Defense spending down in Ohio, but up for Wright-Patt region

The end of the war in Iraq, a troop draw down in Afghanistan and mandatory budget cuts under sequestration have hit spending on weapon systems the most, a Department of Defense Office of Economic Adjustment report shows.

Montgomery and Greene counties combined had $2.9 billion in payroll and defense contract spending in 2014 versus $2.6 billion a year earlier, based on Defense Department data.

Wright-Patterson Air Force Base, which spans both Montgomery and Greene counties, remains the largest single site employer in Ohio with more than 26,000 military, civil service and contractor employees.

“Defense cuts have not yet hurt the flow of federal money into the Dayton region,” Michael Gessel, Dayton Development Coalition vice president of federal programs, said after reviewing the data.

Wright-Patterson figures show the total yearly economic impact of the sprawling base reaches $4 billion in both direct and indirect spending.

Critical missions at Wright-Patt

Critical missions of intelligence and the development of warfighting science and technology at Wright-Patterson could be part of the reason for the higher measure of defense spending in the report, Gessel said.

However, Air Force decisions on reorganization and mission consolidation under sequestration will have a large impact at Wright-Patterson in upcoming years. “The bottom line here is that there are yet to be many, many decisions made that will determine that Wright-Patterson does feel the decline in national defense spending or not,” he said.

Overall, the Buckeye state collected $7.2 billion in defense spending, a drop from $8.7 billion in 2013, Defense Department data shows. Maj. Eric Badger, a Pentagon spokesman, said the Office of Economic Adjustment could not elaborate on the numbers beyond what was in the report. The OEA released its first report, focused on fiscal 2013, last year.

Ohio dropped to 19th from 17th in defense dollars spent out of all 50 states and the District of Columbia between 2013 to 2014.

The value of defense contracts in Ohio reached $4.3 billion, down from $5.5 billion in 2013, which sequestration began, and $6.3 billion in 2012, the report showed.

Nationally, defense contract spending dropped from $320 billion in 2012 to $282.7 billion last year.

The report projected national defense spending would drop by 28 percent in real terms between 2011 to 2019 after a hike of 65 percent between 2000 to 2010. Automatic budget cuts reached under the Budget Control Act of 2011 will reduce spending by more than $450 billion from fiscal 2013 to 2021.

“The Obama Administration elected to comply with spending caps specified in the Budget Control Act — the sequestration law — by cutting weapons spending more than spending on personnel or readiness,” said Loren B. Thompson, a senior defense analyst with the Virginia-based Lexington Institute and a defense industry consultant.

“So weapons contractors such (as) the General Dynamics tank plant in Lima are on life support until military modernization spending recovers,” Thompson said. “The Army actually wanted to close the plant for several years, even though it’s the last factory where tanks are made in America.”

More dollars for small businesses

Wright-Patterson spokesman Daryl Mayer said one reason more defense dollars may be in the local economy is because the Air Force Life Cycle Management Center and the Air Force Research Laboratory, both headquartered at Wright-Patterson, have made it a priority to award more contracts to small businesses. Wright-Patterson also is home to the Air Force Materiel Command, which develops, tests and buys virtually every aircraft in the service branch.

“They made a concerted push to reach out more to small businesses, because those companies tend to be the birthplace of innovation,” he said.

Mayer said while overall defense spending is down, budgets at the base for research, development and acquisitions “have been more stable.”

AFRL figures show the science agency has spent more with small business nationally, in Ohio and in the Dayton region.

In fiscal 2015, AFRL awarded $1.08 billion contracts to small businesses compared to $1.03 billion in 2014 and $890.5 million in 2013. In Ohio, AFRL spent $229 million in the most recent fiscal year compared to $215.1 million in FY 2014 and $173 million in 2013.

Small business contractors in Greene and Montgomery counties, combined, also have won a larger share of the AFRL pie: $216.5 million in fiscal year 2015; $202.3 million in 2014; and $165.8 million in 2013.

Virginia-headquartered Integrity Applications, Inc. set up an office in Beavercreek with 81 employees to compete for work in a $960 million support contract with the National Air and Space Intelligence Center at Wright-Patterson. The defense contractor is one of three that can bid on work orders out of the lucrative eight-year NASIC deal.

“That’s why we set up this office here and why we pursue work here,” said Michael P. Ronanye, Integrity Applications director of operations in Beavercreek.

The firm could hire as many as 50 additional employees by the end of the year in mostly research and development work for NASIC and for other base contracts, he said.

“I think for this reason, research and development is the big draw for this region,” he said. “We really haven’t seen a decline. … We have a lot of people working for us coming from out of state because of that stability.

“We’re winning enough work that we need more people to manage this mission,” he said. “We’re hiring on a daily basis.”

Ronanye said the government has shifted more work to small businesses in search of fresh ideas and innovation and to avoid high overhead costs with major defense contractors.

