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Budget deal gives U.S. capital region what it wants: certainty

December 23, 2013

By Lisa Lambert

WASHINGTON, Dec 23 (Reuters) – The recent budget compromise passed by the U.S. Congress is delivering what the country’s capital region has wanted for more than a year: certainty.

Federal austerity measures that included automatic spending cuts beginning in March and a partial shutdown of the government this fall left Washington, D.C., Maryland and Virginia wondering what Congressionally induced economic obstacle would pop up next.

While the recent spending fights led to only mild reductions in direct federal funds for the three jurisdictions, they caused ongoing uncertainty in an area that is home to federal employees and contractors and defense installations.

Many residents did not know if they would have jobs or, at times, when they would be paid. Private companies providing services, equipment and armaments to the government could not plan. The U.S. government provides more than one in four jobs in the area, according to Moody’s Investors Service Vice President and Senior Credit Officer Nick Samuels.

The Senate quelled local anxiety by passing a two-year budget agreement on Wednesday that lessened some of the spending cuts and lowered the risk of another shutdown.

“The length – the duration – is probably the most important factor,” said Virginia Finance Secretary Ric Brown about the deal. “We got a breather.”

The lighter defense cuts should lessen the pressure on revenues especially for Virginia, where defense procurement contributes nearly 10 percent of state gross domestic product.

Even then Virginia Governor Robert McDonnell proposed a budget earlier this week that included extra reserves and lower income forecasts to keep the state ready for new, unexpected federal tightening. Budget analysts used models to forecast future revenue and then cut the amounts, Brown said.

“We purposefully made the assumption we would underperform the nation until 2016,” he added.

It is a reversal of fortune. The area weathered the 2007-09 recession better than many other parts of the country and recovered quickly, mostly due to the 2009 stimulus plan. Local job and housing markets took off, population in the District itself boomed, and revenues soared.

The Congressional budget standoff in 2011 and resulting sparring over spending did not halt the growth. But in the last two years the region’s expansion has noticeably slowed.

Brown said Virginia is collecting less withholding taxes from large federal contractors.

“They’re just not hiring. They’re stockpiling cash to give them flexibility whenever the situation changes,” he said.

Sales tax collections have been sluggish, as consumer confidence falters over future pay. Workers who were furloughed during the shutdown in October received backpay. Still, real estate closings in the area came to a “screeching halt” during the shutdown, the first time they dropped in 15 months, Samuels said.

“Certainly the furloughs being announced and implemented took money out of our economy,” said Warren Deschenaux, director of the Maryland’s Office of Policy Analysis.

Maryland revenues, though, were slowing before the shutdown, he said, and the state estimates the automatic spending cuts – frequently called “sequester” – led to 25,000 jobs lost within its borders. Average wage growth was only 2.1 percent in 2012 and is expected to finish 2013 at 0.9 percent, as well, according to a recent state revenue report.

“For many months we saw the part of the income tax that is most tied to wages and salaries – employer withholding – was quite sluggish. We’ve seen that pick up in the last couple of months, but sales tax has been moribund for a while,” Deschenaux said.

Personal income tax withholding grew 2.5 percent in fiscal 2013, which ended on June 30, and will likely only rise 3.1 percent this fiscal year, according to the report. Sales tax receipts were up 1.4 percent in fiscal 2013 and will likely grow 2.3 percent this year.

Altogether, state revenues will likely only grow 2.3 percent this fiscal year to $15.23 billion, according to the report. LOOKING TO THE PRIVATE SECTOR

The private sector has made up for some of the federal job losses. In Washington, D.C., food services and restaurants especially have created jobs. Still, the sector’s growth “isn’t as fast as the nation as a whole,” said D.C. Deputy Chief Financial Officer Fitzroy Lee.

In fiscal 2013, which ended Sept. 30, federal employment in Washington fell 2.1 percent while private sector employment rose 1.7 percent.

In November, Washington’s unemployment rate was 8.6 percent, compared to 8.5 percent in November 2012, according to federal data released on Friday. In Virginia, it was 5.4 percent, much lower than 5.7 percent last November.

Maryland’s rate was 6.4 percent, compared to 6.7 percent a year ago. The state added the most private sector jobs for the month since 2007, 6,600, Governor Martin O’Malley said in a statement lauding the state’s “innovation economy.”

Moody’s Samuels says technology, higher education and healthcare are becoming major sources of employment in the region. Areas related to government, but not reliant on congressional appropriations – such as patent law – are prospering, as well.

“There’s quite a stirring of an entreprenuerial spirit that is quite new to the city,” said the District of Columbia’s senior economist, Stephen Swaim. “How great it is over the long haul remains to be seen.”