(Corrects location of Urban Land Institute in 19th paragraph)
April 8 (Bloomberg) -- When Mobil Corp. quit midtown Manhattan for 130 green acres in Fairfax County, Virginia, its new neighbors included country stores, dairy farms and a highway that ringed the nation’s capital. Mobil brought hope that the suburb could break free of its Washington ties to build its own world-class economy.
More than 26 years later, the largest U.S. oil company -- now Exxon Mobil Corp. -- is leaving Fairfax and the county is more dependent upon the U.S. government than ever. Even as prize employers including Volkswagen AG and Hilton Worldwide Inc. opened shop, federal spending as a share of the county’s economy has almost doubled since 2002, to 14.4 percent. Last year, the U.S. funneled more procurement dollars to Fairfax than anywhere else, almost $28 billion.
Now, the county of 1.1 million people, whose $194 billion economy is bigger than Hungary’s, is bracing for its share of federal spending cuts, known as sequestration, that began last month. Localities reliant on federal dollars, from Fairfax to Pine Bluff, Arkansas, will take a disproportionate hit from reductions that Goldman Sachs & Co. in New York estimates will subtract 0.6 percentage point from U.S. economic growth this year.
“There was a day where we couldn’t fathom that there would be a retreat of federal programs,” said Sharon Bulova, a Democrat who has led the Fairfax Board of Supervisors since 2009. “It’s become obvious that our closeness to the federal government is both good news and bad news.”
Fairfax’s wealth and educated workforce, with median family income of $119,634 and 29 percent of its 25-and-older population holding graduate degrees, will help it avoid hard times. Still, sequestration will test those strengths and offer a lesson in how difficult it can be for even a well-managed economy to wean itself from a single big spender like the U.S. government.
Payrolls in the U.S. grew by 88,000 in March, less than forecast, in a sign that federal budget cuts may be sapping growth in the world’s largest economy. The Standard & Poor’s 500 Index rose 0.6 percent at 4 p.m., reversing a slump from April 5 that followed the Labor Department’s release of the payroll figures. German industrial production rebounded, while in Japan, a measure of sentiment matched a record high as the Bank of Japan’s stimulus bolstered the outlook for the world’s third-biggest economy.
Since 2004, Fairfax has been the nation’s top recipient of federal contract dollars, according to data compiled by Bloomberg. Four of the county’s top six employers -- Lockheed Martin Corp., Booz Allen Hamilton Holding Corp., Northrop Grumman Corp. and SAIC Inc. -- are among the 20 biggest federal vendors.
The county’s fortunes are so aligned with the government’s that Moody’s Investors Service has said Fairfax’s Aaa bond rating could be hurt if U.S. debt is downgraded.
“We’ve ridden this horse as far as we can, and it was a good ride,” said Stephen Fuller, director of the Center for Regional Analysis at George Mason University in Fairfax. “Now we have to change horses.”
Direct government employment alone accounts for about 6 percent of the county’s workforce, according to the Census Bureau. That doesn’t include thousands more jobs at private vendors that depend on the government. Replacing any that are lost won’t be easy. A federal contract employee contributes about $135,000 to the local economy, Fuller said. In contrast, a hospital worker contributes about $55,000.
“You need more than two of them to make up for one worker in the federal sector,” said Fuller, who wrote a report on defense budget cuts for the Aerospace Industries Association, one of sequestration’s chief critics.
When Fairfax passed this year’s budget, it assumed sequestration would be avoided. Now, the $7 billion spending plan for fiscal 2014 calls sequestration’s impact “significant” and “largely unknown.” To prepare, the proposed budget includes a real-estate tax increase that would add $262 to the average resident’s annual bill.
“It may not sound horrible, but it means something to people who are being furloughed or being laid off,” Bulova said. “There aren’t a whole lot of options available.”
Fairfax isn’t unique. Hundreds of localities, from Los Angeles to Shoals, Indiana, where almost half of all jobs are with the U.S. government, depend on a military base, agency or federal project to fund schools, pay police salaries and keep their economies humming. Federal spending on procurement, salaries and wages accounts for more than 10 percent of the economies of New Mexico, Alaska, Hawaii, Maryland and Virginia, according to the Pew Center on the States.
