Bailout of S&Ls; Seen Crippling Curbs on Deficit

In order to save Gramm-Rudman, they had to destroy it.

That’s the paradoxical result of the “compromise” crafted by Congress and the White House on the immense federal bailout of the savings and loan industry.

The compromise broke an impasse that threatened to block approval of the critical rescue plan, but at a price.

“They’ve opened a tiny loophole so wide you could drive a bulldozer through it,” said one congressional budget analyst, lamenting the damage done to the principles of the Gramm-Rudman law, which sets mandatory deficit reduction figures each year until the deficit is eliminated in 1993.

‘Worst of Both Worlds’

“Politically, neither side could go for the other’s (financing plan), because it would be labeled a defeat,” said Barry Bosworth, an economist at the Brookings Institution here. “So they chose a compromise that has the worst of both worlds.”

The bargain struck Thursday night, which ran a gantlet of objections from House Democrats before the bailout plan was approved early Saturday, combines features of the competing proposals from both Democrats and the White House. The combination, Bosworth and other analysts say, makes a mockery of the fiscal limits supposedly imposed on Congress by the Gramm-Rudman law.

Gramm-Rudman requires the White House to rule each autumn whether Congress has managed to meet the target for the upcoming fiscal year beginning Oct. 1.

The dirty little secret of the law is that any spending approved by Congress after the fiscal year begins is not counted against that year’s Gramm-Rudman ceiling. And that loophole is the key to the compromise on the S&L; bailout.

Congress decided to spend now--too late to trigger the law’s mandatory budget cuts for 1989--a healthy portion of the money needed for next year’s bailout effort.

“It’s literally a shell game,” said Carol Cox, director of the Committee for a Responsible Federal Budget. “You can use this gimmick to hide spending someplace where it doesn’t matter anymore.

‘Evade Political Choices’

“What really bothers me,” she added, “is that they keep pointing to Gramm-Rudman as evidence they are controlling the deficit. But all it does is allow them to evade the political choices the government refuses to make.”

At issue in the S&L; bill was how to account for $50 billion in bond sales necessary to raise the money that will be used for federal insurance payments to depositors in failed S&Ls.;

Democrats wanted to count the $50 billion as part of the federal budget for this year and the next two. That way, the Treasury Department could sell the bonds, assuring the lowest possible interest rates and saving money for taxpayers.

But that would have entailed massive violations of Gramm-Rudman’s deficit ceilings for the next two years. The Democrats recommended the simple expedient of exempting the $50 billion from Gramm-Rudman computations.

Administration Balks

The Bush Administration would have none of it. The consequence, it charged, would be to pull the teeth from the Gramm-Rudman law.

It recommended instead that the bonds be sold by a new agency called the Resolution Trust Corp. This approach would pull the $50 billion off the federal budget and solve the Gramm-Rudman problem, leaving the annual payments of principal and interest to be covered by taxpayers in future years.

But that approach would have a drawback of its own. The Resolution Trust Corp. bonds, being not quite as safe an investment as Treasury bonds, would carry somewhat higher interest rates. Democrats said taxpayers would have to pay something like $5 billion more in interest payments over the 30-year life of the bonds.

In effect, the compromise takes $20 billion from Column A and $30 billion from Column B.

Deadline Passed

Using the Democrats’ approach, the first $20 billion in bond sales would be made by the Treasury Department and shoved into the budget for the current 1989 fiscal year. Thanks to the loophole, there is no Gramm-Rudman problem with this money because the 1989 fiscal year is already 10 months old and the deadline for triggering deficit-cutting provisions has passed.

Then, following the Bush formula, the remaining $30 billion would be sold in 1990 and 1991 by the Resolution Trust Corp. and kept off the government books.

“This has been done before, but never on so massive a scale,” said a budget analyst.

Until now, government officials have only moved spending from one budget year to another in relatively small amounts. For example, Congress once shifted about $1 billion by ordering Medicare to speed up payments to the elderly by five days so it would not appear to be spending so much money in an upcoming fiscal year.

And this year, the Defense Department is planning to pay servicemen a day early so that it does not have to cut an extra $2.1 billion from fiscal 1990’s budget.

Last August, the Ronald Reagan Administration certified that the deficit for this year would not exceed Gramm-Rudman’s $136-billion ceiling. Recently, however, the White House acknowledged that the budget gap was likely to widen to roughly $150 billion by the time the books close on Sept. 30. And if the S&L; bailout adds another $20 billion, the deficit could climb to almost $170 billion.

Next year’s deficit is supposed to be less than $110 billion, and the Administration is preparing to predict later this month that the government will meet that goal. But there is no telling how wide the gap between federal spending and revenues will be once the year begins.