Military Cuts Threaten Virginia’s Pentagon-Dependent Economy

Virginia, Hawaii and Alaska may suffer the most economic harm from defense cuts of as much as $1 trillion during the next decade, a Bloomberg Government study shows.

Those three states are the most dependent on U.S. military spending, the study found. Virginia, home of the Pentagon and the Norfolk naval base, tops the list with 13.9 percent of its gross domestic product derived from defense spending. Hawaii ranks second, at 13.5 percent, and Alaska is third with 10.7 percent. All other states are in single digits, the study showed.

Bloomberg Government examined military spending by state as Congress considers budget cuts that might threaten the economies of states such as Virginia, where the Defense Department spent $56.9 billion in fiscal 2009, the last year for which comprehensive data were available. The spending came in the form of payroll, contracts and grants.

“It is a big-ticket item for Virginia,” said Richard Brown, the state’s secretary of finance. “That would be quite a blow to Virginia if there would be a major hit.”

Hawaii had $8.8 billion in 2009 defense spending, about 72 percent of which came in payroll for defense personnel. Alaska received $4.9 billion that year, mostly concentrated at military bases such as the Army’s Fort Wainwright and Elmendorf Air Force Base, now called Joint Base Elmendorf-Richardson.

On average, the military spent more than $10 billion per state, the study by analysts Robert Levinson and Sopen Shah found.

Doubled Spending

States that gained from the surge in Pentagon spending, which more than doubled to $708 billion in fiscal 2011 from $316 billion in fiscal 2001, may be vulnerable as the military’s budget plans are reduced to help shrink the federal deficit.

Defense Secretary Leon Panetta has warned of a “hollow force” if a congressional supercommittee fails to produce a 10-year plan that can pass Congress, which would trigger automatic spending cuts. Defense budget cuts might reach $1 trillion in that scenario, which the Pentagon says would hurt national security.

“It’s a ship without sailors,” Panetta said at a Nov. 10 Pentagon hearing. “It’s a brigade without bullets. It’s an air wing without enough trained pilots. It’s a paper tiger.”

Winslow Wheeler of the Center for Defense Information, a non-profit watchdog group in Washington, said the Pentagon is exaggerating and resorting to “rhetorical gibberish.”

Dimmer Outlook

The prospect of cuts already has raised concerns about the future economic health of defense-dependent states.

Moody’s Investors Service Inc. of New York lowered the outlook of five states with triple-A bond ratings -- Virginia, Maryland, New Mexico, South Carolina and Tennessee -- in July, partly because of their dependence on defense and other U.S. government revenue, said Bob Kurtter, Moody’s managing director of U.S. public finance.

“Any state or local government that has a significant federal presence is asking that question: Are they vulnerable?” Kurtter said.

Perhaps no state has more at stake than Virginia, which hosts the country’s largest naval base in Norfolk and is home to five of the Navy’s 11 aircraft carriers.

The Defense Department awarded $38.7 billion in contracts in Virginia in 2009, including $5.3 billion to Northrop Grumman Corp. (NOC) of Falls Church, Virginia, $1.6 billion to Booz Allen Hamilton Holding Corp. (BAH) of McLean, Virginia, and $1 billion to CACI International Inc. (CACI) of Arlington, Virginia.

Preparing for Cuts

To prepare for defense cuts, Virginia’s state budget includes a $30 million contingency fund that may be used to help businesses find alternative customers, among other things, Brown said. “It may require more, no doubt,” he said of the fund’s size.

Even in states with relatively little defense spending, some localities may be affected by the cuts.

In Wisconsin, 3.7 percent of the state’s economy comes from the Pentagon. Still, the city of Oshkosh was one of the top four U.S. cities for military dollars, the study found. The locality, which has about 70,000 residents, received $5.8 billion in fiscal 2009, mostly for contracts for mine-resistant trucks made by Oshkosh Corp. (OSK) for use in Iraq and Afghanistan.

Minnesota, the least reliant on defense spending, is losing a major defense contractor to Virginia. Alliant Techsystems Inc. (ATK) announced plans to move its headquarters from Minneapolis to Arlington. The company, better known as ATK, makes advanced missile systems, precision munitions and satellite components.

Minnesota ranked 51st among the states and the District of Columbia, with defense spending accounting for 1.1 percent of its gross domestic product. The Defense Department spent $2.8 billion in the state in fiscal 2009, including $1.5 billion in contracts benefiting companies such as Lockheed Martin Corp. (LMT) of Bethesda, Maryland, BAE Systems Plc (BA/) of London, and General Dynamics Corp. (GD) of Falls Church, Virginia.

The study used 2009 data from the Defense Department, U.S. Bureau of Economic Analysis, the U.S. Census Bureau and Bloomberg Government.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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