A year ago this month, Congress and the Obama Administration agreed to a short-term increase in the debt ceiling in return for the establishment of a “Super Committee,” which was to present a plan for long-term deficit reduction. Under the Budget Control Act of 2011 (BCA), enacted on August 2, 2011, the Super Committee was to develop recommendations to reduce the federal deficit by 1.2 to 1.5 trillion dollars over 10 years.
The BCA required that, if the committee failed to agree on these recommendations, across-the-board cuts, also known as sequestration, would automatically be triggered and reduce federal outlays by 1.2 trillion. Because the Super Committee ultimately failed to agree on a deficit reduction plan, spending reductions under the BCA are slated to start in January, divided equally between “security” (meaning the Department of Defense) and “non-security” spending. No one expects serious debate of the issue until after Election Day on November 6, 2012.
Unless overturned, postponed or modified by the U.S. Congress before the end of this year, the sequestration process means that across-the-board cuts will occur in both domestic and defense spending for each of the next nine years. Yet, based on the provisions of a previously-enacted law called the Balanced Budget and Emergency Deficit Control Act (BBEDCA) of 1985, also known as “Gramm Rudman-Hollings,” certain programs are exempt from sequestration. For example, Social Security, Veterans Affairs (VA) health benefits, and Medicaid would be exempt from the cuts, as will payments to Medicare beneficiaries. However, payments to Medicare providers - including physicians and hospitals – would not be exempt. Instead, they would experience diminished payments capped at two percent. Thus, starting in 2013, Medicare payments to physicians, nurses, therapists, medical suppliers and drug providers could be reduced by two percent. According to one industry source, this means doctors and others would receive 98 cents for every dollar’s worth of medical care they provide until 2021, which would amount to a staggering $11 billion in 2013 and $123 billion through 2021. “For physicians, the new budget cuts could lead to serious access-to-care issues for patients,” said American Medical Association President Jeremy A. Lazarus, M.D. He said reducing Medicare fees could also impede efforts to improve quality of care for seniors.
While the specter of deep cuts to the U.S. defense industry has caused even Secretary of Defense Leon Panetta to raise serious concerns about anticipated downsizing of the military, until recently there has been a relatively muted response from potentially affected domestic interests. However, as the date of sequestration draws closer, the impact of the anticipated cuts on various sectors of the U.S. economy is starting to be highlighted by both Members of Congress and potentially affected domestic interests. These include not only the healthcare industry, but also educators and first responders (including policemen and firefighters), as well as workforce investment advisors, who fear that unemployed workers soon will be unable to access much-needed job training and support just when enhanced job skills are needed the most.
To highlight these concerns, on July 25, 2012, the Senate Appropriations Committee’s Subcommittee on Labor, Health and Human Services, and Education, and Related Agencies held a hearing on the anticipated effects of sequestration. The Subcommittee’s Chairman, Senator Tom Harkin, focused on the severe impact that budget cuts would have on social programs specifically. He stated that, while “some Members of Congress warn that defense contracting firms will lay off employees if sequestration goes into effect, they say nothing of the tens of thousands of teachers, police officers and other public servants in communities all across American who would also lose their jobs.”
Sen. Jack Reed noted at the same hearing that we are already at the lowest percentage of discretionary spending in 60 years. It was the further consensus of many on the Senate panel that additional cuts to job training and education, in particular, would be devastating. The apparent goal of the hearing was twofold: to ensure that congressional actions (if any) to avoid sequestration do not preserve defense spending at the expense of domestic investment, and to underscore that Congress must increase revenues.
In conjunction with the hearing, Chairman Harkin released a 180-page report titled “Under Threat” containing data which indicate that, subject to sequester, draconian cuts would diminish funds for job training just as the U.S. economy seeks to recover from the worst economic period since the Great Depression. For example, the report states that sequestration would mean a loss of $54.7 million to the U.S. Employment Service in Fiscal Year 2013, which would result in 1,216,690 fewer jobseekers receiving assistance and $60 million less in Worker Investment Act (WIA) grants to states for adult workers. The practical effect of all WIA cuts would mean that 413,546 fewer adults, dislocated workers and youth would receive employment training. Further, according to the Harkin report, sequestration would also affect the U.S. Jobs Corps, which provides economically at-risk youth with academic and vocational training for jobs in the private sector and, sometimes, the military. The U.S. Job Corps would lose $122 million, which would cause at least 4,300 otherwise employable youth to remain without a job. Finally, the report asserts that cuts caused by sequestration would put millions of American workers at unnecessary risk by taking $44 million from the Occupational Safety and Health Administration (OSHA); $29 million from the Mine Safety and Health Administration (MSHA); and would eliminate in-person reemployment assistance for 80,000 individuals.
