauthorization high on the agenda for the committees with consideration likely following completion of a reauthorization bill for the Workforce Investment Act. Higher Education Act The second big education reauthorization on the agenda for the 113th Congress is the “Higher Education Act” which does not lapse until 2014. However, Congress and the Administration will be facing a defining moment on June 30, 2013, when the interest rates on subsidized Stafford Loans made to undergraduate students could jump from 3.4 to 6.8 percent. In 2007, Congress passed the “College Cost Reduction Act” (CCRA), which cut these interest rates in half over a five-year period. Last year Congress passed a one-year extension of the current 3.4 percent rate on these loans. The need to address this issue before next year could spark efforts to begin the reauthorization of the student aid provisions in the Higher Education Act this year, well before its expiration date. Another popular student aid program, Pell Grants, received some good news earlier this year. Many had expected the Pell Grants program to face a budget shortfall this year. However, the Congressional Budget Office estimated that under the new policy baseline released on February 5, the Pell Grants program has a surplus balance of $9.3 billion of funds not used in fiscal year 2013. With news of the Pell Grant surplus, there is not likely to be any legislative action on the Pell Grant program in 2013.


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Energy and Environment

President Obama sought energy reform and climate change legislation during his first term and reaffirmed his commitment during both his second Inaugural and this year’s State of the Union Addresses, saying that if Congress does not act, he will. A divided Congress, however, suggests much of the energy policy activity will be driven by the Executive Branch while Congress attempts to tackle energy/climate policy through either a comprehensive approach or through more modest legislative efforts. No major energy legislation has passed Congress since 2007 and prospects for a successful comprehensive bill are slight. However, in the next two years, advocates of robust energy and climate reform will continue to lay the groundwork for a time when comprehensive legislation can be enacted. While energy policy and its impact on climate will be in the forefront of the policy debate, it is unlikely the 113th Congress will muster the huge political and regional tradeoffs needed to fashion a comprehensive energy bill. Although lightning could strike and lead to major compromises on energy regulatory decisions, smaller but still significant legislative skirmishes are more likely and could collectively alter the energy landscape and affect energy industry investments. ADMINISTRATION The President’s 2nd term will see a significant change in the makeup of his Cabinet with jurisdiction over energy policy. Most significantly, Energy Secretary Stephen Chu and the Administrator of the Environmental Protection Agency (EPA), Lisa Jackson, will be stepping down. This provides an opportunity to revisit the EPA’s aggressive (many say heavy-handed) regulatory approach that has focused largely on fossil fuel extraction and emissions. Despite a new EPA Administrator, it is unlikely that the Administration will change course on its regulatory goals in this area and the President has signaled that he intends to use the tools available under existing laws, like the Clean Air Act, to shape climate and energy policy going forward. Also departing is Interior Secretary Ken Salazar, who has overseen energy exploration on federal lands, and the nominee to replace him, REI CEO Sally Jewel, brings an interesting mix of business acumen, technical experience in oil and gas, and a commitment to natural resource protection. Additionally, the new Secretary of State, John Kerry promises to be aggressive in pursuing international action on climate change which could increase pressure on the Administration to deliver on the domestic front. The Executive Branch will dictate the fate of three major policy issues: construction of the Keystone XL pipeline, applications to export domestic natural gas to foreign markets, and the nature of further carbon regulations for new (and potentially current) sources of emissions. These decisions and potentially others will have longstanding and significant impacts on the future of energy policy and have the potential to fundamentally change the nature of economic drivers in the United States. They are also likely to trigger legislative efforts to affect the Executive Branch decisions.


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POLICY ISSUES Keystone Pipeline A decision on the Keystone XL pipeline is due in 2013, coincidentally around the time the next wave of major budget and fiscal negotiations come to a head. While the State Department has had a major role in the development of Administration policy regarding the pipeline, and incoming Secretary John Kerry is a strong advocate for an international climate change regime, the ultimate decision will rest with President Obama. The President’s base is split over this issue, with labor unions in support of the pipeline’s construction and most environmentalists opposed. It is possible that a decision to proceed with the pipeline will be coupled with a demand from the Administration for investment in renewable energy and energy efficiency programs or other progress on broader climate issues. Natural Gas Exports The Administration is expected to decide whether to grant approval to build liquefied natural gas (LNG) export terminals, for which 15 applications were pending at the Energy Department as of December of last year. The domestic natural gas boom is seen as a future game changer for the U.S. economy and for major international markets, but it has already fundamentally altered the economics of other energy sources including coal, nuclear and renewables. Studies conflict over the impact that LNG exports will have on the upward price of natural gas, which will be determining factor in the ultimate decision of whether to grant export approval. Energy and Natural Resources Chairman Ron Wyden (D-OR) has been skeptical of natural gas exports and will use his committee’s gavel to influence the decision making process. Carbon Emissions EPA is scheduled in 2013 to issue its final rule on carbon emissions performance standards for new fossil-fueled power plants. As a result, all new coal-fired units would be required to install expensive emissions control technologies or shift to cleaner fuel sources. By regulating new sources, EPA would trigger a requirement of the Clean Air Act to issue similar standards for existing sources, a process that could take several years. By all accounts, the new source rule (coupled with the existing sources rule) will touch all sectors of the economy and continue to marginalize coal as a viable energy fuel. EPA also will study the issues of hydraulic fracturing (fracking), coal ash and other sensitive issues with wide-ranging impacts. Aggressive regulatory approaches are likely and will increase pressure on Congress to act, either to block regulations or to substitute legislative compromise for agency action. Republicans in Congress (along with coal-friendly Democrats) will continue attempts to challenge the EPA wherever possible. A successful effort to put this to a vote in the Senate could put moderate Democrats in a tough position creating the possibility of either action to limit EPA’s authority or a political issue that can be used against them in the election. The President’s support in his State of the Union address for market-based, bipartisan Congressional approaches on climate, like those advanced by Senators John McCain and Joe Lieberman (I-CT) a few years ago, will have an uphill climb that is not likely to succeed unless industry can unite behind an approach acceptable to the White House.


