| Fate
of Hampton Roads' economy lies in direction of
military budget
by Bill Geroux
for Virginia Business
May 2005
These are prosperous but jittery
times in Hampton Roads. Since the election of President
Bush more than
four years ago, the Department of Defense has been
pumping money into the area’s $60 billion regional
economy. A boost by the Pentagon in its procurement
of goods and services has created a cluster of defense
contractors in northern Suffolk. And the military has
steadily raised the pay of its nearly 115,000 men and
women in the region, boosting consumer spending and
a galloping real estate market.
Throw in continued growth of
the port of Hampton Roads — the
second busiest harbor on the East Coast — and
the future of this area of 1.5 million looks rosy.
But as the U.S. military is
transformed by technology, budget cuts and global
events beyond Hampton Roads’ control,
the potential effect of those changes is huge in a
defense-dependent region where economists say the military
accounts for one-quarter of its 1 million jobs.
In March, the Navy stunned
Hampton Roads by announcing plans to retire the 37-year-old
aircraft carrier John
F. Kennedy. Though the Kennedy is based in Mayport,
Fla., its loss would reverberate through the area.
The carrier is scheduled for more than $300 million
in repairs at shipyards in Hampton Roads, and those
repairs won’t happen if the Kennedy is mothballed.
Plus, the Navy may fill the Kennedy’s spot in
Mayport with one of the five carriers now based at
Naval Station Norfolk.
An aircraft carrier is a floating city generating
5,000 jobs and roughly $188 million per year for the
regional economy, says John Whaley, an economist with
the Hampton Roads Planning District Commission.
The Kennedy decision may be only the first piece of
bad news. This spring, the military is undergoing an
unusually tough round of base closings by the
Base Realignment and Closure commission, (commonly known by the acronym BRAC),
which hopes to eliminate up to 20 percent of the military’s total infrastructure.
In previous rounds of base closings, Hampton Roads has fared well, but it could
lose some of its 15 bases this time around.
The Pentagon has been unusually
secretive about which bases it considers expendable,
but is expected to release
its recommendations this month. Final decisions by
the BRAC commission are due in September. Local officials
are worried about the Army’s Fort Monroe in Hampton
and possibly Oceana Naval Air Station in Virginia Beach,
both of which were on the chopping block in previous
rounds of base closings.
Despite such worries, economists
predict a good year overall for the regional economy,
with growth slowing
only modestly from the robust period of 2001-04. Still,
for some businesses closely tied to the military, it
may be a year to keep close watch on developments from
Washington. “We just have to react and adapt,” says
Ron Ritter, senior vice president of Earl Industries,
which owns a shipyard in Norfolk and repair facilities
in Mayport and San Diego.
The Navy already has dramatically changed the rules
of competition for repair contracts, encouraging shipyards
to team up to obtain long-term maintenance contracts
for entire classes of warships. Yards that once fought
like dogs for individual contracts have been forced
to work together, Ritter says.
Compared to 30 years ago,
Hampton Roads’ economy
is not nearly as dependant on the military, says Art
Collins, director of the area planning district commission.
In fact, the area’s economy has outperformed
the country’s for the past four years, growing
by 5.2 percent last year. Tourism and the port’s
growth provide a buffer to military cutbacks. Despite
rising gas prices, tourism remains healthy. A new oceanfront
hotel just opened in Virginia Beach, and $41 million
is being invested in a new terminal in Norfolk to bolster
cruise traffic to the city’s downtown harbor.
Cities throughout the region
are investing in development projects, including
new convention centers in Hampton
and Virginia Beach. Large commercial projects
include Trader Publishing Co.’s plans to invest $51 million in a high-rise
division headquarters expansion in downtown Norfolk, which will create 600
new jobs.
Still, defense spending remains
the driving force behind the local economy. Between
2000 and 2003, defense
spending accounted for 75 percent of the growth in
Hampton Roads’ gross regional product, according
to a recent State of the Region report by economists
from Old Dominion University.
One result of that spending
is on vivid display in northern Suffolk, along Interstate
664 near the southern
terminus of the Monitor-Merrimack Memorial Bridge-Tunnel.
Defense contractors have clustered around the Suffolk
headquarters of the U.S. Joint Forces Command, whose
mission is to develop ways for branches of the armed
services to fight together. General Dynamics Advanced
Information Systems won a $500 million contract to
maintain Joint Forces Command’s computer system.
