Strong federal ties leave Md. vulnerable to sudden cuts

Looming federal budget cuts make a whole lot of Marylanders nervous because a whole lot of Maryland depends on Uncle Sam for a paycheck — directly or indirectly.

More than 300,000 Maryland residents work for the federal government, according to the state Department of Business and Economic Development. That's one in every 10 employed adults in the state. And that's just the start.


Maryland is one of the nation's top recipients of federal spending on goods and services. Those billions of dollars supported about 230,000 jobs here at federal contractors and subcontractors in 2010, the state economic development agency estimated.

The state is also one of the biggest beneficiaries of federal research-and-development dollars. The Johns Hopkins University regularly pulls in more than $1 billion a year in such funding, outranking all other academic institutions since 1979. (Not coincidentally, it's also one of the state's largest employers.)


Add the local governments that rely on federal grants, the hospitals that take Medicare payments and all the businesses that stay in the black thanks to federal workers buying groceries, gas and other items of daily life, and it's hard to tell who wouldn't feel some effect from cuts that could begin as soon as January.

According to the Census Bureau, D.C., Virginia and Alaska are the only states that receive more federal money per person than Maryland.

"We are utterly dependent on federal spending," said Richard Clinch, director of economic research for the University of Baltimore's Jacob France Institute.

If Congress can't agree on a way to reduce budget deficits, the automatic, across-the-board cuts known as sequestration will start Jan. 2. That will mean $109 billion in reductions to military and domestic spending squeezed into the rest of the fiscal year.


The state Board of Revenue Estimates believes sequestration could slash $2.5 billion from residents' collective wages.

"Virginia and Maryland are in the eye of the hurricane, the typhoon and the … tornado," said Arnold Punaro, a retired Marine Corps major general who analyzes federal budget and defense policy. "That's basically what the sequester is going to do. It's going to level this area, without question. There's no getting around it."

Even if the plug is pulled on sequestration, government contractors expect reductions in procurement spending, which ballooned in Maryland for most of the last decade but has leveled off in the last few years.

Some contractors have been pulling back for a while now. Bethesda-based defense contractor Lockheed Martin employs just fewer than 8,000 workers in Maryland, down from about 9,300 in 2008. Hundreds of Lockheed executives took buyouts in 2010.

And Northrop Grumman's Linthicum-based electronic systems sector is into its third round of reductions in the past two years.

The company blamed cost pressures when it announced recently that it would cut up to 350 jobs, largely at Baltimore-area locations. The division plans to offer buyouts, with layoffs to follow early next year if it doesn't get enough volunteers.

But preparation for the sequester is tricky when no one knows exactly which programs will feel the brunt of the budgetary belt-tightening.

"Obviously, the less uncertainty, the better," said Tom Brown, director of business development for Smiths Detection in Edgewood.

The company, part of the U.K.-based Smiths Group, is at a critical stage in its development of chemical-biological-protective shelters for the military. The units are mobile emergency rooms, suitable for war zones or the aftermath of a natural disaster, and they've just moved from testing to production.

The Army and Army National Guard have requested about 1,300 of the units, but so far just 111 are funded, Brown said.

The federal fiscal year started Oct. 1, but Congress hasn't agreed on a proper budget — just a continuing resolution that temporarily extends funding for the government through March 27.

"The program is now at a point where it should be ramping up in production, and that's what we anticipate," Brown said. "But with continuing resolution, with sequestration, it puts some uncertainty into exactly how, when and if that will happen."

Smiths Detection is a standard defense contractor, but Maryland has plenty of less traditional examples.

Take BreakAway Games in Hunt Valley, for instance. It started as an entertainment-game company nearly 15 years ago, but was immediately pulled into the Defense Department's orbit.

CEO Doug Whatley knew someone working for a big contractor, and the contractor needed someone to turn a board game into a computer game.

These days, BreakAway's products — largely instructional — include multiplayer medical training and crisis management games for the Army. But the company, whose customer base was once nearly 100 percent government, has spent the last several years diversifying beyond the feds to prepare for the budget crunch.

"Now … closer to 50 percent is government," Whatley said. "The commercial market is beginning to catch up to the government in terms of using games for training, so it was natural that that market was growing, but the second [reason] is, we all saw this [budget problem] coming several years back."

Amid the worry, there's some hope.

Maryland's economic development officials argue that the state's focus on high-tech contracting and intelligence — the National Security Agency, and other organizations — will help it avoid the deepest cuts.

Defense Secretary Leon E. Panetta told Naval Academy graduates in May that the military would "protect investments in new capabilities" such as cybersecurity and unmanned systems, both of which are Maryland specialties.

Mike Hayes, a retired Marine Corps general, heads the state's office of military and federal affairs.

"If there are significant cuts, we will suffer like everybody else," he said. "But not nearly as significantly as others might."

He's not alone in such optimism. The University of Maryland, Baltimore County's cyber security business incubator has grown from five companies to 25 in the last year and a half.

Now the university is launching a government contracting institute with consultant TargetGov to help those startups — and anyone else — battle for a piece of the increasingly competitive federal budget.

"While all of us in Maryland have some concerns about what will happen with the government budget and government spending, our belief is that cybersecurity is an area where the federal government will continue to spend," said Ellen Hemmerly, executive director of bwtech@UMBC, the university research park that includes the cybersecurity incubator. "The problems are growing; the need is growing."

But for the big government contracting firms, anxiety's the word. They're lobbying Congress. Their trade group, the Aerospace Industries Association, is funding studies forecasting layoffs in every state (115,000 jobs in Maryland alone). There's even an association-designed website urging the public to get their elected officials to "stop the clock" ticking down to Jan. 2.

"We're seeing it across the board in all of the big defense contracting primes," said Whatley of BreakAway Games. "They are expecting just a cold winter coming."


Considering that half the biggest employers in Maryland are either federal agencies or contractors, the state has its own challenges ahead.


Clinch, the University of Baltimore economist, expects jobs to be saved if sequestration is avoided. But with federal spending likely to remain austere in the short- to medium-term, he doesn't foresee strong expansion in the state's economy.

"Maryland's economic growth is entirely dependent going forward on our ability to diversify away from the federal spending that has served us quite well for over two decades," he said.


By the numbers

The federal government spent $42 billion in the Baltimore metro area in 2010, from salaries to procurement to Social Security. Here's the breakdown:

Anne Arundel County: $8.2 billion

Baltimore: $17.1 billion

Baltimore County: $9.2 billion

Carroll County: $1.1 billion

Harford County: $3.1 billion

Howard County: $3.4 billion

Source: U.S. Census Bureau