September 27, 2011

Federal Spending in Maryland Declines

Federal spending in Maryland dropped by nearly $1.4 billion last year — a setback for a state economy built largely on Washington dollars and a likely omen, analysts say, of further austerity to come.

The pullback, which was revealed in census figures released Tuesday, came largely in government contracting and individual assistance such as unemployment benefits and Medicare payments. State officials attributed the decrease to the tapering off of funds from stimulus programs as well as for construction at recently expanded Maryland military bases.

Federal funds flowing to Maryland dropped 1.4 percent during the 12 months that ended last September, accounting for inflation. That's the steepest decrease since 1996 and could be the start of a long slide as Washington focuses its attention on reining in budget deficits.

"This is a prelude," said Stephen Fuller, director of the Center for Regional Analysis at George Mason University in Virginia.

That's an unpleasant thought for many in Maryland, where a concentration of federal contractors, agencies and employees makes the state one of the biggest beneficiaries of the federal checkbook. Per capita, the state ranks third after the District of Columbia and Virginia for dollars going to contractors and fourth for total spending.

While spending in Maryland fell last year, it rose slightly nationwide — just more than half a percent, according to the census.

The state has long benefited from its proximity to Washington. But the last decade was especially fruitful. In inflation-adjusted dollars, federal spending in the state increased from $59 billion in 2001 to nearly $98 billion in 2009 — pumped up by the war on terrorism, the military base realignment known as BRAC and stimulus spending. In 2009 alone, spending jumped almost $19 billion, the Census Bureau said.

Federal contracting, one piece of that pie, more than doubled in Maryland from 2001 to 2009, to nearly $28 billion, the Census Bureau said.

And that doesn't account for the massive intelligence operation at Fort Meade, the National Security Agency, where even the budget is top-secret.

But now the name of the game is belt-tightening.

"It's sort of the capping out of this federal spending bubble that propelled the Washington region and benefited Maryland and Virginia more so than other states," Fuller said.

Close to half of Maryland's federal contracting is funded by the Department of Defense, which could see its budget cinched substantially as part of deficit-reduction negotiations.

Travis Sharp, a fellow at the Center for a New American Security, said the cuts that have been proposed would take the agency's $530 billion "base" budget — which doesn't include the wars overseas — to somewhere between the mid-$400 billion and $500 billion.

According to Sharp, that would likely mean fewer contracts and fewer civilian employees — both of which Maryland has in abundance. But he does see some good news for the state, economically speaking: International instability should give intelligence workers some job protection, he said, and cybersecurity — defending computer networks — is the new hot thing. Fort Meade has both.

The Army base in Anne Arundel County and Aberdeen Proving Ground in Harford County also gained thousands of jobs and billions of dollars in contracting power through BRAC, an interstate relocation completed this month.

"That's why I remain somewhat optimistic that even in this tough environment. … Maryland will weather it better than others," said Mike Hayes, a retired Marine brigadier general who directs the Office of Military and Federal Affairs at the state Department of Business and Economic Development.

The Census Bureau's annual measurement of federal spending is exhaustive, but it's not always the final word. The agency revised its figures for the 2009 fiscal year to show less contracting activity than it originally reported in Maryland but about $4 billion more in overall spending.

Last fiscal year, money earmarked for purchasing goods and services dropped nearly 5 percent, as did funding for grants, while direct payments such as unemployment benefits fell 6 percent, the Census Bureau said Tuesday. Overall spending didn't fall as steeply because wages and salaries for the federal workforce in Maryland increased by $1.6 billion.

About 7,000 more federal employees were working in Maryland in September 2010 than a year earlier, according to the Labor Department. The increase is at least partly due to BRAC.

The Johns Hopkins University and its Applied Physics Laboratory, which together land more research-and-development funding than any other academic institution in the nation, reported an increase of more than 9 percent in federal R&D money last fiscal year.

But Scott L. Zeger, Johns Hopkins' vice provost for research, expects that the major agencies funding its research — such as the National Institutes of Health and NASA — will soon see cuts of perhaps 2 percent or more. So Hopkins is expanding its horizons. It's collaborating with venture capitalists and companies much earlier in its research-and-development efforts in the hope of translating more of its discoveries into products and services, and more quickly.

"We're bringing them into the planning phase so as they listen to what we're trying to do, they can help us understand what the market needs," Zeger said. "While it's a difficult time, I think difficult times generate innovation."

Defense contractors are also heading down new avenues. Bethesda-based Lockheed Martin Corp. is working to increase its international sales from 15 percent of revenue to 20 percent, and on Tuesday it expanded its health care offerings by acquiring a California company that provides medical evaluation services to government agencies.

But Lockheed and others are also cutting back. One in four of Lockheed's executives took a buyout last year. Northrop Grumman Corp. — which, like Lockheed, is one of the largest private employers in Maryland — announced in May that it would reduce Baltimore-area employment by 500 workers through buyouts and layoffs.

Uncertainty about defense spending looms large.

"We really feel like it's incredibly important to Maryland's status as a top employer for high-tech jobs to avoid massive, across-the-board cuts in the defense budget," said Chris Williams, a Lockheed spokesman.

Fuller, the George Mason economist, thinks the effect of government cutbacks will accelerate over the next several years. But he doesn't expect they will be "bloody and wholesale."

What Maryland needs to do now, he said, is focus on areas of strength — such as biotechnology — that could flourish even when federal revenues do not.

"It's only reasonable to expect that the gravy train has come to an end, and we need to move on," Fuller said.