View from Washington

1. Washington in Chaos as the November Election Approaches: What Lies Beyond?API’s Biennial Tanker ConferenceOrlando, FloridaMay 21, 2012Kenneth J. KiesManaging DirectorFederal Policy GroupA Practice of Clark & Wamberg

2. View from Washington

3. Overview • Federal Fiscal Outlook • Economic Outlook • Debt Ceiling Outcome and Super Committee Results • The President’s FY 2013 Budget • Tax Increases Ahead in 2013? • Tax Legislative Agenda for 2012? • Political Outlook • Possible Game Changers

4. The Outlook for 2011 Federal Fiscal Outlook

5. Deficit Outlook Under Obama Budget Source: CBO Baseline Budget Outlook, March 2012/ President Obama’s budget for fiscal year 2013, February 2012

6. Federal Debt Outlook: Treasury

7. Federal Debt Outlook: Treasury Source: Annual Report on the Public Debt, June, 2011

8. Projections Actually Understate Scope of Real Problem Assumes No Medicare “Doc” Fix Assumes Bush Tax Cuts Expire for those with income over $250,000 Assumes no individual AMT “patch” Possibly unrealistic economic assumptions

9. Economic Outlook

10. Economic Indicators • Consumer confidence • At 69.2 in April, down from 69.5 in March 2012. The index would need to be at 90 to indicate the economy is on solid footing. • (source: Conference Board) • Residential real estate remains troubled • 5.78% of all mortgage borrowers were delinquent in the 1th quarter of 2012, down from the 1st quarter 2010 high of 10.1%, but far above the historical average of about 2%. • Delinquency rates for FHA loans, which typically go to low-to-moderate income borrowers, are up over the past year, to 12.1%. • GDP growth for most of 2011 was very poor—just 0.4%, 1.3%, and 1.8% in the first three quarters, though Q4 improved to 3.0%. GDP growth for the first quarter of 2012 was 2.2%. • Unemployment in April was 8.1%, down from 8.2% in March. • 522,000 job-seekers gave up looking for work in April. • Only 115,000 net new jobs were created in April.

11. Economic Indicators • Labor force participation rates continue to drop, particularly among men and youth, to record or near-record lows, while long-term unemployment is at record highs • The civilian labor force participation rate declined in April 2012 to just 63.6% of the population 16 years and older, the lowest level since December of 1981 according to the Bureau of Labor Statistics. For March, the participation rate was not much better: 63.8%. • The labor force participation rate for men 20 and older in April 2012 was just 72.9%, the lowest since World War II. January to March the rate was 73.3%. • Teen employment dropped to 25.4% in April, the lowest in post-WW II history. In January of 2012, only 59.9% of adults aged 20-24 were employed, down from a high of over 70%. • Overall unemployment rates have declined largely because the millions of people who have left the workforce are not counted as unemployed. • The number of long-term (27 weeks or more) unemployed persons has quadrupled since 2008. Of the 5.1 million unemployed over 27 weeks, 4 million have been unemployed over a year. 41.3% of all unemployed persons are long-term unemployed, more than twice historical norms.

12. States and Cities in Fiscal Crisis • States face over $3 trillion pension funding shortfall • A 2011 University of Chicago and Northwestern’s Kellogg School of Management study found that all 50 states collectively face a $5.17 trillion pension obligation, but only have $1.94 trillion set aside in state pension funds, a difference of $3.23 trillion. • Stanford University study shows possible pension funding liability of $500 billion for California alone. • Pension funds for state and local workers are understated by $1.5 trillion or more, meaning that the benefits are much costlier than many governments and taxpayers thought. Economists: State, local pension funds understate shortfall by $1.5 trillion or more – Washington Post, March 3, 2011

13. States and Cities in Fiscal Crisis • States face over $3 trillion pension funding shortfall (continued) • Pension costs force major layoffs. Citing pension costs, Costa Mesa, Calif., plans to lay off nearly half its employees – Washington Post, March 19, 2011 • Rhode Island has barely one million residents and a pension shortfall of at least $6.8 billion for city employees. Washington Post, September 6, 2011 • Across New York, state and local governments are borrowing $750 million this year “from the very same $140 billion pension fund to which they owe money…to finance their contributions to the state pension system.” New York Times, February 27, 2012 • Some cities face bankruptcy • “Los Angeles could go bankrupt if it doesn't overhaul its finances with new taxes, possible layoffs and the privatization of some city services, the city's top budget official says.” San Francisco Chronicle, April 7, 2012 • Stockton, California's City Council will be asked next week to begin the process of becoming the largest U.S. city to file for bankruptcy.” Bloomberg, March 1, 2012

14. The Debt Ceiling Deal

15. Agreement to Increase the Debt Limit • $900 Billion Initial Increase in the Debt Limit • Increased in two tranches: $400 billion and $500 billion • $500 billion occurs if Congress doesn’t block it • $917 Billion in Spending Cuts tied to Initial Increase • Bill created a “Congressional Joint Select Committee on Deficit Reduction” (a.k.a. “Super Committee”) to locate up to $1.5 trillion in additional deficit reduction • If Committee fails to locate at least $1.2 trillion in savings, across-the-board cuts kick in but not until January 2, 2013.

