Defense firms face hit from budget cuts

WASHINGTON – Minnesota's biggest defense contractor, BAE Systems, thinks the automatic federal budget cuts that kicked in this month could lead to elimination of 10 percent of its U.S. workforce, or 4,000 jobs.

The company can't say how many, if any, of its 560 Minnesota jobs would be in jeopardy as the process known in government-speak as sequestration plays out. A spokeswoman said the company does not have enough information to assess long-term consequences to specific programs, although she said there is already an effect.

"The cloud of uncertainty from sequestration already has had a profound impact on the way our industry is able to deploy its capital and invests in facilities, jobs and new product development," spokesperson Stephanie Serkhoshian said in an e-mail.

The Center for Security Policy, a pro-defense think tank in Washington, estimates the impact of automatic budget cuts on Minnesota's defense industry at nearly $350 million over the next nine years. The biggest estimated hits, according to the center, could come in Hennepin County ($160 million over nine years), Anoka County ($96 million) and Dakota County ($52 million).

The White House, meanwhile, has predicted the furlough of "approximately 2,000 civilian Department of Defense employees" in Minnesota.

Experts say the hit to the state's economy from defense cuts is impossible to pinpoint. But it will not be nearly as harsh as in many states. That's because some of Minnesota's largest defense contractors left the state years ago.

"Big programs have already gone," said Chip Laingen of the Defense Alliance, an advocacy group for Minnesota's defense industry.

The state had only $1.7 billion in "prime contracts" from the Department of Defense in 2012, according to the Minnesota Department of Employment and Economic Development.

The state's defense contractors tend to be companies not totally dependent on government. Diversification in the private sector should soften the blow of automatic budget cuts, Laingen said.

For example, General Mills is Minnesota's third-largest defense contractor with $201 million in contracts in 2012, according to government website usaspending.gov. But General Mills' annual revenue stream is around $16 billion.

"Military sales are a relatively small part of General Mills' Bakeries & Foodservice business," spokeswoman Kirstie Foster said in an e-mail. The automatic defense cuts' "impact on our business, if any, would be relatively small."

Honeywell International got $43 million in defense contracts for Minnesota facilities in 2012, usaspending.gov reports.

"We have large airline and business jet commercial businesses and aftermarket sales in addition to our defense business," Bill Kircos, a Honeywell vice president for communications, said in an e-mail. No more than 3 percent of Honeywell's aerospace revenue is tied to any one platform, he added.

Even so, Honeywell has developed contingencies against automatic budget cuts.

"We've had a plan in place for quite some time to manage specific sequestration scenarios," Kircos said. "But we need to see what will happen first."

Mid-sized and small defense contractors in the state "began to reposition two years ago" when budget battles and congressional gridlock kicked in, Laingen said. "You didn't have to be a rocket scientist to see that there would be defense cuts. So what happens this week is sort of old news."

Still, amid the grim predictions, some Minnesota defense businesses may actually grow, Laingen said.

He singled out Recon Robotics, a 2006 start-up that commercialized robot-building technology perfected in a University of Minnesota lab as a business that should be sequester-proof. He also pointed to companies that offer cyber security and that physically protect buildings, bridges and other structures.

Derek Dorr, chief executive of Champlin-based DECO, is co-founder of a company that provides armed security for federal buildings, as well as training services and protection at some U.S. embassies.

DECO gets $100 million to $200 million in government contracts per year, Dorr said. In 2012, roughly $47 million came from the Pentagon. Dorr doesn't expect that to dip much because of automatic budget cuts.

"There are certain services that we provide to the government that are difficult to reduce," he said.

Jim Spencer • 202-383-6123