How Sequestration Affects the D.C.-Area Economy

A region that was largely insulated from the recession could feel big impacts from federal budget cuts.
by , | December 7, 2011
 

For full coverage of sequestration's impact on states and localities, click here.

For years, Washington, D.C.-area residents have enjoyed the fact that their region has been resilient to the economic downturn that has plagued the rest of the country.

This year alone, the region celebrated the news that greater Washington, D.C., has overtaken Silicon Valley as the wealthiest part of the country. It currently has the lowest unemployment rate among the country’s largest metro areas. It's one of just two metro areas that has seen housing prices increase lately. And a recent Gallup study revealed that Washington is the only place where residents generally believe the economy is improving.

Come 2013, though, residents may have a different tone. In an ironic twist, Washington, D.C. is poised to feel the effects of federal belt-tightening more than anywhere else in the country.

“We will feel this hard in this region,” Jim Dinegar, president and CEO of the Greater Washington Board of Trade, said to his members at a meeting last week to discuss the issue. “That’s to be expected.”

Starting in January 2013, the federal government will make $1.2 trillion in spending cuts over a nine-year period. The cuts, scheduled to be split evenly between defense and non-defense discretionary spending, are the automatic result of the congressional super committee’s failure last month to find any deficit reductions through spending cuts or revenue increases.

The Washington region's close ties to the federal government has helped provide it with a degree of stability during the economic downturn while much of the rest of the country suffered. Now, businesses and local governments are trying to figure out what to expect when the federal spending that the economy has relied slows down.

When stacked up against the states, the federal government spends more money per capita in D.C. than anywhere else – more than $100,000 per resident – according to 2010 Census figures. That analysis includes federal spending on salaries, grants, procurement and retirement payments, among other forms of spending. Neighboring Virginia and Maryland are also high on the list, especially when it comes to government salaries and procurement spending.

Nearly 13 percent of the Washington, D.C.-area workforce is federal employees, according to the Greater Washington Board of Trade. Many others are employed by area contractors such as Lockheed Martin, Northrop Grumman and BAE Systems who work for the government.  Federal procurement in greater Washington was $78.9 billion in 2010, according to the board.

The trickle down effect of cuts would affect a variety of sectors, especially the hospitality and leisure industry, which employ nine percent of the area workforce. Any impact on that industry is a concern, since half of D.C.’s sales tax revenue is generated by that sector, said D.C. Chief Financial Officer Natwar Gandhi. Hotel operators and event planners say they're especially worried about the impact of an executive order signed in November that orders agencies to reduce travel, technology, printing, fleet and promotional item costs by at least 20 percent in the 2013 fiscal year.

Ronald Reagan Washington National Airport and Washington Dulles International Airport will experience an estimated 2 to 4 percent decrease in outbound passengers due to that order, according to Andrew Rountree, chief financial officer of the Metropolitan Washington Airports Authority, a quasi-public agency. That’s a concern, since travelers to the D.C. area – many of whom come here on federal government business – spend $1.9 billion annually on lodging, said Solomon Keene, president of the Hotel Association of Washington, D.C.

Or, take the case of the local commercial real estate market: government leasing accounts for 46 percent of all office space leased in D.C. this year. Local real estate leaders say given that massive footprint, any cutbacks by the feds is a source of concern for their sector.

The D.C. government receives about $2.3 billion in annual federal funding, but because sequestration exempts Medicaid and some programs for the poor from cuts, only about $769 million annually would be affected, Gandhi said. Of that, leaders can expect cuts of about $70 million annually, but that's a relatively small sum: less than one percent of the city budget. The bigger issue is the larger effect the sequestration would have on D.C. and the surrounding areas' revenue if the economy slows down.

“Overall, we have great concerns about contractions at the federal level,” Gandhi said. “What the federal government does in terms of freezing salaries, no promotions, no hiring, the substantial contraction on federal contracting – all that would have an impact on us.”

In September, ratings agency Moody's gave D.C. a negative outlook, citing the impact that federal budget cuts could have on the local economy. “We expect that efforts to reduce the federal deficit, including federal workforce reductions and entitlement cuts, could have an outsize impact on the District and its finances,” Moody’s wrote. The city still has a strong Aa2 rating from Moody’s, which is the third best available.

Nearby localities find themselves in a similar position but are trying to put a positive spin on the situation. Fairfax County, Va., a hub for contracting, is still projecting 2 to 3 percent revenue growth in FY 2013, said Fairfax County CFO Susan Datta. If the federal government can find efficiencies by consolidating their contracting work with companies already clustered in the area, her community may actually benefit, Datta said.

In Montgomery County, Md., local leaders are monitoring the situation since the county is home to many federal agencies such as the National Institutes of Health, the Nuclear Regulatory Commission, and the National Institute of Standards and Technology. Montgomery County Budget Director Jennifer Hughes said the county’s tax revenue comes primarily from its wealthiest taxpayers – a category that generally excludes federal employees – so she’s hopeful that the impacts to her county won't be so drastic.

Meanwhile, in D.C., Gandhi said his office is drafting various contingencies for its budget based on models of different types of federal cuts, since his city will pass a budget before the feds are likely to finalize all their decisions about sequestration. This week, he will travel to New York City to meet with Wall Street advisors to discuss an upcoming bond issue. He'll make the case that the city's finances are sound and its budget will remain balanced, regardless of what happens at the federal level.

“There is nothing we can do about what’s going on on [Capitol] Hill,” Gandhi said. “But what we can do is mange our resources, our budget, and our finances in light of the constraints put on us by federal budget.”

“My sense is that the should be able to manage it," Gandhi continued. "Because we have to manage it.”

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