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CONGRESS In Congress, incoming Chairman of the Senate Energy & Natural Resources Committee Wyden and incoming Ranking Member of the Senate Environment & Public Works David Vitter (R-LA) represent major leadership changes. Senator Wyden in particular is reaching across the aisle to find ways to work with Ranking Member Lisa Murkowski (R-AK) and with coastal state Senators interested in promoting expanded energy exploration through revenue sharing or oil and gas royalties. Tradeoffs are possible but politically challenging. The smart money says they will not succeed but an effort to fashion a comprehensive bill can’t be ruled out. In the House, Ed Markey (D-MA), Ranking Member of the House Natural Resources Committee, is running for the open Massachusetts Senate seat. While the Administration will be driving many of the energy policy decisions during the next two years, the opportunity remains for Congress to play a significant role in the future of America’s energy landscape. Comprehensive tax reform is on the table but is likely to be a multi-year process. As part of that, a number of energy-related measures will be considered. At a minimum, the various tax incentives for oil and gas as well as renewables will be in the mix. In an effort to streamline the tax code, many of the energy incentives will be on the chopping block, generating great activity from interest groups and advocates on Capitol Hill. Through this debate, specific subsidies may be traded for a more robust policy on federal investment in energy and its related technologies. One measure proposed by the President is tying oil and gas revenue growth to investments in clean energy. In addition, a proposal to raise revenue through a carbon tax regime may be considered. The Obama Administration has said it will not take the lead on advancing a carbon tax proposal, leaving the issue to Congress. Taxing carbon would raise billions of dollars annually but will be fought from many quarters in Congress and is unlikely to be included in any final reform package. Congress may also attempt to muster agreement on a more modest package of energy reforms focused on energy efficiency and renewable energy either as part of a larger effort or separately. Members of both parties are seeking common ground on authorizing legislation for energy conservation programs in the federal and commercial markets, and the Administration will pursue greater energy efficiency/renewable standards through executive orders and rulemakings. For the past several years, both parties have advocated an “all of the above” energy policy. However, the two sides continue to talk past one another. We believe that the White House, through unilateral action, will drive much of the significant activity although Congress will seek to have a role. In addition to their oversight role and the prospect of delivering consensus on more modest approaches, an effort to craft something broader, particularly if consensus on other measures like immigration and sequestration paves the way for a more cooperative and effective Congress than the 112th, cannot be ruled out.


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Financial Services

Five years after the financial crisis began and nearly three years after the epic Dodd Frank omnibus regulatory response was signed into law, the outlook for banking and financial services activity in the Congress has both an aggressive and go-slow look. The continued very slow growth of the economy has led consumers and businesses to continue deleveraging their financial positions and maintaining their risk adverse outlook. This economic backdrop combined with what is effectively a zero interest rate policy of the Federal Reserve Board, increased capital requirements for financial institutions, and the tsunami of new federal and state regulation, has resulted in formidable challenges for the financial services sector of the economy. ADMINISTRATION The 113th Congress began with a substantial change of the key policymakers in the financial services sector. The departure of Treasury Secretary Tim Geithner and the expected confirmation of his successor, former OMB Director Jack Lew, will lead to a transition period likely marked by less activity as the new Secretary gets comfortable with the myriad of issues confronting the Treasury Department. Additionally, the President has named a new head of the Securities and Exchange Commission (SEC), Mary Jo White, who brings a background as a federal prosecutor to the role of leading the agency with significant responsibility for implementing the historic sweeping Dodd-Frank law. This appointment may signal a shift to an emphasis on enforcement at the same time the agency is overwhelmed both from a personnel and financial standpoint with the burdens of implementing Dodd-Frank. SENATE The go-slow approach of the Senate and the activist focus of the House of Representatives likely will continue. Senate Banking Committee Chairman Tim Johnson (D-SD) is joined by a new ranking Republican Senator Mike Crapo (R-ID). The Senate Banking Committee is expected to become a much tougher investigative panel given the new members of the committee, which include Senator Elizabeth Warren (D-MA). Senator Crapo is known for his deliberative style that will emphasize oversight to understand the effects of the hundreds of regulations being imposed on the financial services sector. HOUSE Just the opposite can be expected from the House Financial Services Committee where the new Chairman of the House Financial Services Committee is Jeb Hensarling (R-TX) and the new ranking Democratic member is Representative Maxine Waters (D-CA). Chairman Hensarling, an outspoken free market advocate, will oversee not only aggressive oversight of bank and financial regulators , but will also push legislative ideas to reform government housing support and address problems exposed by the implementation of Dodd-Frank. Representative Waters is well known for her advocacy for the inclusion of minorities and women in the financial services industry, but has made a concerted effort to broaden her reach to the financial services


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industry. Her evolving role and her relationship with Chairman Hensarling will be interesting to observe for clues as to whether the Financial Services Committee can actually become more bipartisan with a free market conservative Chairman setting the agenda. There are three issues likely to dominate the Congressional agenda in 2013: the continuing implementation of Dodd-Frank, reforming government support of housing, and responding to the Consumer Financial Protection Bureau (CFPB). POLICY ISSUES Dodd-Frank Repeal of Dodd Frank will not occur, but change is certain. Implementation grinds on with only 35 percent of the nearly 400 mandated rulemakings completed as final rules. This is complex and arcane work that has engulfed the regulators at the SEC and the Treasury Department. Haste to enact the rules has led to mistakes which have been successfully challenged in the federal courts. The demand for change will increase exponentially going forward as implementation shows both the ineffectiveness and unintended consequences of final rules once they are issued. Congressional oversight of the interaction and compliance burdens of the regulations inevitably will lead to more legislative proposals to address problems discovered with Dodd-Frank. Government Sponsored Enterprises (GSEs) Chairman Hensarling has been an outspoken proponent of abolishing the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, but addressing the insolvency of the Federal Housing Administration (FHA) will be a first priority. FHA has at least a $16 billion shortfall as its share of mortgage originations increased six-fold since 2009 in response to private lenders leaving the market during the great recession. FHA recapitalization likely will occur only after Congress reexamines the mission of the agency and reduces its scope of operation to avoid future taxpayer losses. There is broad support among House Republicans on the Financial Services Committee to replace the GSEs with a fully privatized mortgage finance system. There is no interest by the Democratic controlled Senate Banking Committee in eliminating the GSEs. The fact the GSEs survived Dodd-Frank without change, the dramatic shift of their financial position to a more positive basis, and general nervousness over any potential disruption to the slowly recovering housing market are all points arguing against significant change to the GSEs. Consumer Financial Protection Bureau (CFPB) The roll out of the Consumer Financial Protection Bureau (CFPB), nurtured by then consumer advocate and now Senator Elizabeth Warren, will result in much legislative activity. The CFPB with its vast funding and strong support from the President will undertake a bold agenda certain to create legislative demands as a backlash. The CFPB is funded by the Federal Reserve and, as a result, is not subject to the Congressional appropriations process and its oversight. Republicans will continue to demand the CFPB convert to a five member board, rather than the single administrator, and be subject to the Congressional appropriations process. The CFPB has a large budget and a broad scope of potential consumer finance jurisdiction including


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mortgages, private education lenders, pay day lenders, debt consolidation and collection activities, credit reporting agencies, consumer credit providers and prepaid payment cards. How the conservative House and the liberal Senate address the actions of the CFPB will be of substantial interest during the second term of the President.

