Defense cuts carry big cost in Virginia
RICHMOND, Va. — Some defense contracts are all about airplanes, ships and tanks.
At Ashland-based Produce Source Partners, the contract is about apples, oranges, lettuce, tomatoes and potatoes.
"We're the pretty basic stuff," said Norman Saville, president of the 75-year-old company, a supplier of fresh produce to public- and private-sector customers in Ashland, Hampton Roads and Roanoke.
With a fleet of 70 trucks and more than 200 employees, the company ships produce sourced from around the nation to feed troops at military bases in Virginia and Maryland through a contract with the Department of Defense that is worth about $13 million a year for the business.
"It's about 12 percent of our overall business," Saville said.
Produce Source Partners is just one of hundreds of central Virginia companies that have defense contracts, or that produce goods or services in the defense supply chain. Unless lawmakers act, those companies could be hurt by automatic defense cuts — as part of what's known as sequestration — scheduled to start in January and total nearly $500 billion over a decade.
The cuts' economic impact could be substantial locally.
Nearly 1,800 defense contracts worth about $610 million were awarded to companies and organizations in the counties of Chesterfield, Henrico and Hanover and the city of Richmond in 2011, according to figures compiled by the Greater Richmond Partnership, a regional economic development group.
While that was down from $693 million worth of contracts in 2010, it was up from $79 million in 2001, reflecting growth in federal contract spending that much of Virginia has experienced in the past 10 years.
"From 2000 to 2010, we certainly saw very substantial growth in terms of federal spending here in the commonwealth," said Michael Cassidy, president of the Commonwealth Institute for Fiscal Analysis, an independent fiscal and economic policy think tank in Richmond. "A large and a growing plurality of this spending was in the form of procurement contracts."
Virginia is first in the nation in per capita defense spending and second in per capita federal spending, with about $17,000 in federal spending per person in 2010, compared with an average of $8,859 per capita nationally, Cassidy said. That growth largely was driven by contracts in Northern Virginia and Hampton Roads.
"The flip side of that is that the high level of dependence on federal spending puts us at a significant risk in terms of this whole host of federal budget and deficit reduction strategies," Cassidy said.
Without an agreement from Congress and the Obama administration on a long-term plan to reduce the deficit, the military will face automatic budget cuts starting with a $55 billion reduction in January and more than $492 billion over a decade. Domestic programs also would be reduced by $492 billion over 10 years.
The prospect of the defense cuts has led some organizations backed by defense industry suppliers to predict millions of job losses nationwide.
One study released in July estimated that Virginia could lose 207,571 jobs and nearly $10.7 billion in labor income as a result of the automatic budget cuts.
That report, conducted for the Aerospace Industries Association, a trade group for manufacturers that could lose billions of dollars in federal contracts, found Virginia ranks second only to California in estimated job losses from the automatic budget reductions, which would kick in Jan. 2.
Stephen Fuller, an economist at George Mason University who conducted the analysis along with Chmura Economics and Analytics, a research firm in Richmond, said the spending cuts likely would hit Northern Virginia and Hampton Roads the hardest because of the concentration of defense-related and federal contracting jobs in those areas.
While Virginia is home to some giant defense contractors such as General Dynamics and Northrop Grumman Corp., numerous smaller companies have a stake in defense-related spending as well.
No one is certain exactly where the budget cuts would hit the hardest, because the federal government has not said yet precisely how it would accomplish the reductions.
A list of defense contracts compiled by the Center for Security Policy, a Washington think tank that focuses on defense and security issues, indicates that about 1,600 companies and organizations received defense contracts in three congressional districts encompassing the Richmond area and parts of Hampton Roads in 2011.
Those contracts range in value from a few hundred dollars to several hundred million dollars, for services and products as various as manufacturing, logistics, construction, computer software, engineering, janitorial, food supply, legal, hardware and hotel rooms.
The small or midsize businesses and nonprofits in the area that have military contracts include Richmond-based Klean Kare Team Inc., which provides custodial services to military installations, and The Greater Richmond ARC, which employs people with developmental, intellectual and physical disabilities.
