'Fiscal cliff' could put some Southern California businesses over the edge

If there’s no deal soon on the so-called "fiscal cliff" in Washington, automatic across the board cuts to the federal budget are set to take effect on January 2.

The cuts are known as “sequestration.” They were designed to be so painful that they would motivate Congress and the White House to reach a deal on reducing the national debt. The potential cuts to the Defense budget are a big worry for a lot of businesses in Southern California that depend on military contracts.

Sequestration would chop $500 billion out of the defense budget over the next 10 years.  The first $50 billion would come out next year.  That's cause for anxiety in the Antelope Valley city of Lancaster, where the defense and aerospace industries are big drivers of the economy.

"If it doesn’t happen, my shop might be double the size next year," Lancaster entrepreneur Velma Searcy says about the looming cuts.  "But if it happens, I might not be here next year.  So it’s just a scary thing right now."

Searcy founded Aerowire Technical Services in 2010 after she'd worked for 30 years as an aerospace engineer.  The company employs 12 people. Aerowire builds the complex wire harnesses that run everything electronic on an airplane – the cockpit, the black box.

"Some of the harnesses range from 10 to 80 feet depending on if they’re for the wings," Searcy says at a long table in Aerowire's shop.

Aerowire has done work for Lockheed on its C-130 Hercules military transport plane, the Sierra Nevada Corporation, and NASA. It’s working on a project now Searcy isn’t allowed to talk about. She’s expanded her workforce twice this year. She could hire even more people, but there’s a big contract on hold.

"I got told it’s gonna have to wait until after the first of the year,"  she explains. "I talked to a friend of mine, and they said it was because they’re not sure how sequestration is gonna go and whether they’re gonna be able to fund it or not."

So for Searcy, next year could be feast or famine. She’s worried about losing so much work that she’d have to lay off employees, most of whom she trained herself. Then, if the work comes back, she worries that those employees might not be available because they might have left the region for other jobs.

Less than a mile from  the Aerowire shop in Lancaster, the non-profit Desert Haven Enterprises has been finding jobs for people with developmental disabilities for almost 60 years. It serves 600 people in the Antelope Valley, offering them vocational training  and placing them in businesses and agencies in the area. Those businesses have included defense contractors like Lockheed Martin.

One of Desert Haven's largest contracts is at nearby Edwards Air Force Base, where as many as 50 people affiliated with the non-profit have worked on the grounds maintenance and janitorial staff. Recent cuts have reduced that number to 25 workers. Desert Haven Executive Director Jennie Moran worries that even deeper cuts would eliminate the contract.

"The contract that we have with Edwards Air Force Base right now is close to 20 percent of our operating revenue as a company so it’s a very sizable contract," Moran says, adding that Desert Haven's overall budget is $7 million. Moran says the jobs on the base pay prevailing wages.  "So for our individuals who work out there, it’s excellent living for them. They're able to provide for themselves, pay their bills, and live on their own."

 In Sylmar, 160 people work at the Quallian factory. The company was founded 14 years ago to develop lithium ion batteries for implantable medical devices like pacemakers, but its batteries are also used in airplanes.

The company already produces batteries for the U.S. military, but Quallion President Paul Beach says it could be making a lot more.

“If the military were to replace the entire fleet of aviation vehicles' [batteries] with lithium ion today, over a five year period, the U.S. military would achieve a savings of $1.7 billion,” Beach says.  

He adds that his company’s prospects of getting more military contracts – and potentially doubling his staff – dim with sequestration. He says steep cuts to the defense budget would delay, if not derail, any expansion plans.

“It has a very percolating effect down to us here in little Sylmar with our 160 people where I’m not able to turn on certain programs or projects where I even might be hiring more people," Beach says. "I’m not able to do that until this issue gets resolved.”

Beach isn’t as worried about having to lay people off as Aerowire’s Velma Searcy, but he doesn’t rule it out. Searcy says defense and aerospace are a huge part of the Antelope Valley economy, and she’s heard other firms in the Lancaster area are considering layoffs.

"It’s a small town, but if that happens, we’re going to be more like a ghost town," Searcy says. "There’s not going to be that many retail shops able to survive either.”

It’s all a big “IF” right now as leaders work toward backing away from the "fiscal cliff." But, for some small businesses in Southern California that rely on defense spending, sequestration could push them over the edge.