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'This thing was never supposed to happen'

Updated: March 1, 2013 - 2:35 pm

Posted: February 22, 2013

By Jared Council

jared.council@insidebiz.com

The sector that helped Hampton Roads weather the greatest recession in decades is on track to deal a substantial blow to this coastal Virginia economy, local experts and business leaders said.

Federal spending accounts for about 47 percent of gross regional product, according to some estimates, and if the deep federal cuts known as sequestration take place Friday, thousands of jobs could be shed, among other things.

"We've estimated here that the impact could be as large as 42,000 jobs," said Gary Wagner, who's with the Old Dominion University Economic Forecasting Team. "If full sequestration were to occur, most of the job losses would hit the region in 2013 and 2014. They would not occur over the next 10 years."

Sequestration is a budget provision that would trigger $1.2 trillion in federal cuts over the next 10 years, half of which will come in defense spending. It's a part of the 2011 Budget Control Act and was intended to be the last-resort, "Draconian" resolution if legislators failed to agree on a comparable deficit-reduction plan.

"This thing was never supposed to happen," said Craig Quigley, executive director of the Hampton Roads Military and Federal Facilities Alliance. "Well, here we are."

In addition to job losses, Wagner said full sequestration would cause the gross regional product to slip 5 percent, or about $4.2 billion. Others close to the matter said irreversible damage may result for federal contractors, their subcontractors and their suppliers.

Congress was off last week and has until March 1 to either delay sequestration again - as it did in early January - or reach terms on spending cuts, revenue or both to substitute for sequestration.

"I almost hate to say this, but it certainly looks like full sequestration is going to take effect," Wagner said last week.

Despite what happens by next week, uncertainty surrounding the issue has already inflicted some damage, business leaders said.

Terry Penn is president of Service Disabled Contracting Group Inc., a 14-employee federal contractor in Norfolk that specializes in construction and environmental projects. In an effort to avoid layoffs, Penn said he's postponed spending money on training, upgrades, equipment and more. As for the tasks he used to subcontract, he's now brought many in-house. All of that has likely adversely affected his vendors and subcontractors, he said, but it was necessary because he's not sure what's next.

"The uncertainty is really a showstopper," he said.

Bill Crow, president of the Virginia Ship Repair Association trade group, said sequestration is only one issue. Another is the fact that the federal government hasn't passed a fiscal 2013 budget and is operating under what's called a continuing resolution.

"If I had an appropriations bill and it was approved for 2013 and it said that I had this money to spend," Crow said about contractors, "then I know I can go spend it.

"We don't have that," he said. "We haven't had that for the last three years. It's been, 'Well, we'll give you a little bit now, and we'll give you a little bit later on.'"

The current continuing resolution runs through March 27.

Penn said, "If you tell me I only have a certain amount of dollars to spend for the year, then so be it. But to do a start-and-stop every couple of months is too disruptive. There's no way anyone can plan. If you cannot run your company this way - how can you run the country this way?"

 

THE GIFT AND THE CURSE

There are about 80 federal facilities in Hampton Roads representing 15 different agencies, from the Department of Agriculture to the Department of Veterans Affairs.

According to a Hampton Roads Military and Federal Facilities Alliance study released last year that surveyed 2010 data, those federal agencies employed just over 159,000 military and civilian personnel on a payroll of about $10.9 billion.

Those agencies also accounted for roughly $10 billion in private sector contracts.

"We were cushioned to a considerable extent," said Quigley about federal spending and the recession. "But if you have a region that has so much of its economy predicated on federal spending, and now that federal spending takes a downturn - then we're going to feel that disproportionate to some other parts of the country."

Under sequestration, the effects will likely be widespread and start with federal employees. Active-duty military will be exempt, Quigley said, but furloughs are slated for civilian employees.

Then there are the government contractors. They include companies that repair naval ships, manage information technology services, clean facilities and more.

Last week, BAE Systems Plc, which employees 1,628 at its Norfolk ship repair division, announced that every employee there will receive layoff warning letters. The continuing resolution - not sequestration - prompted this, spokesman John Measell said.

"At this point, we believe that the potential exists for a reduction in force, a layoff," he said. "As we get further clarity on which ships will be coming, will not be coming, then we can adjust the potential impact."