Health Care POLICY ISSUES Affordable Care Act The Supreme Court decision on the constitutionality of the “Affordable Care Act” (Department of Health and Human Services, et. al. v. Florida, et. al.), certainly paved the way for the law’s full implementation. While the Court’s decision did alter the provisions of the Affordable Care Act that expanded the Medicaid program, essentially making it a state option as to whether to expand Medicaid coverage in the state, the decision ultimately allowed the Administration to continue its course of implementing the law. The continued implementation ensures that health insurance exchanges are up and running by 2014. The Administration will not see a turnover of the key personnel at the Department of Health and Human Services and the Centers for Medicare and Medicaid Services (CMS), where much of the law’s implementing regulations will be developed. The President has re-nominated Marilyn Tavenner to serve as the Administrator of CMS. Ms. Tavenner has been serving as the Acting Administrator since the departure of Dr. Donald Berwick. Her nomination has gained support from key Republicans such as House Majority Leader Cantor and Senator Orrin Hatch (R-UT), Ranking Republican on the Senate Finance Committee. A confirmation hearing has not been scheduled but is expected and Ms. Tavenner will likely be confirmed. The last Senate confirmed CMS Administrator was Dr. Mark McClellan. The Administration is also beginning efforts designed to educate the public about the health insurance exchanges so that there will be a smooth transition to the new system next year. Congressional efforts to repeal the Affordable Care Act in its entirety are not likely to be advanced given the political realities following the November elections. However, House Republicans have signaled they will pursue an aggressive oversight agenda on the law’s implementation. The House Energy and Commerce Committee appointed psychologist Dr. Tim Murphy (R-PA) as Chair, and physician Dr. Michael Burgess (R-TX) as Vice Chair, to lead the Oversight Subcommittee, indicating that an emphasis will be placed on health oversight issues. Similarly, the House Ways and Means Committee Oversight Subcommittee is also chaired by a physician – Dr. Charles Boustany (R-LA) – suggesting this committee will also closely examine the implementation of the Affordable Care Act. Medicare SGR Congress may finally address the need to permanently fix the Medicare Sustainable Growth Rate (SGR) formula, which is used to reimburse physicians for Medicare services. The SGR was put in place by the Balanced Budget Act of 1997 in an attempt to control Medicare costs, but turned problematic when it began projecting payment reductions. Congress has routinely acted to negate these scheduled reductions in payments to physicians. Although there has always


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been strong desire in Congress to permanently fix the formula, the high cost of doing so proved to be an obstacle. An updated cost estimate released February 5, by the CBO, showed that a freeze on physician payments would cost $138 billion over a ten year period, down from previous estimates of more than $300 billion only months earlier, giving new momentum to the issue. There are efforts already underway by the Congressional committees of jurisdiction to prevent any future reductions in payment under the Medicare SGR formula and to develop an alternative fee-for-service payment system. Proposals currently being circulated envision a payment system that would place an emphasis on quality and efficiency of care. Medicaid There may not be much legislative action on Medicaid this year, but the program will continue to draw considerable attention. Provisions in the Affordable Care Act that allow states to expand their Medicaid programs to cover individuals up to 133 percent of the federal poverty level are due to take effect in 2014, which means states must decide whether to participate. So far, 21 states and the District of Columbia have opted to expand their programs. Medicaid expansion is of particular interest to hospitals concerned about reductions in Medicaid Disproportionate Share Hospital (DSH) payments under the health care law, as well as businesses concerned about covering health care costs for their low-wage workers. Lobbying on this issue at the state level will continue to intensify. Medicaid is exempt from pending cuts under the budget sequestration, but still remains vulnerable as Congress looks for ways to reform entitlements, reduce spending, and pay for other health care priorities, such as fixing the Medicare SGR formula. In the last Congress, options to reduced Medicaid spending included reducing Medicaid provider taxes and extending the Medicaid DSH reductions passed in the Affordable Care Act. Both of these options remain on the table.

Homeland Security and Cybersecurity HOMELAND SECURITY SENATE This year the Department of Homeland Security (DHS) will mark its 10th anniversary. Throughout the past ten years, Senator Joe Lieberman (I-CT) and Senator Susan Collins (R-ME) led the Senate Homeland Security and Governmental Affairs Committee (SHSGA), the primary Senate committee of jurisdiction for DHS. Homeland issues were a principal focus for Senators Lieberman and Collins, and the two worked closely on oversight of the Department. Leadership of SHSGA has now moved to Chairman Tom Carper (D-DE) and Ranking Republican Tom Coburn (R-OK). While both Senators have worked on homeland issues, they have focused most of their committee efforts on the inner workings of government agencies generally. Senator Coburn has been a strong advocate of reducing the size of the federal bureaucracy, and issued a report critical of DHS’s work with


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state and local grants, as well as the use of fusion centers for information collection and analysis. Senators Carper and Coburn share a cordial relationship, but it remains to be seen whether they will develop the same level of cooperation and interest in promoting homeland issues as their predecessors. Chairman Carper has already indicated that cybersecurity will be a primary agenda item for the committee. He was a co-sponsor of the Lieberman-Collins cyber bill in the last Congress. This year, he has already joined Senator Jay Rockefeller (D-WV) and others in offering a cybersecurity bill (S. 21), and has said he will work closely with his Senate colleagues, affected industries and outside interests to consider changes to the bill that will enhance the possibility of passage. In addition to cybersecurity, other items on Chairman Carper’s homeland agenda include border security, public safety communications, Federal Emergency Management Agency (FEMA) oversight, and passage of a DHS Authorization bill. Both Senators Carper and Coburn will focus on DHS management, including ways to reduce spending and limit waste. HOUSE The House Homeland Security Committee will also see a shift in leadership as Representative Michael McCaul (R-TX) replaces Representative Peter King (R-NY) as Chairman Representative Bennie Thompson (D-MS) will remain as Ranking Member. There will be several new members on the committee, most of whom will not have the “in at the beginning” relationship with DHS that outgoing Members had, and may be more critical generally of its operations and performance. While we do not expect any efforts to “undo” DHS, there continue to be concern expressed regarding the Department’s track record. Chairman McCaul has met with Secretary Napolitano to discuss the Department, and he has released an extensive agenda for his committee. Like his Senate counterparts, Chairman McCaul stressed the urgency of acting on cyber legislation (he is Co-Chairman of the Congressional Cybersecurity Caucus). He will also focus on border security, DHS management (he has offered legislation to improve the DHS management process), chemical security (CFATS), first responders, terrorism, TSA (more privatization) and passing a DHS authorization. Both House and Senate committees will also be active in the immigration debate. Though this is primarily a Judiciary Committee domain, Homeland jurisdiction derives from the role of DHS in immigration services, border security, enforcement and programs such as E-Verify. House and Senate Appropriators will also review DHS spending and program performance. Representative John Carter (R-TX) will assume Chairmanship of the House DHS Appropriations Subcommittee and has particular interest in border security, immigration, transportation security and FEMA.