Because the closing of bases is not part of the sequestration plan, a few contractors who do work at installations said they are confident that demand for their services will remain, though there may be more pressure to cut costs.
"I am sure there is going to have to be some budgeting going on, but you are going to still have to have these services and products to support the government facilities," said Klean Kare Team owner Sharon Dabney-Wooldridge, who founded the company 26 years ago and became a government contractor in 2001.
The company has about 15 people working on a custodial contract at Fort Lee. "A good portion of our total revenue comes from government contracts," she said. Budget cuts "will affect all of us. It is a trickle-down effect."
Defense contracts have provided jobs for dozens of people who work at several military supply or support sites for The Greater Richmond ARC.
The organization has federal contracts that accounted for $4.9 million, or 42 percent of its revenue, in 2011. Of the 250 people employed through ARC at various businesses and organizations in the community, 83 are in jobs at government sites such as the Defense Supply Center Richmond.
ARC officials said they have been told there would be no change in the scope of the services the organization provides now, because those are basic services such as visitor center staffing, grounds maintenance, custodial, recycling and emergency dispatch.
But the group has reviewed its contracts and found areas of efficiencies to save contract dollars for the federal government. For example, to keep costs down, its workers have not had a pay raise in three years.
Sequestration would hit Northern Virginia and Hampton Roads the hardest, but the Richmond area would see ripple effects, Cassidy said.
That could come in other ways besides direct contracts, such as through companies that supply goods and services to defense contractors elsewhere in Virginia and the nation.
DuPont Co., for example, does not have major direct defense contracts at its Richmond-area operations. But its Spruance plant on Jefferson Davis Highway makes high-performance materials such as Kevlar and Nomex, which are supplied to companies that make body armor and other products for the military.
For example, the Kevlar fibers produced locally might go to a company in South Carolina that weaves the fibers, then to a company in Florida that makes body armor.
DuPont has invested heavily in Kevlar production in the past five years, even opening a plant in South Carolina, to meet demand for the material. But the company isn't counting on defense as the primary growth market in the future, said Thomas G. Powell, president of DuPont Protection Technologies.
"What we have seen lately, and by that I mean the last 19 months or two years, is a slowdown in government purchasing, more so on the Kevlar side than the Nomex side," Powell said. "It has been particularly disturbing because what we are hearing from our contacts is there is a shortage of body armor."
DuPont anticipated that military spending on products such as body armor would not be sustained at the levels seen in the early to mid-2000s, so the company has factored that into its production plans, Powell said.
At the same time, it has been working to build its other markets for Kevlar and other products in the private sector.
"We would not have expanded our capacity just based on the military business. There are plenty of other applications," he said.
"We do see a downturn" in defense demand, Powell said. "The military is certainly an important part of our business and something we are proud of. We do not plan on the military as a growth industry for us. About 85 percent of the growth we are forecasting is in nonmilitary applications."
Construction work at military bases also might decline under sequestration, though some local contractors in the Richmond area say they expect they still would see steady business in maintenance-related work.
"Fort Lee is not going to go anywhere," said Mitch Haddon, president and chief executive officer of ColonialWebb Contractors, a Richmond-based commercial, mechanical and electrical contractor that did more than $60 million worth of work at Fort Lee during the base's $1.2 billion expansion.
Haddon said that created a bubble in defense-related construction work that already has deflated.
"When I hear about the fiscal cliff, I don't really worry that there is going to be another shoe that is going to drop in our market because I think the cutbacks have already occurred," he said.
While debates about sequestration often include talk of a "fiscal cliff," it is important to remember that the defense cuts would not all happen at once, said the Commonwealth Institute for Fiscal Analysis' Cassidy.
"It will be more of a slope than a fiscal cliff in terms of how it plays out," he said.
Produce Source Partners' Saville said he is working to build the company's customer base so that defense contracts are not as significant a portion of its overall revenue.
In the fourth year of a five-year contract, he is not worried about immediate cuts.
"It is something we are trying to stay aware of," he said of the defense cuts. "We can't do much about it, if something were to change."
"It would definitely affect our company" if contracts were cut or reduced, he said. "If it went away we would survive, but it sure is nice to have that business."