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Office of the Press Secretary

For Immediate Release August 4, 1993
                           PRESS BRIEFING
                      OMB DIRECTOR LEON PANETTA

The Briefing Room

1:22 P.M. EDT

MR. GEARAN: Good afternoon. In deference to Director Panetta's time, I'd like to invite him to the podium to go through some of the executive orders that the President signed, as well as any other matters that you may want to visit with Leon about. Then I'll be back.

DIRECTOR PANETTA: What I'd like to do is present a summary which -- we provided some backup documents basically summarizing each of the executive orders that the President signed. One was the deficit reduction fund. The other was the budget control fund that basically -- the budget control tool that deals with entitlement spending.

The history of both of these really relates to what the House did. The House enacted both of these provisions as part of the reconciliation bill that passed in the House of Representatives.

On the Senate side, obviously, what happened was that the Senate Republicans made use of the Senate rules, principally the Byrd rule as well as some other budget rules, to stop these provisions from being enacted on the Senate side. When we looked at the conference report, if we included these provisions they would obviously have run into the same blocks on the Senate side because those rules do apply to the conference report as well.

So it was at that point, mainly because both the President as well as a number of members wanted these provisions included, that we looked at several courses of action. One was, should we challenge it in the conference report and have the Republicans basically vote it down, but that would then require a second vote to be brought back to the House. The second approach that we looked at was the possibility of trying to do a separate bill and try to run it through quickly. But that would run into a filibuster on the Senate side and so we thought that would not be able to solve the problem. And that's what brought us to doing this by executive order and having the President put both of these provisions into law via an executive order.

Let me just briefly explain each of the executive orders. The first executive order relates to the deficit reduction fund. The purpose of that obviously is to establish the separate account in the Treasury to receive both the savings and the revenues that flow from the reconciliation bill. The amount in the account will be equal to the total amount of deficit reduction produced by the reconciliation bill. And essentially, the total will be added on a year-by-year basis, each of those amounts as specified in the executive order, itself. The amounts would be set aside and used only to redeem Treasury debt.

Q How do you determine what that amount is?

DIRECTOR PANETTA: The amounts are based basically on the overall amount, which is the $496 billion savings in the reconciliation bill, and then those numbers are broken down according to CBO's numbers.

Q But those numbers were reached by virtue of multiplying your assessment of your assumptions times your rates, right?

DIRECTOR PANETTA: That's correct. That's correct. In other words, you've got to use -- you're basically using CBO's assumptions as to what --

Q So what happens -- I mean, assumptions inevitably vary more or less. What happens if they're off?

DIRECTOR PANETTA: I think we can make adjustments depending on the numbers over the period of years. But we're setting it and trying to lock it in, and we will have basically to -- we have to make a report on this in the budget each year so that it will be pretty clear what each -- whether we're meeting these targets or not in terms of the savings that would be put into the fund. The account itself will obviously be presented in the budget of the United States, as well. And that will be presented on an annual basis to the people of the country.

Let me just talk a little bit about the second executive order, which is the executive order on the entitlement review. The mechanism here basically ties right in to what the House of Representatives provided. This is almost word for word the provisions that were included in the House. Let me just say, as somebody having worked with budget issues for a long time, there's been a lot of talk about trying to deal with entitlements in one way or another. We've had suggestions of entitlement caps. We've had a number of suggestions as to how we try to control overall entitlements.

This, for the first time, gives us a tool which we can essentially present to the country in the context of the budget that sets out, by virtue of what's in reconciliation, where we expect entitlement spending to be over these next five years. We're required to set those targets based on the assumptions that are in reconciliation. Those obviously include the economic assumptions with regards to inflation plus caseload projections on each of the entitlements.

Within 30 days, I'm obligated then to set what those targets are over a five-year period and report those numbers to the Congress of the United States.

Then what happens is that in our budget presentation, we would then look at each of those targets and determine whether or not they're going to be breached. If they are breached -- if we expect that we will pass through these entitlement targets, then the President is required in the budget to present how he would achieve savings in order to stay within those targets. And, obviously, those could include both cuts or taxes or a combination of both to achieve those. We would present those in the budget and request that reconciliation be enacted in order to achieve those savings.

The House of Representatives, we understand, in their rule will enact rules to basically implement this in the House of Representatives. In any case, it would be part of the budget resolution. The budget resolution has to acknowledge the reconciliation that we request from the executive branch. We assume the House would act and we would assume that the Senate would have to follow suit as well in terms of dealing with the President's request.

The President also, under this executive order, has the ability not to recommend that we achieve it, but he would have to explain why he's recommending that we don't have to achieve these savings. And then the Congress would be forced to vote -- certainly, at least, on the House side right now -- we don't know what the Senate will do with its rules -- but the House, pursuant to its rules, would be required to then vote on that issue. And the House could either go along with the President's position, or not.

