Potential furloughs, hiring freezes and other spending cutbacks to the region’s defense institutions could send an economic ripple effect through the Tri-Counties, according to economists and industry leaders.
The 2011 Budget Control Act aims to reduce the government’s deficit and will trigger $85 billion budget-wide spending cuts on March 1. The federal spending cuts, also called sequestration, are split between defense and non-defense programs over a seven-month span and call for a 13 percent reduction in defense spending.
As the Business Times went to press, Congress was still working on a deficit reduction plan to avoid the automatic budget cuts, and an alternative option seemed unlikely. But even if the sequester doesn’t kick in, Vandenberg Air Force Base in Lompoc, Naval Base Ventura County and tri-county defense contractors might still be forced to scale back their operations.
Vandenberg Air Force Base is one of the largest employers in the Tri-Counties with 6,857 workers. It has a $1.8 billion impact on Santa Barbara County, mostly in the form of salaries and wages, said Col. Brent McArthur, vice commander of the 30th space wing at Vandenberg. If the sequester doesn’t go through, Vandenberg will still cutback services such as routine maintenance, training and travel to protect its core business of launching rockets and missiles, McArthur said. But the base would not institute mandatory furloughs if Congress navigates around the automatic spending cuts.
“Our people are our biggest asset, so we plan not to do that,” McArthur said. “But we will do whatever we can to keep our core business running, which means we may have to cut back on infrastructure. … We may have to look at routine maintenance and those kinds of services that aren’t directly tied to our core mission, which is protecting the public.”
Travis Mack, the founder and owner of Saalex Solutions, said his company is preparing for the worst. The Oxnard-based defense contractor provides technical support to the Navy, Army, Air Force and NASA. While Saalex is better off than most defense contractors because of several large-scale contracts, it’s still looking to reduce its workforce and change its business model, Mack said.
“We continue to see the government shrinking and not exercising contract options, which impacts defense contractors like myself,” he said. “We have to look at ways to become more cost effective. We’re not doing as much business traveling and things of that nature, which further impacts the community. We’ve been given a clear signal that if we don’t change now, we’ll pay the price later.”
Santa Maria-based Quintron Systems’ hardware helps Vandenberg and NASA operations teams talk to each other during missile tests and rocket launches. A company such as Quintron won’t feel the federal budget cutbacks immediately but may have to cut back on some services and hold off on equipment upgrades, Quintron President David Wilhite said.
“There may be few jobs lost,” said Wilhite, adding that other companies may implement hiring freezes. “And every time a job in our industry is lost, it hurts because most people are in the higher end of the pay scale.”
If the sequester does start on March 1, the U.S. Naval Institute announced that it expects the Navy to furlough employees, who may be forced to work eight hours less per week. The institute is a private-sector research group.
This would mean the 20,000-plus employees at the Naval Base of Ventura County would see a 20 percent decrease in annual income. But furloughs wouldn’t happen immediately. The Department of Defense said it would give defense companies 30 days before mandating any unpaid leave. Furlough days could have a trickle-down effect on the local economy as federal workers put off large purchases and tighten their belts, said Bill Buratto, president and CEO of the Ventura County Economic Development Association.
“My supposition is that it will have ripple effect throughout entire economy,” he said. “People will buy fewer cars, purchase fewer TVs, there won’t be as many dinners spent in local restaurants — those kinds of things.”
Ventura County has a number of small- to medium-sized defense contractors and retired or ex-military “folk who are going to get crunched,” Buratto said. The Department of Defense also indicated that it would slow government payment to prime and other contractors. This could have a profound impact on cash flow for small-to-medium defense contractors, he said.
But the defense industry is just one faction of the public work force that could be impacted by federal cutbacks. The public-sector employment share in Santa Barbara County is about 23 percent, which means that the county will be impacted if federal workers are forced to take off one day a week, said Peter Rupert, the director of the UCSB Economic Forecast Project. It could result in anywhere from a 0.5 to 1.0 decrease in the county’s GDP, which has already been relatively flat over the last few years, he said.
“If the government cutbacks are seen as transitory, it won’t really change spending habits,” Rupert said. “But if people believe it’s a permanent reduction that will translate into their lifetime income declining, it will change how they spend.”
Funding for many federal programs is also projected to run out on March 27. If Congress doesn’t reach a deal to fund the government, it may face a partial government shutdown and permanent layoffs. “We want Congress to come together and stop the sequester,” Mack said. “If it does happen, I guarantee it will spur another recession.”