Report: Az's smaller defense firms face sequester cuts

Smaller companies with contracts to supply products and services to Arizona’s top-tier aerospace and defense companies face the greatest threat if sequestration cuts take effect, according to a report released Tuesday.

The Greater Phoenix Economic Council said companies such as Boeing and Honeywell have laid plans to expand into international markets and focus more on commercial sales. But Arizona firms supplying them face the possibility of job cuts or even closing in some cases, it said.

The report analyzed 114 companies that employ 30,000 workers in the region to determine the potential impact of sequestration, as well as strengths and weaknesses in the state’s aerospace and defense sector.

Barry Broome, GPEC’s president and CEO, said anticipation that defense spending will be reduced even without sequestration cuts has already affected smaller firms.

“Most of these companies are telling us that they haven’t had new contracts in 12 to 18 months,” Broome said.

Arizona firms received $13 billion in defense contracts in fiscal 2012, and the aerospace and defense industry directly employs more than 40,000, the report said.

James “Rusty” Mitchell, director for the Community Initiative Team at Luke Air Force Base, said the threat of sequestration has already affected the base. That includes the decision by Brig. Gen. Michael Rothstein, commander of the 56th Fighter Wing, to cancel a biennial open house and air show scheduled for next month.

“He (Rothstein) has to make the economic priority decision of where to put the limited resources that he is given, and that has to be focused on his mission of training fighter pilots and maintainers to support the aircraft,” Mitchell said. “Everything else takes second stance to that.”

The report called the forthcoming sequestration a “game-changer” for the state, which is the sixth-largest market in the nation for defense contracts. About 5.2 percent of Arizona’s total gross product is dependent on federal defense spending, it said.

“Arizona is probably the most per capita-driven defense economy in the U.S., and that’s including both defense contractors, defense research and important base assets as well,” Phoenix Mayor Greg Stanton said.

The sequester, which would take effect Friday, could cut up to $85 billion in federal spending nationally over the next seven months as the first step in a 2011 plan to cut $1.2 trillion over 10 years.

“If this is a fully-loaded $1 trillion cut, we are going to bleed to death,” Broome said.

According to a White House report, approximately 10,000 Department of Defense employees in Arizona would be furloughed under sequestration, while the state’s Army base operations funding would be cut by about $43 million and Air Force operations cut by about $6 million.

“We met with every member of our congressional delegation and they have told us that this (sequestration) is going to happen and it can’t be reversed,” Broome said. “A lot of us are wondering if this is a scare tactic – and if it is, I’m scared, so stop now, you got me, so turn it around.”

The report recommended ways Arizona can support the defense industry and mitigate job losses, including working to secure a test site for unmanned aircraft systems and developing ways to retain defense firms and help them grow.

“It takes reaching across the table and bipartisan compromise,” Stanton said. “It (the report) is also a call to arms … not just for elected officials and the business community but everyone in this community to look in the mirror about where we really are and what public policies we can adopt to advance this economy.”

Broome said it will be important to follow up and make sure the companies analyzed are receiving the support they need.

“This is not a doomsday report, it’s really an exposure report,” he said. “We have to keep close with this industry base and its reputation.”