Arizona may need to diversify after boom in federal contracts

2013-08-31T00:00:00Z Arizona may need to diversify after boom in federal contractsBy Evan Bell Cronkite News Service Arizona Daily Star
August 31, 2013 12:00 am  • 

WASHINGTON — Federal contract spending in Arizona grew more than three times faster than the national rate over the past 20 years, according to a Cronkite News Service analysis of government data.

Between 1992 and 2012, the value of federal contracts in Arizona rose from $2.4 billion to $14.2 billion, a 491 percent increase. Total federal contract spending in the same period rose 158 percent, from $199.8 billion to $517 billion.

The growth in contracts outpaced overall growth of the state economy, with federal contracting rising from 3 percent of Arizona’s economy in 1992 to more than 5.3 percent in 2012, according to Bureau of Economic Analysis data.

Federal contracting is “one of the most important drivers of the state’s economy,” said Dennis Hoffman, a professor of economics at Arizona State University’s W.P. Carey School of Business.

“I just don’t know how you can avoid the simple arithmetic,” Hoffman said of the numbers. “These are private-sector jobs” supported by federal spending.

Contract jobs are a “boon” to towns like Mesa, where a Boeing plant produces Apache helicopters and brings “very high-paying jobs,” said Mayor Scott Smith.

Defense-related jobs like Boeing’s have always played a large part in federal contracts in the state, accounting for 77 percent to 92 percent of total Arizona contracts over the 20 years.

Defense contracts in Arizona grew 578 percent, from $1.9 billion to $12.9 billion. Only Kentucky and Nevada saw larger percentage increases in defense spending over the 20 years. Only Kentucky saw a higher increase in all federal contracts, growing 622 percent.

Nationally, defense contract spending rose 167 percent since 1992.

“Support for defense spending is bipartisan,” said Nick Schwellenbach, a senior fiscal policy analyst with the Center for Effective Government, a government watchdog group. “Nobody ever complains when government spends more on contracting.”

And contractors spread work out among congressional districts so it’s harder to cut, said Stephen Slivinski, a senior economist at the Goldwater Institute.

“Contractors have gotten very savvy,” he said.

More than 150,000 Arizonans worked in defense contracting in 2012, fifth-highest among states, according to a report done for the Aerospace Industries Association of America last year.

Most of the growth is being driven by the expansion of high-tech manufacturing at defense firms such as Tucson-based Raytheon Missile Systems, as well as Lockheed Martin, Boeing, General Dynamics, BAE Systems and other companies in Arizona, said Hoffman.

Boeing and BAE Systems did not return calls seeking comment on the numbers, while Raytheon and Lockheed Martin would not comment.

Rep. Ed Pastor, D-Phoenix, who took office in 1992, has seen the growth first-hand. He said it was natural for Arizona firms to get defense contracts because they began with a solid base.

Pastor said Arizona companies in the 1990s were providing weapons for fighting in Bosnia and the Balkans, and have continued to do so for current wars in Afghanistan and Iraq.

Schwellenbach said the current wars have played a huge role.

“The spigot of defense spending opened, especially after 9/11,” he said.

Demand is a key factor in how Arizona companies respond to the “tempo” of spending from the Pentagon, said Rob Doolittle, a spokesman for General Dynamics, which has facilities in Scottsdale and Tempe.

“When defense activity levels go up, purchases of General Dynamics-provided equipment and services that support those operations also increase,” he said.

Despite the past growth, many defense-oriented companies are diversifying into other areas, such as service-centered contracts, including health care and information technology. Schwellenbach said that trend has been going on for 15 years.

“A lot of the more traditional defense contractors have been buying smaller, non-traditional contractors,” Schwellenbach said.

“The big contractors right now are not doing too badly,” he said. “That doesn’t mean they won’t be hurt” by future reductions in spending.

Economists worry that the reliance on defense contracts might affect the state’s ability to manage any downturns in Pentagon spending, especially after the recent drawdowns of troops in Iraq and Afghanistan.

“If you put all your eggs in one basket, your economy’s going to be lopsided,” Slivinski said. “I think we should be worried about the lopsided nature of the Arizona economy.”

Hoffman agreed, saying that while Arizona is a “net beneficiary” of government spending, such spending is not sustainable over time.

“We don’t know what the economy is going to look like in the future,” Slivinski said. He said state lawmakers should work toward helping the state “diversify” the type of industries it attracts.

“If you have a diversified economy, you can weather” ebbs and flows in defense spending, he said.

Smith agreed that while defense contracts are “important to our economy, we’re subject to changes in spending” if the Pentagon cuts back.

“What contractors want is certainty” in the contracting process, Smith said.

Still, even with budget battles in Washington, sequestration and the wars in Iraq and Afghanistan winding down, some are skeptical that there will be big cuts in defense contracting.

“While I would not expect big growth in this sector, and even with smaller defense budgets, defense contracts will be protected from deep cuts,” said Michael O’Hanlon, a senior fellow at the Brookings Institution.

Even if there are cuts, the companies will be able to sustain themselves because they have learned to “evolve” as the DOD’s needs change, Pastor said.

“It’s still my belief that the companies that are in Arizona will continue to play an active role in the defense of this country,” he said.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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