Under the Dome: The Week in Review August 1, 2014

Matthew A. Foss, CRPC®
Financial Advisor
UBS Financial Services Inc.
Smith Wealth Management Group
801 Laurel Oak Drive
Suite 500
Naples, FL 34108-2764

Information is valuable. Perspective is invaluable. We bring you the news of what happened in Washington this past week and what we expect will happen in the coming week. Let’s talk about what it all may mean for you and your long-term investment strategy.

This week: The Senate passed a House-passed bill to provide short-term funding for the Highway Trust Fund (HTF) and a number of nominations, including Robert McDonald to serve as secretary of the Department of Veterans Affairs (VA) and John Tefft to serve as the U.S. Ambassador to Russia (lucky guy). The House passed an endangered species reform bill and a resolution authorizing Speaker John Boehner (R-OH) to file a lawsuit against President Obama for executive overreach (see below). The lower chamber remains in session today to try to find a compromise on a bill to address the immigration crisis at the Southwest border.

Next week: The House and Senate will be out of session until September 8.

Financial Services Issues

Fed Spotlight. A House committee passed legislation designed to bring more transparency and accountability to the Federal Reserve following lengthy hearings on the operations and scope of the Fed earlier this year. The bill does some things that many House Republicans have long advocated for, such as requiring the Fed to conduct cost-benefit studies on new regulations, but this latest bill goes a step further. It requires the Fed to adopt a rules-based policy in conducting monetary policy. This is far too prescriptive for the Fed’s liking, and while the legislation may pass the full House later this year, it will not pass the Senate. Also with regard to the Fed, the White House is under pressure to nominate two individuals to serve on the Fed Board of Governors to give the board full membership. The White House will likely nominate two people in September, but they will not get Senate approval until next year.

Other Policy Issues in Play

Finished Business. The House and Senate passed a $16.3 billion package to improve health care services for veterans. The good news is that veterans will get better care and wait less time for it, often at non-VA facilities. The bad news is that most of the bill is not paid for, so $12 billion will be added to the federal budget deficit over the next decade. The Senate passed a House-passed bill to provide short-term funding to the Highway Trust Fund (HTF) to avert a potential shutdown in road construction and maintenance projects through May of next year. Both measures will be signed into law by President Obama. Look for a return to the fight over the long-term funding challenges over the HTF next spring.

Wait Until September…or Later. Neither the House nor the Senate was able to pass legislation to address the immigration crisis at the Southwest border, but the House is staying in session today to try to pass a bill. However, lawmakers from both parties and chambers have so many differing views on how to address this issue that passage of a final bill will require more time and jockeying. Also, neither chamber was able to pass a continuing resolution funding bill for government agencies for Fiscal Year 2015, which begins on October 1. This will be a highlight issue in early September since passage of a bill is needed to avert a government shutdown on October 1. House Republicans are especially eager to pass such a bill well before October 1 so they do not get blamed (like last year) for a threat of a government shutdown.

House Lawsuit Against POTUS. The House passed a resolution authorizing House Speaker John Boehner (R-OH) to file a lawsuit against President Obama for executive overreach. We do not know what the future holds for this legal action, but its political impact will likely be more positive for the President and Democrats in general. Democrats were successful this week in raising the possibility that Republicans may ultimately pursue impeachment proceedings against the President, although few, if any, congressional Republicans have advocated this option as far as we know. The lawsuit may strike many as an escalation of the petty partisan feud that has paralyzed Washington, and that is how we think the politics will play out in the near term. Lost in the political spin over the issue is a legitimate conversation over the proper roles and separation of the legislative and executive branches of government.

Entitlement Program Funding Woes. The annual federal report detailing the financial health of Social Security and Medicare was released this week and confirmed that the trust funds supporting both programs will become insolvent in 2033 and 2030, respectively. That is a long enough time period from now for most Washington policymakers to feel comfortable letting their successors find a solution to these problems. One exception, though, is the Social Security Disability Program, which is projected to become insolvent in just two years. This means that President Obama and most of the same people in Congress today will have to find a solution to this funding problem in the next two years. Good luck with that. The funding shortfall will either be addressed by increasing taxes to put more money in the system, cutting disability benefits, reforming the program to affect future beneficiaries, or a combination of all. Putting the Social Security Disability Program back into the black will be a very heavy lift over the next two years, and it will be as contentious as any other issue dealt with over the next 24 months as its 2016 insolvency date approaches.

Climate Change in Focus Again. Environmental Protection Agency and Obama Administration officials began a public promotion of its proposed rule to limit carbon-based emissions from power plants this week in a public hearing in Washington, D.C. Public events followed or will follow this week in Atlanta, Denver and Pittsburgh in an effort to gin up national support for the proposed rule, which has become a big campaign issue in energy-producing states that will help decide which party controls the Senate next year (WV, KY, AR, AK, and LA, among others). Also, leading House Democrats used the public push this week to introduce legislation calling for a “cap and dividend” plan where power plants would offset pollution they generate by purchasing carbon permits. Dividends from the permits would be sent back to taxpayers. Advocates claim the bill would cut carbon emissions by 80% below 2005 levels by 2050. The bill will not go anywhere, but the proposed rule will be approved in final form late next year.

Scrutiny on Real Estate Investments. Windstream, a U.S. telecommunications company, was cleared this week by the Internal Revenue Service to reclassify part of its business as “real estate.” Its move to form a Real Estate Investment Trust (REIT) will enable the company to significantly reduce its tax bill. Under a REIT structure, as long as the company pays out 90% of its taxable income to shareholders it will not owe corporate tax. We have recently reported on the strong policymaker focus on corporations moving offshore for lower tax rates (inversions), but the REIT conversion maneuver is also beginning to draw attention from those same officials. Earlier this year, House Ways and Means Committee Chairman Dave Camp (R-MI) included proposals to discourage the use of the REIT structure to erode the corporate tax base by making it more difficult for operating companies to convert into REITs. This change (like changes to inversions) is likely to be done in a broad tax reform bill, which could begin to move forward next year, but we do expect transactions like Windstream’s to trigger more scrutiny of the REIT laws as a prelude to that effort.