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CYBERSECURITY Despite wide-spread, bipartisan agreement on Capitol Hill and in the Administration that our vulnerability to cyber attacks, crime, theft, and economic disruption must be addressed, Congress was unable to agree on a legislative solution in the 112th Congress and the issue has resurfaced as a high profile agenda item for this Congress. Last Congress Numerous bills were introduced in the last Congress. In the Senate, a comprehensive bill (S. 3414) introduced by Senators Lieberman and Susan Collins would have provided a new regulatory framework and organizational changes along with incentives for improving private-sector security. An alternative measure (S. 3342) was introduced by Senators John McCain and Kay Bailey Hutchison (R-TX) with less regulatory authority and more focus on cybercrime provisions. Neither bill passed the Senate. While comprehensive bills were introduced in the House as well, the House Leadership took a more piecemeal approach to cyber reform, and passed several bills dealing with information sharing and R&D and the development of technical standards. The most notable of these was a bill (H.R. 3523) offered by Representatives Mike Rogers (R-MI) and Dutch Ruppersberger (D-MD) to promote information-sharing between the government and businesses that own critical infrastructure. None of the House measures were taken up in the Senate. One reference to cyber was included in the Defense Authorization bill, which was passed. That provision directs DOD to establish a process for defense contractors with classified information to report cyber attacks to DOD. ADMINISTRATION Citing an increase in cyber activity and the lack of congressional action, President Obama issued a cybersecurity Executive Order on February 12, directing relevant federal agencies to develop voluntary security standards for critical infrastructure companies, expand government sharing of classified threat data with the private sector, and consider additional regulations where appropriate. Both Congress and the Administration agree that legislation is still necessary since there are important issues such as liability, civil penalties, etc., that cannot be done through an Executive Order. Congressional committee leaders have suggested they will review the President’s Executive Order as part of their legislative process. 113th CONGRESS House and Senate committee leaders on both sides of the aisle have indicated that cybersecurity will be a priority this year. Representatives Rogers and Ruppersberger have reintroduced their information-sharing legislation. Senate Commerce Chairman Rockefeller, Senate Homeland Security Chairman Carper and others have already introduced S. 21, a “placeholder” cyber bill which will be fleshed out during further discussions among senators, outside groups, stakeholders and other affected industries. Some of the more controversial issues from last year’s bills, including the “standards” language, have yet to be decided. Chairman Carper has also been in discussions with the new Chairman of the House Homeland Committee, Representative McCaul, who has also emphasized on cybersecurity. In the House, primary focus will be in the Homeland Security and Oversight and Government Reform Committees. In each case, several other committees, including Judiciary, Intelligence, Armed


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Services and Commerce will also be active. A primary concern will be whether to move a more comprehensive measure, or to move quickly on less controversial aspects in a piece-meal approach. In either case, Congress will have to address the major concerns that arose during last year’s debate. These include: the impact on consumer use, costs, innovation, privacy and liability. Some critics also objected to giving DHS control, and suggested that the constant changes in technology make it difficult to agree on setting specific technical standards. Since many of these issues have been aired at length, Congress can draw on existing work and consider modifications that could enable legislation to move this year. However, finding the time between all the “cliffs” and other priority issues could present a significant challenge. One other cyber-related issue is worth noting. Several departments, including DOD and DHS have suggested the need for more qualified personnel and resources to deal with the growing cyber threat. While there will continue to be some debate about “who mans the tiller” with regard to some cyber programs, it appears likely that this is one area where spending cuts may be less severe, even in view of the general concern that IT spending overall may see some reduction.

Immigration Policy and political concerns converge to make immigration reform ripe for consideration in 2013. On the policy front, millions of undocumented aliens reside in the United States; their status needs to be addressed. There is a continuing need to secure America’s borders and gain control over who enters, and stays, in this country, which will include consideration of a workable e-verify system. At the same time, the country’s employers need a reliable flow of temporary workers, as well as seasonal, agricultural and skilled workers, including those in technology fields. The status of children of undocumented aliens brought to this country by their parents has also become part of the policy debate. These are the potential components of a comprehensive immigration reform package, and long-time advocates for such a package, especially one providing a pathway to citizenship for undocumented aliens, are pressing for action. The last comprehensive immigration reforms date to the 1980s and 1990s. There is a broad consensus that the nation’s immigration system is broken and badly in need of repair. Political Motivation Added to the mix of policy issues that need to be addressed on their merits are political considerations. President Obama’s 2008 campaign promise to address immigration reform in his first term went unfulfilled, as economic and budget issues, together with a major health care overhaul, dominated the domestic agenda. With very strong support from Latino voters in 2012, the President has again made immigration reform a major priority. Republicans are aware that their last two Presidential candidates have done poorly among Latino voters. There is a


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greater understanding among Republicans, now more than ever, that they must do better among Latino voters and that immigration, the way it is discussed and substantively addressed, is, at a minimum, a gateway to reaching out to those voters. The convergence of policy and political concerns that has pushed immigration reform to the top of the Congressional and Presidential agendas, however, is not matched by as broad a consensus in how to address the issue. There is greater support for comprehensive immigration reform among Congressional Democrats than among their Republican counterparts. In the House of Representatives, there has been strong Republican support for some parts of the immigration reform agenda, such as meeting the increased need for high-technology workers. A majority of House Republicans, however, have not, in the past, favored a comprehensive approach. Many House Republicans are skeptical of granting a pathway to citizenship for undocumented aliens and are focused on border enforcement and finding a workable, mandatory e-verify system that can accommodate agricultural employers. In the Senate, there are some Republicans who favor comprehensive immigration reform; others are more aligned with the House Republican approach. Comprehensive Frameworks On January 28, a bipartisan group of Senators announced agreement in principle on a comprehensive immigration package, in a five page document, with the difficult tasks of adding the details and crafting actual legislative language still to follow. These principles, as expressed by Senators Charles Schumer (D-NY), John McCain, Dick Durbin, Lindsey Graham (R-SC), Bob Menendez (D-NJ), Marco Rubio (R-FL), Michael Bennet (D-CO) and Jeff Flake (R-AZ), broadly speaking include:

A path to citizenship for unauthorized immigrants already in the country, contingent on securing the border and combating visa overstays;

Improving the legal immigration system and attracting the world’s best and brightest;

Employment verification; and

Admitting new workers and protecting worker’s rights.

President Obama announced his plan for immigration reform the next day. His basic plan calls for strengthening border security; cracking down on employers knowingly hiring undocumented workers; earned citizenship for undocumented immigrants now currently in the country; and streamlining legal immigration, with a focus on the best and the brightest and family reunification; and streamlining visa and foreign visitor processing. The President said that if Congress does not act in a timely way, he will submit legislation to Congress reflecting his approach. The Next Steps Hearings in the House Judiciary Committee got underway on February 5, 2013. Senate hearings began in the Judiciary Committee on February 13, with a plan for legislation to be introduced by the group of eight Senators no later than March. A bipartisan group in the House may soon announce either its own set of principles on which they will later introduce legislation or actual legislation. A path to legal status will be a tougher “sell” in the House. A number of House


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Republicans are talking of a “middle ground” which might include legalization of undocumented aliens but not a pathway to citizenship for them. As well, some House Republicans prefer a piecemeal approach to immigration reform, embodied in several bills, not one comprehensive bill. Traditional advocates for immigration reform do not find this middle ground acceptable on substance, nor the piecemeal approach viable as a matter of process. Whether the Senate and the House will be able to agree on a bill to be presented to the President remains to be seen; the effort to reach such agreement will play out at least through the spring and summer.