While federal outlays are only 3.4 percent of the economy in Arkansas, sequestration could have a disproportionate impact in places like Pine Bluff, which has watched its fortunes decline for a decade as the U.S. Army shutters its chemical weapons stockpile. Unemployment is 10.5 percent, and more than 1,000 jobs will be gone by the end of this year.
“They saw it coming,” said Rick Maher, president and chief executive officer of Maher & Maher in Neptune, New Jersey, which is helping Pine Bluff recruit new employers. “They knew the chemical weapons program had an end date. And yet they felt stunned.”
Areas hit by sequestration won’t have a decade to plan.
“It helps to have a crisis,” said Patrick L. Phillips, chief executive officer at the Urban Land Institute, a Washington-based research group that studies development issues. “You can talk all you want about diversification and everyone understands that in an intellectual sense, but when it’s looking you in the face it’s a call to action.”
In the 1960s and 1970s -- and before Mobil’s arrival in 1987 -- Fairfax residents could work for the federal government, provide services for those who did, or move somewhere else. With a negligible non-government business base, the county struggled to build schools and provide services for a growing population.
It did have lots of open land and a highway straight to the Pentagon. Some procurement contracts required vendors to be within 30 minutes or 30 miles of the Defense Department’s headquarters, a prerequisite that Fairfax capitalized on.
By the 1980s, companies catering to the federal government crowded a corridor that reached nearly 20 miles from the county’s eastern border near the Pentagon to Dulles International Airport in the west.
One of the first to arrive was PRC Inc., a technology contractor that relocated from Los Angeles in the 1960s. Tom Davis was PRC’s general counsel and served on the Fairfax County Board of Supervisors from 1980 to 1994.
“Office space was less expensive, we were close to the Pentagon, we had a great school system. It all seemed to click,” said Davis, a Republican. “You could try to diversify the economy, but the marketplace dictated government contracting could beat everyone else out. Government contractors had the cash.”
As Fairfax capitalized on its proximity to Washington, its dependence on contractors grew. Even when the dot-com boom of the 1990s gave rise to locally based Internet giants like AOL Inc. and UUNET Technologies Inc., federal procurement’s share of the Fairfax economy expanded, peaking at 14.6 percent in 2011, up from 4.2 percent in 1991, according to Fuller.
“This will be better for Fairfax in the long run because it will push them to diversify faster,” he said. “Now there’s an imperative. They’ve had the capacity to do it, they just didn’t need to.”
Government contractors already are taking steps to adjust by doing their own diversifying, said Mark Moore, executive vice president and chief lending officer at John Marshall Bank in Reston. The bank’s customers, many of them vendors to U.S. agencies, are beefing up their cash cushions and looking for new lines of business.
“They’re trying to diversify their revenue streams into more stable or growth-oriented sectors of the federal government,” Moore said.
SAIC, an engineering and information technology contractor in McLean, is one example. As the nation’s eighth-largest contractor, it relies on the U.S. government for about 90 percent of its revenue. In August, SAIC announced plans to break into two companies to better compete for a shrinking pool of government business. In December, it said it would cut 700 employees.
Government and contract employees have been showing up at small-business workshops hosted by the Fairfax County Economic Development Authority. Chief Executive Officer Gerald Gordon said he believes many of them are preparing for furloughs or layoffs.
As cheerleader-in-chief, Gordon is naturally upbeat. While the county needs to diversify its economy, he said, government spending cuts aren’t the same as, say, a shuttered steel mill or auto plant. Unemployment in the county was just 3.7 percent at the end of last year, less than half the current national rate of 7.6 percent.
“Being a government town is still a good deal,” he said.
These days he’s excited about the efforts of another big Fairfax employer, Inova Health System, a not-for-profit hospital network that in 2010 began a project to collect genetic data as a way to advance patient care. The institute is mapping the genes of 2,500 families in Fairfax County to try to identify diseases and health abnormalities.
Exxon Mobil’s relocation of its Fairfax offices to Houston could even turn out to be a boon for Inova, whose flagship medical center is outgrowing its space right across the street, Bulova said.
“Their loss isn’t catastrophic,” Bulova said. “In fact, the vacancy of their space will afford us some new opportunities.”
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