Tanks A Lot

Increased federal spending fuels the local economy

February, 2005

Three years ago, a small phenomenon occurred in Hawaii that went relatively unnoticed, perhaps because it was largely overshadowed by post-9/11 chaos. While most people scrambled to restore Hawaii’s economic mainstay – tourism, which took a huge hit following the terrorist attacks and the ensuing wars in Afghanistan and Iraq – the federal government steadily pumped more and more money into the local economy, primarily in support of its military efforts. As a result, by the end of 2002, Federal expenditures surpassed visitor expenditures as the No. 1 contributor to the local economy.

According to the U.S. Census Bureau, federal expenditures in Hawaii in 2002 totaled $10.47 billion, while the state Department of Business, Economic Development and Tourism reports that visitor expenditures that same year were $9.55 billion. In 2003, the gap between federal and visitor spending widened, with federal expenditures increasing 8 percent, to $11.27 billion, and visitor expenditures increasing less than 1 percent, to $9.64 billion, for a difference of more than $1.5 billion. And while it is true that a portion of the federal expenditures (i.e. Social Security, Medicare) is funded in part by local tax dollars, it is still by and large an apples-to-apples comparison. This makes the federal government a highly critical piece of Hawaii’s economic pie – and not just in terms of defense spending.

In 2003, the federal government injected $6.8 billion in nondefense spending into the local economy, a 24 percent increase over 2000. Hawaii received millions in federal dollars to support varying causes, including public education, transportation, Native Hawaiian initiatives, agriculture and environmental programs and the University of Hawaii System. Furthermore, according to Sen. Daniel Inouye, Hawaii stands to receive $229 million in fiscal year 2005 to support several nondefense programs, including $19.5 million for the East-West Center, roughly $45 million in Impact Aid to help offset the cost of educating dependents of military and government families, $10 million for the UH Cancer Research Center and $20 million for emergency medical services for children.

THE POWER OF ONE
As the ranking Democrat of the Senate Defense Appropriations Subcommittee, Inouye is often credited with keeping Hawaii on the federal radar when it comes time to dole the funds. “There’s tremendous competition for all these funds. But Sen. Inouye’s seniority and the respect he has in Congress adds an important additional dimension to our ability to get funds,” says Walter Dods, Inouye’s campaign chairman for more than 20 years.

True, in his 43 years as a U.S. senator, Inouye has steered billions of federal dollars our way, and is well-respected for his ability to establish bipartisan relationships that have proven highly beneficial to Hawaii. And this year, adding to his already extensive list of accomplishments, Inouye has become ranking member of the Senate Commerce Committee, which oversees all things important to Hawaii, including transportation, telecommunications, aviation, maritime and more. However, the 80-year-old senator is in his eighth consecutive term, and some fear that when it comes time to pass the torch, his seniority and alliances will be difficult, if not impossible, to replicate.

“For a small state like ours, it means a lot to have a congressman with the kind of longevity and respect that he has. One of his tremendous skills is generating bipartisan alliances with other senators. It’s a very collegial approach, and a very special skill that’s served Hawaii extraordinarily well. But that’s not something you learn, and it’s not something you have just because you’re driven,” says Watanabe Ing Kawashima and Komeiji Partner Jeff Watanabe, who worked for Inouye in the ’60s.

Yet while Watanabe is doubtful the heir to Inouye’s throne will be able to duplicate his seniority or relationships, he does believe the senator is already preparing to make it a smooth transition. “I’ve always suspected that one of the strategies the senator has in the back of his mind is to build up the military infrastructure in Hawaii,” he says. “Because, aside from the fact that he believes Hawaii is the right location for the buildup of defense, the more facilities we have here, the harder it is to move.”

Inouye’s chief of staff, Jennifer Goto Sabas, confirms Watanabe’s suspicions: “He is very cognizant of that, so he has us on a fast path doing many things because of that. In a lot of ways, his goal is to put in the types of infrastructure that would carry on for 10 years past his own service, which would give the next person some time to get their own seniority, build their own relationships. He’s a real big thinker, so while there are things he does that has a positive impact today, a lot of what he does is intended to get us to the next decade and beyond.”

DEFENSE BOOM
Of all the funding Inouye has secured, the most tangible funds are from the Department of Defense, which account for 40 percent of federal expenditures to the state. Although the unofficial method of gauging military impact in the Islands (counting the number of yellow-ribbon magnets plastered liberally on cars from Waianae to Waimanalo) might yield fairly accurate results, the actual U.S. Census figures speak volumes as well: In 2003, Hawaii ranked second in the United States, with $2,566 in per-capita defense spending. That puts us behind only one other state, Virginia, home of the Pentagon, headquarters of the U.S. Department of Defense.

In actual dollars (rather than per-capita), Hawaii received $4.5 billion in 2003, an increase of 13 percent over 2002, according to the U.S. Census Bureau. The gains mirrored a national increase in defense spending, which rose 12.2 percent last year, to $320 billion. The jump in spending is the result of an overall increase in defense-related construction, contracts and research and development grants in the Islands. Multimillion-dollar projects, such as the upgrades to Pearl Harbor Naval Shipyard and Kauai’s Pacific Missile Range Facility (combined, both projects brought in more than $600 million), contributed to the increase, as well.

