Sequestration impacts and diversification of the Hampton Roads Region

Sequestration has become that big, ugly word that has been with us for the last few years. In 2011, a law was passed to make arbitrary, across-the-board budget cuts that took effect in 2013, with mandatory cuts through the Budget Control Act totaling $1.2 trillion over 10 years through 2021. Now in 2015, we are still asking if it is going to happen again in 2016.

President Barack Obama presented the fiscal 2016 budget with a goal of passing a spending bill by Oct. 1, the start of the new fiscal period. This was not met but instead a continuing resolution was passed to fund the federal government at fiscal 2015 budget levels through December 11. The President’s budget levels request was well above the 2016 spending levels with the intention being to reverse harmful sequestration cuts.

In late October, a budget framework was passed to set spending levels for the next two years to help break the cycle of shutdowns that harm the economy and provide some stability, mitigating the likelihood of another shutdown. The 2015 budget deal required the cutting of $5 billion from the national defense authorization act and provides $545 billion in defense base budget spending and another $59 billion in overseas contingency operations spending (OCO) for emergency war funding.

Defense spending is a key driver of jobs and wealth in Hampton Roads, and military downsizing has certainly hurt the region over the last few years. A further $100 million decline is expected in 2015. Approximately 40 percent of the value of economic activity in Hampton Roads is directly or indirectly related to defense spending.

While the budget acts have kept sequestration at bay, they have not provided any growth and have really only maintained a status quo. As the U.S. Department of Defense spends money on more expensive airplanes, ships and technology, it leaves them with less money to spend on people, and advanced technology means fewer people. The Hampton Roads Planning District Commission report on federal employment was no surprise, showing a decline in government employment, with both local and federal jobs falling significantly over the past year. It is safe to say that the 2015 budget deal will not provide growth in this region, and other industries need to come to the region to turn the economy around. There have certainly been positive developments for this region, such as Congress’ intention to maintain 11 large aircraft carriers in the fleet. This will help preserve employment in the region, but will not turn around the sluggish economy. For that, we need diversification.

So how does the region diversify?

Many look to the Port of Virginia as an economic avenue of growing importance to Hampton Roads. This can be built upon, to bring in more cargo and, therefore, more jobs. In addition, there are a significant number of nonprofit organizations in the Hampton Roads area. This represents a significant opportunity for investment to foster this growing industry.

Aneesh Chopra, who served as the country’s first chief technology officer under Obama, spoke to business leaders at the Hampton Roads Chamber of Commerce in Norfolk and expressed great optimism for the region’s future, with a focus on the importance of entrepreneurship and “open innovation.” “We will not realize the benefits of an innovative state unless we step up and put these ideas to work,” Chopra said. “No one's going to come here, a white knight, saving the region while you sit back and observe passively. This requires active participation.”

The area needs to develop and retain talent and skilled workers through an emphasis on science, technology, engineering and math (STEM) programs and entrepreneurism. Supporting startups through angel investment networks will enable local businesses to expand and will attract new industries to the area. Creating jobs in areas that require highly skilled and a high-paying workforce will entice young adults to call Hampton Roads their home and a place to live, work and raise their families.

In summary, sequestration has been fended off yet again, providing two years of much-needed stability for defense spending. This is good news for the Hampton Roads region. However, for growth, the region needs to focus on diversification, and that can be achieved through education, an emphasis on STEM education and encouraging entrepreneurism. A culture of innovation will be at the heart of this diversification, and will go a long way to spur growth.

Neena Shukla, CPA, CFE, CGMA, is a senior assurance manager and government contracting niche leader at PBMares, LLP, in Fairfax and a member of the Virginia Society of Certified Public Accountants. She is also the leader of the firm’s technical and emerging issues group. Contact her at [email protected].