International Affairs CONGRESS The Senate Foreign Relations and House Foreign Affairs Committees have undergone a sea change of leadership, with a set of all-new Chairmen and Ranking Members. Senator John Kerry’s (D-MA) ascension to Secretary of State and Senator Richard Lugar’s (R-IN) primary election defeat have resulted in the rise of Senators Menendez and Bob Corker (R-TN) to be Chairman and Ranking Member, respectively. In the House, term limits and a primary defeat resulted in Representatives Ed Royce (R-CA) and Eliot Engel (D-NY) replacing Chairwoman Ileana Ros-Lehtinen (R-FL) and Ranking Member Howard Berman (D-CA), respectively. These changes will have major repercussions. In both cases, the chances of bipartisan cooperation and, as a result, greater productivity, increase exponentially. Furthermore, while more modest due to institutional constraints, there are also real opportunities for bicameral cooperation between the committees. For example, the shared background and interests of Representatives Royce and Corker in international financial and economic issues may spawn cooperative efforts and will certainly drive their respective agendas. POLICY ISSUES Representative Royce has made no secret of his interest in promoting free trade and competitiveness and his committee’s role in authorizing Overseas Private Investment Corporation (OPIC) and the Trade and Development Agency. In addition, he will promote energy security and intellectual property protection. He also intends to conduct more active oversight of the State Department, USAID, the Broadcasting Board of Governors and other agencies/entities under the committee’s jurisdiction. Senator Menendez is likely to cooperate with Senator Corker in much the same way former Senators Kerry and Lugar worked together on many issues. Senator Menendez supports Cuba economic sanctions and he will be pitted against freshman Senator Jeff Flake (R-AZ) who has made a name for himself in the House opposing Cuba sanctions. Senator John McCain is also new to the committee and his overall seniority and stature will make him a player as he has already demonstrated in hearings with Secretary Clinton on Benghazi and with John Kerry’s confirmation.


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Both committees will be consumed with complex country issues including Iran, Syria, North Korea, and the rise of al-Qaeda splinter groups in Mali and North Africa. Russia, China, and Venezuela will also receive attention. Also expect to see a Foreign Relations Authorization Act considered in both chambers this year which will, no doubt, address the issues that led to the Benghazi murders, among many other things.

Judiciary POLICY ISSUES Gun control With the strong backing of the Obama Administration, Congress is expected to consider legislation that reinstates the “assault weapon” ban that was enacted in the 1990s and expired during George W. Bush’s Presidency, affecting semi-automatic weapons with certain features, including militaristic appearance. The President has also called for universal background checks for anyone seeking to buy a firearm, closing existing exceptions to the background check requirement. Congress will also debate a limit on the size of ammunition clips. President Obama and other gun control advocates have called for a 10-round limit. Congress may also legislate to require better record keeping to enhance the effectiveness of background checks and better track guns, as well as to make changes to federal mental health programs. Intellectual property The Judiciary Committees in both Houses can be expected to undertake oversight on implementation of the “America Invents Act,” which overhauled the nation’s patent laws. Oversight hearings might also be had on the use of standard essential patents, an issue with both intellectual property and competition components. Piracy on the internet will remain an oversight focus of both Committees as they grapple with the desire to protect copyrighted material on the internet without interfering with the legitimate operation of internet. After the uproar in the last Congress over the SOPA/PIPA bills, Congress will tread carefully here, likely looking first for areas of clear consensus. Privacy The Judiciary Committees are likely to address various privacy issues in the 113th Congress, such as data breach legislation; location data protection; review and possible amendment of the “Electronic Communications Privacy Act” (ECPA); and Committee members will play a role in the cyber security issue. Both Committees are likely to examine the computer fraud and abuse provisions of Federal law. Competition The two Judiciary Committees can be expected to continue their oversight role on general competition issues. This will include issues affecting the internet, as well as oversight of the activities of the Justice Department’s Antitrust Division. The House Judiciary Committee will likely renew its consideration of a bill introduced in the 112th Congress, the “Business Activity Tax Simplification Act,” which clarifies the nature of the nexus a business outside of a state


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must have for the state to tax it. The Committee is also likely to consider legislation addressing marketplace equity authorizing states to require remote sellers to collect and remit sales and use taxes on sales into the state. Under the leadership of Senate Judiciary Committee Chairman Patrick Leahy (D-VT), the Senate passed a renewal of the “Violence Against Women Act” (S. 47) by a vote of 78-22. House Majority Leader Cantor has announced that there will be floor time for the bill in the coming weeks.

Labor With recent decisions in Michigan and Indiana enacting “right-to-work” laws, a series of blows have been dealt to organized labor in states that were once at the heart of the labor movement. Though these decisions were made at the state level, they highlight an ongoing movement against unionization. It is through this prism that we assess the implications of the Presidential and Congressional elections of 2012 and the outlook for 2013 for organized labor and the future role of the National Labor Relations Board (NLRB), the tenuous situation with Obama’s recess appointments, wage and hour issues, Employee Free Choice, and Title VII. NLRB Appointments In January 2012, the President made three "recess appointments” - Sharon Block, Terence Flynn, and Richard Griffin to serve as Members of the NLRB. The court’s ruling sides with Republican lawmakers and a canning company that challenged the appointments and the decision could reshape a long-standing practice by U.S. presidents to make recess appointments.On January 25, 2013, the U.S. Court of Appeals for the District of Columbia Circuit ruled that President Obama's January 2012 recess appointment of three members to the five-member National Labor Relations Board (NLRB) was unconstitutional. Though such appointments have been used by presidents for decades, in this particular case, President Obama’s actions were unprecedented because the Senate was in “pro-forma session” – when Congress is briefly in and out of session, sometimes only lasting a few minutes.

The January 25 decision, if it holds, would restrain the President’s power to make such decisions in the future and calls into question the validity of more than 200 disputes the NLRB has ruled on over the past year and an additional 100 cases that are pending review because the Board lacked a quorum. These disputes cover a wide range of topics including when employees can form a union to whether employers can fire employees because of comments they post on social media about their working conditions. The decision also puts in jeopardy recent moves by the Consumer Financial Protection Bureau (CFPB), since its director, Richard Cordray, was also installed via a recess appointment. That said, we believe his appointment will remain firm.

Ultimately, the long term impact of the ruling will depend on what the Obama Administration does next. If the Administration appeals the decision to the full D.C. Circuit Court and the Supreme Court, the rulings would determine the validity of all board decisions since Obama


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made his appointments and the validity of the board members themselves. If no appeal is made, every NLRB ruling since January 2012 would be invalidated.

While the NLRB has said that it plans to move forward with business as usual, issuing decisions in labor disputes as though nothing has changed, the decision raises major questions and such uncertainty creates confusion in the short term for banks, financial markets and the mortgage industry. Whatever the outcome, the NLRB will continue to represent organized labor’s most preferred and sympathetic venue for consideration of their agenda. No matter the outcome of the case, the Obama Administration will continue to try and stock the Board with appointees sympathetic to labor organizations.