In summary, it does this -- and I think the good part of it is this -- that for the first time, we have a vehicle for laying out what targets we expect on entitlements -- where we expect entitlement spending to go. And then we have a vehicle to say to the American people whether we're sticking to those targets or not. And if we aren't, the President's in a position where I think he's made very clear he wants to be able to suggest ways to achieve those savings in order to stick by those entitlement targets.

I think it is a very important first step in terms of dealing with entitlement spending overall. And if there was anything that I thought the '90 agreement failed to do, it was the ability to do anything with regards to controlling overall entitlements. This at least gives us a tool to address that problem, and I think it's an important one.

The President also indicated this morning at the signing that he would also be prepared to support legislation if they decided they wanted to move separate legislation with regards to this issue as well.

Q On both of these issues -- on the entitlement reform, it's basically up to the President and a future Congress. They can ignore it if they want. It's not binding. And on the deficit trust find, it doesn't net -- reduce the deficit by one penny. It just tells people that it's placed in a certain account. What difference does it make --

DIRECTOR PANETTA: Let me explain why the trust fund is important. I mean, there's been a lot of debate on this issue, but let me tell you why it's important to do this. If we don't do this, what would normally happen is that these savings would go on what's called the pay-go scorecard, which means that, essentially, these savings could be used for entitlement expenditures or for tax cuts. Under what's called the pay-go principle that was enacted in the '90 agreement, if you increase benefits on entitlements, or if you cut taxes, you've got to basically pay for it so the deficit doesn't go up. If you have these savings on what's called the entitlement scorecard, or this pay-go scorecard, you can use these to basically pay for these expansions. What --

Q Only on entitlements, right?

DIRECTOR PANETTA: Only on entitlements. What we do here is we basically remove those funds from this scorecard and essentially say you have -- you cannot use these for any expenditures. And it is an important tool. It does need to be done. And the combination of the legislative action plus the executive action to now isolate these funds in a separate fund prevents the Congress from using these funds for expenditures. So it provides an additional guarantee that what we say is going to go to deficit reduction, in fact, is going to go for deficit reduction.

Q Can you answer the first part of that question?

Q And the reason you mentioned entitlements is -- the reason why you're mentioning entitlements is that you are already barred, are you not, from using such funds for discretionary expenditures? Is that correct, or not?

DIRECTOR PANETTA: On the deficit reduction trust fund? We have a cap on discretionary funds and the tool there is a sequester across the board.

Q So because you're capped you don't need this for that purpose?

DIRECTOR PANETTA: That's correct. We've got to sequester -- it's only for the entitlement side and the tax side.

Q The only way this would come into play, if I'm understanding you correctly, is if somebody came along in the next couple of years and proposed to increase entitlement spending --


Q or cut taxes, this would then prevent that?

DIRECTOR PANETTA: That's correct. It would prevent -- well, it would prevent them from using these savings for that purpose. Now if they want to come up with other ways to do it, that's okay. On the --

Q Can you answer that question about it's not binding?

DIRECTOR PANETTA: On the first question, it is binding on the President. I mean, this is --

Q But he can issue a report saying I choose to ignore it, I don't believe we should put people through this pain, I don't want to --

DIRECTOR PANETTA: There is a provision that says that he can make the statement that this is not binding. Although, it puts a tremendous amount of public focus on the President and on the budget as to whether or not we're either -- we're blowing through the entitlement ceilings. And the President would have to explain to the American people why he thinks that we should not have to adhere to those caps.

That has never been asked of any other President, to explain why entitlement are going up. We all know why they're going up. But this is the first time if the President decides he does not want to take action where he's got to explain to the American people exactly why he's going to excuse himself and the country from dealing with that. I think that's a very important tool to be able to put pressure on the entitlement budget.

Q What do you say to Senator Dole who says this is a gimmick designed simply to mislead the American public?

DIRECTOR PANETTA: It's a little hard to address Senator Dole's comments because, you know, he's obviously taken a position where he's going to oppose this proposal under any circumstances. And I regret that because, frankly, Senator Dole, certainly in the '90 agreement, supported some of the budget tools that are incorporated here and basically worked with us to try to achieve deficit reduction. But he's taken a political position in opposition to it so that anything that's part of this plan is going to be unacceptable to Senator Dole and the rest of the Republicans.

So you have to take any criticism of these tools in that context. I think the fact is that if this were not in this kind of political atmosphere, they would view both of these tools as being very important to ensure deficit reduction. In this political atmosphere, they're going to attack any of these tools.

As a matter of fact, even on the floor of the Senate, when they had a chance to adopt some of these tools they voted against them. When they had a chance to vote for capital gains, my God, for targeted capital gains, they voted against that. So that tells you a little bit about where they're coming from. They're not going to support anything that gives this effort a chance of passage.

