Defense Cuts: What’s at Stake for Va. and Hampton Roads?

This Congress seems bent on cutting the federal budget, and even once-sacrosanct defense spending won’t be getting a pass.

That worries Stan Scott, Virginia’s point man on defense spending as executive director of the Virginia National Defense Industrial Authority.

Created by the General Assembly in 2005, the Richmond-based authority tracks defense spending’s economic impact in Virginia, one of the nation’s top three defense contracting states, along with Texas and California.

It’s also charged with making sure the state won’t be caught flat-footed again like it was with the 2005 Base Realignment and Closure process, or BRAC, which recommended the shutdown of Oceana Naval Air Station in Virginia Beach.

The authority manages the state’s Military Strategic Response Fund, created to provide grants to local communities for projects that mitigate the impacts of the base closure process. Of the $67 million allocated so far, most has gone to acquire property near Oceana to prevent development – $45 million.

A retired Army sergeant, Scott has led the state’s defense industry authority for the past year. As the national debate over spending priorities intensifies and questions hover over the impact on defense, he talked with The Pilot about what’s at stake.

Q. Could you sketch out the defense spending picture in Virginia?

A. The 2009 numbers are the most recent – Virginia was No. 1 in the nation with roughly $56.9 billion in total defense spending. Contracting accounted for a little under $39 billion of that. The rest went to payroll and retirement pay and those kinds of things. We did an economic impact study in 2009 that found that defense accounted for a little under 16 percent of the gross state product – a little less than 200,000 direct employment jobs and about 1 million jobs indirectly. Defense is easily the most important industry in Virginia. Nothing else comes close.

Q. How concerned are you about the potential impacts of defense cuts on Virginia?

A. I know that the Defense Department is going to have to cut back. I know that it’s largely a political question, however, and you have powerful forces in Congress and in the federal government who don’t think defense ought to be cut at all, that cuts should come elsewhere.

I

think the danger for Virginia, in the long run, has to do with contracting. Some of the contracting stuff that the Defense Department’s doing will be cut back, and you saw that with the Joint Forces Command closure. It’s a good example of how the Defense Department is going to start trying to cut leadership positions at the top, reduce the number of four-stars and three-stars and two-stars and shove that work down. That will hurt Virginia because there are a lot of commands here.

Q. Do you think shipbuilding will be affected?

A. I don’t think there’s any way to avoid that. I don’t think that they’re going to stop building aircraft carriers, but they’ll spread out the cost of it over eight years instead of five or six. So it’ll take longer to build it because we’re not going to spend that money as quickly. And that’ll hurt Virginia because that’s a key component, especially down here in Hampton Roads…

You can expect that procurement at least to slow down. I think in the long term – in the 25- to 30-year term – you may see fewer ships in the Navy, especially fewer aircraft carriers.

Q. We’re home to defense contractors of all sizes – we’ve got Northrop Grummans and Lockheeds and Boeings – to medium-size firms to small-size firms. If I’m working with a small defense contracting firm in Hampton Roads, what’s at stake for me now?

A. In 2009, 10 percent of all defense contracts in the world – $39 billion – went either to companies that are in Virginia or companies that were performing the work in Virginia. If the Defense Department is successful in reducing that $39 billion by 10 percent, then you can expect the amount of contracting to be spent in the world to drop from about $400 billion to $360 billion, right?

What that means is that there’s a smaller share, there’s a smaller pie. What Virginia needs to do is to find ways to increase the amount of the pie we get. If the pie’s going to shrink, then we want a bigger slice of what’s left.

Q. How likely is it that the cuts recommended by Congress would be so painful that the mechanics of executing them would be relegated to another BRAC round?

A. A new BRAC process is always a possibility. The important thing to remember, though, is that on some level the services sort of have to ask for it.

Politically, the 2005 BRAC process had some problems with respect to two things. One, it’s not clear that they really saved any money with those moves. The second thing is that the whole point of the BRAC process is to de-politicize these kinds of decisions. And the 2005 BRAC process was very political. An example of that, again, goes back to Oceana where Florida and Virginia both lobby the BRAC commission to get those jets – to keep the jets in Virginia or to move them to Florida.

So it’s not clear that that process has really de-politicized anything. I’d be personally very surprised if there’s another BRAC round anytime in the near future.

Q. What’s your advice to defense contractors in Hampton Roads?

A. Match your product to what the Defense Department’s looking for. Try to understand where military strategy and defense needs are going. You’re going to see things move away from big weapons systems and big ships and move more to unmanned stuff, robots. Intelligence gathering is going to be huge. Information technology is going to be huge.