“They get more bang for their buck as far as that,” he said. “For the Dayton region, it’s been a big deal. … That’s drawing a lot of companies to this area and it’s bringing new ideas.”

Sawdey Solution Services, Inc., in Beavercreek has landed more than a dozen government contracts worth a total of about $115 million and hired around 50 people since September 2014, said Connie Sawdey, company president. Most recently, the firm landed an $18 million contract to provide consulting expertise in acquisition intelligence and information technology to the Air Force Life Cycle Management Center at Wright-Patterson. The company is one of more than 200 firms selected to bid on government contracts in the One Acquisition Solution for Integrated Solutions (OASIS) program.

“All of this work is small business awards that we’ve won,” she said. “I think it’s a good time to be a small business.”

Big contracts

Center for Strategic and International Studies analysts in Washington, D.C., said defense spending overall in Ohio declined broadly in many areas but was less severe than other places across the nation. Army contracts and research and development were two of the hardest hit in defense spending around the country, they added. CSIS found a smaller drop in contract spending in Ohio than the Defense Department report showed, said Greg Sanders, CSIS deputy director of the defense industrial initiative group.

The Dayton region and Ohio may have fared better than others, because the Pentagon has preserved major defense acquisition contracts, particularly aircraft programs, and multi-year deals for jet engines, Sanders said.

“The more you zoom in, specific large programs start to dominate,” he said.

Defense contracts often take years to execute with money coming years after deals are signed, they added.

“Major defense acquisition programs … move like pigs through an Anaconda,” he said.

“It’s sort of like steering a battleship,” said Jesse Ellman, a CSIS research associate. “You need a wide turning berth to actually get it turned around.”

“We may be reaching an end to the decline when it comes to defense contract spending, although that will depend on the election outcomes of course,” Sanders said. “That said, big increases do seem unlikely. “

Still, Sanders was cautious comparing consecutive years in spending. “We always try to be a little careful reading too much into year-to-year analysis,” he said.

Deborah Gross, executive director of the Dayton Area Defense Contractors Association, said the economic clout of defense spending is “significant.”

“Even with the overall Ohio contract budgets dropping we are still talking about big numbers,” she said in an email.

She did not have recent figures for defense contracts in the region, but said Dayton Defense brings industry together with the Air Force to talk about how contractors can meet the military’s needs and how to do business with the government.

“If we can do these things and improve our percentage of wins we can get through lower budgets while also improving our overall economy,” she said.

The biggest defense contractor in Ohio is GE Aviation, which produces jet engines in Evendale. The defense giant manufactures power generators in Vandalia for F-18 fighter aircraft and the GE Aviation Electric Power Integrated Systems Center in Dayton is working on a secret Air Force research and development project for electrical power distribution in aircraft, according to company spokesman Rick Kennedy.

GE is also designing and testing a next generation engine for future fighters and bombers.

“Military engine/aircraft production volumes are not high in relative terms, but the military’s R&D programs are quite active and important,” Kennedy said in an email.

About 25 percent of GE Aviation’s $24 billion in revenues last year was work for both U.S. and international militaries, Kennedy said.

GE Aviation has 9,000 workers in southwest Ohio and about a quarter of those work on military contracts, he said.

Defense spending and GNP

Nationally, the Defense Department spent $418 billion, or 2.4 percent of U.S. gross domestic product on defense payroll and contracts, according to the recently released report.

Virginia had the most of all 50 states and the District of Columbia in defense spending with $54.7 billion. The East Coast state is home to the Navy’s Atlantic Fleet and naval air force and large Air Force and Army bases.

Other states with the most defense spending were California ($52.5 billion), Texas ($39.6 billion), Maryland ($19.6 billion) and Florida ($17.9 billion). The five states account for well above two-fifths of spending on defense payroll and contracts in the United States.

Ohio outranked neighboring states in defense spending, except Kentucky which had $9 billion in defense payroll and contracts, the report said. The state is home to both Fort Campbell and Fort Knox, two large Army posts.

Franklin County, home to the Defense Logistics Agency, had the most of any single Ohio county in defense and payroll at $1.7 billion, a drop from $2 billion the year prior.

Montgomery County was second with $1.6 billion and Greene County third with $1.3 billion. Both counties had $1.3 billion in spending the year prior, according to Defense Department figures.

Dwindling defense spending spurred the Defense Department’s Office of Economic Adjustment to send a two-year, $7 million grant in September to Wright State Research Corp. to investigate ways to diversity the Dayton region’s economy.

Researchers will focus on technologies created at the Air Force Research Laboratory or area university labs that have potential as commercial products.

“In all honesty, there’s been lots of discussion about this, but this is the first time that we’ve really had any significant resources to build the system and ecosystem around moving technology from inside the defense to outside the fence, from defense applications to commercial applications,” Montgomery County Administrator Joseph P. Tuss said in an interview in September.

The grant dollars also were meant to help workers transition into the growing fields of unmanned aerial vehicles, medical manufacturing, information technology and creating an international trade strategy.

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