Just around the corner Lockheed Martin has built a
$30 million research and development center.
Nearby at the Virginia Modeling, Analysis and Simulation
Center, known as VMASC, students and faculty from Old
Dominion University design and test simulated war games.
Such war games are increasingly in demand by the military,
which is incorporating them into training programs.
The fledgling modeling and
simulation industry already has created more than
4,000 high-paying jobs in the
area. The state hopes to broaden the industry through
the Virginia Modeling and Simulation Initiative, which
will promote programs for nonmilitary purposes, such
as health care. “There’s no doubt this
is an area we can capitalize on,” says C. Jones
Hooks, president of the Hampton Roads Economic Development
Alliance, the organization created by the recent merger
of the economic development marketing groups of the
Peninsula and South Hampton Roads.
The merger, discussed off-and-on for years, finally
happened because business leaders on opposite
sides of the James River concluded a regional
approach made more sense in courting large corporations,
many of which are themselves the products of mergers. Combining
the two Hampton Roads development groups will
be more cost-effective, not to mention less confusing to
the businesses being courted, says Hooks.
The defense jobs are only part
of the economic boom in northern Suffolk, which has
become the fastest-growing
part of Hampton Roads. Home buyers are attracted
by its affordable land, waterways and convenience to the interstate system.
Many new Suffolk residents commute across the Monitor-Merri-mack bridge tunnel
to jobs on the Peninsula, says Tom O’Grady, Suffolk’s economic
development director.
The real estate market has
been brisk throughout Hampton Roads, spurred by low
interest rates and steady
improvements in pay and housing incentives for the
military. The value of the average home in Virginia
Beach, Virginia’s most populous city, rose 22
percent this year to $244,500. Neighboring cities have
experienced nearly as large percentage increases.
The port of Hampton Roads — including large
marine cargo terminals in Norfolk, Portsmouth and Newport
News — has been growing partly because of China’s
extraordinary output, says Linda Ford, a spokeswoman
for the Virginia Port Authority. The port authority “conservatively” projects
9 percent growth in 2005, and work began this winter
in Portsmouth on a $450 million marine cargo terminal
being built by APM Terminals North America for its
affiliate, the shipping giant Maersk Sealand.
The impressive growth, though,
is shadowed by the threat of terrorism. Last month
Jeff Keever, deputy
executive director for the Port Authority, warned a
congressional committee that ports badly need more
federal money for security against terrorist attacks,
including the possibility of a radioactive “dirty
bomb” being smuggled into Hampton Roads in a
shipping container. The Virginia Port Authority, Keever
says, “has been required to divert funds to port
security, which would otherwise have been invested
in port development — bringing additional business
to the port.”
The changing nature of world
conflict may reshape the Navy, by far the dominant
branch of the armed services
in Hampton Roads. Norfolk could lose another of its
carriers to the Pacific, where tensions are rising
over North Korea’s nuclear ambitions and China’s
growing influence. President Bush’s proposed
2006 budget would delay for a year the start of construction
of a new carrier at Northrop Grumman Newport News Shipbuilding,
the nation’s sole builder of carriers. The delay,
until 2008, could result in hundreds of layoffs at
the shipyard. Sub-marine construction is slowing, too.
But Navy cutbacks do not always
translate into less spending. In the fiscal year
2004, for example, the
Navy increased spending in Hampton Roads by 2 percent — to
$9.97 billion — despite cuts in personnel, the
retirement of seven aging warships, and the completion
of the new carrier Ronald Reagan and its transfer from
Norfolk to San Diego. An increase in Navy contracts
more than offset those losses.
Changing federal budget priorities
reach beyond the military. At NASA’s Langley
Research Center in Hampton, which specializes in
aeronautics, as many
as 1,000 jobs could be cut as the federal government
shifts money from aeronautics to space exploration.
Still, the biggest wild card
is the base-closing process. In 1993 BRAC wiped out
4,000 jobs at a Norfolk
aviation depot. In 1995 it expanded Oceana Naval Air
Station in Virginia Beach into the Navy’s main
jet base on the East Coast. ODU’s latest economic
report used a famous quote to characterize the dependence
of Hampton Roads on the military: “Live by the
sword, die by the sword.”
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