It is also safe to say that defense spending in Hawaii will likely increase steadily through 2006, at least. For starters, last year marked the start of the multibillion-dollar effort to reconstruct thousands of homes on various Oahu military bases. And then there’s the Army’s conversion of the 2nd Brigade of the 25th Infantry Division at Schofield Barracks into a Stryker brigade (a fast-attack Army unit designed to bridge the gap between the Army’s heavy and light units). The brigade, which is expected to spur nearly 30 new construction projects and bring about 800 additional soldiers and roughly 300 more tactical vehicles to the state, will no doubt have a sizeable impact on the local economy.

The scope of the impact, however, is debatable. Some experts say the hoopla surrounding the military housing buildouts, the Stryker Brigade and the talk of basing a U.S. naval carrier in Hawaii is disproportionate to its economic impact, considering the military’s local presence has been scaled back significantly from the late ’80s. “Most of what the military is in Hawaii is payroll – what these guys earn as military personnel. So if you want to understand how military spending changes in Hawaii over time, you need to look at personnel numbers,” says Bank of Hawaii Chief Economist Paul Brewbaker, pointing out that, in 1988, there were just over 64,000 military personnel ashore and aboard ship in Hawaii, along with 70,000 military dependents. “We now have around 34,000 personnel. That’s a substantial decline. That’s not to say there isn’t a revival of military spending going on, but when you add [800] people to the 34,000, after we’ve lost 30,000, plus their dependents, in the more dramatic post-Cold War period, I just don’t understand the orders of magnitude on which this is happening.”

However, while 800 bodies aren’t necessarily exciting Brewbaker, he says there is at least one thing noteworthy about the heightened military presence: “It is important, in that it’s going the other way. The military went through one transition associated with the change in the geopolitical environment – the end of the Cold War. Now it’s going through another transition that reflects the new geopolitical reality, which is the war on terrorism. Because of that, I wouldn’t expect those numbers to go downward again anytime soon.”

A RETURN ON RESEARCH
Another figure that isn’t likely to head south anytime soon is the value of procurement contracts (for goods and services provided to civilian and military agencies) in Hawaii. For four years, procurement expenditures in the Islands have grown by double-digit percentages and, in 2003, hit an all-time high of $1.98 billion. It’s interesting to note that procurement contracts represent a larger portion of total federal expenditures now than 15 years ago, while salaries and wages (S&W) have diminished over the same period. In 1991, S&W and procurement contributed 37 percent and 12 percent to federal expenditures in Hawaii, respectively. In 2003, S&W’s share decreased to 25 percent, while procurement rose to 18 percent.

This is extremely significant, because, unlike S&W, which are directly attached to the number of federal and military personnel stationed in Hawaii, procurement contracts represent long-term investments and benefits to the Islands. Many of the contracts are awarded to local suppliers of goods and services, in addition to generating a considerable amount of indirect employment. “Defense research and development have established a strong presence in the Islands,” says Inouye, “and have spurred the growth of the tech sector in the state, helping to diversify Hawaii’s economy.”

According to UH Connections Director Keith Mattson, Inouye is due much of the credit for leveraging research and development funds in Hawaii: “That’s really built up the whole base, because now there are more companies, not only the local ones, but multinational companies, that have pretty serious branch operations here,” says Mattson. “[Federal funding] has helped maintain and increase our technician and engineering base – the people who work for these companies.”

Although this is true for all of the major Islands, it is particularly apparent on Kauai, where no less than nine new technology companies have sprung up in the past five years to support the Navy’s Pacific Missile Range Facility, which is the island’s second-largest employer. “I had my doubts about the dual-use industry in the beginning, I thought it was a big aspiration for a place like Kauai. But we started with just one person in 1999, and by mid-year we’re looking at 14 or 15 employees,” says Tom Cooper, senior manager of business operations at General Dynamics Advanced Information Systems’ Kauai branch. “I’m not doubtful anymore. The industry has absolutely blossomed. And in terms of economic impact, we’ve grown from roughly $177,000 in 2000 to $1.3 million [last year]. Those figures are specifically what we put back into the Kauai economy.”

That’s just one company. Statewide, the number of technology companies has risen 53 percent, from 756 companies in 1997 to 1,152 companies in 2001. Janice Kato, manager of federal programs at the Hawaii Technolo-gy Development Corp. (HTDC), says it’s a chicken-and-egg situation: “As federal funding increases in Hawaii, Hawaii companies are becoming better at attracting those monies.” HTDC provides assistance to local companies applying for the Defense Depart-ment’s Small Business Innovation Research (SBIR) program, which funds early-stage research and development in small companies. In 2003, 18 Hawaii companies were awarded $2.3 million in SBIR funding – more than any other state in the nation on a per-capita basis.

DEPARTMENT OF DEFENSE RESEARCH AWARDS TO THE UNIVERSITY OF HAWAII
YEAR
NO. OF AWARDS
AMOUNT (In $Mil)
‘00-01
40
$11.6
‘01-02
67
$22.5
‘02-03
83
$51.2

“Just overall, there’s been a very significant growth in federal funding in the last couple years, and in defense funds and [research and development] specifically, in large part due to our congressional delegation,” says Ret. Admiral R.J. “Zap” Zlatoper. “But it’s also because of the realization that the future is out here in the Pacific for the 21st century, and all the trends say that, even if the defense budget remains level – which is unlikely during this time of insecurity – I think Hawaii will surely continue to see a growing influx of federal funds.”

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