Virginia’s GOP targets government spending, a key driver of state’s economy

Stephanie Klein-Davis/AP - George Allen greets employees of Dynax America, an auto parts manufacturing plant in Botetourt County, near Roanoke, Va., in October.

As he campaigns for his old Senate seat, George Allen is hammering a theme that has served Virginia Republicans well in recent elections: He wants to lower taxes and reduce government spending.

“It’s clear to everyone outside of Washington that government spending is out of control,” Allen said. “The families, businesses and Virginia all know how to live within their means, and it’s time that the federal government does the same.”

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It is the kind of message that has helped Virginia Republicans capture the governor’s mansion, three congressional seats and control of the legislature in the past three elections.

But Virginia’s recent political behavior is at odds with its heavy economic reliance on federal spending. No state has a higher share of its economy fueled by federal procurement. And Virginia is second, behind Alaska, in the per-capita flow of federal money to its borders. Altogether, federal spending accounted for 38 percent of the Old Dominion’s economic activity in 2009, according to a report by Federal Funds Information for States.

The tension between Virginia’s economic reliance on federal spending and its support for candidates who are determined to cut it is likely to be the defining political issue in the coming election year. The failure of a special congressional committee to agree on a plan to reduce the federal debt by at least $1.2 trillion over the next decade probably will leave it to the 2012 presidential election to decide how the problem is addressed.

Nowhere will that debate be more crucial than in Virginia. The state is home to more than two dozen military installations, huge federal agencies, prosperous clusters of civilian contractors that depend on federal procurement money, and a host of shipbuilders and other defense firms.

“Virginia is particularly vulnerable to federal budget cuts,” said Stephen S. Fuller, a George Mason University professor. “Everybody is concerned about that.”

When asked about his support of government spending cuts and Virginia’s reliance on federal funding, Allen said the state should avoid the most damaging impact of any reductions because its “capabilities converge with the top responsibility of our government: defense and national security.”

Yet the “supercommittee” failure is supposed to trigger $1.2 trillion in spending cuts beginning in 2013 — half of which would be to the defense budget. Those reductions would come on top of $450 billion in Pentagon spending reductions that Congress previously approved.

Some lawmakers, concerned about the impact those automatic cuts would have on national security and the jobs that help provide it, have suggested trying to prevent them by disabling the debt-reduction trigger. But President Obama has threatened to veto any effort to back out of the reductions.

“If you look at these cuts, it is not just the amount of the dollars that is a concern, but also the arbitrary way the cuts are done,” said Rep. J. Randy Forbes (R-Va.), whose district includes huge military installations in Hampton Roads. “The worst thing you can do is reach up and pull a figure and say you are going to cut without any strategic review.”

In a report outlining the impact of just one portion of possible federal cuts — the Pentagon’s estimated reduction in the purchase of military equipment — Fuller projected that Virginia would lose nearly 123,000 jobs. That is just 2,000 fewer positions than were lost in much larger California, and the second highest state total in the country.

“One of the disconnects in our public discourse is around government spending,” said Michael Cassidy, president of the Commonwealth Institute for Fiscal Analysis, a Richmond think tank. “The net result of any of the pathways being discussed for reducing the federal deficit will be a loss of economic activity in the state.”

The heavy flow of federal money into Virginia is one reason the state’s unemployment rate never exceeded 7.2 percent, even as the national rate peaked at 10.1 percent during the worst of the economic downturn. The current unemployment rate in the state is 6.4 percent, well below the national rate of 9 percent. Much of the federal spending in Virginia is clustered along what economic development officials call the state’s “golden crescent,” which parallels I-95 between Washington and Richmond, before following I-64 to the military-heavy Hampton Roads area.

That swath of the state includes key elements of the country’s most crucial national security infrastructure: the CIA headquarters, the Pentagon, the FBI’s training center in Quantico and a series of military installations, well as many high-tech firms that are critical to the government’s operation, and ending in the Navy and shipbuilding hub at the mouth of the Chesapeake Bay.

Defense-oriented firms such as Spectrum in Newport News have experienced almost nothing but good times in recent years — something that could abruptly change if the amount of federal money is severely crimped.

Started by Air Force veteran Jeffrey Wassmer in 1999, Spectrum has prospered atop a wave of national security spending. In the past dozen years, the company has grown from three to 350 employees. Annual revenue has skyrocketed to nearly $50 million. Spectrum workers, on average, earn more than $80,000 a year.

It is the kind of economic success story that has helped Virginia weather the recession far better than most of the country. But the good times could be ending.

“I really think our time is coming,” said Wassmer, Spectrum’s president and chief executive. “There are going to be companies that do not survive what is coming. We haven’t experienced anything like this coming up.”

Facing that prospect, Republicans are still calling for budget cuts — but not those that could damage the drivers of the state’s economy.

Gov. Robert F. McDonnell (R), who was elected in 2009 — just one year after Obama became the first Democratic presidential candidate since Lyndon B. Johnson to win in Virginia — has called continued federal deficits “unsustainable” and “immoral.”

Still, McDonnell has urged that federal budget cuts not touch “core” functions such as defense and national security, said Jeff Caldwell, his press secretary.

Forbes, who is a member of the House Armed Services Committee, argues that Virginia voters did not intend to see big national security cuts when they voted for candidates who advocate reducing federal spending.

“If you are asking if people were voting to slash the national defense of the country in the way the supercommittee trigger would have it done, I would say there is no evidence to suggest that is what they were voting for,” he said.

If federal procurement is hit, it would hurt the defense equipment manufacturers as well as federal-related in firms in Northern Virginia.

“We’re already seeing contracts delayed,” said Wassmer, the founder of Spectrum. “In this environment, our main client seems hesitant to commit.”

Even if defense is spared, other federal contractors in the state are vulnerable. Companies based in Fairfax County receive about $25 billion in federal procurement funding per year, the most of any county in the nation. Much of that money pays for defense and homeland security applications. But a lot of spending also goes to computer-related work for other parts of the government, as well as office operations such as grant application reviews.

“The government contracting community has seen this coming for a long time and they are concerned,” said Gerald L. Gordon, president and chief executive of the Fairfax County Economic Development Authority. “But they long ago started looking at other areas where they could apply their skill sets.”

Although big federal cuts would be painful, Gordon said they would not be as devastating for the county as they might have been decades ago. Not only do many government contractors have a substantial number of private-sector clients, he said, but Fairfax County has managed to diversify its economy.

In recent years, Hilton Worldwide and Volkswagen Group of America moved their headquarters to the county. Exxon Mobil, meanwhile, houses oversight of its marketing, refining and retail operations in Fairfax.

Although Virginia is the nation’s top recipient of overall federal funding, it ranks at the bottom in terms of the amount of federal money that comes in grants that support basic government functions such as education, law enforcement and health care. So the shape of any potential budget cuts matters almost as much as the size.

If the federal reductions come in the form of aid to states, that would further stress Virginia’s already strained social safety net. Programs involving education, health care, crime prevention and other areas would be scaled back.

“Further cuts in federal discretionary spending would hit states hard,” Cassidy said. “You’re talking about serious cuts to the poorest of the poor.”

 
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