The District of Columbia, labeled as "insolvent" by congressional auditors Wednesday, is planning to lay off 1,200 workers and is giving 16,000 union workers two weeks to accept pay cuts or face harsher action.

In Tokyo, the dollar fell against the yen Wednesday on reports of Washington's insolvency, said Masahiri Yamaguchi of Tokai Bank."It's the District that is on the line now," Eleanor Holmes Norton, the District's non-voting delegate in the House, said Wednesday morning as the city's financial crisis was being taken up in Congress.

Rep. Thomas Davis, R-Va., co-chairman of Wednesday's hearing, said, "We just need to level with each other, the Congress and the District, to find a way out of a very difficult situation."

Meeting in emergency session Tuesday, the 12-member council told the city's approximately 16,000 unionized workers to either agree to a 5 percent pay cut by March 7 or have a 12 percent wage reduction imposed upon them. The council also voted to cut non-union workers' pay by 4 percent.

The planned layoff of 1,200 workers follows a reduction of 1,850 employees since October, when the city's dire financial situation surfaced.

The actions were taken on the eve of the release of a report by Congress' General Accounting Office saying the city government is deeply in the red after deferring hundreds of millions of dollars in Medicaid payments and other obligations the past several years.

The GAO report, a copy of which was made available to The Associated Press, called the city' cash position "especially precarious."

"Given the combined spending levels above what is budgeted annually, it is now clear that the District of Columbia will run out of cash by this summer," the report said. "In fact, today the District of Columbia is insolvent; it does not have enough cash to pay its bills."

Mayor Marion Barry had recommend cutting only 750 employees from the 32,500-member work force, saying the reduction plus the pay cuts would generate $70 million in savings to fight a deficit that private auditors estimate could reach $722 million this year.