While Democrats have stayed largely silent on the issue, House and Senate Republicans on the committees of jurisdiction - the House Education and the Workforce Committee and the Senate HELP Committee - have loudly supported the D.C Circuit court decision, calling on the NLRB to cease all activity until “qualified’ nominees have been constitutionally appointed to the board. From their perspective, any attempt to continue the battle in federal court prolongs the uncertainty the action has created for America’s workers and job creators. Hearings will begin in the House mid-February to assess the future of the Board and what it means for business and labor alike. Wage and Hour Issues In President Obama's second term, we expect to see even more vigorous enforcement of the wage and hour laws. Wage and hour law is the body of law that establishes and regulates wage standards, including minimum wage and overtime. This year the Department of Labor (DOL) is committed to an aggressive approach with employers that seek to maximize recovery of backpay and other monetary remedies. Also expect to see more DOL regulatory initiatives in this space. During his 2013 State of the Union Address, the President called for Congress to increase the minimum wage to $9.00 per hour, saying that a “family with two kids that earns the minimum wage still lives below the poverty line.” President Obama also offered his support for tying the minimum wage to the cost of living. Currently set at $7.25 per hour, the last congressional action authorizing an increase in the minimum wage was signed into law in 2009. States have been taking the issue into their own hands with nearly half having increased their minimum wage this year or considering plans to raise it. Employee Free Choice Act (EFCA) and Major Rules The general consensus is that the “Employee Free Choice Act” (EFCA) will not come to the floor in the 113th Congress. However, the NLRB will seek to support unionizing efforts through the rulemaking and regulatory process. A number of important rules will come into play in this space including: NLRB’s “Notice Poster” rule, the “Ambush Election” rule, and The “Persuader Rule.” These rules, which could have significant impacts on business, have all been subject to several legal challenges and the final word on these cases will have major implications as to how far the


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NLRB can go within this rulemaking realm. While a decision on the Notice Poster rule was expected at the end of January, the court has yet to rule on the case and a decision is not expected until later this spring. The same is true for the Ambush Election rule and we do not expect a ruling until later this year. The DOL’s proposed Persuader rule not yet out, but is expected in late April. DOL’s intent to drastically change the accepted definition of “advice,” would have major implications for business as it would require consultants to disclose any advice given to a client regarding “collective bargaining” issues to the Department of Labor. This is a concern for a number of reasons, not the least of which is protecting the proprietary information and advice that a consultant provides. Title VII and Equal Employment Opportunity Commission With President Obama remaining in power, we expect that there will be a move to add sexual orientation as a protected category under Title VII of the Civil Rights Act of 1964. The Equal Employment Opportunity Commission (EEOC) will also continue to strengthen its initiative targeting systemic discrimination.

Tax POLICY ISSUES The Fiscal Cliff Passage of the “American Taxpayer Relief Act” (ATRA), H.R. 8, avoided the fiscal cliff in early January. Given the recent action on ATRA, some are questioning the need or urgency for tax reform this year, or even in the 113th Congress. It is true the next few months will be filled with more fiscal and budgetary drama, but the need for comprehensive tax reform with lower rates is as necessary and relevant as ever. Significantly, the ATRA inverted who pays the top rates; individuals now pay the highest tax rates in the United States. Prior to the ATRA, corporations and individuals shared the top statutory tax rate of 35 percent. Small businesses and multinational corporations will continue the fight for a lower tax rate. Issues that add to the economic uncertainty early this year include the sequester of funds from the federal budget for deficit reduction scheduled to take effect on March 1, 2013; the expiration of the current six-month funding for the federal government which expires on March 27, 2013; and the ever present federal debt limit which will need to be increased again sometime in the summer of 2013. Congress will have to address these issues immediately. Despite this immediate fiscal focus, House Ways and Means Committee Dave Camp (R-MI) has indicated publicly and privately that he intends to bring a legislative product to the Committee soon – even as early as this summer. Some revenues were gained by the increased tax rates in ATRA, and there were significant cost items swept away as well. For example, the tax writing committees will not have to manage the $1.8 trillion cost of fixing the alternative minimum tax (AMT). Tax reform may produce additional revenues by eliminating various tax deductions and credits in order to achieve a lower corporate tax rate – now the highest in the developed world along with Japan.


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Tax Reform Recent activities that signal the future of the tax reform debate include:

Chairman Camp of the House Ways and Means Committee recently released a discussion draft of tax changes to the financial services industry. Other discussion drafts are expected early this year. It has been suggested that Chairman Camp may want to hold a Committee markup as soon as this summer.

The President’s 2011 “framework” for tax reform, while not comprehensive, was a signal that the Administration was ready to engage on corporate tax reform. In his State of the Union Address, President Obama said, “Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit.” Incoming Treasury Secretary Jack Lew, in his confirmation hearing, stated that the Administration supports efforts by Congress for a more competitive tax system and “pledge[d] to work with the Committee to get it done.” A key element will be whether the President will put his political force and emphasis behind a comprehensive deal.

Chairman Baucus of the Senate Finance Committee has also stated his support, though not as aggressively as Chairman Camp, for comprehensive tax reform. He is up for re-election in 2014 and he will take great care to be responsive to the many small businesses in Montana over the next two years.

A key question is if corporate tax reform might be considered before overall tax reform. This is possible because both the President’s “Framework” and the discussion drafts offered by Chairman Camp thus far address the corporate side of the tax code. However, as more than half of the U.S. economy is driven by S-corporations and partnerships, great care will need to be given to ensure that business deductions and credits that are eliminated in order to lower the corporate tax rate do not disadvantage of pass-through taxpayers. It is noted that the two Chairmen have stated their strong desire for comprehensive reform and not individual or corporate reform as stand-alone measures. We believe that they will keep their word on this matter and will incorporate individual tax reform into a comprehensive package. Comprehensive tax reform could be a key component of an overall deficit reduction package. We anticipate that this package will take shape this year and could include the various issues reviewed here. Several tax and budget legislative opportunities exist in the new Congress, even early this year.

