Unthinkable Cuts Almost a Reality

By DAMIAN PALETTA, CHRISTOPHER WEAVER and DION NISSENBAUM

Mandatory federal spending cuts designed to be prohibitively drastic will become a reality on Wednesday if negotiators remain unable to reach an agreement to avert the reductions.

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Associated Press

Sen. Lindsey Graham on Friday, Dec. 21, during a news conference on Capitol Hill.

The cuts would hit a broad array of departments and programs, from the military's purchase of mine-resistant vehicles to government food inspections. They would slash funding for Secret Service details and cut rental housing subsidies in rural areas.

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European Pressphoto Agency

Secretary of Defense Leon Panetta delivers a speech at the National Press Club in Washington on Dec. 18.

Illustrating the gravity of the cuts, the Pentagon plans to notify 800,000 civilian employees that they could be forced to take several weeks of unpaid leave in 2013 if a deal isn't struck, and other agencies are likely to follow suit.

The cuts, which members of both parties have referred to as a "meat ax," are the product of a hastily designed 2011 law that required $110 billion in annual spending reductions over nine years to reduce the deficit. Their severity, representing close to 10% of annually appropriated spending, was intended to force Democrats and Republicans to come together on a broader package of deficit-reduction measures, which would replace the cuts. That effort failed, raising the prospect of the cuts' taking place.

Complicating matters, the White House hasn't informed federal agencies or contractors of precisely how the cuts might be administered, leading to confusion about the potential impact. Several federal agencies referred questions about the cuts to the White House's Office of Management and Budget. OMB didn't respond to questions.

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"The biggest challenge is just the uncertainty," said Steven Glass, chief financial officer at the Cleveland Clinic, a medical center and health-care system that expects to see a $22 million cutback in its Medicare payments in 2013 if the government doesn't reverse the cuts. "It's really hard to plan when you're literally looking a few days out and you don't know what Washington is going to do."

Facing the sequester and other financial pressures, the Cleveland Clinic may squeeze costs by consolidating services such as inpatient psychiatric units and skilled nursing among its numerous locations.

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With a federal budget close to $3.6 trillion, $110 billion in annual cuts seems like a rounding error. But some of the largest parts of the federal budget are exempt from the cuts, including benefits under Social Security, Medicare and Medicaid, and interest payments on federal debt.

Not all health spending would be protected. Sen. Tom Harkin (D., Iowa) has said the cuts would mean reduced testing for HIV, cancer screenings and vaccinations. The law also requires a 2% cut in Medicare payments to hospitals, other health-care providers and some insurance plans, a roughly $11 billion reduction for fiscal 2013, according to an analysis by Avalere Health.

Half of the cuts would be focused on military programs, a prospect that Aerospace Industries Association President Marion Blakey said would be a "grave dereliction of duty" if it came to pass. The Pentagon has begun planning for the cuts as it would need to reduce spending on many programs by almost 10%. "Everyone wouldn't be furloughed on the same day," one senior defense official said. "There would be some degree of rationality."

The Pentagon also is considering reductions in flying hours for pilots, cutbacks in training-exercise days for the Navy, and reduced maintenance and repair for planes, ships, tanks and other military hardware, according to administration officials.

While Congress could reverse the sequester if it is triggered, federal agencies must plan as if they are going to happen, said Alan Chvotkin, executive vice president at the Professional Services Council, a trade group that represents government contractors. "Every week you wait, the deeper the cuts you will have to eventually make," he said.

Write to Damian Paletta at damian.paletta@wsj.com, Christopher Weaver at christopher.weaver@wsj.com and Dion Nissenbaum at dion.nissenbaum@wsj.com

A version of this article appeared December 31, 2012, on page A4 in the U.S. edition of The Wall Street Journal, with the headline: Unthinkable Cuts Almost a Reality.