The Washington area’s reliance on federal spending has become a major headache for state and local governments, with congressionally mandated program cuts leaving gaping holes in revenue projections from Annapolis to Richmond.
George Mason University’s Center for Regional Analysis estimates that the federal government spent $13.4 billion less in the Washington area in 2013 than in 2010. That decrease, economists say, contributed to the following: Virginia is struggling to fill a projected $2.4 billion revenue gap in its state budget over the next three years, even though the national economy is improving; Maryland faces a $600 million budget deficit next fiscal year and nearly $300 million for the current fiscal year; the District last week announced a possible revenue shortfall of $163 million for fiscal 2016.
Other local governments are forecasting similarly gloomy scenarios.
“We’ve got to stop relying on being a government town,” said Bob Buchanan, a member of the 2030 Group, a set of area business leaders who have been contacting elected officials to argue for measures that would diversify the regional economy. “I think most of us are coming to realize that there is a transformation going on in our economy. The quicker we step back and act on that, the better off we’re going to be.”
Exacerbated by federal sequestration cuts that went into effect last year, the decline in federal spending has contributed to a regionwide shift from higher-paying jobs — government contractor or subcontractor, for example — to jobs that pay less, according to the Center for Regional Analysis.
Between September 2013 and this past September, the Washington region lost 13,000 jobs in federal government, business and professional services, education, health care and other higher-paying fields, according to federal data analyzed by the center.
During the same 12-month period, the area gained 26,000 lower-paying jobs concentrated in retail, construction, leisure, hospitality and similarly lower-skilled areas.
The shift has helped drive down the region’s gross regional product, an indicator of an economy’s health, by nearly $243 million since last year.
Fewer highly paid workers, in turn, has led to a weaker and more stagnant real estate market, higher office vacancy rates and — year after year — reductions in the projected flow of tax dollars that help pay for schools, roads and other government services. In Fairfax County, the office vacancy rate has crept up steadily, from 15.6 percent in 2011 to as high as 17 percent in recent months.
Without a fundamental shift in the region’s economic base, area leaders say, future declines in federal spending will result in more shortfall announcements and more hasty budget revisions.
“A lot of people have talked about this being the new normal,” said Susan Datta, budget director for Fairfax County in Northern Virginia, which will announce Tuesday its seventh consecutive budget deficit since the 2008 recession. “We anticipate it’s going to be a very, very difficult budget year.”
Jennifer Hughes, director of the Office of Management and Budget in Maryland’s Montgomery County, struck a similarly dark tone after the county learned that the state’s November distribution of income tax revenue was $96 million short of projections.
“Unless we have offsetting additional revenue, we are definitely in the red for 2016,” Hughes said. “And we have to figure out how we’re going to handle that.”
Prince George’s County is facing a $59 million deficit that threatens its bond rating and prompted officials to cancel recruitment for police and firefighters, slash funding for various programs and reduce overtime hours for emergency workers.
In Virginia, where state legislators briefly considered dipping into the state’s highway fund to close their budget gap, Gov. Terry McAuliffe (D) has moved to lay off 565 state workers, raise the price of liquor and even sell an old state police airplane to save money.
On Monday, McAuliffe met behind closed doors with a panel of business leaders, who privately shared projections for their own firms to help the administration forecast revenue for the coming budget year. The governor emerged saying he was convinced that the state must be “cautious” about its budgeting. He said the threat of sequestration had put the state’s defense-heavy economy in a “perilous” situation.
“We face huge head winds,” McAuliffe said. “We’re all in agreement — very perilous until we know how the Congress is going to deal with these economic issues.”
McAuliffe said “everything should be on the table” to close the budget shortfall, including squeezing all possible savings from state agencies and eliminating tax preferences that “no longer make sense.”
In Maryland, Gov.-elect Larry Hogan (R) says he is determined to roll back tax increases in spite of his state’s projected shortfalls, and says that one of his top priorities is making his state’s economy more competitive for the private sector.
Montgomery County recently opened the first federally funded research and development center for cybersecurity technology, part of an effort by officials there to create a local hub for private companies involved in that expanding field.
And the District’s mayor-elect, Muriel Bowser (D), has been focusing on development initiatives she says will continue to lift neighborhoods in the nation’s capital.
The problem is that those efforts are rarely coordinated, said Stephen Fuller, director of the Center for Regional Analysis. Too often, he said, the states and counties in the region are competing with one another — a strategy that may be good when times are flush but can be harmful during an economic downturn.
“We’ve just had it easy for so long that we’ve never had to work at this,” Fuller said. Steady increases in federal spending, which reached a peak of $80.7 billion in 2010, kept the Washington region relatively stable during the recession, he argued. But it also fostered a false sense of security. “The message is clear: We need to rebrand ourselves and promote our assets.”
Gerald L. Gordon, director of Fairfax County’s economic development authority, said he has been working to foster an environment that will attract cybersecurity companies and businesses working with technology for personalized medicine — another growing field in which treatment is tailored to a patient’s genetic makeup.
Gordon said he sees opportunities for regional collaboration in personalized medicine, teaming software engineers based in Virginia with health researchers in Maryland who work at the National Institutes of Health and other medical facilities.
“The total growth potential would be enhanced and our share would be greater working together than standing alone,” Gordon said.
Peter Franchot, the state comptroller in Maryland, agreed that regional collaboration is ideal. But the recently reelected Democrat said his state also needs to become a more stable environment for businesses already there.
“Maryland has a lethargic economy,” Franchot said.
During this fall’s bitter gubernatorial campaign, Hogan said too many companies had left Maryland during the eight-year tenure of his Democratic opponent, Lt. Gov. Anthony G. Brown, and Brown’s boss, Gov. Martin O’Malley (D).
Between 2006 and 2011, the most recent year for which statistics are available, 6,276 companies left Maryland, with 1,178 going to Virginia and 745 to the District, state officials said. In that same period, 5,609 entered the state, with 1,170 coming from Virginia and 1,140 coming from the District. A big blow came in 2011, when construction giant Bechtel transferred 625 jobs from Frederick County to Reston, Va.
More important than those back-and-forth tallies, economists such as Fuller say, is how many of those companies rely on federal dollars, and how many do not.
Bill Turque and Laura Vozzella contributed to this report.