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Part 2: D.C. Area Braces For Impacts Of Federal Budget Cuts

As deadline looms, planning for the worst and hoping for the best

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Stan Soloway, president and CEO of the Professional Services Council, addresses federal contractors at a meeting called "OMG: What if sequestration happens?" in Arlington, Va. earlier this month.
Mylon Medley
Stan Soloway, president and CEO of the Professional Services Council, addresses federal contractors at a meeting called "OMG: What if sequestration happens?" in Arlington, Va. earlier this month.

There's a lot of talk around Washington these days involving a nasty "s"-word: sequestration. It's the name given to the deep, across-the-board federal spending cuts set to go into effect in January if Congress does not intervene.  

These cuts were meant to be an incentive for a Congressional "super committee" to find an alternative way to reduce the deficit, but its failure to reach any agreement triggered $1.2 trillion in reductions during the next decade. As the deadline approaches for lawmakers to avert the cuts, many local leaders are concerned.

 "When you tie your economy to one horse, it really has to be a good horse. And ours has come up lame now," says Stephen Fuller, director of George Mason University's Center for Regional Analysis.

Federal spending accounts for roughly 40 percent of the D.C. metro area's economy, according to Fuller's analysis. The sequestered cuts could put more than 2 million jobs at risk nationwide, according to projections Fuller published this month in a report for the aerospace industry

"Federal payroll supports a lot of jobs at Giant and Safeway and CVS and other retail establishments," he says, citing some examples. "There will be fewer high-income households that can afford big houses.  So we could see a rollback on housing values."

While he agrees federal spending cuts are necessary to get the debt and deficit under control, he calls the risk of across-the-board cuts "enormous," because so many federal employees and contractors spend their paychecks here.

State-to-state, a waiting game for impacts

It's unclear how the cuts will play out for individual communities. The Obama administration has not released detailed plans for implementing the cuts, so local leaders are preparing for contingencies.

In D.C., where federal spending accounts for 60 percent of the city's annual economic output, according to the District's chief financial officer, Natwar Gandhi, the effects could be significant.

"We're practically sitting in the lap of the federal government," he says. "So whatever they do over there will have an impact on us."

Cuts to federal spending could mean less income for local businesses and residents, as well as local tax revenue, Gandhi says. That could lead to reductions in services for the city's most vulnerable residents, he adds.

Maryland may be in a better position, but it's difficult to predict because the state has more economic diversity, says State Treasurer Nancy Kopp. It's easy to see how there could be ripple effects, however; for example, Johns Hopkins University in the state receives more federal funding than any other institution.

"Every institution, from the state to the counties to the private industry to nonprofits, are looking at how they manage their budget, how they use and manage federal funds, and are taking that into their planning," Kopp says.

One big question in Virginia is what sequestration would mean for defense contractors. Nearly half the sequestered cuts are slated for defense spending, and the commonwealth is home to the Pentagon, several military bases and many defense contractors.

A state task force lead by Lt. Governor Bill Bolling (R) is preparing for federal cuts. Bolling firmly believes that budget cuts are necessary, but he acknowledges that Virginia is vulnerable to the kind of broad, across-the-board cuts involved in sequestration.

Military cuts could cost Virginia thousands of jobs and possibly billions of dollars, Bolling says. He's working with colleagues on Capitol Hill and at the Pentagon to try to protect Virginia jobs. 

He also thinks local companies may be able to take advantage of the cuts.

"If those consolidations occur in Virginia, then we may be able to find a way to actually benefit from that," he says.

Planning for the unknown

To figure out how to make the most of this ongoing uncertainty, representatives from 122 defense contractors assembled in Northern Virginia earlier this month for a conference titled "O.M.G.: What if Sequestration Happens?" 

Organizers presented tips to help companies negotiate a possible post-sequestration world. A slew of acronyms, federal contracting jargon and names of procurement vehicles were thrown around, but for individuals in the room, the human impact was top of mind.

"Our employees are very nervous," says Neal Albert, vice chairman of the board for MCR, a company based in McLean, Va. All of the company's business comes from the federal government, and that puts a lot of pressure on employees, says Albert.

"Our people are all we sell, so from my perspective we need to keep them first in our thoughts," he says.

Those employees have some reason for optimism, however, in part because of the nature of the local economy. Federal workers and contractors tend to be paid for thinking rather than for manufacturing, and they may be able to apply their skills in other industries. 

The health care and education industries are primed for growth, for example, says Stephen Fuller, the economist. In the long run, he adds, shifting the local economy away from such a heavy dependence on federal spending could be a good thing.

"This has been a welfare program for the Washington metropolitan area," he says. "Taxpayers around the country send us their money, and we've been living well off of this, and now we have to face the music. We have to earn our own way."

Despite all the preparation and anxiety, it's possible sequestration will be averted. Some lawmakers on Capitol Hill are trying to negotiate a deal to avoid at least some of the cuts — especially those to defense.  But with a Congress marred by gridlock and facing huge decisions before the end of the year, many local businesses and governments are preparing just in case.


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