Budget deal marks end of Maryland's federal spree

Like a sheep contemplating the barbershop, Maryland can draw some consolation from the Washington deal that reverses a decade-long bonanza of federal spending.

Federal trimming was going to happen sooner or later. Now the state that relies on Washington to power a third of its economy gets a small glimpse of how it might work.

Much of the pain is postponed. The biggest cuts won't come for years.

At the same time, Maryland has avoided the shock that would have come with default. Offered a choice between a major customer downsizing and a major customer going bankrupt, most businesses would take the former.

"The good news is that we've avoided national economic catastrophe," said Richard Clinch, an economist at the University of Baltimore who closely follows Maryland and its neighbors. The bad news, he said, is that "the out years of this deal are going to suppress growth in Maryland. We are going to have to live on our wits rather than federal spending."

Maryland's massive reliance on federal dollars means that even small changes in the U.S. budget mean large consequences for the state that mostly surrounds the District of Columbia. The changes announced Monday are not small.

Thanks to two wars, Census Bureau hiring and a big federal stimulus package, in recent years Washington has been spending almost a quarter of a billion dollars in Maryland every day.

That comes to $15,000 annually for every adult and child who lives in the state, according to figures gathered by the Maryland Department of Planning. Since 1990, Maryland has collected half a trillion dollars more in federal spending than it has paid in federal taxes, according to the Economist magazine.

How much Maryland's federal revenue will shrink — as well as when and where — is far from certain. But there is no new tax revenue in the debt-ceiling deal that might have reduced the need for large cuts. Both stages of spending reductions in the pact take direct aim at defense while largely sparing social programs.

"From a Maryland perspective, the best solution would be adjustments made to Social Security, Medicare and Medicaid," the federal retirement and health care programs, said Anirban Basu, head of Sage Policy Group, a Baltimore economic consulting firm. "That would spread the pain of those adjustments across the country and not just disproportionately impact Maryland's economy."

But that's not what's happening. The deal's first stage cuts $350 billion in defense spending over a decade, with most cuts postponed until later. The second stage depends on a bipartisan committee that will meet this fall. But a failure by the committee to reach a deal — a likely outcome, given the rancor in Congress — would automatically trigger new cuts of $1.2 trillion after 2013, with fully half of them in defense.

Maryland's defense industry might not be what it was at the end of the Cold War, but the state still relies heavily on aerospace companies such as Lockheed Martin and Northrop Grumman as well as hundreds of smaller defense contractors. For fiscal 2009, the most recent year for which figures are available, defense contracts here came to $18.5 billion.

Perhaps Maryland's decline as a manufacturing economy means the state will suffer fewer factory layoffs during this defense downturn than it did in the Cold War aftermath of the early 1990s. Most hardware made by Northrop and Lockheed is put together elsewhere, notes Daraius Irani, director of applied economics at RESI, Towson University's consulting wing.

At the same time, the Pentagon has been moving thousands of jobs to Maryland as a result of base realignment, economists note. And when government budget-cutters review the nation's defense needs, they could deem electronic eavesdropping and cybersecurity, both Maryland specialties, more crucial to national security than, say, Lockheed Martin's F-35 fighter.

But with more than $2 trillion in federal spending cuts on the table, Maryland's economy is vulnerable in more sectors than just defense.

Hundreds of millions of dollars in federal research grants from the Bethesda-based National Institutes of Health for Baltimore's critical medical industry could be at risk. While Medicare benefits are exempt from the second-stage budget trigger, Medicare reimbursement for doctors and hospitals doesn't seem to be. That could add to pressure on hospitals.

In any event, the federal stimulus grants that kept the state above water for two years are history.

"You're already seeing some of the cutbacks affecting Maryland," Irani said. "You can see it in the jobs numbers."

Federal contractors of all kinds see the writing on the wall. In the short term, agencies and companies that had been hoarding cash in preparation for a federal shutdown might now start hiring and paying vendors. But contractors see the budget picture for the next decade more clearly, and they're not going to wait for years to get ready.

"All of them are going to tell you that they are expecting a bloodbath," Clinch said. "They are not hiring. They are scaling back and they are preparing for an end to the good old days."

The scheduled expiration in 2012 of President George W. Bush's tax cuts would deliver significant new federal revenue and lessen the need for program cuts. But it's far from certain that will happen. And federal contractors won't wait to find out.