By: Leada Gore
A $1 billion cut in military contract spending in Alabama through sequestration could mean a $2.5 billion impact to Alabama’s economy, according to experts, and that’s before the state deals with the trickle-down effect such losses could have on retail, commercial and real estate growth.
President Obama’s new defense strategy limits the U.S. military to one regional conflict and one smaller action at any given time. As a result, defense budgets were already set to be cut some $487 billion, or 9 percent, in the next 10 years. On top of that, Congress passed the Budget Control Act of 2011 that raised the nation’s debt ceiling but called for sequestration – automatic, across-the-board cuts to defense – if Congress didn’t reach a budget agreement. President Obama met with key congressional leaders on Friday to see if some sort of agreement could be reached, but nothing has happened yet.
The deadline to reach that agreement is Jan. 2, 2013, and failure to do so cuts an additional $500 billion over the next 10 years. That would bring the total amount of cuts to 18 percent from current levels. Just the mention of massive cuts – a minimum of $500 billion sliced from defense spending over a 10-year period – is enough to ice an already lukewarm economic recovery.
“Any cutback in military spending not only has a direct impact and subsequent indirect or ripple effects, but it also has a very direct impact on private businesses that depend on military contracts, which in turn have to lay off their workers and that indirect impacts. Generally, a cutback in military spending or payrolls have a much more significant impact on the economy than cutbacks in private business spending or layoffs,” said Ahmad Ijaz, director of economic forecasting for the University of Alabama’s Center for Business and Economic Research.
A recent study by the Federal Reserve Bank of Philadelphia said Alabama had the Southeast’s worst economy and the fourth-worst in the U.S. The military in Alabama directly employs approximately 33,000 people with almost $2.5 billion in earnings, bringing with it a massive trickle-down effect to commercial and retail businesses. Any impact to that – even if it’s just a suggestion that something could happen – has repercussions here.
“A number of private businesses not only depend on these employees and their spending, but also the military contracts. As an approximate estimate, a single job cut from military could result in anywhere from 1.5 jobs to almost 3 or 4 job losses in the overall economy,” Ijaz said.
Ijaz offers this scenario – A $1 billion cut in military contract spending in Alabama translates to:
- $2-2.5 billion loss in state GDP
- 11,000-12,000 lost jobs
- $9 million sales tax loss
- $500 million loss in earnings
- A $20 million decline in income tax revenue
- $1 million decline in property tax receipts for a total drop of about $30-35 million in tax revenues
The areas with a higher concentration of military facilities and their supporting contractors would bear the brunt of the impact. A study by Coalition for the Common Defense – formed from the Center for Security Policy, which includes lobbyists for defense contractors – shows military contracts accounted for $9.1 billion in Alabama in 2011. A 9 percent cut would reduce that by $815 million. An 18 percent cut – the amount if full sequestration hits – would mean a loss of $1.6 billion in contractor revenue.
Of those hard hit areas, nowhere would be more devastated than Huntsville and north Alabama. Home to hundreds of contractors that support Redstone Arsenal and NASA’s Marshall Space Flight Center, area officials are trying to brace for the great unknown.
“No one knows what’s going to happen but Huntsville is a defense town and if sequestration happens, it’s going to trickle-down to defense contractors and everyone else,” Rebecca Merrill, director of contracts for APT Research Inc. in Huntsville, said. APT provides safety engineering services for Department of Defense Agencies and NASA and employs about 100 people. With so much unknown about sequestration, Merrill said businesses are waiting to make hiring decision or purchase equipment.
“It’s a scary thing,” she said. “I’ve said before that if sequestration happens, Huntsville will be the new Detroit.”
Other contractors, including those with a national and international scope, echo those sentiments.
“We don’t know how sequestration will affect any individual program or facility. We remain firm in our conviction that the automatic and across-the-board budget reductions under sequestration are ineffective and inefficient public policy that will weaken our civil government operations, damage our national security, and adversely impact our industry,” Jen Allen, spokesperson for Lockheed Martin, said. “We will continue to work with leaders in our government to stop sequestration and find more thoughtful, balanced, and effective solutions to our nation’s challenges.”
According to the Center for Security Policy study, Madison County businesses accounted for 2,556 military and government based contracts in 2011. Huntsville accounts for the bulk of those contracts – some $5.7 billion – with Madison contributing an additional $154 million and Toney $20 million. The previously planned 9 percent cut means losses of almost $530 million. Full sequestration could put Madison County’s losses at more than $1 billion.