Q Let me ask something about how flexible or inflexible the entitlement review is here. For example, right now you've got the flood in the midwest, which means you're going to have higher than anticipated antideficiency payments later this year. That's a mandatory appropriation to replenish that fund. Is something like that large enough that it would trigger your entitlement cap, or is there enough built-in flexibility in here that you can ride out that kind of change?

DIRECTOR PANETTA: It's a pretty tight formula, I have to tell you, because initially when you set the targets you can base it on economic projections -- where we expect inflation to go, what other technical factors are brought in such as caseload areas, what we expect farm prices to be; all of these issues would have to be weighed in terms of setting that entitlement target. After we establish those targets, the adjustments in the future only relate to caseloads. I could make some adjustments because of caseloads, but I'm pretty well tied down in the future in terms of making major adjustments on those targets. And I would just point that out.

So that what we have to do is in the initial establishment of those targets. We've got to be able to look at those kind of potential problems in establishing the initial targets. But that's -- I think that's the reason to allow the President some flexibility as to whether or not he wants to address this, because if you do wind up with a serious problem in the economy or a serious disaster that suddenly impacts on an entitlement program of one kind or another, the President has got to be able to have the flexibility to explain to the American people why that happened and why we can't address that particular problem.

Q But as it stands, almost any changes apart from the projections that you're going to make over the next 30 days, almost any change over the next five years would at least force the President to come back in and --

DIRECTOR PANETTA: That's correct. That's correct, and I think that's the important point. We cannot bury this issue anymore. We can't just say, oh, my God, entitlements are going up, we can't control it, can't deal with it. The President has got to speak to these issues in the budget and to the American people, and it can't be ignored.

Q The option to borrow would always be there, right?

DIRECTOR PANETTA: The option of borrowing would be there, except then the pressure would obviously fall on the Congress, both the House and the Senate as to whether or not they would accept that explanation.

Q Do you set these targets program by program? And do you then look at each program to see who's going to go over, or do you have flexibility within an entire cap or entitlement spending?

DIRECTOR PANETTA: It's an entitlement -- it's an entire entitlements -- although all of the entitlements, including Social Security, are part of this entitlement budget --

Q So you can set them program by program, you're just setting an entire entitlement cap --

DIRECTOR PANETTA: That's correct. Obviously, I have to look at each program to determine what that overall line will be.

Q something you could shift from one to another?

DIRECTOR PANETTA: That's correct.

Q And they could be--

Q On the trust fund, though, with this pay-go money, since it's not binding on the Senate or the House to have this trust fund, what if they decide to just spend that pay-go money? They could do that, right? Because there's no law that prevents them from doing that?

DIRECTOR PANETTA: My understanding is that part of reconciliation -- part of the legislative side of this issue is that the legislation will also try to strike this from the pay-go scorecard.

Q Leon, I'm still unclear on how much of an escape clause you have on entitlement caps. You say you have wiggle room on caseloads. Suppose that there is a severe recession unanticipated a couple of years from now and your AFDC and food stamp caseloads go way beyond your projections. Does this executive order trigger the review, or do you have the wiggle room to simply say, well, the caseloads have gone up and we're still okay?

DIRECTOR PANETTA: The two -- I mean, as I said, the initial setting of the targets is based on inflation as well as all of the other economic projections that are part of it. After that's established, though, in the future, the only changes would be automatic adjustments would be included for unforeseen growth in caseloads. So you do have the caseload option to look at that. And a one-half percent margin of error to address forecasting problems would also be available. The changes in inflation would not be included in the automatic adjustment.

I think the answer to your question, Leo, is that if, in fact, you ran into that kind of economic problem in the future, the President at that point could, because of those circumstances, indicate that we have blown through the ceilings that were set in the entitlement budget, but because of those economic conditions he is not going to recommend that we take steps to deal with those savings. I mean, I think that is the tool that the President would have under this approach. But we do not have the ability under what was drawn by the House to make broad adjustments in the future.

Q But the caseloads alone -- can you foresee any other adjustment you would have to make, again, under the scenario of a recession, except adding caseloads?

DIRECTOR PANETTA: We all know inflation could be a real problem if inflation starts going to double-digit and your caseloads don't necessarily increase, but the costs increase, then inflation could be a real problem.

Q Outside a few moments ago, Senator Bradley mentioned that in September there's been a request to have a special two week budget cutting session in Congress to look at ways to cut spending through discretionary spending cuts, entitlement cuts, and the elimination of tax incentives. What is the administration's position on having a special session in September to address that issue?

DIRECTOR PANETTA: I think that's something that both the President and the Vice President are willing to discuss with the leadership in the Congress. Obviously, the President will be presenting his national -- the Vice President and President both will be presenting the national performance review recommendations in September, and that will have to be a major focus by the Congress with regards to what steps have to be taken with regards to further reductions and with regards to further improvements in terms of delivery of services by the government. So it's something I think they're prepared to continue to discuss.