Technology Against the political backdrop of President Obama’s re-election and numerous changes in Congressional Committee membership, Congress faces a robust agenda of technology-related issues, many of which were discussed at length in the 112th Congress, but with no legislative results. These issues fall into several categories: first, the “perennial headliners” such as cybersecurity, privacy-related issues, and copyright protection; second, the “event-related” issues such as media violence (part of the gun control debate), hi-tech visas and STEM issues (related to immigration), emergency communications systems (fallout from Hurricane Sandy


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and other disasters); and third, a growing concern that communications laws written in the “copper wire, cable and wireless days” may no longer address the realities of today’s IP-based network. Also, issues regarding federal spending on IT systems, research, and the need for more “tech-savvy” government workers will arise during the budget oversight process. Congressional Committee leaders in the new Congress have already listed some of these issues as agenda “priorities,” and are undertaking renewed efforts with their colleagues and outside stakeholders to find consensus. In some cases, success may depend on whether members pursue a “comprehensive” approach or agree to a “piece-meal” strategy for passing smaller, less contentious bills. A number of outside activities could influence Congressional action. For example, the Federal Communication Commission (FCC), the Federal Trade Commission (FTC) or court decisions (on net neutrality or spectrum auctions) could also provoke congressional reaction. Marketplace and business activities could invite hearings. And of course, another incident of violence, cyber attack, or natural disaster could add “crisis pressure” for some action. POLICY ISSUES Cybersecurity In terms of cyber legislation (see earlier section), both House and Senate leaders have designated this as a priority issue. Senate Commerce Chairman Rockefeller, Senate Homeland Security and Governmental Affairs Chairman Carper and others have introduced S. 21, a sense of the Senate place-holder bill to be finalized after further discussions with colleagues and others. House Homeland Chairman McCaul is also working on a cyber strategy with his colleagues. House Intelligence Chairman Mike Rogers (R-MI) and Ranking Democrat Ruppersberger re-introduced their cyber information-sharing bill which the House passed last Congress. Privacy Privacy issues also remain front and center, particularly those dealing with mobile privacy. Senator Rockefeller will renew his push for do-not-track legislation and Senate Judiciary Chairman Leahy will seek to reform the “Electronic Communications Privacy Act.” Also, Senator Al Franken (D-MN) will renew his geo-location data bill. Representative Joe Barton (R-TX), who co-chairs the House Privacy Caucus, is expected to pursue privacy issues including do-not-track, protecting children online, and how data brokers collect and use consumer information. Spectrum FCC efforts to conduct a spectrum auction and free up additional spectrum for wireless use, an issue which concerns broadcasters and wireless carriers, and also raises the question of licensed versus unlicensed spectrum use, has generated congressional interest. Representative Greg Walden (R-OR) who chairs the House Technology Subcommittee will conduct oversight hearings in this area to ensure that the FCC doesn’t “pick winners and losers” and responds to the need for mobile broadband as well as public safety communications. The “Satellite TV Extension and Localism Act” expires in 2014, and both House and Senate Commerce Committees are expected to act on an extension this year. Because this is considered “must pass” legislation and raises the thorny issue of retransmission consent, it


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could become a vehicle for other telecom issues, including the possibility of efforts to change the 1992 Cable Act and the 1996 Telecommunications Act. While many suggest that current telecom law and common carrier rules do not reflect technology and marketplace changes that have produced the IP-based network of today, the likelihood of a major re-write of either the Cable Act or the 1996 Telecommunications Act in this session is highly unlikely. Additional Issues Other issues which have been mentioned include the possibility of state taxes on video goods and services. Both Senator Wyden and Representative Lamar Smith (R-TX) had legislation on this in the last Congress. Despite the demise of anti-piracy legislation (SOPA) last year, Representative Bob Goodlatte (R-VA) may want to revisit the issue. The Immigration Innovation Act offered by Senators Orrin Hatch and Amy Klobuchar (D-MN) reforms the H-1B visa program, student visas, employment green cards and promotes STEM programs. This will likely be considered as part of the larger immigration debate. Also, as various jurisdictional committees conduct oversight of the Executive Branch departments, we could see concerns raised about the level and effectiveness of IT spending in the departments. While this could produce some budget revisions, one likely exception will be funding for cyber-related technology and resources.

Trade Trans Pacific Partnership and Trade Promotion Authority Renewal While the Committees with jurisdiction over trade issues want to renew fast track or trade promotion authority (TPA), the Obama Administration has indicated that the initial focus in 2013 should be the realization of the Trans Pacific Partnership (TPP). House Ways and Means Committee Chairman Camp and Senate Finance Committee Chairman Baucus have prioritized the renewal of trade promotion authority this year, but the Administration is suggesting that TPA consideration wait until TPP negotiations near conclusion. The Obama Administration is focusing on moving ahead on the most controversial elements of the TPP talks so that negotiations can move toward completion. This effort will demand working closely on difficult issues with Congress on the specific issues the TPA will include. We expect that influential Members like Chairmen Camp and Baucus will have a number of opportunities to get commitment on renewal of TPA should the Administration’s desire to conclude a TPP be realized. Some trade analysts are predicting that the Administration could attempt to couple the TPP deal, which is targeted to reach conclusion as soon as October 2013, with a broader vote on a TPA bill that would address future negotiations. While such combined legislation would not enjoy fast track protections, it would provide the Administration with the objective of having only one major fight over trade instead of two. Another scenario that may play out would be that the Administration holds off on asking for TPA until there is greater momentum behind TPP


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but before a definitive close to the negotiations is realized. A third scenario could be that the Administration moves to pass TPP without fast track protections, and only then engage Congress on the issue of future fast track negotiation authority. Republicans on Capitol Hill have long sought the renewal of trade promotion authority. Some Democrats, including Chairman Baucus, have TPA as a top priority for the first session of the 113th Congress. There appears to be, however, much less urgency for TPA among House Democrats. Given that the most recent TPA bill was enacted in 2002, the business community is seeking changes to the now lapsed legislation. The changes will fall into two categories. The first covers so called “new issues” that relate to electronic commerce, free data flows, and state owned enterprises. Such issues were not covered by the 2002 bill but have been pursued by the Administration in TPP talks and Congress may want to include new language in these areas in a new TPA bill. The second category will be how a new TPA bill handles protections for the environment, labor rights, and intellectual property. Members of the New Democrat Coalition in January suggested that revised TPA negotiating objectives ought to reflect such provisions that were contained in the so-called May 10 deal, which provided enhanced environmental and labor protections in U.S. trade deals as opposed to the “enforce your own” standard that was the basis in the 2002 legislation. Senate Finance Committee Ranking Member Hatch has continued to express concerns about such provisions in the May 10 deal. The business community meanwhile sides with many on Capitol Hill in the view that waiting to engage on fast track reauthorization until nearly concluding the Trans Pacific Partnership negotiations about would be a mistake. There have been suggestions that TPA negotiations will be difficult and that they will not get any easier if negotiations are postponed until later this year. Additionally, business interests speculate that waiting to address TPA issues will likely bring about delay on the realization of TPP. TPA could well provide for an easier consideration and passage of the TPP, but the Administration argues that having a strong TPP deal in hand would make it easier to convince skeptics about the benefits of moving ahead on other deals, including possibly a U.S./European Union (EU) deal. Congress can and may choose to kick off the TPA process prior to receiving the request from the Administration for trade promotion authority. A hearing in Ways and Means on fast track / TPA in the ensuing weeks may well result. Whether a final TPP agreement can be reached before the October meeting remains to be seen. U.S./EU Move to Launch Comprehensive Trade Negotiations Just hours after the State of the Union speech, in which President Barack Obama made a strong endorsement of free trade negotiations with Europe, the Administration announced that formal negotiations on a Transatlantic Trade and Investment Partnership (TTIP) were being launched. Earlier in February, foreign ministers from the European Union reacted with guarded optimism to Vice President Joe Biden’s indication that an FTA with the EU is a top priority of the Administration and that they wish to realize the FTA “on one tank of gas” as the Vice President


