In defense-heavy San Diego, ‘fiscal cliff’ threat hits home
SAN DIEGO — Vicky Geron’s restaurant a few blocks from the gates of the naval base here and the 86-acre Nassco shipbuilding yard depends on the weekday lunch crowd, split evenly between sailors and defense contractors.
Geron said her recession-battered Mexican eatery in this industrial stretch of the Barrio Logan neighborhood could be closed down if the country fails to avoid the “fiscal cliff” — the triggering of automatic defense cuts along with tax hikes — because no deal was reached on the federal budget.
The impasse gripping the nation disproportionately threatens San Diego County because the military and defense industry is an economic juggernaut, responsible for 1 in 4 jobs in the area.
If the fiscal cliff isn’t averted, the county stands to lose as much as $5.9 billion in tax breaks and federal spending, according to an August report by the National University System Institute for Policy Research.
The ripple effects of those cuts worry business owners such as Geron whose livelihoods are tied to defense.
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“It’s scary,” Geron, 50, said on a recent afternoon as she wrapped up a burrito at Colima’s Mexican Food. “It bothers me that I don’t know what’s going to happen.”
In recent months, San Diego business groups have been lobbying legislators furiously, pressing for a solution that would soften defense cuts. Local groups have staged rallies outside lawmakers’ district offices, pressing for more urgency on budget talks.
For now, frustration builds as San Diego businesses and economists wait to see what shape a deal might take. They are bracing for the worst: sequestration, the almost dirty word used in this Navy town to refer to the automatic defense cuts.
“Sequestration would make for an immediate hit,” said Erik Bruvold, president of the National University institute. “Contracts will get scaled back, federal employees laid off.”
Since early summer, groups including the Aerospace Industries Assn. have projected that the federal cuts triggered by the fiscal impasse could cost California 126,000 jobs in aerospace, a sizable industry in Southern California.
The political and economic uncertainty in recent months has shaken hiring confidence, with many defense contractors enacting a de facto hiring freeze.
“The business environment is paralyzed right now,” said Jamie Hewitt Moraga, president of IntelliSolutions Inc., an information and system technologies defense firm based in San Diego. “On the government side, we’re seeing a lot of delays with contracts. We cannot hire direct employees until we have the government funding.”
Moraga said that if cuts are steep, the firm would be forced to find ways to cut costs and hiring would slow. “We’re not looking at layoffs,” she said. “But if there are programs that are cut, we’ll cross that bridge when we come to it.”
Nassco, whose 3,600 employees make it the largest industrial manufacturing firm in San Diego, had planned early this year to lay off 350 workers but reversed course as the economy improved. The company, once known as National Steel & Shipbuilding Co., will continue work on existing contracts — including commercial ones — and will react to defense cuts if and when they happen, a company spokeswoman said.
Contributing to the uncertainty is the lack of information from the Pentagon on possible cuts, economists said.
“Realistically we’d like to see no cuts at all,” said Mark Cafferty, president of the San Diego Regional Economic Development Corp. But compromises have to be made, he added.
As budget negotiations continue in Washington, local groups such as Cafferty’s have banded together in an effort called Operation San Diego to lobby lawmakers. They have joined groups such as the San Diego Military Advisory Council and San Diego Regional Chamber of Commerce to advocate for a better solution to automatic spending cuts.
Although the region is vulnerable to the effects of the fearsome-sounding fiscal cliff, some economists say that a compromise will be brokered and that the region may benefit from a shift in military strategy.
“I think it’s unlikely to take place because there’s so much public and market pressure,” said Lynn Reaser, chief economist at the Fermanian Business and Economic Institute at Point Loma Nazarene University.
Reaser said that if a budget deal isn’t reached and the economy slides back into recession because of partisan bickering, Republican and Democratic lawmakers will both share the blame. She estimates the chance of falling off the so-called cliff at 25%, “but one cannot rule out the risk,” she said.
“We would be hit harder than the nation and the state as a whole because of defense,” she said.
Reaser’s group recently conducted a study on the military and defense contribution to the regional economy and found that $20.6 billion of direct spending will flow into the area during fiscal 2012.
The military sector is responsible for 311,000 of San Diego County’s jobs in 2012 after accounting for all the ripple effects of defense spending. An estimated $9.7 billion will flow into the county during the fiscal year from past and current defense contracts.
Reaser’s report, commissioned by the San Diego Military Advisory Council, did offer a few bright spots for San Diego.
The Navy, for instance, is planning on shifting its focus to the Asia Pacific region and will eventually keep 60% of naval operations in the Pacific and 40% in the Atlantic. Presently, operations are evenly split. That would modestly increase the number of troops stationed in the area.
A shift in technology toward unmanned vehicles could also prove beneficial to contractors in San Diego, she said.
But all the forecasts and calls for a resolution on the fiscal impasse mean little to business owners such as Geron. The wife of a retired Navy man said she’s frustrated with the political gridlock that she fears could bring her to close the restaurant she’s operated for eight years.
“I think it’s time they got things done,” Geron said, “and get the economy moving again.”
