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Defense cuts could slow D.C. economy for years

By Marjorie Censer and Peter Whoriskey
Washington Post Staff Writers
Saturday, September 11, 2010; 3:29 AM

After surging in size and profits during the post-9/11 era, the defense industry in metropolitan Washington is bracing for a major contraction and significant layoffs that economists said could produce a drag on the regional economy for years.

Already, there have been signs that announced cuts in national defense programs are having an impact: Six hundred executives at Bethesda-based Lockheed Martin are accepting the company's offer of a buyout. ITT Defense and Information Systems, based in McLean, this year combined seven business units into three and cut 1,000 workers. Hundreds were let go this year from Northrop Grumman operations in Maryland.

Those losses are just the beginning of what many expect to be a much broader set of reductions at local companies.

After making cuts in military hardware budgets last year, Defense Secretary Robert M. Gates last month took aim more directly at the Washington region's defense industry, calling for reducing spending on "support contractors" by 10 percent each of the next three years. This region is a hub of contractors providing professional, administrative and computer services.

"As the defense budget shrinks, it will be impossible for the companies here to escape unscathed," said Loren Thompson, chief operating officer of the Lexington Institute and a consultant to several major defense contractors. "There will be many thousands of layoffs in the greater Washington area."

Several in the industry said the downturn could be as severe as it was in the early 1990s, when, among other things, the Navy largely pulled out of Crystal City.

"We're seeing the start of another down cycle," said Randy Jayne, managing partner for executive search firm Heidrick & Struggles's aerospace, defense and aviation practice.

During the defense buildup over the past decade, the Washington area's economy became more dependent on the federal government and, in particular, defense spending.

Federal spending now amounts to about 37 percent of the regional economy, up from 33 percent in 2000, said John McClain, deputy director of the Center for Regional Analysis at George Mason University.

Over the same period, the volume of defense procurement contracts in the area almost tripled, rising from $12 billion to more than $35 billion, according to McClain's statistics.

If the significant cuts come as expected, McClain said, the local economy could stall, as it did in the mid-'90s.

The campaign to rein in defense costs began in earnest in April 2009 when, in dramatic fashion, Gates put an end to several big-ticket military programs.

Among others, he targeted a program to build 23 presidential helicopters that had more than doubled in cost and was running six years behind schedule; several missile defense efforts he said had technological problems; and a set of eight Army combat vehicles he said were ill-suited for the kinds of war that the military has faced in Iraq and Afghanistan.

Some cancellations surprised even top military officials, but Gates said he had seen enough studies on reforming Pentagon buying. "Enough hand-wringing, enough rhetoric," he said. "Now is the time for action."

Despite the drama, the effect on the Washington region was relatively small: Some of the companies affected were based here, but most of the building of military hardware is done elsewhere in the country.

But since the recession, Gates has preached the need for the military to be "respectful of the American taxpayer at a time of economic and fiscal distress." Last month, he announced cuts that are expected to have a far more serious effect on the local economy.

The series of 10 percent cuts for each of three years were directed at "support contractors" - that is, companies that provide administrative and professional help, computer technology and other services. More than a quarter of national defense spending consists of outlays for service contracts, and much of those are provided by Washington area companies. Among the largest are CACI, SAIC, Lockheed Martin, General Dynamics, Booz Allen Hamilton and ManTech International.

"The Washington area historically has been insulated from downturns," said Jim McAleese, a defense industry consultant who recently participated in a briefing by Gates on the cuts. "Over the next few years, you are basically looking at a 5 to 10 percent reduction in the workforce here that supports the Department of Defense. It will be signficant."

Defense industry experts have differed over how large the cuts will be, however, because the Defense Department has yet to detail how it will achieve the 10 percent reductions.

There's little question that the Washington industry that is now in the crosshairs of budget cutters helped propel the region's growth in the boom years.

General Dynamics, which has its headquarters in Falls Church and bases much of its information technology business in Fairfax, had just over 1,100 local employees at the end of 2000; there were nearly 6,000 by 2005. Between 2002 and last year, its revenue grew from $13.7 billion to $32 billion.

Much of the company's local work is related to information technology - areas such as collecting and processing intelligence data and managing cybersecurity. The firm also has a program office for a Marine Corps vehicle in Woodbridge and an office near the Navy Yard.

Likewise, Arlington-based contractor CACI International, which works in the defense and intelligence worlds, grew dramatically as the United States ramped up its presence in Iraq and Afghanistan. The company has a broad range of service-related businesses, including evaluating the military's security systems and helping it bring together multiple systems such as sensors and intelligence programs.

At the start of 2001, CACI had about 2,600 area employees; it now has close to 6,200.

Its revenue also grew virtually every year, from $490 million in 2000 to $2.7 billion in 2009. Profits ballooned from $38.4 million in 2000 to $107 million last year.

The magnitude of the cuts locally will depend on how Gates' mandates are carried out - whether entire programs are eliminated or whether companies are simply asked to reduce their prices, said Alan Chvotkin, lobbyist for the Professional Services Council, which represents the contracting industry.

"These companies have been growing for 10 years, accumulating people in marketing and [research and development] and administration," Thompson said. "As they see these cuts enacted, they will let people go. They won't wait."

whoriskeyp@washpost.com censerm@washpost.com

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