Defense spending in Virginia: How deep will cuts be?

VIRGINIAN-PILOT INVESTIGATION
War has been good to Hampton Roads. Last year, more than $12 billion in contracts fed the region and helped make Virginia the No. 2 state for defense spending. But defense cuts loom, and contractors and economists are concerned about what that could mean for Hampton Roads.

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A block south of the busy auto dealerships and fast-food franchises on Military Highway in Chesapeake, an 80,000-square-foot building sits on a side street in an industrial park.

Most people looking for a new car or a burger, a minute away, would never suspect it’s there, much less what goes on inside.

Small Navy patrol boats, Humvees and black, armor-laden SUVs, like those in movies, are brought by tractor-trailer into the hangar-like facility. There, BAE Systems Inc. installs and tests prototype communications devices in them for U.S. special operations forces, the Navy and an array of other government agencies.

Since Sept. 11, 2001, the facility has grown from a handful of employees to nearly 250.

Many are former military personnel who may have once used equipment similar to what they now help perfect. Others are engineers or programmers, busy at work stations adorned with coils of wire and assorted electronics gear.

BAE Systems, one of the world’s largest defense contractors, is one of thousands of such firms operating in Hampton Roads. The region is so thick with contractors it’s known by some as “Pentagon South.” They’re vying for contracts that are part of a requested Pentagon budget worth $708 billion . Virginia – along with California and Texas – is one of the Big Three states for Department of Defense expenditures. In 2009, it was No. 1 in the nation in total defense spending, surpassing even California.

In terms of defense-contracting dollars, Virginia ranked second only to California. Quite naturally, Hampton Roads gets its share.

The four congressional districts that represent South Hampton Roads were awarded more than $12.5 billion in defense contracts in 2009, federal figures show.
But the defense landscape is shifting.

In a speech last spring, Defense Secretary Robert Gates laid out his case for why business-as-usual at the Pentagon must end.

“The attacks of Sept. 11 , 2001, opened a gusher of defense spending that nearly doubled the base budget over the last decade ,” he said. “… Given America’s difficult economic circumstances and parlous fiscal condition, military spending on things large and small can and should expect closer, harsher scrutiny. The gusher has been turned off, and will stay off for a good period of time.”

In early January, Gates called for $78 billion in defense cuts; later the same day, President Barack Obama signed off on the closure of the Norfolk-based Joint Forces Command, which will mean a loss of roughly 1,900 jobs.

“The canary has died,” said E. Dana Dickens III, president and CEO of the Hampton Roads Partnership, a regional economic development organization.
When the partnership was founded in 1996, military/federal spending accounted for roughly 26 percent of the local economy. Today, he said, it’s “north of 45 percent.”

“There’s a wake-up call, that the region needs to diversify our economy,” Dickens said.

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Defense contractors and their facilities are so much a part of the local landscape as to seem virtually invisible.

“It’s like the layers of an onion,” said Chris Philbrick, vice president of marketing at ADS Inc., or Atlantic Diving Supply Inc., a roughly $1 billion-a-year defense-contracting firm based in Virginia Beach. “For every large defense contractor, there are hundreds of small ones.”

They range in size and service from huge, well-known companies such as Northrop Grumman Corp. and Lockheed Martin Corp. to a Norfolk-based unit of Flowers Foods Inc., which makes bakery and cereal products, and Jo-Kell Inc. of Chesapeake, which supplies shipboard electrical systems. Even Landmark Media Enterprises LLC, owner of The Virginian-Pilot, publishes base newspapers under a defense contract.

Together, defense contractors pack an economic wallop.

Procurement contracts in the region totaled more than $8.3 billion in fiscal year 2009, according to the Hampton Roads Planning District Commission. Toss in other defense spending in the area, including salaries/wages as well as retirement/disability payments, and the Pentagon’s contribution to the local economy came to nearly $14.5 billion.

Of course, not all that money stays in Hampton Roads. When a contractor such as Northrop Grumman, for example, gets a large award for work on an aircraft carrier, its expenditures will be spread across a number of years and will include purchases of services and materials from companies outside of the region and the state.

Tracking defense contracting isn’t easy. An array of sources offer information , and their numbers don’t always align .

Since its launch in 2007, however, USAspending.gov has become the government’s showcase for user-friendly, publicly accessible federal spending data.
It presents a good picture of how many defense-contracting dollars have been committed to the region and how that spending has grown in recent years.
Defense contract awards for work performed in Congressional Districts 1, 2, 3 and 4 – which cover Hampton Roads but extend elsewhere in Virginia – grew 32-fold between fiscal years 2004 and 2008, from $421.7 million to more than $13.5 billion.

In the past two years, the totals began to slide – to $12.6 billion in 2009 and $11.8 billion in 2010.

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ADS is one company whose revenues soared as defense-contracting dollars poured into the region.

Its roots go back to the 1980s, when it began as part of Lynnhaven Dive Center. “SEALs were coming in and buying their own stuff,” Philbrick said.

The company soon began to compete for – and win – defense contracts.

ADS was spun off as a separate company in 1997. Its CEO is Luke Hillier, whose father, Michael, founded Lynnhaven Dive Center. Its business has grown at a nearly incomprehensible rate, climbing from $18,380 in contract awards in 2005 to $1.08 billion in 2010, according to USAspending.gov data.

For the past four years, ADS has been the No. 1 defense contractor in the 2nd District – in terms of defense contract awards – eclipsing much larger and more nationally prominent contractors.

Some of ADS’ recent success is the result of a massive contract announced in January 2008. It lets ADS and four other firms compete for work worth up to $4 billion over as many as five years.

Yet even before winning that contract, the kinds of products in which ADS specializes – such as boots, socks, scopes, night-vision and infrared equipment, cold-weather and flame-retardant gear – positioned it to capitalize on the wars the nation is fighting in Iraq and Afghanistan.

The Defense Department is moving away from large programs that focus on aviation or other expensive platforms, to equipment and technology to protect the individual soldier, Philbrick said. “That’s our core business.”

While ADS ships massive amounts of supplies to U.S. troops in Iraq and Afghanistan, it is not a manufacturer, but what Philbrick calls a “value-
added distributor,” a kind of buyer for the Pentagon.

Years ago, if the Pentagon needed, for example, a flame-retardant glove, it would design and develop it itself, buy thousands of them and stockpile them in government warehouses, Philbrick said.

Today, it’s faster and more economical to buy “off-the-shelf” products on the commercial market.

ADS offers the Defense Department and government agencies one-stop-shopping for equipment and logistical support, buying the products that meet the necessary standards and then “kitting” – or assembling – them for shipping.

The company has an 85,000-square-foot kitting operation off London Bridge Road in Virginia Beach and employs more than 400 people. And, Philbrick said, it expects continued growth, so it’s building another kitting operation.

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