Bargainers reach deal to head off gov't shutdown

WASHINGTON (AP) — Congressional negotiators reached agreement Thursday on a compromise spending bill to avert a weekend federal shutdown. They also worked toward a deal renewing the payroll tax cut and unemployment benefits for another year but prepared a shorter version as a fallback.

Senate Majority Leader Harry Reid, D-Nev., told reporters he was still optimistic that bipartisan talks on yearlong extensions of the Social Security payroll tax cut and unemployment coverage would succeed. But as a "Plan B," he said, they were working on a two-month extension as well, which would also prevent cuts in Medicare reimbursements for doctors during that period.

"We're still working on the long-term" bill, Reid told reporters as he exited the Capitol after a day of talks over both the payroll tax and spending measures. As for the two-month version, he said, "We'll only do that if what we're working on doesn't work out."

Reid's remarks put a slight damper on a day on which for the first time, Democratic and Republican leaders expressed optimism at prospects for swift compromise on their payroll tax standoff and a spending battle that had threatened to shutter federal agencies beginning at midnight Friday.

A deal on a $1 trillion spending bill was reached after Republicans agreed to drop language that would have blocked President Barack Obama's liberalized rules on people who visit and send money to relatives in Cuba. But a GOP provision will stay in the bill thwarting an Obama administration rule on energy efficiency standards that critics argued would make it hard for people to purchase inexpensive incandescent light bulbs.

The House is expected to approve the spending measure Friday, and the Senate could follow suit, possibly the same day.

Donald Stewart, spokesman for Senate Minority Leader Mitch McConnell, R-Ky., said talks aimed at agreeing to a yearlong extension of the payroll tax measure will continue.

"We're 12 hours into this debate, they just started talking," he said when asked about the two-month version of the bill. "I wouldn't hit the panic button."

A senior White House official said the administration supported the two-month plan.

Bargainers were considering the two-month extension of this year's payroll tax cut and unemployment benefits bill because so far, they haven't agreed how a yearlong extension would be paid for, said a Democratic aide who spoke on condition of anonymity to discuss the private talks.

The two-month bill would cost $40 billion, according to the aide. It would be paid for from a list of around $120 billion in savings that bargainers are considering, including sales of the broadcast spectrum and raising fees that Fannie Mae and Freddie Mac charge to back mortgages, the aide said.

The two-month extension would let lawmakers revisit the measure after returning to Washington after the holiday season. That could be risky because that work would come well into the 2012 presidential and congressional election year.

Without congressional action, the payroll taxes would rise and extra benefits for the long-term unemployed would expire on Jan. 1. Doctors' Medicare payments would be automatically reduced that day by 27 percent, a reduction that could prompt some to stop seeing Medicare patients.

 "Right now, Congress needs to make sure that 160 million working Americans don't see their taxes go up on Jan. 1," said Obama, referring to the tax cut extension at the core of the jobs program he outlined in a nationally televised speech three months ago.

House Speaker John Boehner of Ohio, the most powerful Republican in an era of divided government, agreed. "We can extend payroll tax relief for American workers, help create new jobs and keep the government running. And frankly, we can do it in a bipartisan way," he said.      

 In the Capitol, the previous day's bristling rhetoric and partisan jabs all but vanished.

Still another year-end bill, setting new rules for the handling of terror suspects in U.S. custody, won final congressional approval and headed to Obama's desk for his signature.

 Republicans agreed to consider changes to a $1 trillion spending bill compromise that they and at least one Democrat said had been wrapped up days ago.

On the payroll tax cut bill, Democrats abandoned their demand for a surtax on million-dollar incomes that they wanted to include in the measure.

 At a news conference, Boehner minimized the concession, noting that Democrats lacked the votes to impose the surtax a year ago when they commanded 60 votes in the Senate. Even so, he said, "there was some movement yesterday from the White House and Democrat leaders" toward a compromise.

 Boehner also left open the possibility of a compromise on another key sticking point — a House-passed provision that all but requires construction of the proposed Keystone XL oil pipeline from Canada to Texas Gulf Coast refineries.

 Construction "will put 20,000 people to work immediately And there are about 115,000 other jobs directly related to it," he said. Yet he skipped an opportunity to say construction of the project was non-negotiable as talks on the payroll tax cut bill proceeded.

Obama has threatened to veto the House-passed bill, in part citing the requirement for the pipeline. The project has been studied for more than three years, but the president recently announced he would put off a decision until after the 2012 elections.

At Obama's insistence, Congress cut the 6.2 percent Social Security payroll tax to 4.2 percent this year in an effort to stimulate the economy with more consumer spending. The president has proposed deepening the cut to 3.1 percent next year, but Republicans have only shown a willingness to renew it at this year's level.