16. Some Perspective on the Debt Limit Deal • The Debt Agreement Must Reduce the Deficit by at least $2.1 trillion over the next ten years • The Federal Government is Slated to Spend more than $46 trillion over the next ten years • Bottom Line: The Debt Agreement cuts 4% from Federal Spending over the next ten years • Put Another Way: Cuts in Debt Agreement do not cover half of Federal Interest payments of $5.4 trillion over the next ten years Source: The Congressional Budget Office: “Budget and Economic Outlook: Fiscal Years 2011 to 2021”, “CBO Analysis of August 1 Budget Control Act”

17. Putting the Debt in Perspective for Fiscal Year 2011 • U.S. Tax Revenue: $2,314,000,000,000 • Federal Budget: $3,597,000,000,000 • New Debt: $1,283,000,000,000 • National Debt: $14,698,625,550,307.37 (and counting) • Budget Cuts: $38,500,000,000 Source: The Congressional Budget Office, Treasury Department’s Bureau of Public Debt

18. Drop 8 Digits, the Debt becomes a Family Budget • Annual Family Income: $23,140 • Money Family Spent: $35,970 • New Credit Card Debt: $12,830 • Credit Card Balance: $146,986.37 (and counting) • Budget Cuts: $385

19. The Real Kicker “A federal budget compromise that was hailed as historic for proposing to cut about $38 billion would reduce federal spending by only $352 million this fiscal year, less than one percent of the bill’s advertised amount, according to the Congressional Budget Office.” - The Washington Post, April 14, 2011

20. Translation: The Family Budget was cut by $3.85, not $385

21. President Obama’s Deficit-Reduction Plan Uncovered The Promise: “It’s a plan to reduce our debt by more than $4 trillion.” - President Obama, September 19, 2011

22. President Obama’s Deficit-Reduction Plan Uncovered The Reality: The plan INCREASES the deficit by $3.049 TRILLION

23. President Obama’s Deficit-Reduction Plan Uncovered The Math: $4.850 trillion: Deficit-reduction purported in the President’s plan Minus: $5.109 trillion: Tax cuts and spending increases the President seeks that are not in current law Minus: $1.084 trillion: Troop withdrawal savings in the plan already anticipated Minus: $1.349 trillion: Deficit-reductions included in the President’s plan that already have been enacted into law Minus: $ .357 trillion: Additional Interest Expense on the Debt ____________ Equals:$ 3.049 trillion DEFICIT INCREASE

24. Federal Revenues Are Depressed As Well • Revenues as a percent of GDP have averaged 17.8 percent since 1950 • Revenues as a percent of GDP have been at their lowest level since 1950 FY- 2009 - 15.1% FY- 2010 - 15.1% FY- 2011 - 15.4% FY- 2012 - 16.3% (projected)

25. Outcome of the Super Committee • Super Fail • USAToday, November 22, 2011 • Deficit Panel Folds Its Tent • The Wall Street Journal, November 22, 2011 • Super committee rests in pieces • The Christian Science Monitor, November 22, 2011 • Deficit supercommittee announces failure • The Washington Times, November 21, 2011 • Supercommittee Failure PosesThreat to U.S. • Bloomberg, November 22, 2011 • Short Term Consequences • NOT MUCH

26. Snooze Alert: President Obama’s FY 2013 Budget “If there was ever a year to ignore the President’s annual budget proposal, this is it.” National Journal Daily, February 13, 2012

27. Pending Federal Tax Increases (continued) Current Law Tax Increases to Take Effect in 2013 (includes effect of (1) higher top marginal ordinary income tax rate, (2) expiration of qualified dividend tax rate, (3) expiration of reduced long term capital gains tax rate, (4) imposition of higher Medicare tax)

28. Pending Federal Tax Increases (continued)

29. “Congress risks taking the economy over a ‘massive fiscal cliff,’ Federal Reserve Chairman Ben Bernanke warned lawmakers on Wednesday. In remarks that hit Wall Street stock prices, the central bank boss suggested the economy could hit a serious roadblock if Congress allows the Bush tax rates and payroll tax cut to expire and $1.2 trillion in spending cuts to be implemented simultaneously in January.” - The Hill, March 1, 2012