Crow said sequestration could result in a loss of about 10,000 jobs in the local ship repair industry, which comprises a few major ship repairers, several contractors and many more subcontractors. He's concerned about workforce erosion.

"We've got all these people who are specialists in regard to the ship repair industry," Crow said. "Now they're unemployed. They may move into other industries."

Fran Bartlett, president of Chesapeake-based Technical Systems Integration Inc., said, "I have a couple of employees who, there's probably only two or three people in the world who can do what they do."

Bartlett said he has no plans to lay off any of the 95 employees at his analytics firm, but "it's very probable that could happen."

Penn and others said subcontractors and suppliers are at risk if work slows even further.

"Our [subcontractors] are being bitten," Penn said, "because the number of opportunities for them to contract are less frequent."

Volume reductions within supply chains may prompt prices to go up when demand does rebound, Crow said.

And changes in scheduled ship maintenance - like the U.S. Navy's decision to postpone the "refueling and complex overhaul process" of the USS Roosevelt and USS Lincoln due to fiscal uncertainty - could be costly for taxpayers.

"You've now detracted from the life-cycle," Crow said about skipping maintenance, "so the ship has to be decommissioned earlier than what it was supposed to be."

Crow said Hampton Roads ship repairers are patriots and take pride in the strength and safety of the vessels they service. But the budget issues could disrupt inherently long-term maintenance plans.

Crow said no irreparable damage has been inflicted on this sector yet, but if sequestration does happen, it will be felt here and "all across the country."

OTHER IMPACTS

Uncertainty not only affects businesses, but consumers too, several experts noted.

Jack Hornbeck, president and CEO of the Hampton Roads Chamber of Commerce, said military families typically commit to big purchases when both decision-makers are around - as opposed to when one is on deployment.

But he suspects that may be scaled back even if both are around, as the future seems unclear.

"Uncertainty has got to be a negative," he said about military consumers. "I don't think there's any other way to look at that."

If sequestration happens, Quigley said, it will directly impact those furloughed federal employees. That, in turn, may affect their spending at retail outlets, restaurants, in the housing market and more.

"A lot less has been written on the non-defense piece of this," Quigley said, "but it will be substantial."

Dave Boisselle, director of military and veterans affairs at Regent University, said he's watching to see if military tuition assistance or the Post 9/11 GI Bill will be reduced.

Tuition assistance awards students up to $4,500. The GI bill covers tuition, provides a book stipend and pays a housing allowance to those who serve three years in active duty.

"Affording college is an important issue for military, as well as the general population," Boisselle said, adding that the workforce military members enter is largely a white-collar workforce.

Boisselle said cuts are forthcoming, though the location and extent remain to be seen. He likened the future of federal spending to a game of musical chairs.

"Everybody isn't going to have a chair to sit in when the music stops," he said.

 

CONTRACTOR REACTIONS

While several business leaders forecast cuts and have begun preparing for the worst of sequestration, others are reacting differently.

"We haven't felt the effects yet, nor had any direct immediate conversations with clients," said Chris Stuart, vice president of business development at Hampton-based Top Guard Security. "So our preparation is more of an anticipation of what may be coming, rather than anything that's actually come down the pipe."

The firm has 600 employees and offers security services to private clients and all levels of government.

Jim Toone, who leads local business development for Manassas-based Enterprise Management Systems, said his company is not gravely concerned about the prospect of sequestration because it has already begun pivoting from the federal dollar.

"We're focusing primarily on the commercial sector right now," he said. "So while we hope that sequestration doesn't happen, whatever level it occurs will not change the direction that we're going."

Ken Johnson owns Eagle Distributing Enterprises Inc., a Hampton-based distributor of aircraft parts and components. He said he hasn't had much time to follow the sequestration issue closely because he's been so busy with work.

The first week of February 2013, he said, outperformed all of February 2012 in terms of products shipped and revenue. He also said he recently filled one part-time and two full-time positions to bring his employee count to nine.

Speaking about his success, he said, "When you think about it, you can't have a military unless you're protecting the airspace. That's a 24/7 job. That's one you can't back off on."

 

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