Debt Ceiling Deal: Top 7 Ways Government Cuts Could Affect You

Aug. 2, 2011 — -- intro: While the United States may have averted a default on its sovereign debt, the spending cuts in the deficit reduction proposal are yet to be determined. The Congressional Budget Office said the tentative agreement, which the House approved Monday night and Senate approved Tuesday, could cut $1.2 trillion over 10 years from the federal budget.

The deal puts off many of toughest decisions on taxes and entitlement programs, leaving that to a super committee that could suffer from the same bipartison issues we have seen for months. And the majority of cuts won't take effect until the next election.

President Obama said on Sunday the "messy" process is still not over.

"The result would be the lowest level of annual domestic spending since Dwight Eisenhower was president, but at a level that still allows us to make job-creating investments in things like education and research," the president said. "We also made sure that these cuts wouldn't happen so abruptly that they would be a drag on a fragile economy."

Political analysts said it is still too early to tell when and how much will be cut from various programs and services.

quicklist: title: Uncertainty: What will the "super committee" do?text:

Randall Kroszner, former governor of the Federal Reserve System, said the vast majority of spending cuts will come through the "super committee," a deficit-reduction group of 12 members of Congress who, as of now, have an unclear amount of authority.

"I think there's still a lot of details to work out. We don't even have the legislation yet," Kroszner said. "This is certainly the case where the devil will be in the details -- where they choose to cut and the timing of those cuts."

This super committee is responsible for recommending $1.5 trillion more in reductions between 2012 and 2021, according to the Congressional Budget Office. The House and Senate must vote to approve the committee's recommendations without revising them by Dec. 23. It is unknown who will be on the committee, though it will be six Republicans and six Democrats.

If the committee's recommendations are not enacted in legislation by Jan. 15, 2012, $1.2 trillion in cuts will automatically go into effect by 2013. Those cuts would be divided equally between defense and non-defense programs, including both discretionary and direct spending.

Should the super committee not be able to agree on sufficient cuts, the impact on the Pentagon and Medicare may be significant, ABC News' Jake Tapper reported.

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quicklist: title: Social Securitytext:

While Social Security spending is protected by law, it may not be untouchable to the super committee. Any guess how much savings could be wrung from Social Security, long famed as being the "third rail" of American politics (and thus off-limits to cutters), would be speculative.

Still, an expert with a leading consumer advocacy group in Washington, D.C. (one that asks that its name not be used) says a stealthy form of cutting has been and remains under consideration, and could presumably be used by the committee: changing the way the government calculates the cost of living. The number affects the size of the checks Social Security sends out.

"One of the proposed changes on table is a re-calculation of the consumer price index," he confirms. It's not just Social Security that would be affected, but many other programs and payments as well, he said, "everything from the tax code, which is indexed to Consumer Price Index, to private sector contracts that also are indexed to it."

One idea that has been suggested, he says, is to reduce the rate of growth in the CPI by 3/10 of a point a year, "So, instead of a cost of living adjustment of 3 percent, you'd get 2.7 percent."

The change would become a permanent part of the cost of living calculation, not just next year but every year. The impact, modest at first, would compound over time. A beneficiary who saw a cut of, say, $40 in his check the first year would see double that the second and three times it the third.

"Over someone's lifetime, the loss of benefits could be pretty significant -- in the thousands of dollars," he said. He called "particularly troubling" the impact such a change would have on older retirees, who tend to be more reliant on Social Security payments than do younger ones.

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quicklist: title: Unemployment insurancetext: While cuts to Social Security remain uncertain, the White House has confirmed unemployment insurance extensions will not be a part of the final deficit reduction package. With the latest unemployment rate at 9.2 percent, there are approximately 25 million unemployed Americans. It is unclear how many of those individuals will not be eligible for an extension in unemployment support.

However, it is possible Obama will push for extensions within the next few months.

Mohamed El-Erian, CEO of PIMCO, said spending cuts will only exacerbate the unemployment situation.

"So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise," El-Erian said.

El-Erian questioned the impact of discretionary spending cuts that will likely make up the short-term budget savings in any final agreement.

"We have a very weak economy, so withdrawing more spending at this stage will make it even weaker," El-Erian said.

The jobs of federal employees may be at risk also. While the deficit reduction plan does not yet mention federal workers, caps on federal discretionary spending could affect budgets that pay our public servants. Also, the super committee may have authority to affect their worker benefits.

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quicklist: title: State spendingtext: Of course, cuts at the federal level affect state and local government as well. The five states most dependent on federal money (Maryland, Virginia, South Carolina, Tennessee and New Mexico) are particularly susceptible to a fall-off in federal spending. Curtis Loftis, the treasurer of South Carolina, told ABC News he draws comfort, for now, in the fact that no one knows for sure yet, how big Washington's cuts will be or on what programs and services they might fall most heavily.

"This act of political theater," Loftis said, "isn't over yet."

His state, he said, has been fiscally conservative. It's got a balanced budget amendment. And it has built reserve accounts against a rainy day, "much as any household would," he said.

South Carolina's second biggest hit would be in highway outlays.

