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Sequester's outsized impact on defense contractors

By Jake Grovum

Stateline.org

POSTED:
LAST UPDATED: 04:01 p.m. HST, Mar 01, 2013

<br /><br />Star-Advertiser / 2010<br />Two officers aboard the Pearl Harbor-based submarine USS Jacksonville were relieved of duty Sunday after an accident in the Persian Gulf last month.<br />

WASHINGTON » Perhaps more than any governor, Virginia’s Bob McDonnell has been the face of concern among state officials as the U.S. has careened toward the automatic budget cuts taking effect today.

McDonnell has sounded the alarm about “devastating” cuts, and spoken of “irreparable” damage. And he has good reason to worry.

Of all the states, Virginia stands among the most vulnerable to the $43 billion in defense cutbacks that will make up a significant portion of the anticipated cuts known as sequestration, according to a Stateline analysis. While defense accounts for half of the overall $85 billion sequester, Department of Defense contracts alone comprised more than 8 percent of Virginia’s economy in 2011, according to Stateline’s comparison of economic figures from the most recent year for which data are available. That’s more than four times the average among the 50 states and the District of Columbia.

The next closest, Mississippi, is a distant second at just under 6 percent.

Other states are also particularly vulnerable, including some where the potential for ill effects is not as obvious. Defense spending equaled more than 5.5 percent of Connecticut’s economy in 2011, according to the analysis. In Missouri, it was 5.2 percent.

But Virginia stands out.

“If sequestration occurs as it’s currently laid out, Virginia will end up in recession,” says Christine Chmura, an economist with Chmura Economics and Analytics who worked with George Mason University to study the potential effects of the cuts. “I don’t think the nation will. I think activity will slow in the nation, slow to a crawl.

“But make no mistake,” she added, “it is going to hit (Virginia) harder than other places.”

Virginia’s Vulnerability

The reason Virginia tops the list is twofold: Northern Virginia is home to many defense contractors because it’s near Washington and the Pentagon with its huge civilian workforce. Further south in the Norfolk/Tidewater region of the state is the nation’s largest naval base. That two-pronged vulnerability could cost Virginia $4.2 billion in economic output in five years and 164,000 in direct and indirect jobs, McDonnell says.

Nationally, there are other things to worry about from sequestration besides the shrinking of the defense budget. Aside from the 8 percent overall defense reductions, education spending and countless federal grants, agency budgets and safety net programs will be cut 5 percent. Economic growth will slow, the Congressional Budget Office has said, and the cuts will cost hundreds of thousands of jobs. Unemployment, according to the CBO, will remain above 7.5 percent into 2014 — the sixth consecutive year and the longest such period since the Great Depression.

But it is the defense reductions that are attracting most of the public attention. The Pentagon has notified its 800,000 civilian employees of possible furloughs, and private defense contractors have been cutting back in preparation. As the March 1 deadline neared, many states braced for the fallout.

The reasons are clear. According to Stateline’s analysis, there are six states where defense contracts equaled 5 percent or more of the states’ economies in 2011. Defense contracts equaled 3 percent or more in 12 states and the District of Columbia. The analysis does not include subcontractors who may reside in other states.

In dollar amounts, defense contracts alone meant $10 billion or more in 10 states in fiscal year 2012. Three states — California, Texas and Virginia — each took in more than $30 billion.

For many states, the diversity or sheer size of their economies could prove a barrier against the worst of the pain. California’s nation-leading $40.1 billion in defense contracts is about 2 percent of a nearly $2 billion economy. In Texas, the second-biggest receiver of defense contracts, defense’s $32 billion is about 2.5 percent of the economy.

Some smaller economies could be hit disproportionately. Hawaii and the District of Columbia, for example, are middle of the pack in defense contracts, but those dollars equaled about 4 percent of their economic activity, according to Stateline’s analysis.

The discrepancies were apparent as lawmakers in Washington jockeyed ahead of the March 1 deadline, with many Republican members of Congress blasting the cuts even as members of their own party stood fast or defended them.

“It’s morally irresponsible,” Republican Rep. Steven Palazzo of Mississippi said at a recent House Armed Services hearing. “I’m praying that we’ll be able to put this behind us, find a way to avert sequestration but also to get our spending under control in this country.”

The looming budget ax also forged bipartisan alliances, as members of the Virginia congressional delegation wrote a letter in mid-February to President Barack Obama, House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev., pleading to avoid the cuts.

But as February drew to a close, there was no significant movement to delay them. The only apparent reason for hope was uncertainty about how long sequestration would continue and whether its maximum effects could be pushed to later in the year. The federal fiscal year runs through October, meaning officials could stretch some of the cuts out toward that date. There’s also a looming budget deadline at the end of this month that could give Congress the opportunity to backfill or change the reductions.

For now, though, states are left to deal with the situation as is: billions in cuts coming just as many are recovering from the recession and crafting budgets of their own in the uncertainty.

The tension and worry was apparent as the governor of one vulnerable state, Maryland’s Martin O’Malley, spoke in dire terms. “This is an economic threat,” he said on CBS’ “Face the Nation” last Sunday, where he appeared with McDonnell in a bipartisan session. “This is going to hurt a lot of moms and dads in our region who go to work every day.”






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