By ANDREW TAYLOR
Associated Press

(Federal News Radio contributed to this report.)

WASHINGTON (AP) – Federal employees can breathe a sigh of relief for now. Congress will not freeze federal pay or change the annuity formula to fund the two-month extension of the payroll tax cut and jobless benefits it agreed to Saturday. Instead, the extension will be paid for through an increase in fees to Fannie Mae and Freddie Mac.

The renewal of the 2-percentage-point cut in the Social Security payroll tax for 160 million workers and unemployment benefits averaging about $300 a week for the additional millions of people who have been out of work for six months or more is a modest step forward for Obama’s year-end jobs agenda.

As a condition for GOP support of the payroll tax measure, Obama has to accept a provision demanded by Republicans that forces him to decide within 60 days whether to approve or reject a proposed a Canada-to-Texas oil pipeline that promises thousands of jobs.

The payroll tax measure won a 89-10 tally that send it back to the House – where many Republicans only reluctantly support it – for a vote early next week.

Democratic and GOP leaders opted for the short-term extension of the payroll tax and jobless benefits measure after failing to agree on big enough spending cuts to pay for a full-year renewal. The measure also provides a 60-day reprieve from a scheduled 27 percent cut in the fees paid to doctors who treat Medicare patients.

The fees on Fannie and Freddie to cover the $33 billion cost of the measure will be drawn from a Treasury Department housing finance market reform plan, and would effectively raise the interest rate on home loans guaranteed by the mortgage giants and the Federal Housing Administration by one-tenth of a percentage point.

The idea is to open up the market to private companies currently priced out by the implicit subsidies of Fannie and Freddie.

The White House says the fee would increase the monthly cost of a typical $200,000 mortgage by almost $17 a month. Over 30 years, the fees would increase the total cost of such a mortgage by more than $5,000.

In contrast, a worker making a $100,000 salary would reap a tax cut of about $330 through the two-month extension of the payroll tax cut.

Officials said that in private talks, the two sides had hoped to reach agreement on the full one-year extension of the payroll tax cut and unemployment benefits that Obama had made the centerpiece of the jobs program he submitted to Congress last fall.

Those efforts failed when the two sides could not agree on enough offsetting cuts to blunt the measure’s impact on the debt.

The failure tees up the issue again for early next year, but it won’t get any easier to agree on spending cuts.

Neither House Speaker John Boehner, R-Ohio, nor his aides participated in the negotiations, although McConnell said he was optimistic about the measure’s chances for final approval. The payroll tax cut is unpopular in GOP ranks and another vote in two months could present a headache for GOP leaders.

On the controversial Keystone XL pipeline, the legislation requires the president to grant a permit unless he makes a determination that it is "not in the national interest." One senior administration official said the president would almost certainly refuse to grant a permit. The official was not authorized to speak publicly.

The White House on Friday backed away from Obama’s earlier threat to veto any bill that linked the payroll tax cut extension with a Republican demand for a speedy decision on the proposed 1,700-mile pipeline. Obama said on Dec. 7 that "any effort to try to tie Keystone to the payroll tax cut I will reject. So everybody should be on notice."

The president recently announced he was postponing a decision on the much-studied pipeline until after the 2012 election. Environmentalists oppose the project, but several unions support it. The legislation puts the president in the uncomfortable position of having to choose between customary political allies.

The State Department, in an analysis released this summer, said the pipeline project would create up to 6,000 jobs during construction, while developer TransCanada put the total at 20,000 in direct employment.

The 1,700-mile pipeline would carry oil from western Canada to Texas Gulf Coast refineries, passing through Montana, South Dakota, Nebraska, Kansas and Oklahoma.

Associated Press writers David Espo, Alan Fram, Donna Cassata and Jim Kuhnhenn contributed to this report.

(Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

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