The History of the Section 1402 Payments in House of Representatives v. Burwell

May 25th, 2016

On May 11, under subpoena by the House Ways & Means Committee, David Fisher was deposed about the Obama administration’s funding for the ACA’s Section 1402 cost-sharing payments. (For a background of this issue as it relates to House of Representatives v. Burwell, see this piece in National Review). Fisher served as the IRS’s Chief Risk Officer.

In a nutshell, Fisher was concerned that there was not a valid appropriation. He attended a meeting with an OMB political appointee who provided a memo explaining the administration’s position, but he was not allowed to keep the memo or take any notes. The Chief Risk Officer still was not persuaded, so he called for a meeting with the IRS Commissioner. The Secretary of the Treasury and AG Holder both personally signed off on the memo, which the IRS Commissioner approved over Fisher’s dissent.

In this (lengthy) post, I digest the 73-page deposition into a narrative (with record cites) to try to explain from Fisher’s perspective what transpired. I’ll offer my commentary in a later writing. Here, I’d like to establish the record as clearly as I can.

“As the Chief Risk Officer,” David Fisher said, “I am commonly engaged with senior leaders from around the IRS. And there was a potential concern about these payments.” (p. 13). David Fisher first became aware of the 1402 issue in the “late fall of 2013.” Gregory Kane, Deputy Chief Financial Officer, “raised a little confusion about the funding source for the cost-sharing program, as to whether or not that source was going to be subject to sequester or not subject to sequester.” (p. 13). He described the thirty-year civil servant’s role as “engag[ing] senior leaders into making sure they have all the information necessary to make a good decision.” (p. 16). Permanent appropriations are not affected by the sequester, but annual appropriations are subject to the restriction on federal spending. “The IRS would need to decide,” Fisher said, “whether or not to sequester those funds if sequestration kicked in.” (p. 16).

The IRS’s “original understanding,” Fisher explained, “was that these funds were going to be appropriated funds and, therefore, subject to the sequester.” (p. 16). But there was a “shift,” and HHS’s budget request “had been withdrawn.” (p. 17). By December, “it became clear that . . . the intent was to use the permanent appropriation to pay the cost-sharing reduction payments.” (p. 22). This decision, Fisher said, raised “some confusion and concern . . .  from an audit standpoint,” because auditors had to be “able to trace these payments all the way back to the source.” (p. 19).

Fisher explained that in his experiences, “in all previous instances” when Congress wanted to create a “permanent appropriation,” there was a “discrete update to the Internal Revenue Code.” (p. 49-50). For example, “section 1401 of the Affordable Care Act creates section 36B of the Internal Revenue Code,” which established a permanent appropriation for the Advance Premium Tax Credits (subsidies on the exchanges). (p. 49). While the funding for Section 36B was “discretely articulated in” the ACA, he noted, “there was no clear reference in the section regarding the cost-sharing reduction payments to the Internal Revenue Code in the Affordable Care Act.” (p. 50). The Section 1402 “cost-sharing reduction payments are not linked to the Internal Revenue Code, as far as I could tell, directly anywhere.” (p. 59).  The requirement of Congress “mak[ing] it clear,” was the “consistent practice, perhaps in all cases.” (p. 51-52). In light of this “risk,” and the statute being “at best unclear,” Fisher was “looking for the administration’s perspective on this.” (p. 50, 54).

Fisher attended a meeting at the Old Executive Office Building—across the street from the White House—on January 13, 2014. He requested an invitation to attend this meeting because he determined “there was at least some risk here and it was appropriate for the Chief Risk Officer to be involved in the discussion.” (p. 25). Fisher explained that the “risk” was “whether or not the utilization of the permanent appropriation for the cost-sharing program had been appropriately appropriated by the law.” (p. 26).

At the meeting with the Office of Management and Budget, Fisher recalled, “We were given a memo to read,” but “we were instructed we were not to take notes and we would not be keeping the memo, we’d be giving it back at the end of the meeting.” (p. 26) There “was no real explanation as to why we couldn’t keep the memo,” Fisher said. (p. 46). It “was just simply stated.” (p. 48). This secrecy “was not a common practice” in Fisher’s “10 years in government at the three agencies where [he] worked.” (p. 47). Other than dealing with classified information at the Department of Defense, he did not “recall another occurrence” of not being able to keep a memorandum. (p. 47). Fisher speculated that the cloak-and-dagger protocol was triggered because the administration “wanted to have some kind of contained distribution for whatever purpose. I don’t know their purpose. They clearly wanted to have that information only shared with a select group of folks.” (p. 48). It was “a little unusual,” he said. (p. 69). Further, while Fisher usually takes copious notes, he “took no notes in the meeting at OMB because we were told not to take notes.” (p. 70).

After distributing the memo, “The OMB team left the room,” and the “IRS team stayed in the room” “to read the detailed memo.” (p. 26). Afterwards, Fisher recalled, “the OMB people came back in.” (p. 26). Fisher asked if he would “be able to use this memo” in the event of an audit to explain the “legal justification that the administration had put forward.” (p. 46). He was told “yes,” and “if our auditors down the road found a concern related to the source of these payments,” the IRS could “actually show that full memo.” (p. 46)

The memo, which Fisher was not allowed to retain a copy of, “justif[ied] the payments out of the permanent appropriation.” (p. 26). He described the memo as a “lengthy . . . list of small justifications of individual things trying to identify why the administration believed that it was Congress’ intent to have the payments for both the Advance Premium Tax Credit and the cost-sharing reduction payment being made in the same manner.” (p. 27). For example, there were “allusions” to statements made on the floor and statements made in the media. (p. 27-28). But “there was no sort of single, main argument.” Instead there was a “collection of . . . elements that in total, would draw the conclusion that these payments out of the permanent appropriation would be appropriate.” (p. 28).