My advice would be to try to find ways to discover what the Defense Department is going to need in the next couple of years and then develop products that you can sell to them…

I think one of the things that the Defense Department is going to do to try to cut costs is going to be to try to figure out ways to reduce the amount of money they spend on legacy employees like me. What’s driving the problems for DOD today, in large part, is that health care costs are really rising as the volunteer Army that was created in the ’70s gets old. They’re paying me to do this job, but I’m getting a pension, I’m getting health care. And they’re going to ask me and other retirees to pay for more of those costs.

Q. How many other states have organizations like yours?

A. Kentucky has a Commission on Military Affairs, for which the state has appropriated about $300,000 a year in the past, and its board is somewhat similar to ours. It’s fair to say that only Virginia and Kentucky have such a robust effort in this sector.

Q. What’s your current budget?

A. It’s $395,251. That was our budget for this fiscal year 2012 that just started on July 1. The first year it was $510,000. It’s gone down every year as budgets got tighter. And we can function well enough on that. Obviously, if I had more money I could do a lot more. The key appropriations that we need to see – that I’d like to see – is a reinvigoration of the grant program, because we haven’t really gotten any money for that in the last couple years, except for the Virginia Beach program.

Q. Grants to provide incentives and/or to pay for mitigation programs?

A. Here’s the problem. Virginia has a pretty good system of economic development incentives. The Governor’s Opportunity Fund is the best example of that. That’s basically designed to create incentives for businesses or corporations to move to Virginia and create jobs here…

What we’re finding is a lot of the smaller and medium-size businesses don’t have the staff to dedicate to doing all the little things that you have to do to actually win these contracts. So if we can help Virginia firms do that, then we can help them get that bigger piece of the pie that I’m talking about.

Q. So a lot of it, then, involves the mechanics of bidding for contracts and knowing the process?

A. A lot of it is. I could go out tomorrow and start a disabled-veterans-owned business myself and I could hire people, but I can’t afford to do anything until I get at least one contract. So a lot of these businesses start with one, two, three or four people and they can’t afford to pay someone $70,000 a year or $50,000 a year to do nothing but negotiate that process.

So one thing Virginia can do that I’d like to try to do is expand our efforts to help these small businesses do that. We can’t necessarily do it for them, but we can provide them with some training and some staff expertise and some support that would help them do that.

Another thing is infrastructure. We could help create more favorable conditions for defense investment in Virginia by improving traffic congestion and things like that. One admiral in the Hampton Roads area has said he can’t recommend to the Navy that they bring more missions to Hampton Roads if he can’t get his people to work.

Q. Despite all the hype about deficit reduction and the supercommittee and potentially close to $1 trillion in cuts just from defense if they can’t get agreement by December – you’re not losing any sleep over this?

A. Well, I am, and here’s the reason. I think there are definitely going to be cuts. The problem is that because Virginia gets so much of it and because Virginia is so dependent on this investment, any kind of reduction for Virginia would hurt.

I think Gov. (Bob) McDonnell is right when he says that it’s time for Virginia to start thinking about ways to diversify our economy. Both he and Terrie Suit, the secretary of veterans affairs and homeland security, are paying very close attention to these issues and working on ways to protect this investment.

Q. Your organization was created in response to BRAC. What’s next?

A. We’re still feeling the impacts from BRAC and we need to continue to manage those, but now we want to shift to more of an opportunity fund idea and what we call the Defense Community Opportunity Fund.

If the legislature appropriated new grant money, we would focus economic incentives on defense contractors and defense investment. We’d try to push that money down to local communities and let them create the kinds of programs that they think will attract more defense investment and help their businesses in their regions get these contracts. That’s what we’d like to do.

Q. The country is now operating under a “continuing resolution,” a temporary funding mechanism, because it does not have an approved 2012 budget. What’s the impact of that on Virginia?

A. That’s a very good question, and I’m not really sure I can answer it. I think it’s going to be very difficult for Congress to come up with a full-blown budget before the next presidential election. I expect they will, but it won’t be easy.

I frankly don’t know that really big defense cuts will be a part of it. As long as the GOP controls the House of Representatives, I’d be very surprised if there were any massive budget cuts, to defense at least.

But that said, I think what the continuing resolution does to Virginia and Virginia companies that are operating in this sector is that it creates some uncertainty for them. One of the things that these guys do is they watch the appropriations process and they try to tailor what they’re going to do in their hiring and their manpower needs to what that’s going to look like. So they try to predict it. And when there’s a continuing resolution – if you don’t know what the 2012 budget’s going to look like – then it makes it harder to do.

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