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Has Military Spending Peaked In San Diego?

We take a look at whether military spending has peaked in San Diego.
GUEST:Lynn Reaser, Chief Economist, Point Loma Nazarene

CAVANAUGH: San Diego's economy's been spared the worst the recession, with the help of billions in military spending. But the military lobby in San Diego is gearing up for a fight to keep the investments in this region. Lynn Reaser is chief economist with. Point Loma Nazarene university here in San Diego. Thank you for joining us. REASER: Thank you for having me. CAVANAUGH: Now, your report concludes that there are more than 300,000 jobs in San Diego, that are either indirectly or directly on related to military spending. REASER: The rest of the jobs are spread across a wide range, Alison. We see jobs in all of the various areas of defense contracting, electronics firms, software company, and also all the jobs that are related to these people who have employment, so people who do construction, retail stores, medical offices, and people who serve in restaurants and various other types of services. CAVANAUGH: So that's a significant proportion of our economy it dependent on that funding. $20 billion apparently, right? REASER: The direct amount of spending that comes into the region for payroll of various employees for retirees and veterans, and all the construction contracts, grants, we also receive a fair amount of spending from tourism that's linked to the military here. The large number of graduations that take place from the Marine Corps recruiting depot, that's 60,000 graduates this here, and all those family and friends will come here to see their graduations, and spend time in holingses, and various -- hotels and various other venues. CAVANAUGH: Has federal military spending in San Diego peaked? REASER: Nationally, it appears that defense spending has peaked for the current cycle. We do believe that San Diego has some important advantage, the whole review orientation toward the Pacific region, the emphasis on unmanned vehicles and weapons, some of the areas that San Diego has expertise in. But we have some peaking as well. CAVANAUGH: How much has military cushioned us from the full impact of the downturn? REASER: One of the areas we have seen some of the impact, many of the jobs are not reported in the official employment numbers, so the economy appears to be somewhat stronger than just looking at those employment and unemployment figures. The follow unemployment rate would be a half percentage point lower if we included the active duty personnel. CAVANAUGH: How wise is it to put so many eggs into one basket? Is it wise to be so dependent on this source of income? REASER: This is a military presence that has many dimensions. All the people in the bases, but also the contracts and subcontracts. A lot of these military contracts have spinoff effects, and potential in other markets, consumer applications. We're seeing unmanned weapons and transportation applications develop in those areas. CAVANAUGH: Is it true that it's going to become much more competitive though? As communities compete for these resources, San Diego has a housing markets, it's pretty expensive, will San Diego be able to hold onto what it has? REASER: The defense contractors will have to continue to demonstrate their competitive edge, leaning-edge technologies, they'll have to continue to rationalize their cost structure to be competitive. But in terms of the military's presence here, we have tremendous advantages. 2/3 of the nation's training space is within our region, and we also are in this prime spot as the Navy repositions its fleet to be the area of 16% on that Pacific region versus the 50% split we currently have vis-a-vis the other part of the world. CAVANAUGH: Military spending has been declining in the nation, but increasing in San Diego. We have had some powerful people in Congress -- we're just about to lose a second. We had Duncan hunter who stepped down, and his son is there, but he doesn't have the seniority of his father. Do you think we have the congressional clout to hang onto the resources? REASER: I think it will be important for the community it get behind the military here. We all have these very important partners now, working to be sure that we maintain that presence. But we are competing against some other regions in the country which are going to want to maintain their space as well. CAVANAUGH: Do you know which are the main competitors? REASER: Virginia is certainly one of them. CAVANAUGH: About half of the military spending is going to defense contracts; is that correct? REASER: Conference contractors. Small contractors, and all the dollars that are not related to retirement benefits, veterans' benefits, or direct payroll, about half of that goes into spending. CAVANAUGH: There was a chart in your report that does show that a lot of the contracts are contracts that were signed some years ago. So they're not new contracts. So is there maybe a concern that the region may not have new contracts to maintain that level of activity? REASER: There is certainly a risk that we could lose some contracts going forward. We have advantages in the areas that the Department of Defense is emphasizing as its new strategy, cyber security, all of the emphasis on unmanned vehicles and leading technology. We have some very important clusters that we could gain for, but the areas of budget cuts, we don't know exactly where those might fall. CAVANAUGH: I thinks a fairly insecure time, in that wee ending two wars, and we have thousands of people who are active duty, which would you say is the most vulnerable? REASER: The most vulnerable part is the contract spending. That is an area that is going to be up against some of the budget pressures that we see in Congress, are the budget control act that was passed last year already started to cut defense spending over the last ten years, and we're going to have to find somewhere to rein in spending for the country. Recently the more focus has been on these discretionary parts, which includes the defense area. CAVANAUGH: Susan Davis who is in the house service committee feels that the salaries will be probably the thing that is protected the most in the budget. So that does leave you to think well, the rest of the pie is going to be more at risk figure it shrinks. REASER: That probably is correct. CAVANAUGH: And the chamber of commerce is sending a lobbyist to Washington for the first time since 2005. Do you see any parallels at all between what happened in 2005 and what's happening now? REASER: There has been some talk about brack. That does not seem there's a near-term risk to the areas. But the lesson of the earlier