Commentary: Texas is vulnerable to D.C. spending cuts

The Fort Worth Star-TelegramJuly 27, 2011 

The battle between Republicans and Democrats over the debt ceiling overshadows one consensus that has emerged in Washington: Most leaders want to cut federal spending deeply, shaky recovery or not.

Absorbing those hits down the road may prove even more painful than watching the bickering federal government.

Uncle Sam has been priming the economy for a couple of decades, and states and cities have been among the biggest beneficiaries. That includes Texas, where federal spending topped $227 billion in 2009, up from almost $107 billion in 2000, according to the Census Bureau.

Only California brought in a larger total. Because Texas is such a big state and has a concentration of defense businesses, it's vulnerable to deep cuts in federal money. And while the state is proud of leading the country in job creation, the unemployment rate was 8.2 percent in June -- nearly twice as high as four years ago.

Tarrant County, in particular, remains a big beneficiary of federal spending. Home to a major Lockheed Martin facility, Bell Helicopter and a currency printing plant, Tarrant took in $25.3 billion in federal money in fiscal 2009, the Census Bureau reports. That's $8 billion more than Dallas County, whose population is more than one-third larger.

Tarrant has been stung by deep defense cuts in the past, but the North Texas economy is more diversified now. As federal support slows, there's also a chance that state and local leaders will try to fill in the gaps, despite the current anti-tax rhetoric.

"At some point, people will want to invest again in public schools and services," said Bud Weinstein, an economist at Southern Methodist University. "Whenever federal spending has pulled back over the past 50 years, state and local government stepped in. We're looking at a tough slog for a couple of years, but people still care about education, highways and prisons."

Moody's has put the United States' triple-A bond rating on review for a possible downgrade, which could raise interest rates for cities, states, companies and individuals. To avoid a downgrade, leaders have to raise the debt ceiling. To maintain its stable outlook, the government also has to produce a budget that reduces the deficit over the long term and improves key financial ratios, such as lowering debt as a share of gross domestic product.

Last week, Moody's said it was also reviewing the investment grades for five states whose $24 billion in debt were closely tied to the federal government. Texas was not among them.

By many measures, Texas is much less dependent on federal spending than most states. Texas received $9,164 in federal money per person in 2009, compared with a national average of $10,396. Texas ranks No. 42 among the states per capita, the Census Bureau reports.

Federal spending accounted for 17.6 percent of Texas' gross product in 2008, almost 2 percentage points lower than the average for all states. In Kentucky, Mississippi and New Mexico, that measure topped 30 percent.

In Texas, more people work for government than the U.S. average, but they're with local and state entities. Fewer than 200,000 work for the feds, not including the military, and that's 1.87 percent of the state workforce. Nationwide, 2.16 percent of nonfarm workers are employed by the federal government.

Military spending is big elsewhere in the state, including Fort Hood and San Antonio. Reductions in spending on fighter jets in Fort Worth and NASA in Houston could hurt jobs, too. And Texas depends on a lot of federal help with Medicaid, the healthcare program for the poor that's paid with a mix and state and federal money.

While Texas provides less support for Medicaid than many states, it has to serve a much larger poor population, said Ed Friedman, an economist who follows Texas for Moody's

He said Texas' exposure to federal cuts will be significant but varied, depending on the sector. And the state continues to create jobs and draw people from elsewhere.

Rising exports, oil and gas growth, and the proximity to Latin America have helped, he said. Total employment is back to pre-recession levels here, while for the rest of the country, it remains 5 percent lower.

"Texas is still the place to be," Friedman said.

Even if things get tighter.

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