30. What Is On the Legislative Agenda for 2012? White House spokesman Josh Earnest said extending the payroll tax break through next year, a fight that will consume Congress after lawmakers return to Washington in January, is “the last must-do item of business on the president’s congressional agenda.” - The Wall Street Journal, January 1, 2012

31. Political Outlook for 2012

32. Congressional Outlook Senate Outlook • 2010 Results in 53 Democrats and 47 Republicans • Democrats have 22 seats to defend in 2012 House Outlook • Current Make up Republicans 240 Democrats 193 Vacancies 2 • Factors that could affect 2012 Outcome • Economy/Jobs

33. Presidential Race • Obama Vulnerabilities 2008 compared to 2012 • Support for Gay Marriage • Economy/Jobs • Women • Young Voters • Independent Voters • Unions • Jewish Voters • African American Voters • Hispanic Voters • No George Bush • Republican Vulnerabilities - The primaries

34. President Obama’s Unemployment Problem Average Monthly Unemployment Rate • Obama: 9.2% • Ford: 7.8% • Reagan: 7.5% • Carter: 6.5% • Bush 41: 6.3% • Kennedy: 6.0% • Bush 43: 5.3% • Clinton: 5.2% • Nixon: 4.2% • Eisenhower: 4.9% • Truman: 4.2% • Johnson: 4.2%

35. Can Gas Prices Prediction the Election? Source: U.S. Energy Information Administration, weekly average for midgrade conventional gas prices/AAA

36. Does Obama Have a Money Problem? The Obama campaign is lagging behind its fund-raising pace of four years ago. Shortfalls in contributions from major industries have made the campaign more reliant on small donors and joint fund-raising with the Democratic National Committee. The New York Times, April 20, 2012

37. Obama Contributions: Then and Now Source: Center for Responsive Politics; Federal Election Commission

38. Contributions: Obama 2008 vs. Obama 2012 Source: Center for Responsive Politics; Federal Election Commission

39. Poll Numbers Bad for All

40. Elected Officials Take a Hit • McClatchy-Marist: 49% “definitely plan” to vote against President Obama, September 13–14 • CBS News/ NY Times poll May 11-13: Romney leading Obama 46% to 43%. • USA Today/Gallup poll May 8-14: Obama leading Romney 46% to 45%. • Real Clear Politics average April 9-May 7: Only 14% approve of how Congress is handling its job. • Real Clear Politics average for April 28 – May 14 for President Obama: 48% approve and 48.5% disapprove • In December of their third year in office here’s where past President’s were: • Eisenhower (1955) 75% - Nixon (1971) 50% - Carter (1979) 53% • Reagan (1983) 54% - HW Bush (1991) 51% - Clinton (1995) 51% • W Bush (2003) 58%

41. How is Congress Doing? The Bottom of the Barrel Degree of Confidence The Military: 78% Small Business 64% The Police 56% The Church 48% Hospitals 39% Supreme Court 37% The Presidency 35% Justice System 28% Newspapers 28% TV News 27% Banks 23% Labor 21% Big Business 19% HMOs 19% CONGRESS 14% Gallup, June 23, 2011

42. The English Language has some wonderfully anthropomorphic collective nouns for the various groups of animals. We are familiar with a Herd of cows, a Flock of chickens, a School of fish,

43. a Gaggle of geese, However less widely known is: a Pride of Lions, a Murder of crows,

44. (as well as their cousins the rooks and ravens), an Exaltation of doves, and, presumably because they look so wise: a Parliament of owls. Now consider a group of Baboons. They are the loudest, most dangerous, most obnoxious, most viciously aggressive and least intelligent of all primates. And what is the proper collective noun for a group of baboons?

45. Believe it or not ……. a Congress! A CONGRESS OF BABOONS! I guess that pretty much explains the things that come out of Washington ! You just can't make this stuff up. Go green – Recycle Congress in 2012 !!!

46. Possible Game Changers

47. Possible Game Changers for 2012 • President Obama’s Support of Gay Marriage • U.S. Supreme Court decision on Obamacare • Euro Zone Meltdown • Iran Nuclear Activity • North Korea • China Economy • Middle East Unrest • Natural Disasters • Terrorist Attack • Debt Ceiling Pierced before November 2012 Election

48. Fast and Furious • Solyndra Bankruptcy • General Services Administration – “It didn’t stay in Vegas” • Cartagena - Gate