period was that we need to support San Diego's comparative advantage, our expertise in many of these areas,and really try to work to defend our position here. We're much more diversified than we were in the last defense cutbacks, but the military has a huge footprint here. And many implications that we would want to preserve. CAVANAUGH: Well, do you think San Diego has made a big enough effort to diversify its economy so it isn't quite as dependent on military spending as it was back then? REASER: Definitely so. CAVANAUGH: In what way? REASER: We have a wide variety of companies in bio tech, telecommunications the healthcare industry, tourism continues to grow. So we have a quite diversified economy, and also we're much less dependent on large major corporations, a lot of small business, medium sized companies in various areas is very important driver, it's our most important economic industry in the San Diego area, and it's important that we retain that advantage. CAVANAUGH: So in your report, you mention that there's a lot of money going to be cut in the budget, and maybe we'll do okay with that, because of the mention -- the elements that you mentioned earlier that give us a head start, and an advantage. But what about this issue of sequestration? REASER: Well, there's a lot of question what sequestration really is. Basically last year when Congress could not agree on a way to reduce the budget did he have kit, there was a clause put in that would trigger automatically $1.2 trillion of cuts over the next decade, have to be born by defense. This was set to be so onerous that Congress would never accept it. Well, it turns out that Congress could not agree, and so if nothing is done, these automatic cuts will go forward on January 2nd of 2013. Everyone is worried about the fiscal cliff, and the impact on the economy. So hopefully Congress will avoid the chaos and the havoc that would be wrought by these automatic cuts. CAVANAUGH: So if San Diego is benefited disproportionately from military spending in the past, it might suffer disproportionately. REASER: That is definitely true of the CAVANAUGH: Okay. Wife heard various things from different people who really feel like it's just not going to happen. Is that it's more just a political gambit so that perhaps this is more of a false hammer hanging over San Diego's head. Would you agree with that? REASER: Well, it's important to realize that if Congress does nothing, sequestration or these automatic spending cuts will take place. And the consensus in Washington is that nothing is going to happen until after the election. So it's a very short timeframe, where they have to deal with not only the sparing bush tax cuts but these automatic spending cuts. So while we're assuming that the can will be kicked down the road a little bit, that Congress will avoid the automatic spending cuts taking place right away, no one knows exactly what might play out as we end this year. CAVANAUGH: And if that did go into effect, it's a 10% across the board, which might affect people's salaries, benefits, all of those things. REASER: Right. It's not clear at this point whether or not personnel would be exempted or not. It's not clear exactly how this will all take place, which is one of the worst things for companies to deal with certainly at this point. Defense contractors in many cases are just in freeze mode because they can't plan this scenario, and that's the worst kind of situation you want to have for businesses. CAVANAUGH: So defense contractors are the ones who are perhaps most affected by all these impending uncertainties. REASER: At this point, yes, they are. CAVANAUGH: Now, there's another element that you mentioned, the construction, the building boom on the bases had brought billions of dollars into this region. And I know you did a report about how much money was coming into San Diego with all the new building on bases. Where are we at in that boom now? REASER: We are probably past the peek point of the boom in construction spending, but it certainly has provided a major cushion for the downturn that we saw both in housing and commercial construction. So it came at a very good time and it was a combination of both defense department funds and some of the funds from the stimulus program for the Camp Pendleton hospital, came from the stimulus program. Fortunately, I think we're beginning to see some gradual recovery in housing, and some gradual resilience in commercial building. But a little bit of those backlogs from the military side is certainly welcome. CAVANAUGH: So the hospital I believe is still being built up there. So there are still some jobs. And I understand there's a few hundred million dollars still in the budget for construction, but that is another sign that in a sense that spending is on the decline. Do you as an economist feel like San Diego should be working to try to get more diversity so it's not as vulnerable to this particular source of funding? REASER: Well, more diversification is always good, but it'saus important to strengthen what we have. We have a comparative advantage for the military, they see a need for the region, so I think we work both sides. CAVANAUGH: And I understand this was the first year that you did this report; is that correct? REASER: Yes. CAVANAUGH: Are you going to be getting the contract for it next year as well? REASER: It was a two-year contract, so we're looking forward to doing it again next we're with the update, seeing how the numbers play out with the new defense department budget and also seeing the various clusters work. So it's a wonderful opportunity. We have some ideas already how to enhance the program and the report for next year. CAVANAUGH: And if you could predict, all the grants going up, up, up for the next few years, and you know you said holding steady is the key word, but do you feel like next year we might be seeing some declines? REASER: For 20 then, we basically see stability. We have the return of the Ronald Regan aircraft carrier in January which will help bolster the Navy's personnel numbers here. We believe the reserve counts will stay fairly steady, a little bit of attrition on the part of the Marines and the civilian workers. But I think San Diego the key word in the media term is probably indeed steady. CAVANAUGH: Thank you very much. REASER: My pleasure, thank you.

San Diego's economy has been spared the worst of the recession with the help of billions in federal military spending. But with inevitable cuts in defense funding ahead, the military lobby in San Diego is gearing up for a fight to keep the DOD's investments in this region. Has military spending peaked in San Diego, and is it wise rely so much on funding controlled in Washington, DC?