Bloomberg News

Virginians Trim Lifestyles as Budget Cuts Threaten Pay

February 26, 2013

Virginians Trim Lifestyles as U.S. Budget Cuts Threaten Salaries

House Speaker John Boehner of Ohio, a Republican, said the chamber won’t act to replace the automatic cuts until the Senate “gets off their ass” and passes a plan. Photographer: Douglas Graham/CQ Roll Call via Getty Images

In Newport News, Virginia, Betty Hazelwood said she’s on “pins and needles” about whether her job as a submarine pipefitter will be eliminated by U.S. spending cuts. In Northern Virginia, Kate McLaughlin canceled a vacation to Costa Rica because of concern her federal contracting will end. At a suburban Washington car dealership, Infiniti of Tyson’s Corner, customers aren’t buying.

Virginia, which relies on U.S. government contracts more than any other state, is already seeing the effects of $85 billion in across-the-board federal spending reductions set to start on March 1. President Barack Obama traveled to the state yesterday to warn of economic damage.

“Almost everybody has got their heads down waiting,” said Michael Clark, 52, who works in Northern Virginia writing government contract proposals. “If someone came in and laid them off, it wouldn’t be a surprise.”

Most of the impact in Virginia is linked to planned military cuts -- from the Pentagon and some of the nation’s largest defense contractors in Northern Virginia, to the Navy’s biggest East Coast installation in the Norfolk area to the south. The reductions may eliminate as many as 200,000 jobs in the state in the next decade, said Republican Governor Robert McDonnell.

The nationwide cuts, half from defense and half from domestic spending, will take effect if Congress doesn’t act.

‘Ass’ Comment

Congressional leaders traded recriminations yesterday over their failure to advance negotiations to avert cuts.

House Speaker John Boehner of Ohio, a Republican, said the chamber won’t act to replace the automatic cuts until the Senate “gets off their ass” and passes a plan.

Senator Majority Leader Harry Reid of Nevada, a Democrat, said voters should understand which chamber is “sitting on its posterior.” He said the House is on the sidelines while the Senate is working to pass a bill.

Senate Democrats probably will vote tomorrow to replace this year’s portions of the mandated reductions with a smaller defense spending cut, a halt in direct payments to farmers, and a minimum 30 percent tax increase on top earners.

Senate Republicans may offer an alternative giving the president flexibility to cut the required spending at federal agencies. There was no indication either measure would advance.

The looming reductions, part of a 2011 deal that allowed an increase in the federal debt ceiling, were designed to be so unpalatable and arbitrary that lawmakers would come up with a way to replace them.

Airline Delays

The cuts will lead to airline delays, shuttered national parks, and the elimination of teaching jobs, the White House said this week. About 750,000 civilian employees of the defense department may also be furloughed one day a week.

Nationally, the cuts, known as sequestration, may slow the economy’s expansion, according to the median forecast of economists surveyed by Bloomberg last week.

Bond investors have shown little concern. Ten year general-obligation bonds from Virginia, which has a top credit rating, yield 2.02 percent, according to Bloomberg indexes, 0.04 percentage points less than other AAA rated bonds.

Still, the effects may be more severe in the state than elsewhere. The federal government awarded $54.6 billion in contracts in Virginia in the 2012 budget year, according to Bloomberg Government data.

The government spent $7.8 billion on civilian defense employees in Virginia in 2012, more than in any other state, according to the House Armed Services Committee. That’s 57 percent more than was spent on employees in California, the next ranked state.

‘Very Bad’

McDonnell said sequestration may force the state into a recession. “It’s going to be very bad for Virginia,” the governor said in an interview.

Stephen Fuller, an economist with George Mason University in Arlington, Virginia, estimates the budget cuts will slow the state’s economic growth, though not enough to cause a recession. The effects will take months to be felt, he said.

“It’s going to take the fizz out of the economy and push back the full recovery another year,” Fuller said.

At the end of last year, 5.5 percent of the state’s residents who wanted work couldn’t find it, compared with 7.8 percent nationally, according to the U.S. Labor Department.

Virginia Furloughs

About 90,000 defense employees could be furloughed in Virginia, resulting in $648 million in lost wages over the next seven months, according to the White House. Work on 11 ships in Norfolk may also be shelved.

That may hurt Hampton Roads, the tidewater region of shipyards and military bases from Virginia Beach to Newport News near the Atlantic Coast. James Koch, an economist at Old Dominion University in Norfolk, said the region may lose 40,000 jobs over the next two years.

“We’d be talking about duplicating the effects of the Great Recession,” he said. “The effects would be felt across the region really by everyone.”

Obama used the backdrop of the shipyard of Huntington Ingalls Industries Inc. (HII:US) in Newport News yesterday to emphasize the effect of cuts on defense jobs.

Hazelwood, 57, the submarine worker, said she has worked at the shipyard for 13 years and is worried about her future.

“We’re very concerned,” she said. “It affects all of us. We’re middle class and we really take pride in what we do.”

Virginia Suburbs

There are similar worries in the Virginia suburbs of Washington, where companies including SAIC Inc. (SAI:US), Booz Allen Hamilton Holding Corp. (BAH:US) and Northrop Grumman Corp. (NOC:US) have offices. The region accounted for three-quarters of the federal contract spending awarded to the state in 2011, according to the Virginia Economic Development Partnership, a state authority that promotes business.

At the Infiniti car dealer in Tyson’s Corner, the majority of customers work for defense contractors or the government, said Young Park, a sales manager. Sales slipped in February from a year ago, he said. Customers also are delaying repairs.

“We didn’t think it was going to affect us as much as it did,” said Park, 40. “They’re delaying making decisions until they see exactly what will happen.”

That’s what McLaughlin, 59, of Falls Church, is doing. After calling off plans for Costa Rica, she decided to save money by driving to Florida to fish with her husband, who consults for defense agencies.

“There’s a huge, red question mark,” she said. “People are worried. They’re anxious and they’re angry.”

Darby Colwell, 67, a retired teacher who lives in Falls Church, outside Washington, earns extra money editing reports for companies hired by the Department of Homeland Security. Her work has already dried up.

“It all trickles down,” she said.

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; David Lerman in Washington at dlerman1@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net; John Walcott at jwalcott9@bloomberg.net


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