Obama also wants to leave in place a system that provides aid for up to 99 weeks for the long-term unemployed. The House-passed measure reduces the total by 20 weeks, a step that the administration says would cut off 3.3 million individuals and that Democrats are hoping to soften if not reverse.

Reid indicated that a number of expiring tax breaks were on the table, as well, a list that included a provision that benefits commuters who use mass transit.

The House-passed payroll tax cut measure relied on a pay freeze and increased pension contributions for federal workers, as well as higher Medicare premiums for seniors with incomes over $80,000, beginning in 2017. The bill would also raise a fee that is charged to banks whose mortgages are guaranteed by Fannie Mae and Freddie Mac and cancel more than $40 billion from the year-old health care bill, Obama's signature domestic achievement.

The year-end, $1 trillion spending measure would lock in cuts that Republicans extracted from Democrats in negotiations conducted months ago against the deadline of a previous government shutdown threat. It funds 10 Cabinet departments, including the Pentagon and dozens of smaller agencies, awarding a slight increase to the military and veterans' programs while trimming most other domestic programs.

 The separate defense bill covered military personnel, weapons systems, the wars in Afghanistan and Iraq and more at a cost of $662 billion, $27 billion below Obama's request. The Senate approved it by a resounding 86-13.

 The main controversy revolved around a provision to require military custody for foreign terrorist suspects linked to al-Qaida or its affiliates and involved in plotting or attacking the United States. Under a change made to gain Obama's backing, the legislation would permit the FBI to arrest and interrogate foreign terror suspects, as is now the case.

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Associated Press writers Donna Cassata and Andrew Taylor contributed to this report.

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Deal reached to avert shutdown

WASHINGTON (Reuters) - Lawmakers on Thursday reached a tentative deal to fund an array of government agencies through September 30 and avert shutting down many of Washington's operations starting this weekend.

Democratic Senator Daniel Inouye, one of the chief negotiators on the massive spending bill, told reporters the deal had been struck and the full Senate could vote on the measure as early as Friday.

The House of Representatives is expected to vote on Friday, a Republican aide said.

Current funding for agencies ranging from the Defense Department and Homeland Security to the Environmental Protection Agency expires at midnight on Friday.

Meanwhile, work on a separate but equally important deal to extend a payroll tax cut and long-term unemployment benefits continued in Congress. Negotiations were also aimed at preventing a pay cut for doctors treating elderly patients under the Medicare healthcare program.

A senior Senate Democratic aide said that if a quick agreement cannot be reached on this measure, negotiators could turn to a two-month extension instead of the year-long one they prefer. The two months would ensure that workers see no drop in their pay checks starting on January 1 and it would allow Congress more time to try working out a longer-term deal.

The stumbling block on the year-long measure centered on how to pay the $120 billion cost of continuing a 4.2 percent payroll tax that is scheduled to rise to 6.2 percent for workers on January 1 without congressional action, the aide said.

Earlier on Thursday, as congressional negotiators hurriedly searched for compromises, Obama warned Congress not to leave for a holiday break without finishing its business.

"Congress should not and cannot go on vacation before they have made sure that working families aren't seeing their taxes go up by $1,000 and those who are out there looking for work don't see their unemployment insurance expire," Obama said.

Party leaders likely fear a backlash from angry voters who already have lost confidence in Congress's ability to pass even the most basic legislation and will get a chance to render their verdict in the 2012 presidential and congressional elections.

Any deals brokered will have to be approved by the full Senate and House. That is a particular concern for House Speaker John Boehner, whose Republican caucus includes conservative Tea Party-aligned lawmakers unafraid to buck his leadership when they think he is compromising on conservative principles.

Republican Representative Joe Walsh told Reuters that a nearly $1 trillion bill to fund the government through September 2012 would be difficult to support because of its price tag.

If lawmakers nail down the spending and tax measures, they would be able to wrap up work for the year by this weekend or early next week.

Negotiations on the payroll tax cut extension picked up pace after Democrats late on Wednesday dropped their demand that it be paid for with a surtax on millionaires, which Republicans staunchly opposed.

The payroll tax cut would give 160 million Americans about $1,000 a year in additional spending power. The White House and a number of economists say it would boost the country's fragile economic recovery, although many Republicans question that.

On the spending bill, there were some major differences between Democrats and Republicans over policy initiatives backed by federal funds.

Republicans agreed to drop two provisions that would have restricted families living in the United States from traveling to Cuba or transferring money to relatives there, a Republican aide said.

The progress on Capitol Hill on Thursday raised hopes that Congress would avoid the first government shutdown since late 1995 and early 1996.

Earlier in the day, Senate Republican leader Mitch McConnell said he was "confident and optimistic we'll be able to resolve both (bills) on a bipartisan basis."

(Additional reporting by Kim Dixon, Thomas Ferraro, Donna Smith, Caren Bohan and Charles Abbott; editing by Ross Colvin and Anthony Boadle)

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