At the hearing, Senator Durbin reiterated that there has been absolutely no increase in discretionary domestic spending, in constant dollars, since the U.S. enjoyed a deficit surplus 11 years ago under President Clinton. At the same time, he stated, mandatory entitlement spending has risen 30% since then, largely the result of health care costs incurred by aging baby boomers. During the same time period, Durbin said, defense spending increased 73 percent. The Illinois Senator argued further that discretionary non-defense spending cannot continue to bear the brunt of budget cuts without some increase in revenue accompanied by cuts in defense spending.
Senator Patty Murray of Washington State, who also attended the hearing, similarly argued for increased revenue measures. In her prepared remarks, she continued the theme of her July 16 presentation before The Brookings Institution titled “Addressing the Nation’s Fiscal Crisis,” where she decried the lack of compromise; underscored the need to raise taxes; and stressed that cuts under sequestration should not be focused solely on domestic priorities.
She then submitted for the record a letter sent to Members of Congress signed by nearly 3,000 national, state, and local organizations in the non-defense discretionary (NDD) community, urging leaders to avert sequestration by adopting a “balanced approach to deficit reduction that does not include further cuts to NDD programs.” Signatories to the letter included national, state, and local organizations from all fifty states representing workforce, education, healthcare, transportation, law enforcement, science, housing, and faith-based organizations, among others.
In fact, there are serious concerns that the economic effects of cuts to non-defense programs could be worse than cuts to Pentagon spending. Specifically, a December 2011 academic study found that investing $1 billion in health care or education creates significantly more jobs within the U.S. economy than spending $1 billion on the military. In health care, the study found the difference is 54 percent more jobs; in education, 138 percent.
And in July, another report with similar findings was issued by the Aerospace Industries Association (AIA) in conjunction with Dr. Stephen Fuller of George Mason University and Chmura Economics and Analytics. In sum, the report determined that the impact of sequestration would be both profound and extremely detrimental to the nation’s economy-but not solely as the result of cuts to defense spending. It determined that 2.14 million American jobs could be lost if the Budget Control Act’s sequestration mandate takes effect. By sector, the report found potential job losses totaling 48,059 in healthcare, 473,250 in manufacturing, and 98,953 in construction.  In summarizing the report and the possible impact of sequestration, Professor Fuller stated, “The results are bleak but clear-cut. The unemployment rate will climb above 9 percent, pushing the economy toward recession and reducing projected growth in 2013 by two-thirds. An already weak economy will be undercut as the paychecks of thousands of workers across the economy will be affected from teachers, nurses, construction workers to key federal employees such as border patrol and FBI agents, food inspectors and others.”
The AIA press release which accompanied its report states “the automatic spending cuts mandated . . . in just the first year of implementation will reduce the nation’s GDP by $215 billion; decrease personal earnings of the workforce by $109.4 billion and cost the U.S. economy 2.14 million jobs.” AIA President Marion C. Blakely stated, “This report shows that sequestration is not just a defense problem, it’s an American problem.”
If you have questions or desire more information regarding sequestration and how it may affect your organization and/or employees, please contact Kathleen Hatfield.
“Medicare Pay: Budget Sequester Adds to Payment Rate Woes,” American Medical News (July 30, 2012).
 “Under Threat: Sequestration’s Impact on Nondefense Jobs and Services,” A Report by Sen. Tom Harkin, Chairman, Senate Appropriations Subcommittee on Labor, Health and Human Services, and Education, and Related Agencies,” 65, July 25, 2012.
 According to FactCheck.org, the Clinton years showed the effects of the tax increase that President Clinton enacted in his first year, which, according to the Annenberg Public Policy Center, “Republicans incorrectly claim is the ‘largest tax increase in history.’ The tax cut fell almost exclusively on upper-income taxpayers. Clinton’s fiscal 1994 budget also contained some spending restraints. An equally if not more powerful influence was the booming economy and huge gains in the stock market[s], the so-called dot-com bubble, which brought in hundreds of millions in unanticipated tax revenue from taxes on capital gains and rising salaries.”
 Id. at 2, summarizing, “The U.S. Employment Effects of Military and Domestic Spending Priorities: 2011 Update,” Robert Pollin and Heidi Garrett-Peltier, Political Economy Research Institute, University of Massachusetts, Amherst, Massachusetts (December 2011).
 “New Report Predicts Widespread American Job Losses,” Press Release, Aerospace Industries Association (AIA), July 17, 2012.
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