Maryland braces for mandatory federal spending cuts

Looming federal budget cuts the nation faces in January could strike a body blow to Maryland's economy, taking $2.5 billion in personal income out of residents' pockets and crimping social programs in health and human services, education, and workforce development, according to a recent state report and interviews with regional economists.

In a memo to Gov. Martin O'Malley last week, the state Department of Budget and Management wrote that the cuts would reduce federal grants to state and local governments by about $150 million; cut defense and civilian jobs in Maryland by at least 12,600; and ultimately decrease annual tax revenues to the state by $200 million.


"Those defense agency people, when they cut back their spending, the first thing they cut back is going out to dinner," said Daraius Irani, director of the Regional Economic Studies Institute at Towson University. "Those busboys and waiters might be living on the margins already."

While much of the attention has been focused on the impact of spending cuts on defense contractors, myriad social services for the poor, for education and for workforce development also would be affected.


Most federal agencies would face an automatic budget reduction of 10 percent.

A broad range of agencies and groups — from the Pentagon and defense contractors to social service providers — have made the case on Capitol Hill that the so-called "sequestration" would damage the economy. Maryland is particularly vulnerable, with 5.6 percent of jobs in the state tied directly to the federal government — or more than double the national average of 2.2 percent.

While some lawmakers are trying to rescind the cuts, other observers call the sequestration a wake-up call for Maryland, with its heavy reliance on federal spending.

Maryland is expected to receive $9.3 billion in federal funding in the next fiscal year, making the $150 million worth of cuts only about 2 percent of the total.

But the cuts would have an impact on the poor and sick, young children, and the under-employed or unemployed.

For instance, $7 million from the state's Head Start early-childhood learning program would be eliminated, resulting in the loss of 233 jobs and denial of service to more than 1,100 children, according to a state-by-state analysis of sequestration cuts in July by Sen. Tom Harkin, an Iowa Democrat who chairs the Senate Appropriations subcommittee on Labor, Health and Human Services, and Education.

Nadine Owens Burton, acting executive director of the Maryland Head Start Association, said in Prince George's County, the program serves 932 children, but has identified more than 3,000 children in poverty who would benefit from the service.

"The impact of sequestration would be powerful," Burton said in an email. "Their funded enrollment would be significantly reduced and thus even [fewer] children would be served."

Other cuts would include:

•$920,000 from HIV prevention and testing, with 23,000 fewer people tested.

•$4.3 million from the low-income home energy assistance program.

•$2.5 million from substance abuse treatment, with 3,560 fewer admissions to programs.


•$15.4 million in education grants to local schools, with 212 jobs lost and 13,000 fewer students served.

•$3.2 million to Job Corps, with 102 fewer at-risk youth served.

The region — spanning from Maryland through Washington to Virginia — is particularly reliant on the federal government. It accounts for 21 percent of federal spending on civilian payrolls and procurement, but has 9 percent of the U.S. population, said Stephen Fuller, director of George Mason University's Center for Regional Analysis in Alexandria, Va.

Fuller called the threat of sequestration a "reality check" for the Maryland economy, which has grown to depend on federal spending over the last decade and needs to diversify.

"Maryland is in a good position to reposition its economy for the future," said Fuller, who issued a report in July documenting the potential impact of the cuts on the U.S. economy. "The handwriting is on the wall; it needs to do this."

In Fuller's report, he found that the sequester would reduce the nation's gross domestic product by $215 billion, decrease personal earnings of the workforce by $109.4 billion and cost the U.S. economy 2.14 million jobs. Maryland would be the fifth-hardest-hit state, losing as many as 114,000 defense and civilian jobs, according to Fuller's analysis.

The back story on the sequester can be found on Capitol Hill.

The sequestration measure was included in last year's Budget Control Act to compel the president and Congress to act to resolve the budget crisis by the end of this year. Congress approved the sequester last year to pressure the so-called supercommittee created by the act to reach a budget deal.

But the panel never came close to an agreement, and now Republicans and some Democrats are pressing to rescind the automatic cuts.

The deal called for $1.2 trillion in cuts that would apply to mandatory and discretionary spending from next year through 2021, with exceptions or limited reductions for Social Security, Medicaid, federal and military employee pay, and veterans and Medicare benefits.

But with a presidential election in early November, many worry that Congress and President Barack Obama won't find a way to compromise on balancing the budget. There's a possibility that thousands of federal workers and defense contractors could get pink slips just days before the election, in order for companies and agencies to comply with the federal WARN notification requirement for mass layoffs.

Towson's Irani said uncertainty and brinksmanship are slowing down the U.S. economy. Already, he said, defense contractors have slowed or stopped hiring in Maryland because they are unsure of what might happen on Jan. 2, when the cuts are supposed to take effect.

Richard Clinch, director of economic research for the Jacob France Institute at the University of Baltimore, said Maryland has benefited from federal spending for years. He estimated two years ago that as many as one in five jobs in the state were tied directly or indirectly to federal government spending.

"This thing that has protected the Maryland economy for 20 years now is coming back to bite us," Clinch said. "This whole idea of federal downsizing, which is inevitable, will have a much bigger impact on Maryland in the future."


Effect on Md.

The potential impact on Maryland if automatic federal budget cuts go into effect in January:

•$2.5 billion losses in wages and salaries from defense, civilian and contractor workforce

•12,600 lost jobs and potentially more than 100,000 in coming years


•$200 million annual revenue losses for state government from lower tax receipts


•$150 million reduction in federal funding to state and local governments.

Source: Maryland Department of Budget and Management

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