Reconciliation 2.0 a real possibility

Congress is facing a heavy workload this week that includes dealing with security lapses at the White House Correspondents Association dinner, a royal visit, a contentious Foreign Intelligence Surveillance Act extension, and dealing with a second reconciliation bill that would fully fund the Department of Homeland Security.

"What was once seen as a long shot? "Reconciliation 2.0" ?has reemerged and made substantial progress in the past few weeks," said Brain Egan, chief policy officer for the National Association of Bond Lawyers, via a post on the NABL website.

The good news at least temporarily is that "the package is unlikely to have much of a direct impact on municipal market participants," said Egan.

There are factions in Congress that would like to load up any piece of legislation with other riders including provisions like restoring the advance refunding of tax-exempt bonds and raising the limit on bank qualified debt.

"I think that if there's going to be something that gets done before the midterms, it's going to be something smaller and more surgical," said Tom Kozlik head of public policy and municipal strategy for Hilltop Securities.

The current definition of surgical is $140 billion that will fund the U.S. Border Patrol and Immigration and Customs Enforcement.

"While it's still a heavy lift, I assume some type of package will likely be advanced," said Brett Bolton, vice president of federal legislative and regulatory policy for the Bond Dealers of America.

Reconciliations are usually subject to strict rules about paying for any budget increases by cutting something from somewhere else, but this one is tapping technicalities to avoid that step.

"At this juncture, as written, it does not require offsets," said Bolton.

According to the Committee for a Responsible Federal Budget, bypassing the pay-for can happen by changing the rules or adding exceptions to the budget resolution itself.

The bypass is made possible by the repeal of the "Conrad Rule," in 2015. The rule prohibited reconciliation from increasing deficits and was repealed by Senate Republicans to grease the skids for the Tax Cuts and Jobs Act of 2017.

The size of the deficit remains a cause for concern among fiscal hawks, who so far aren't holding much sway.

If the second reconciliation can pass the Byrd Rule, which layers on more restrictions and be signed into law, there's also a possibility of a third reconciliation before the end of the year.

"Some politicos are already discussing the potential for a third "tax-focused" reconciliation bill in the last quarter of the calendar year," said Egan.

"Such a package would almost certainly run into election and lame duck realities, including congressional attendance issues among a substantial number of retirements and incumbents not returning next year."

Bolton remains a skeptic about both scenarios. "There's too much to happen for me to feel certain about next steps on any of this."