Those staggering amounts are unacceptable, according to Rep. Mo Brooks, R-Huntsville. In a column written earlier this year, Brooks, who voted against the Budget Control Act, said the sequestration issue is all part of a larger issue of the national debt.
“Instead of re-examining spending priorities or growing America’s economy, sequestration disproportionately attacks the federal government’s number one priority: national defense. Defense is 17 percent of federal spending. Under the BCA, 50 percent of all spending cuts are national defense,” Brooks said. “Sequestration is an unacceptable way to correct overspending. Inasmuch as Redstone Arsenal generates more than 30,000 Tennessee Valley jobs, sequestration’s disproportionate defense funding cuts have serious economic implications for North Alabama, and security implications for America and the world.”
The effects of sequestration wouldn’t be limited to north Alabama. Mobile, Dothan, Anniston, Montgomery are home to military bases and with contractors in surrounding areas. In Mobile, military contracts alone were worth $1.5 billion in 2011. Sequestration on top of the 9 percent budget cuts would slice $272 million from that pie.
Australian-based Austal Ltd., which builds littoral combat ships for the Navy at its Mobile shipyard, said in its annual report that sequestration “creates uncertainty about further contracts.”
Rep. Jo Bonner, R-Alabama, whose district includes much of the state’s Gulf Coast, said while no one is in favor of fiscal abuse, Obama’s plan unfairly targets defense spending.
“Rooting out waste and increasing efficiency is necessary not only for the Pentagon, but for all government agencies as we seek to control spending and balance our budget. But extreme care must be taken to not do harm to our nation’s ability to defend itself in future conflicts. Our budget cannot and should not be balanced solely on the backs of our military,” he said.
In Birmingham, the state’s largest city but not one home to a military base, there were 453 government contracts in 2011, worth some $135 million. An 18 percent cut would lower than amount by $24 million.
Alan Chvotkin, executive vice president and counsel,Professional Services Council, a national trade association of the government professional and technical services industry based in Washington, said while the larger effects of sequestration have been discussed, the impact down the supply chain remains to be seen.
“Even if sequestration goes into effect we know the macro effects but we don’t know the micro effect on the individual companies,” he said. “We’re telling companies they have to expect across-the-board cuts but there’s not a light switch someone is going to flip to turn that on. Sequestration provides that the government has to have spent $55 billion less on Sept. 30, 2013 than it did on Jan. 2, 2013. How that will happen we don’t know. The Department of Defense has a lot of flexibility on how they achieve those results.”
Chvotkin said sequestration would have less of an effect on work already under contract and more on projects that are yet to be awarded. There may be lag time on awarding those projects, he said, or changes made to existing contracts when it’s possible.
Then there’s the impact on government civilian employees. Unlike private contractors, the government has less flexibility on how they handle those jobs. Military and civilian government employees can’t have their pay lowered as a result of sequestration, but it doesn’t mean there won’t be changes.
“Of course, the government wouldn’t have to fill vacancies for civilian employee positions but dealing with incumbent personnel is much more of a challenge. The options that are out there include furloughs and other ways to lower that cost.”
But not everyone agrees that sequestration will be the end to the military spending as we know it.
“It’s not going to happen,” said John E. Pike, director, ofGlobalSecurity.org, a Washington think-tank. “The Republicans are not going to cut defense spending because they are Republicans. And the Democrats are not going to cut defense spending because defense jobs are good jobs with decent wages. And Democrats are always in favor of good jobs with job wages. It’s fundamentally contrary to what both parties want.”
Pike said the current defense budget of $700 billion is double what it was a decade ago.
“You mean to tell me they can’t find $100 billion a year to cut? We don’t have Saddam Hussein or Osama Bin Laden to kick around anymore,” Pike said. “No one wants to see their revenue stream going down and it’s not pleasant but what will they have to do? I guess they might have to stop printing the military brochures on heavy card stock.”
But Chvotkin said, as of now, a clear pathway to avoid sequestration isn’t clear.
“Nothing I am seeing indicated that there’s much room for solutions though I’m hoping there can be,” he said. “The stars haven’t aligned as to what that compromise would look like.”
Chvotkin said the most likely option would be a compromise that would change the Jan. 2 date to a later one.
“I think that even if that happens, there are many members of Congress that are going to be looking for some kind of down payments for spending reductions or other actions,” he said.
Of course, that leaves contractors, government workers and all those who depend on that flow of income left with the same questions.
“There are two things that government contractors value most – predictability and consistency. And those are the things that are lacking now,” he said.
This article can be read here: http://blog.al.com/breaking/2012/11/sequestration_could_have_more.html