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put it. There was some skepticism to such remarks but trade proponents should add the EU deal to TPP as targets to shoot for through which the Administration may reach goals set forth in the President’s National Export Initiative (NEI). Announced in 2010, NEI hopes to: (1) improve trade advocacy and export promotion efforts; (2) increase access to credit, especially for small and medium-sized businesses; (3) remove barriers to the sale of U.S. goods and services abroad; (4) robustly enforce trade rules; and (5) pursue policies at the global level to promote strong, sustainable, and balanced growth. The Administration states that it remains committed to realization of the targets set forth in NEI and realization of additional FTAs like TTIP could help meet the significant growth targets set forth in 2010. In a February 12 letter to United States Trade Representative Ron Kirk, Senate Finance Committee Chairman Baucus and Ranking Member Hatch conveyed their priorities concerning the potential deal with the European Union on trade, investment and regulatory cooperation. Their priorities include: access for U.S. agricultural exports; strong intellectual property protection; access for U.S. services exports; regulatory compliance; and a mechanism for dispute settlement. The Senators also conveyed in the letter their intentions to push for renewal of trade promotion authority/fast track.

Transportation SENATE There have been several changes in Committees with jurisdiction over transportation issues in the new Congress. On the Senate side, Senator David Vitter became Ranking Member on the Senate Environment and Public Works Committee, replacing Senator Jim Inhofe. Senator Barbara Boxer (D-CA) remains as Chair of the Environment and Public Works Committee. Senator John Thune (R-SD) became Ranking Member on the Senate Commerce Committee replacing Senator Kay Bailey Hutchison (R-TX). Senator Jay Rockefeller (D-WV) remains as Chair of the Commerce Committee. Senator Mike Crapo (R-ID) became Ranking Member on the Senate Banking Committee (with jurisdiction over public transit programs), replacing Senator Richard Shelby (R-AL). Senator Tim Johnson (D-SD) remains as Chair of the Banking Committee. On the Senate Appropriations Committee, Senator Patty Murray (D-WA) remains Chair of the Senate Subcommittee on Transportation, Housing and Urban Development and Senator Susan Collins (R-ME) remains as Ranking Member of that Subcommittee. HOUSE On the House side, Representative Bill Shuster (R-PA) became Chairman of the House Transportation and Infrastructure Committee, replacing former Chairman John Mica (R-FL). Representative Nick J. Rahall (D-WV) remains as Ranking Member of the Transportation and Infrastructure Committee.


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On the Appropriations Committees, Representative Ed Pastor (D-AZ) became Ranking Member on the House Transportation, Housing and Urban Development Subcommittee replacing Representative John Olver (D-MA). Representative Tom Latham (R-IA) remains Chairman of the Subcommittee on Transportation, Housing and Urban Development. POLICY ISSUES Reauthorization of the Water Resources Development Act (WRDA) The last reauthorization of water resources development programs occurred in 2007. Congress made attempts in the last Congress to move a WRDA bill, even most recently in the lame duck Congress after Hurricane Sandy, but has thus far been unsuccessful. The WRDA bill authorizes projects and programs of the U.S. Army Corps of Engineers affecting navigation on inland waterways and seaports, harbor maintenance, as well as flood control and environmental issues. Financing these programs going forward, as with all federal infrastructure programs, will be the biggest issue to address. The Transportation Committees in both the House and Senate are preparing to prioritize this issue out of the box in the first session of the 113th Congress. Reauthorization of Federal Passenger (Amtrak) and Freight Rail programs Current authorizations for Federal passenger, freight rail and safety programs expire at the end of this fiscal year. Major issues to be addressed include private sector involvement in the provision of passenger rail service, high speed rail, freight rail and passenger rail safety and regulatory issues. Oversight of Federal Surface Transportation and Aviation Programs With the passage of Federal surface transportation and aviation reauthorization bills in the last Congress, the 113th Congress will engage in oversight of implementation issues of new provisions in both these programs. Oversight of Moving Ahead for Progress for the 21st Century (MAP-21) will include hearings on its environmental streamlining, the federal approvals process for federal transportation projects and other reforms, the federal role in transportation, public-private partnerships, and various safety regulatory issues in the commercial motor vehicle sector. Oversight of the Federal Aviation Administration Modernization and Reform Act of 2012 will include hearings on implementation of NextGen to improve efficiencies in air traffic control, airport capacity issues and consumer issues. Reauthorization of Federal Surface Transportation Programs – MAP-21 Current authorizations for Federal highways, transit, motor carrier and highway safety programs expire at the end of fiscal year 2014 (MAP-21). The 113th Congress will begin the process to reauthorize those programs through hearings in the 1st Session. The major overarching issue to be resolved remains finding a long-term, stable source of revenue to finance these programs into the future.

Conclusion

After the November 2012 elections, it was reasonable to ask: “If the economy is still in the doldrums, the President’s approval rating is not robust, and the American people hold Congress


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in lower regard than a root canal, then how come voters didn’t fire everyone and demand change?” Voters have always held their individual Members of Congress in much higher regard than they do the collective body. The President won, in part, because he did an effective job of painting his opponent as a worse alternative. Nevertheless, Members of Congress and the President are clearly aware of public dissatisfaction with Washington, and they realize that their renewed lease on political life is limited. In the 112th Congress, both parties in a divided government did a good job of protecting their core priorities and delivering their key messages, but there was little to show for it in terms of legislative output. It remains to be seen what lessons were learned from the 112th Congress, and how far policymakers are willing to move from their political comfort zones. The President no longer has to worry about re-election in four years and re-districting has likely put the House majority out of reach of Democrats for at least the next four years. The Senate, where majority control in 2015 is up for grabs, will be the proving ground where national public opinion and local electoral concerns meet. If Senate compromise is reached, it will reflect the fact that an issue was either non-controversial, a must-pass budget-related item, or that a bi-partisan coalition of Senators found the right balance between national and local concerns. The President will applaud successful Senate outcomes. However, the White House feels that they can still gain political advantage by characterizing congressional Republicans as refusing to compromise, and the Administration will have a relatively free hand in terms of using their administrative and regulatory levers. The House has recently been seen as the more partisan body. However, there were strong bipartisan votes on both the bill to delay the expiration of the debt limit and the supplemental appropriation bill for Hurricane Sandy. This may be an indication that Speaker Boehner is willing to pass significant legislation on a bipartisan basis. It is yet to be seen whether these bipartisan coalitions will continue or if those were produced only in the face of pressing deadlines. With the State of the Union delivered, Congress now moves on to the next budget battles and to immigration reform and other big policy debates. Prime Policy Group will monitor all these issues throughout the 113th Congress and provide supplemental updates to this document as circumstances warrant.

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