"Nobody knows if the cuts would be $1or a hundred, but the department of transportation is already having shortfalls now," Loftis said. The amount? About $60 million. "Contractors are complaining they're not getting paid in a timely fashion," he said.

Less would have to be spent on road and bridge repair.

Would South Carolina increase fees and taxes to make up the difference? Perhaps, he said.

"We have some flexibility," Loftis said. "That's why we have reserves, to withstand a cash flow problem."

Still, he said, he sees "nothing in the deal, yet, that says they'll be turning off the faucet and a significant amount of money will stop flowing. For now, we'll just batten down the hatches and maintain our reserves; take it one day at a time."

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quicklist: title: Medicaid and Medicaretext: While Medicaid, the health program for those with low-incomes, and Medicare, which serves the elderly and disabled, are said to be spared and exempt from cuts in this deal, the super committee could decide to make changes to both programs if they find support.

One scenario where Medicare could take a hit is if the committee doesn't come up with a debt reduction plan that passes Congress. In that case spending cuts or a so-called "trigger," could hit Medicare providers (not beneficiaries), according to the White House.

The super committee could, of course, look for cuts in these programs that have some support in both parties. The Center on Budget and Policy Priorities said a deal that President Obama and Speaker Boehner were negotiating several weeks ago would have raised Medicare's eligibility age, raised Medicare cost-sharing charges, and shifted significant Medicaid costs to states. All of which could be something that the super committee explores.

If they take that route it could be a problem for vulnerable states like South Carolina.

In most states, the biggest amount of federal money goes to education and to infrastructure, including building or maintaining roads and bridges. The number one recipient of federal money in South Carolina, however, is Medicaid.

"That's what would be hit hardest. It's the largest program where we're intertwined with the government," South Carolina state treasurer Loftis said.

The state's spending on the program is around $6 billion a year, with 70 percent of that coming from the feds.

"South Carolina has 10.5 percent unemployment," Loftis said. "Our poverty rate is 17.5 percent. Medicaid plays a very important role."

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quicklist: title: Defensetext: Cuts in U.S. defense are a certainty, says Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret.), president of the National Defense Industrial Association. Most people, he says, "recognize defense budgets have to come down and will come down." In the process, however, "no one wants to do lasting damage" to contractors "or to the services themselves." The talent and infrastructure needed to produce, say, submarines and advanced aircraft, he says, "atrophy quickly. If you don't protect those skills, they go somewhere else."

The biggest beneficiaries of defense spending right now include Lockheed Martin, Boeing, General Dynamics, Raytheon, United Technologies, and Northrop Grumman.

"Since 9/11, defense stocks have been pretty healthy," Farrell says.

As for what will happen to them, "it depends on which company you're talking about." Some, like Lockheed, are only in defense. Others, like Boeing, United Technologies and GE, "have a foot in defense and another in the commercial sector." Diversified companies would be better insulated from a defense cutback.

Companies dependent on making ammunition, Farrell says, would take the hit first.

"The tendency, when budgets come down, is for money first to come out of ammunition accounts," he says. "Ammunition isn't needed in peace time. The theory is, that when it's needed, you can always turn up the heat and produce more. Problem is, what do these companies do in the meantime?"

As examples of big ammo producers he cites General Dynamics and ATK.

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quicklist: title: Financial investmentstext:

The defense sector is not the only investment that is at risk.

Alan Schankel, managing director and director of fixed income research at Janney Capital Markets, said the market may be anticipating a long-term negative impact from the spending cuts.

"I'm waiting to see the details, just like my local congressmen," Schankel said. "I don't think they know what's going on either."

Of note, even if the deficit reduction plan is approved, ratings agencies Moody's and S&P have said they could still downgrade U.S. credit.

Moody's placed 177 public finance credits under review for possible downgrade on Thursday, reflecting its assessment that some AAA public finance ratings would likely be indirectly affected by potential credit deterioration. Those include 162 local governments in 31 states, 14 housing finance programs and the University of Washington.

The University of Washington, with $1.3 billion of debt affected, has an "unusually large share" of revenues derived from federal research grants and Medicare and Medicaid reimbursements, according to Moody's.

Rick McQuady, CEO of the Kentucky Housing Corporation, which Moody's included in its list, said the current disintermediation in the market and threat of a U.S. sovereign downgrade make it difficult to predict specific outcomes for his organization's bond rating.

"Under normal market conditions, any reduction in Kentucky Housing Corporation's bond rating could result in higher costs for our bonds, and ultimately higher interest rates for our borrowers," McQuady said.

The Idaho Housing and Finance Association already had bonds under review due to potential loan losses arising from delinquencies and foreclosures. But now Moody's said it will consider the exposure of its single family mortgage bonds to the U.S. government.

John Sager, IHFA's chief financial officer, said the organization is closely watching events in Washington as they pertain to its financial program. Sager said the IHFA depends on a number of federal guarantees to ensure that its investors are adequately protected from systemic risks.

"To the extent that the federal government's credit position or backing is weakened, it has negative repercussions on us," Sager said. "We are hopeful that the current debt discussions are concluded in a manner that doesn't jeopardize our own credit rating and weaken our ability to fulfill our housing mission in the state of Idaho."

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