The memo was drafted by attorney Sam Berger, who had worked at OMB since his graduation from Yale Law School in 2010. (p. 28). Fisher recalled that the memo had been “discussed both within the Office of Management and Budget and in the Justice Department,” and “other parts of the executive branch. (p. 29, 64). Geovette Washington, the OMB General Counsel personally briefed Attorney General Eric Holder on the memo. (p. 31, 36). Fisher recalled that “it stood out in [his] mind” that she personally “had an opportunity to brief the Attorney General himself.” (p. 32).

Throughout the deposition, Fisher carefully distinguished the work performed by career civil servants with decisions made by appointed officials in the “administration. The “administration,” Fisher said, “has gone through the legal analysis and has come up with the opinion that, based on the information contained in this memo, it was appropriate to use the permanent appropriation.” (p. 29). “And that was the administration’s conclusion, and, therefore, the payments should be made,” based on the “legal analysis that the administration had performed.” (p. 29).

After the meeting with OMB, Fisher said his “group was not in consensus on the merits of the argument as conveyed to us through the memo.” (p. 33). Mr. Kane also had “some reservations still, even after . . . reading the memo and going to the meeting.” (p. 34-35). Fisher advocated to “set[] up a meeting with the Commissioner of the IRS to make sure he’s fully informed.” (p. 33). Fisher said that their job was to “identify potential risks” that “require senior-level engagement.” (p. 33). This case was particularly suited for the escalation, because Fisher “had concerns about the analysis in the memo.” (p. 34).

Fisher joked, “I know it’s hard to believe for some people,” but “this was not about health care” for him. (p. 34). It was “about appropriations law.” (p. 34). He noted that they take “very seriously” the Antideficiency Act,” which imposes “criminal penalties” for spending money without proper authorization. (p. 34). “We wanted to make sure that these payments were not going to be in violation of appropriation law and the Antideficiency Act,” Fisher said. “That’s what this was all about.” (p. 34).

It was “not unusual” for there to be disagreements about appropriations law, Fisher said, “but this was “probably a stronger disagreement than is typical.” (pp. 67-68). It “did not occur very often, that it would get to [the IRS Commissioner’s] level.” (p. 68).

The meeting with IRS Commissioner John Koskinen was held roughly one week after the OMB meeting. (p. 38). Fisher described the meeting as a “free and open discussion,” and praised Koskinen as a “not only a phenomenal leader but one of the best managers we’ve ever had in government.” (p. 38). He appreciated that he was given “plenty of time to air [his] concerns.” (p. 40).

At the meeting, Koskinen reviewed a memorandum from Mark Mazur, the Assistant Secretary for Tax Policy to Treasury Secretary Jacob Lew. (p. 39). (Mazur was the author of the blog post in July 2013 that announced the delay of the employer mandate). The memo noted that Treasury’s Counsel “had concluded that these payments were appropriate.” (p. 39). It was “signed and initialed ‘Approve’” by Secretary Lew. (p. 39). Fisher recalled that the Justice Department had also “seen the memo and had . . . approv[ed] of it.” (p. 39).

Fisher sensed that there was a “very strong consensus” at the meeting from “fairly senior positions in government that these payments were appropriate.” (p. 39). The “position [that] carried the day” was that the appropriation was “implied,” or an “intermingled requirement.” (p. 60). However, the Chief Risk Officer “was in the dissent,” because he saw “some risk to making these payments with respect to the appropriations law and the Antideficiency Act.” (p. 39). He told those in attendance that “the memo that we read was not compelling to me to counter my concerns about the Appropriations Act.” (p. 40). Fisher “read the law over and over again to try to convince myself, you know, what’s the appropriate reading of this, recognizing that many others have now come to a different conclusion.” (p. 40). But he was still in dissent.

Ultimately, Koskinen sided with the administration officials. Fisher offered his summary of the decision-making process, which is worth quoting in full.

In the end, he made the decision that I actually would expect him to make. It was a decision that I disagreed with. But when a senior leader, an agency head, has brought his senior advisers together, he is given a lot of information — there was nothing held back. He had, I think, a presentation that did appear to him to be compelling, that these payments out of the permanent appropriation were appropriate, again, with multiple components within the executive branch concurring that that’s the appropriate thing to do, including the memo that we had in hand from the leadership at the Treasury Department. He listened to my concerns and thanked me, actually, in the meeting for expressing those concerns but felt the appropriate course was to go forward and make the payments, you know, per the strong majority of folks who believed that they were appropriate. (p. 40).

I was certainly not surprised that he supported that with this level of senior advice given to him as, you know, what should we go do. He made the choice that I bet you 99 out of 100 people would have made. It’s just one that I happen to disagree with in terms of my understanding of both appropriation law and my reading of the statute. (p. 58).

As an aside, there were two comments from Democratic members of the Committee that stood out:

Rep. Sandy Levin (D-MI), ranking member of the Ways & Means Committee, strongly opposed the deposition: “As we have expressed before, we strongly oppose this deposition. It’s unprecedented. It was done without any consultation with the minority. Also, it’s the same subject matter as a lawsuit begun by the very people who have undertaken this deposition — the same people. The House majority filed a lawsuit. It’s on the very same subject matter.” (p. 9).

Rep. Jim McDermott (D-WA) offered an interesting commentary on how Congress views the implementation of the laws it enacts: “Mr. Fisher, I want to thank you for coming and talking about how decisions are made inside the bureaucracy. We write laws out here, and then they get implemented, and sometimes we’re not aware exactly how it works.”