Q Do you see this as in conflict with what Vice President Gore will be proposing or something that could supplement --

DIRECTOR PANETTA: No, not at all. I think it could be done in a very complementary way.

Q I remain confused about the degree to which the deficit reduction trust fund really locks in that money and prevents it from being used, as you said, for tax cuts or spending increases. You said something that I didn't quite get about how other language would be included. Can you go through that a little more slowly? And if that takes other language, what does this actually do other than sort of throw out a good symbol to people?

DIRECTOR PANETTA: A lot of this is -- I feel sometimes like I'm talking in Italian when I talk about dealing with some of these budget issues. They're hard to follow.

Q Italian we could understand. (Laughter.)

DIRECTOR PANETTA: Senora. (Laughter.) The issue is this, simply: that when you achieve savings in the entitlement area, for example, this year we have about $4.3 billion in what's called the pay-go scorecard as the result of additional revenues that came in the federal government. That means that there's $4.3 billion of a surplus sitting there that could be used either to reduce taxes or to add additional expenditures, if the Congress were willing to go along with that. Here, you've got $400 billion, close to $500 billion in deficit reduction. That essentially would go on the same score card.

Q I understand that, but you say it's locked away. But in what way is it, in fact, locked away if Congress chooses to spend it?

DIRECTOR PANETTA: Well, obviously, Congress, by majority vote, could try to break in to any of these by a majority vote could try to break into any of these areas in terms of using this. But the President, in addition to establishing the trust fund, has the veto power. And obviously, I think the President would be prepared to use that in order to protect the deficit reduction that's in this package.

Q He'd be prepared to do that anyway, wouldn't he?


Q So what difference does it make?

Q So what does this actually do?

DIRECTOR PANETTA: What this basically does is it sends a very important signal to both the Congress as well as the executive branch that this is not available for even proposed ideas within the executive branch or on Capitol Hill for additional expenditures. We are essentially locking this away to say this is going for deficit reduction.

Q But Congress has the key, right?

DIRECTOR PANETTA: Congress -- as a former congressman -- (laughter) -- they always have the key.

Q Can I ask one question on the retroactivity? The President said that no one would be penalized for three years if they didn't pay the additional income tax going back to January 1st of '93. Does that include Social Security increases as well, going from 50 to 85 percent? There's not going to be any penalties on that?

DIRECTOR PANETTA: The Social Security is effective '94, so it's only dealing in the upper one percent.

Q Do you agree with that --

Q What's your reading on the Senate?

DIRECTOR PANETTA: Right now? I think George Mitchell expressed it correctly; we're confident that we're going to win in the Senate and the House.

Q But DiConcini -- couldn't turn him around on this.

DIRECTOR PANETTA: We're confident we're going to win.

Q Do you agree with the deferred payments, letting people make reinstallment payments on income taxes -- it's going to cost a couple hundred million dollars.

DIRECTOR PANETTA: Number one, we're talking about the upper one percent of the taxpayers in this country, 99 percent are not going to be subject to retroactivity because they're not having to pay that additional amount; that's number one.

Q But why should you let them have that?

DIRECTOR PANETTA: Number two, there's precedent for this. There's precedent in '81. There's precedent in '84. There's precedent in '86 for going retroactive on some of these taxes. Number three, the fact is that we are allowing them three years for the additional payment. Those earning over $140,000, $180,000, we're allowing them three years to be able to recoup this.

And number four, the President has been making clear ever since the campaign that it's important that those who are the wealthiest in this country participate in this effort and that we do more to try to make our tax system fair. So I think it's for all of those reasons that I -- I don't have a problem with this because the bottom line is we're going to get $500 billion in deficit reduction, and that's the name of the game.

Q But why give them the three years; that's my question. Why should these people have three more years to pay? It's going to cost the treasury $300 million.

DIRECTOR PANETTA: Well, again, I think it's to try to address the issue of whether or not we ought to give them a little room, based on the retroactivity, to be able to pay. The bottom line is we're going to get the money. The bottom line is it's going to go for deficit reduction.

Q The President is going to have to borrow until you do get the money.

Q Will it mean more borrowing in the short term then?

DIRECTOR PANETTA: Well, as always, both -- all of this is going to transition in over five years. We're not going to get $500 billion all at once. It's going to transition in over five years, and it should, based on the economy.

Q That's a yes, right?

Q So this is just to blunt the Republican attack on retroactivity, even though it would cost the Treasury a couple hundred million dollars.

DIRECTOR PANETTA: It's because it's fair, it's right, and because in the end we need $500 billion in deficit reduction. And nobody else -- nobody else -- has a way to get it, except what the President has presented and what the Congress is dealing with.


Q Amen.

THE PRESS: Thank you.

END1:42 P.M. EDT